Although it differs in important details, the draft Medicaid provisions of the Better Care Reconciliation Act — the Senate’s version of Affordable Care Act “repeal and replace” —  share the vision of its House-passed counterpart, the American Health Care Act: to, as much as possible, shield the federal government from the cost of Medicaid. Like the House, the Senate would accomplish this goal by fundamentally altering the terms of Medicaid itself rather than by ending it and replacing its entitlement structure with a new, successor program as Congress did in 1996 when it replaced the Aid to Families with Dependent Children (AFDC) program with Temporary Assistance to Needy Families (TANF).

Medicaid is far too complex, and the rules of reconciliation far too constrained, to permit the creation of a new program. Instead, both the House and Senate revise the terms of a law that states have relied on for over a half century to fund health care for the indigent, a basic function of all state governments.

The Senate bill, like the House measure, will have massive financial consequences for states, regardless of whether a state has opted for the ACA Medicaid expansion or eschewed this choice. States that want to continue to qualify for federal Medicaid contributions – so vital not only to health care but to their overall economies as measured in employment and local economic activities — will have little choice but to make up the deficits created by legislation that grafts unprecedented payment constraints onto the statutory federal funding formula.

Inevitably, the caps mean that states with costlier programs will face larger funding deficits. But the cost of Medicaid is not simply a function of design choices states make in terms of whom and what to cover. Even states with constrained programs will face a funding gap driven by essentially uncontrollable factors such as the decline of good paying jobs that carry health insurance, an aging population, and public health catastrophes such as Zika or the opioid crisis.

Indeed, it is fundamentally wrong to think of states’ Medicaid design choices as optional, even though they are as a matter of law. States choose to cover optional groups and services in response to underlying economic, demographic, and health forces such as infant mortality, elevated disability rates among children and adults, or high numbers of very old residents. Thus, while the Medicaid and CHIP Payment and Access Commission recently reported to Congress, only slightly more than 47 percent of all Medicaid spending is for mandatory services to mandatory populations, the report also reminds us that in a statute in which prescription drugs and inpatient psychiatric rehabilitation services for adults are technically optional, virtually nothing that Medicaid covers is truly a state option. State programs reflect their effort to deal with population health.

The potential federal funding losses to states stemming from the pending legislation are immense. The Urban Institute pegs the dollar loss flowing from the House version of the legislation at $373.6 billion over ten years; over $50 billion of that amount would be tied to the decline in federal payments for traditional populations and the rest would be linked to the combined effect of the loss of the enhanced federal payment rate for the ACA expansion population coupled and the per capita cap. Urban also points out that the losses would grow far higher if states respond to the loss of enhanced federal funding for the expansion population by eliminating coverage entirely. Urban also reports that under a scenario that applies the capping formula used in the Senate draft (the same formula used by Speaker Paul Ryan in A Better Way) 10-year losses would climb to $841 billion — $467.4 billion less in federal funding than provided by the House.

Other reports add key dimensions to the Urban research.  Researchers at Brookings show that had the House version of the per capita cap been enacted in 2004, by 2011 states would have had to increase their own funding by 11 percent just to maintain their programs. One state would have had to increase its own spending by 77 percent, while 8 others would have had to increase their own spending by 25 percent or more. Ironically perhaps, the Brookings study also found that states with lower per capita spending in the base year would have experienced greater out-year losses. This happens because under any rate-setting formula that fails to periodically rebase (which is the case under both the House and Senate measures), base years can be fickle; states that experience low spending in one base year may experience surges in later years.

Similarly, researchers at Health Management Associates have found that despite the federal Medicaid funding formula, the effective result of altering that formula by superimposing a fixed cap on federal payments otherwise due — as is the case with the AHCA — is to increase the state share of Medicaid by more than $195 billion.

And of course, all of these estimates assume a seamless transition to a new federal payment system. A close look at the actual legislative models, however, reveals innumerable possibilities in which implementation can go awry, pushing the flow of federal funds even lower, with ongoing and unending opportunities for payment disputes, denials, and federal payment clawbacks. Experience tells us that the transition from current law to the complexity of a new Medicaid ratesetting formula that hinges on the use of arbitrary payment caps tied to historic state spending would be chaotic; in this case, the transition would be overseen by an Administration still in the early stages of ramping up its operational capacity.

These estimates of federal losses do not take into account other federal spending reductions that can be found throughout both the House and Senate bills, such as elimination of federal payments for retroactive coverage and the ban on federal payments for covered preventive services furnished by Planned Parenthood.

On the surface of things, the Senate bill appears to offer states a partial Medicaid off-ramp where indigent health care is concerned. The measure would extend the premium tax credit structure, now tied under the ACA to a lower threshold pegged to the federal poverty level, to people with no income at all. States conceivably could eliminate Medicaid coverage for eligible individuals and instead force them to rely on subsidized private insurance products.

But the tax subsidy formula in the Senate draft leaves even people with no income at all responsible for 2 percent of the cost of their premiums, and the actuarial value of the health plans they would be able to buy could be as low as 58 percent, leaving them responsible for out-of-pocket payments for 42 percent of the cost of covered services. How the system would work for people who pay no income tax is unclear. Furthermore, were a state to take advantage of the draft bill’s expanded State Innovation Waiver program (draft bill § 206) and elect to eliminate critical services entirely from the essential health benefit package, the scope of coverage could be so limited that impoverished residents could find themselves totally without coverage for maternity care, prescription drugs, inpatient rehabilitation services, mental health services, and other vital types of health care. The funds made available under the bills for states to pay for uncovered services and cost-sharing pale in comparison to what these costs actually might be for the poor.

Key Elements of the Senate Draft

A Ban On Federal Payments To Planned Parenthood For One Year (§124)

Like the House bill, the Senate draft would bar federal contributions to state expenditures in connection with covered services furnished by Planned Parenthood clinics. As with the House bill, the Senate draft does not name Planned Parenthood, but there is no doubt regarding who is the subject of the payment ban given the draft’s description of the type of “prohibited entity” to which the payment ban applies. The Senate draft, like the House bill, invests additional funding into community health centers to compensate for the loss of Planned Parenthood. This investment is based on the twin assumptions that health centers (a) exist everywhere that Planned Parenthood clinics are found and (b) therefore will be able to ramp up services of equivalent level and scope to what beneficiaries lose in states that cease paying Planned Parenthood using their own state funds.

Ending Hospitals Presumptive Eligibility Option (§ 125)

Like the House bill, the Senate would, effective January 1, 2020, eliminate hospitals’ option to offer presumptive eligibility to the expansion population

Eliminating Enhanced Federal Funding To Cover The ACA Adult Expansion Population (§ 126)

Like the House, the Senate would retain the ACA adult expansion population as a Medicaid eligibility option. (Current Medicaid law classifies this group as a mandatory population, but the United States Supreme Court’s 2012 decision in NFIB v Sebelius effectively rendered the language of the law unenforceable by the HHS Secretary as a mandatory  condition of federal financial participation in state programs). And like the House, the Senate would eliminate the special enhanced federal payment level to which states are now entitled. The Senate measure calls for a longer-term phase out of the expansion funding rate than does the House measure. The Senate’s version is a 4-phase step-down process spanning January 1 2020 through December 31, 2023, with the federal rate set at 90 percent for state expenditures in calendar year 2020, 85 percent in for state expenditures in calendar year 2021, 80 percent for calendar year 2022 expenditures and 80 percent for calendar year 2023 expenditures. (Each year expansion states would receive the higher of the enhanced rate or their normal federal funding rate).

Unlike the House bill, the Senate draft does not appear to tie the time limited enhanced rate in expansion states to continuous coverage without more than a 1-month break.

Eliminating The Essential Health Benefit Coverage Standard For The ACA Expansion Population (§ 126)

Like the House, the Senate would eliminate the essential health benefit (EHB) coverage standard for the expansion population after December 31 2019, presumably leaving states free at that point to either adopt the same coverage standards that apply to the traditional population, retain the EHB in a state’s current form, or offer far more limited benefits. In other words, the Senate draft appears to eliminate the existing coverage standard while providing no indication of what would take its place.

Enhancing Federal DSH Allotments For Non-expansion States (§127)

The draft would reward non-expansion states in two ways. First, it would cancel scheduled DSH payment reductions in the non-expansion states. Second, beginning in FY 2020, the draft would provide a 3-year DSH payment increase for non-expansion states under a federal formula that increases the DSH allotment to non-expansion states whose Medicaid enrollment is below the national average. This temporary  payment increase in effect rewards states that have not adopted the Medicaid expansion and that presumably all would have enrollment rates below the national average for all states, assuming that the Medicaid expansion state enrollment rates are included in the formula (the draft is hazy on this point but appears to refer to enrollment rates in “all” states).   By rewarding non-expansion states with relatively low Medicaid enrollment rates, the bill could, of course, set up a scenario in which the federal government is literally incentivizing non-expansion states to cut their traditional beneficiary optional rolls in order to qualify for a bonus.

Expansion states, by contrast, would receive no relief from the scheduled DSH cuts, even though hospitals in expansion states continue to experience considerable uncompensated care costs, even if reduced.  Nor does the draft take into account the possibility of a rise in uncompensated care, even in states that hold onto their Medicaid expansions, if the changes to Marketplace plan pricing and the Marketplace coverage subsidy system result in a surge of uninsured, near-poor people.

The draft is also unclear regarding whether a state that is an expansion state today can effectively become a non-expansion state — and thus possibly qualify for more DSH payments – by dropping the expansion before 2020. Of course, if many states do this, such a shift would affect the national enrollment rate calculation, and thus, which states qualify for the bonus.

Eliminating Retroactive Eligibility (§128)

Like the House the Senate draft eliminates retroactive eligibility, the Senate draft under the ironic heading, “Reducing State Medicaid Costs.” Retroactive eligibility has been a feature of Medicaid since 1965 and is a vital aspect of its safety-net status. The retroactivity provision helps insure that indigent people are not turned away from expensive care because they are not yet Medicaid enrollees. The House and Senate measures both would shorten the retroactive eligibility look-back period from 3 months to 1 month.

Giving Non-Medicaid Expansion States (More) Additional Federal Funding For Hospital Care (§129)

Like the House bill, the Senate draft would permit states to provide “safety net providers” with an additional upward payment adjustment if they had not adopted the Medicaid expansion.  The payment adjustment period would extend from FY 2018 to FY 2022.  As with the DSH bonus, the bill effectively rewards non-expansion states through provisions aimed at infusing additional funds into hospital care. To add to its bonus feature, the provision would increase the federal contribution rate for supplemental hospital payments to 100 percent for calendar years 2018-2021 and 95 percent in calendar year 2022. Annual allotments to any state would be capped at $2 billion. As in the House, additional payments would be targeted entirely to hospitals rather than to providers furnishing uncompensated care more generally.

Encouraging States To Conduct More Frequent Eligibility Redeterminations (§130)

Like the House, the Senate draft seeks to reimpose more frequent eligibility redeterminations, presumably to shorten enrollment periods. Unlike the House bill, however, the Senate bill makes this optional with states. Like the House bill, the Senate bill would increase by 5 percentage points the federal contribution to state costs in connection with a more frequent eligibility redetermination process.

Allowing States To Impose A Work Requirement As A Condition Of Eligibility (§131)

As in the House bill, the Senate would permit states to impose work requirements on non-disabled, nonelderly, and nonpregnant adults. Both measures would use the TANF work rules as the basis of a new Medicaid work policy. States that have sought to impose work standards under Medicaid on an 1115 demonstration basis have similarly used TANF policy as their jumping-off point.

Limiting States Use Of Provider Taxes As Source Of State Funding (§132)

At a time when states would lose hundreds of billions of dollars in federal funding and would be forced to find hundreds of billions of dollars in additional revenues to simply maintain their Medicaid programs, the senate draft would impose new restrictions on states’ use of provider taxes. Broad-based and uniformly applied provider taxes have been an explicitly recognized feature of federal Medicaid policy since the early 1990s and are integral to the funding of state programs. Indeed, special purpose taxes are a basic feature of state tax policy generally. The federal government similarly makes use of special purpose fees and assessments (think about the pharmaceutical manufacturer payments that support the FDA).

Current policy treats as permissible provider taxes that are no more than 6 percent of net patient revenues. The Senate draft would phase down lawful taxes to no more than 5 percent of net patient revenue by FY 2025, costing state Medicaid programs a major loss of revenue over the 10-year time period. The Kaiser Family Foundation estimates that this change in permissible taxing structure would affect more than half of all states.

Per capita caps  (§133)

Covering over 30 pages, the Senate draft tracks the House bill in its absence of rebasing as conditions change, the absence of adjusters for volume and intensity, new technologies, or public health crises that cause periodic surges in state spending. The Senate bill also, like the House bill, allows federal clawbacks  of allegedly excess federal payments without any real-time dispute resolution process and fails to provide for any real-time method for correcting federal underpayments. Like the House bill, the Senate bill would maintain the special penalty on federal payments for any state whose DSH allotment was more than 6 times the national average as of FY 2016 and that require political subdivisions to contribute to the cost of Medicaid. (This penalty focuses on New York).

The Senate draft also differs from the House bill in several respects. The draft would permit states to select a base period consisting of 8 consecutive calendar quarters between FY 2014 and the third quarter of FY 2017, but would also permit the HHS Secretary to modify the state’s base period if he determines that the state’s estimates are based on poor quality data. Like the House, the Senate would exempt certain state expenditures and certain populations from the cap calculations. These include DSH payments, non-DSH supplemental payments, Medicare cost-sharing assistance, partial benefit enrollees, CHIP enrollees, beneficiaries served by the Indian Health Service, people enrolled on the basis of a breast or cervical cancer diagnosis, payments for delivery system reforms and uncompensated care pool, and similar payments designated by the Secretary. The Senate draft would also exempt from the capping system medical assistance expenditures made on behalf of children entitled to Medicaid on the basis of disability or blindness. This special childhood disability exemption would end once children reach age 18, at which point their care would become subject to the federal payment cap.

The Senate draft also superimposes a tougher arbitrary upper limit on the federal payment formula. Beginning in FY 2025, the annual inflation adjuster for the caps would drop to the CPI-U, an adjuster substantially lower than the medical inflation adjuster used in the House bill.

In addition, the Senate draft contains an “adjustment to state expenditure targets to promote program equity.”  Under this adjustment feature, states whose per capita spending in any given year exceeds the national mean by 25 percent or more will experience up to a 2 percent downward adjustment in federal payments. The Kaiser Family Foundation identifies certain states as falling into this penalty box based on current spending patterns, although as noted, the mix of states subject to the penalty could change in any single year given on-the-ground conditions at a point in time: North Dakota, Alaska, Pennsylvania, District of Columbia, Delaware, Minnesota, Vermont, Massachusetts, New York, Missouri, Connecticut, Rhode Island, and Maryland. In other words, every state is potentially subject to the penalty — except certain “low density” states, whose most recent census data show population density less than 15 individuals per square mile. Today these states are Alaska, Montana, North Dakota, South Dakota, and Wyoming.

The State Block Grant Option: The Medicaid Flexibility Program (§ 134)

The Senate draft provides a more elaborate version of the House block grant option, one more nuanced in its requirements and somewhat more generous in its funding levels, but nonetheless structured to give states that adopt the option maximum flexibility in relation to the population eligibility groups that can be subjected to a block grant.

The draft limits the block grant to people who belong in the enrollee category (created for purposes of the per capita cap formula) known as “other nonelderly, nondisabled, non-expansion adults.” (Senate Draft §133). Presumably this group consists of deeply impoverished parents and caregivers with incomes low enough to qualify for Medicaid as traditional adults, women eligible for Medicaid on the basis of pregnancy, people whose eligibility is based on Medicaid’s special family planning coverage category, and other possible categories of adults who are not elderly, people with disabilities, or covered as members of the expansion population. The scope of the program thus focuses on women and the very poorest and most vulnerable parents and caretakers.

In order to qualify for the Flexibility Program for these populations, a state will have to file an application containing certain information: proposed conditions of eligibility; a description of the “targeted health assistance” (as opposed to medical assistance, the term used under the regular Medicaid program) it will offer; an agreement to provide enrollment data and other expenditure and quality measurement information; information on how the state will notify people being moved that they are being transitioned from regular Medicaid to the new program; and a statement of program goals. The state would be required to allow public notice and comment on the plan, and the HHS Secretary would be barred from approving a plan until the notice and comment period has run. (In submitting the plan and in approving plan, neither the state nor the Secretary would be required to respond to comments).

For populations covered by the Medicaid Flexibility Program, federal payments to the state program would be in lieu of the normal capped federal medical assistance payments under the per capita payment formula. The draft would cap the initial funding level based on historical enrollment among the beneficiaries who are eligible for inclusion, adjusted to take into account general population changes in the year prior to implementation. In later years, the block grant would grow only by the CPI-U. For purposes of calculating the total amount of federal funding owed to a state, the draft also would cap total population enrollment at the state’s base year level.

The draft would include a state maintenance of effort requirement and payments would retain their essential Medicaid structure — that is, they would be made in response to state expenditures on the population. Presumably as a means of encouraging states to take the option, the federal payment rate would be at the enhanced CHIP level.

The draft would identify certain “types of services” that would have to be included in the state plan as “targeted health assistance” while also allowing states to add certain “optional” benefits not included in the targeted list. The minimum targeted service list includes services one might expect for a population of women and extremely disadvantaged parents and caretakers (e.g., nurse midwife services, family planning services and supplies, family nurse practitioner services, hospital care, non-cosmetic dental care, and pregnancy-related services).  A separate provision of the draft also identifies mental health and substance use disorder coverage as a targeted service and applies parity law to the coverage. But prescribed drugs are maintained as an option. (Since the funding is so constrained, it is difficult to imagine how a state would cover even the targeted services, much less offer optional services). The draft also permits premium and cost-sharing totaling no more than 5 percent of family income in any year.

Quality Measures (§135)

The draft provides a bonus payment for states in the form of enhanced federal payments if states can demonstrate that on a set of child and adult quality measures, they were able to achieve results while also showing lower-than-expected aggregate Medicaid expenditures during an annual performance year.

Expanded State Involvement In Rulemaking (§137)

The Senate draft explicitly affords states a formal position in the development of rules, barring rulemakings that do not include a state consultative role in regulatory development, even if such consultation would otherwise be barred under the notice and comment requirements of the Administrative Procedures Act.

Expanded Option To Provide Inpatient Psychiatric Care (§138)

The draft allows states to provide up to 90 days a year in additional inpatient psychiatric care for working-age adults, subject to a 30 consecutive-day limit. The draft caps the federal payment rate for these services at 50 percent. Since the per capita cap formula does not appear to provide for periodic rebasing when there is a change in the scope of services, it is not clear how a state would add coverage of the service.