Editor’s note: This post has been edited to clarify the mechanics of the rate setting and payment system under the AHCA’s proposed per capita Medicaid allotments for states.

Based on page length alone, it is evident that Medicaid is a focal point of the American Health Care Act, released on March 6. Although its fate is uncertain, the bill provides a clear sense of where the Affordable Care Act repeal and replace strategy is heading. Where Medicaid is concerned, what has been discussed for years has now become real: using ACA repeal/replace as the vehicle for a wholesale restructuring of the very financial foundation of the Medicaid program as it has existed over an unparalleled, half-century federal/state partnership.

As expected, the House bill essentially eliminates the enhanced funding levels that made possible states’ expansion of Medicaid to their poorest working-age adult residents, something that 31 states and the District of Columbia now have done. Expansion states could face up to a 40-point difference between the federal funding enhancements they expected to receive in 2020 for the expansion population and what they actually would receive under the bill. What is at stake is continued coverage for some 11 million of the more than 16 million people who have gained eligibility since full implementation of the ACA Medicaid expansion.

Even more fundamentally, the bill—as expected given the draft that was leaked in mid-February—radically restructures Medicaid’s federal financing system. Along with its withdrawal of the ACA’s adult eligibility funding enhancement, the bill would shift an estimated $370 billion in financial risks to the states over the coming decade, according to the Center on Budget and Policy Priorities. And aside from several targeted and harmful restrictions on federal funding for specific state activities, the bill does nothing to provide states with the additional flexibility they would need to absorb these cuts. States have built their programs and designed their complex health care delivery systems for the poor over a half century, entirely depending on this federal/state funding arrangement. Under the bill, they either would have to accept the terms of a seriously diminished financial deal or give up federal funds entirely.

Estimates of the potential impact of these provisions—the Congressional Budget Office (CBO) has not yet released official estimates—paint a sobering picture. The New York Times reports on the potential implications of the House bill’s per capita spending limits, showing which states are especially vulnerable because of their high program costs that cannot be easily controlled, as well as which are vulnerable (looking at things the other way) because their per capita payments historically have been so low that they might have no practical means to absorb further cuts. The National Academy for State Health Policy (NASHP) has summarized the practical issues states will confront if the Medicaid provisions become final law.

Subtitle A – ‘Patient Access To Public Health Programs’

The House bill would bar states from using federal Medicaid (including Medicaid demonstration authorities), CHIP, Maternal and Child Health Services Block Grants, or Social Services Block Grant funds to pay certain “prohibited entities” for the provision of covered services. The federal funding ban would begin on the date of enactment and would apply to both direct payments and payments made through managed care organizations. A “prohibited entity” (including the “entity, its affiliates, subsidiaries, successors, and clinics”) is one that, as of the date of enactment meets all of the following elements:

  1. the entity operates as a nonprofit corporation;
  2. the entity qualifies as an essential community provider under federal regulations for qualified health plan contracting purposes;
  3. the entity is primarily engaged in family planning services, reproductive health, and related medical care;
  4. the entity provides abortions other than those related to rape, incest, or life-endangerment situations; and,
  5. the entity and its subsidiaries and affiliates received federal and state Medicaid payments during fiscal year (FY) 2014 exceeding $350 million.

This funding bar is commonly understood as falling exclusively on Planned Parenthood clinics, which annually serve at least half of all women who depend on publicly funded family planning services.

Unlike some states’ unsuccessful efforts to exclude Planned Parenthood as a qualified Medicaid provider (which numerous courts have held to be a violation of federal law), the House bill would accomplish the same goal by preventing states from using federal funds to pay a prohibited entity, for all practical purposes eliminating the entity from the program. (States could not hope to make up these funding losses from their own coffers, since much of what Planned Parenthood does qualifies for the special 90 percent enhanced federal funding payment for family planning and related services. Picking up these costs would be prohibitive, and doing so would compete with a boatload of other federal Medicaid funding losses.)

In an attempt to offset the access effects of withdrawal of funds (Planned Parenthood accounts for about 50 percent of all publicly supported family planning services provided today), the House bill would provide an additional $422 million to community health centers during FY 2017 (which already is half over, giving the federal government almost no time to make funding available and obligate the money before spending authority expires). Furthermore, nothing in the bill restricts these new funds to the types of Medicaid services furnished by Planned Parenthood clinics, nor are expenditures restricted to communities in which Planned Parenthood services are lost. Thus, while federal payments for covered services furnished by Planned Parenthood would end immediately upon enactment, it could take months to ramp up successor services at health centers, even if such services are theoretically possible.

Subtitle B – Medicaid Program Enhancement

Coverage of the ACA adult population and loss of the ACA funding enhancement

As expected, the bill effectively ends federal enhancement funding for the Affordable Care Act adult Medicaid expansion group while also rolling back additional ACA adult coverage options.

The ACA mandated coverage of working-age adults ineligible for coverage under traditional eligibility categories with incomes up to 138 percent of the federal poverty level (FPL). This nationwide reform ultimately was effectively converted into a state option by the United States Supreme Court in National Federation of Independent Business v. Sebelius. The ACA also gave states the option to cover working-age adults whose incomes exceeded this upper threshold, and several states do so.

For those newly eligible adults for whom coverage was to be mandatory, the ACA established a special enhanced federal Medicaid funding rate, beginning at 100 percent between 2014 and 2016, and declining gradually to 90 percent in 2020. In addition, a specialized enhancement formula was designed for states that prior to the ACA’s enactment had already begun to cover low-income adults under special demonstration authority.

The House bill would end the ACA’s state option to cover adults with incomes over 138 percent of poverty. For the adult expansion population that qualifies for enhanced funding (i.e., those with incomes up to 138 percent of poverty), the enhanced funding would end after December 31, 2019, except for beneficiaries who are (a) enrolled under the state plan as of December 31, 2019 and (b) do not experience a break in enrollment longer than one month. For those beneficiaries who experience a break in enrollment, states that elect to continue coverage for this group (explicitly made optional by the House bill) would receive federal funding only at their normal federal matching rates (which range from 50 percent to about 75 percent). People who become eligible after this date in a state that has opted to cover the expansion population would qualify for federal funding at normal levels. In other words, the option to expand is not time limited, but the enhanced funding is.

An overwhelming body of research into eligibility churn in Medicaid suggests that this policy is likely to mean the end of enhanced matching for virtually the entire adult expansion population. Among low-income adults, breaks in insurance coverage are common. This is true in the case of Medicaid whose fixed upper-income limits mean the loss of coverage for people who experience even slight changes in income, typically as a result of small income fluctuations among low-wage employees paid by the hour. Because long-standing federal rules require that income changes be promptly reported, beneficiaries who experience these types of fluctuations frequently move on and off the program. Indeed, recent evidence from the Commonwealth Fund shows that nearly half of all adults with a gap in insurance coverage had lost Medicaid within the preceding 12 months.

Ironically perhaps given the increasing focus on work as a Medicaid eligibility requirement, the beneficiaries most likely to trigger these steep state financial penalties would be those who work. When combined with the legislation’s other funding losses, it is likely that many of the expansion states would drop coverage of the newly eligible adult population. The number of states that would do so has not yet been estimated by the CBO.

Hospital presumptive eligibility

Beyond curtailing state coverage options and reducing funding for that portion of the adult expansion population covered by the ACA funding enhancement rules, the House bill would end the ACA’s special hospital presumptive eligibility program, under which hospitals can temporarily enroll patients who appear to be eligible and begin to get paid for their care while their full applications are pending.

Stairstep children

The bill would also repeal the ACA’s requirement on states to expand eligibility—up to 138 percent of poverty—for the so-called “stairstep” children ages six to 18 for whom pre-ACA mandatory Medicaid eligibility was set at 100 percent of poverty.

Enhanced funding for coverage of personal attendant services

The elimination of special enhancement funding is not limited to the special enhancements for the newly eligible adult population. Also on the chopping block is the ACA’s special 6 percentage point enhancement bump for states adding home and community-based personal attendant services for children and adults with severe disabilities, a key service in avoiding unnecessary institutionalization. The ACA’s special enhancement rate would end January 1, 2020.

Disproportionate share hospital payment cuts

The bill would eliminate the scheduled reduction in federal allotments to help support payments to hospitals furnishing a disproportionate percentage of care to low-income and Medicaid patients (DSH hospitals). However, this relief from scheduled funding allotments would be available only to states that do not opt to cover the adult expansion group, despite the fact that evidence shows that, even in expansion states, hospitals caring for a very high number of low-income patients continue to experience serious financial constraints.

Lottery winners

The bill devotes nearly six pages to changing the rules regarding how states treat lottery winnings. Under current law, lump sums such as lottery winnings are counted as income in the month they are received and then as assets thereafter. The ACA eliminates an asset test for beneficiaries whose eligibility is based on low-income alone. Under the House bill, effective January 1, 2020, states would be required to count lottery winnings over a certain threshold ($80,000) as income spread over multiple months, which in turn would be counted against individuals’ incomes for Medicaid eligibility determination purposes. The Energy and Commerce Health Subcommittee previously had identified this as an issue, given what it characterized as the greater tendency of lower-income people to play the lottery as well as evidence from some states that some Medicaid beneficiaries also are lottery winners.

Retroactive eligibility

From Medicaid’s original enactment, the program has used a retroactive eligibility standard, meaning that states must begin the date of coverage up to three months prior to the month of application in the case of individuals who would have satisfied eligibility requirements at the earlier date. This requirement essentially removes the disincentive to treat an individual who may be uninsured at the time care is sought and who subsequently acquires coverage. The House bill would, beginning October 1, 2017, reduce the retroactive standard to the month in which application is made.

Federal payment in the absence of documentary evidence of citizenship or legal status

Under current law, states must begin coverage for individuals who are otherwise eligible based on their attestation of citizenship or eligible legal immigration status. The bill would end this practice, requiring documentary proof of citizenship or legal status before eligibility begins; it would bar federal funding during reasonable periods states may establish to allow eligibility to begin while necessary documentary proof of citizenship or legal status is being gathered. The legislation would create an exception to this federal funding ban for individuals receiving Medicare, Supplemental Security Income, or Social Security Disability Insurance and children in certain federally funded adoption and foster care placements, as well as newborns who qualify as “deemed eligible” persons (that is, who are automatically considered eligible and enrolled) under the law.

Home equity

Under current law, states disregard the value of a home when determining Medicaid eligibility for an individual in need of long-term community-supported care. Home equity value up to $500,000 must be disregarded but states can go as high as $750,000, an important type of flexibility when addressing health care needs of people with low incomes who can be maintained in their homes but whose homes have a high-dollar value. The bill would take away this state flexibility, capping the equity value at $500,000. The restriction would take effect 180 days after enactment, with longer periods for states that need to adopt the change through legislative reform.

Safety-net funding for non-expansion states

The bill would provide a $10 billion pool ($2 billion annually) between calendar year (CY) 2018 and 2021 for allocation among states that have not expanded Medicaid. (The language here is confusing, ending the fund in 2021 but later explaining that the FMAP formula applicable to the fund ends in 2022.) Payments out of the annual $2 billion fund would be made in proportion to each non-expansion state’s percentage of the U.S. population ineligible for Medicaid with family incomes below 138 percent of poverty. During the FY 2018-2021 time period, the fund would be allocated at 100 percent federal financing; in CY 2022 (potentially the fund’s final year if the fund does in fact continue through this year), funding would drop to 95 percent, with a 5 percent state contribution requirement.

The fund is extremely modest in relation to the financial support that non-expansion states have foregone. For example, had Texas—which alone accounts for a quarter of all eligible people in the U.S. who fall into the Medicaid coverage gap—expanded its Medicaid program, the state would have received an estimated $100 billion in federal funding over a 10-year period.

Eligibility redeterminations

Under current law, states conduct annual eligibility reviews for both the Medicaid population with incomes below the poverty level and the new adult expansion population. Federal law also requires that individuals report any changes during a year that could affect eligibility, such as changes in earnings that affect gross income or changes in family composition that in turn can affect whether household income falls above or below the 138 percent-of-FPL threshold for a family of that size. This annual eligibility redetermination process stabilizes enrollment, since, in the absence of any changes in family circumstances that could affect eligibility, families need not be put through meaningless administrative review and states can avoid added the costs and administrative burdens of frequent redeterminations.

Yet despite its emphasis on “reducing state administrative costs” and on coverage continuity, the bill would impose a mandatory six-month eligibility redetermination requirement beginning October 1, 2017 in the case of the new adult expansion population. The bill would also increase by 5 percentage points the federal match for state administrative activities in connection with more frequent redeterminations (suggesting that states fiercely resisted this change at least in the absence of more funding). It appears that at least where Medicaid is concerned, the House at least is willing to expend more federal funding on needless administrative burdens whose impact may be to induce churn rather than promote continuity.

Subtitle C — Per Capita Allotment for Medical Assistance

Since Medicaid’s enactment 50 years ago, states have been assured that the federal government would fully share in the cost of medical assistance provided to eligible people. Federal payments are defined by a formula pegged to state wealth, with the federal match rate ranging from 50 percent to 75 percent of permissible state expenditures. Federal payments are made for covered medical services furnished to enrolled beneficiaries by participating providers.

In the case of beneficiaries for whom enhanced federal matching is available under the ACA, the FMAP is far higher, declining from 100 percent in CY 2016 to 90 percent in CY 2020 and thereafter. Separate formulas apply to federal contributions to state administrative expenditures, also on an open-ended basis tied to permissible state costs.

As a general matter, state Medicaid expenditures are below those made by Medicare or private insurance for a comparable set of services. States have a strong interest in controlling spending, since they are liable for a significant portion of the cost of their programs.

At the same time, however, individual states can experience spending surges in any given year as a result of numerous factors. Examples are the need for covered services of greater duration and intensity resulting from a major public health threat such as the Zika virus; the advent of new, costly yet highly effective treatments such as drugs to treat hepatitis C; the expansion of the scope of coverage in the face of a major epidemic, such as Virginia’s recent decision to expand coverage for addiction treatment and recovery to address its opioid epidemic; or higher per capita health care spending following a major event such as Hurricane Katrina or Superstorm Sandy. These types of events can temporarily increase spending on one or more classes of beneficiaries: children, the elderly, people with disabilities, or working-age adults.

The House bill would end this half-century partnership, rooted in deep concepts of federalism, and would introduce the most radical redesign of federal Medicaid policy ever attempted. Even as it retains Medicaid’s eligibility, benefit and coverage, and provider and managed care payment requirements (with the important yet limited changes described above), the measure would introduce a per capita cap system into the program. It would end Medicaid’s open-ended funding formula and replace it with a defined contribution disconnected from the actual cost of furnishing necessary health care.

The combination of federal funding reductions and the retention of the program’s comprehensive legal requirements would, in effect, create a perfect storm for states. While it is possible that some of these requirements could be eased by the Trump Administration using its section 1115 waiver authority, section 1115 is actually a limited research and demonstration statute, not a tool for wholesale statutory re-design simply to create new state flexibility. Furthermore, certain Medicaid provisions, such as premium and cost-sharing rules, are by and large excluded from the scope of 1115.

As noted, payment caps coupled with the loss of enhanced federal funding for ACA adults would shift an estimated $370 billion burden to states over 10 years. This amount does not take into account the other costs to states from changes anticipated under the bill, such as the elimination of attestation efficiencies as part of eligibility determination process or more frequent eligibility redeterminations that threaten to increase coverage interruptions. These additional cuts could in turn disrupt coverage, shift more uncompensated care costs onto the states and their localities, and make far more difficult the types of payment and quality reforms now underway in many states.

The House approach, which contains numerous ambiguities, would use state spending information from 2016 to develop “adjusted total medical assistance expenditures,” that is, those state Medicaid expenditures that would count toward the per capita cap. (As discussed below, certain expenditures are excluded from this adjusted total.) Fiscal Year 2019 would serve as the actual base year, with the base year further adjusted to take into account state supplemental Medicaid hospital expenditures under arrangements such as payment boosts aimed at public hospital systems, and special funding received through section 1115 demonstration programs for delivery system reform (see note 1).

Four separate enrollment groups would be established: children; the elderly; adults; and persons with disabilities. Certain expenditures and individuals would be excluded from the per capita spending levels falling within the “adjusted totals” and would be paid outside the per capita rate: vaccines for children; children classified as CHIP children even if covered through a Medicaid expansion (why spending for these children would not be regulated but that for the poorest children would be is not explained); individuals covered on the basis of diagnosed breast and cervical cancer; individuals such as dually eligible Medicare beneficiaries and immigrants receiving emergency coverage; individuals receiving premium assistance only; individuals served through the Indian Health Service; DSH expenditures; Medicare cost sharing subsidies; and administrative expenditures. (The summary of the bill and the actual legislative language are inconsistent; the summary includes administrative expenses, but the legislative language leaves them out.) The inflation adjuster used would be the medical component of the Consumer Price Index.

Beginning in FY 2020, the per capita cap system would go into effect, with a single aggregate payment to each state representing the sum of the enrollment across  the covered beneficiary categories. “Excess” payments would be recouped over the four calendar quarters of the following year. The bill is silent on the process for making states whole in the event of an under-count. Nor does the bill speak to the process that would be used were a state to contest a federal clawback of funds alleged to be excess. In other words, not only does the process not contemplate any periodic or negotiated updating to account for shifting spending patterns, but the measure establishes no specific means by which the states can stop the clock on a federal clawback while disputes are resolved.

How states would manage this financial risk—both inherent in the design of the system and as applied annually—remains the great unknown. As noted, the bill makes no changes in the eligibility groups that must be covered, the services that must be provided, or the payment rules that must be followed. Effectively this leaves states with the Hobbesian choice of either making up the funds that have been lost out of their own coffers or cutting where they can under existing law, notably funding for optional populations such as children and adults with severe disabilities who receive home and community-based care (many of whom are optional); prescription drug coverage; inpatient and outpatient rehabilitation services for adults; preventive services for adults; durable medical equipment; and so forth.

Concluding Thoughts

There’s no doubt about it: Medicaid is a big program. But its size is a reflection of the number of people it covers; the extent of poverty in the U.S.; the greater survival of children and adults with profound disabilities; the greater life spans of the elderly who need decent long-term care in nursing home and community settings; advances in technology; and a program design strategy pursued over five decades by federal and state lawmakers alike that has deliberately positioned Medicaid to function as what has been described as the “workhorse” of the American health care system.

On a per capita basis, Medicaid actually operates quite efficiently, costing less than other forms of insurance. But Medicaid is big because collectively we have asked that it assume a vast range of jobs, from financing care for the highest-risk babies to being the first line of health care defense when natural disasters strike. Some day we may spread these responsibilities across public and private insurers alike, thereby reducing the burden on the program and on states as well. But in light of the decisions we collectively have made about how best to respond to pressing national health needs, the potential effects of such a seminal shift federal Medicaid funding policy point to the importance of a slower, more carefully crafted process of change.

Note 1

The actual language of the bill is unclear; whether or not all of these supplemental payments would go into the 2019 base cannot be ascertained with any certainty. To the extent that delivery system reform incentive payments (DSRIP) are included in the 2019 base year, one might assume a major surge in DSRIP proposals and approvals ahead of the base year.

Author’s Note

The author is grateful for Commonwealth Fund support in preparing this analysis.