Both proposed versions of the Republican health care bill—the American Health Care Act (AHCA) and the Better Care Reconciliation Act (BCRA)–create an option for states to receive Medicaid funds in the form of a block grant (in the BCRA, the Medicaid Flexibility Program). The lessons from welfare reform can provide valuable insights into the potential impact of Medicaid block grants: namely, states may have a considerable incentive to pursue block grants, because they pose an attractive opportunity to cut state spending and allocate Medicaid dollars for other uses should the state desire that outcome.

In 1996, Aid to Families with Dependent Children (AFDC) was converted from an entitlement to a new block grant program, Temporary Assistance to Needy Families (TANF). The TANF grant was fixed in nominal terms, so over the course of 20 years, federal spending on TANF shrunk by 30 percent as state spending also declined by 30 percent. With substantial cutbacks in funding and greater flexibility for states to tailor their TANF programs, caseloads have declined by 45 percent from the peak of AFDC, TANF provides lower benefits per family, and nearly half of current spending goes to programs outside of core welfare purposes (cash assistance, child care, work supports).

The case of welfare reform illustrates a possible scenario under Medicaid block grants: both federal and state spending drop off, with state spending diverted to other uses. To accommodate these changes, it may not be sufficient to cut enrollees, or benefits, or provider reimbursement—states will likely enact all three. Our historical experience with TANF in trying to constrain states to continue spending on the targeted population via maintenance of effort requirements suggests that it is hard to do.

Parallels between welfare reform and Medicaid block grants

AFDC was similar in some respects to Medicaid: the program targeted low-income children and their families; the benefit (cash assistance) was available to all who qualified under income and asset rules; and spending was shared by states with a varying federal match at or exceeding 50 percent. In 1996, federal government converted AFDC to a block grant program and rebranded it as TANF. A proposal to convert Medicaid to block grants was passed in both the House and Senate at this time as well, but was vetoed by then-President Clinton. Then, as now, the driving arguments for block grant conversion included constraining federal spending and granting states greater flexibility.

Both AHCA and BRCA contain a Medicaid block grant option for low-income, non-disabled, non-elderly, non-expansion adults; the AHCA also includes children (although not until several years out into implementation). In other words, families, parents and pregnant women, and even children may be targeted by states for a Medicaid block grant — the same type of population once eligible for AFDC benefits. Based on experience with TANF, we highlight a few outcomes that may result from block grants.

Block grants reduce federal spending over time- as intended

Federal TANF funding has been fixed in nominal terms under the block grant — which resulted in a decline in real, inflation-adjusted value of over 30 percent. Both AHCA and BCRA include inflation adjustments for block grant Medicaid spending tied to the Consumer Price Index, but both are expected to be less than program requirements going forward (particularly the BCRA, which relies upon the Urban, not Medical, CPI). The Medical portion of the CPI tends to rise more quickly than overall CPI, yet the Medical CPI only includes out-of-pocket spending and thus likely understates health care inflation.

The Congressional Budget Office (CBO) estimates an effective 30 percent drop in funding under both bills, although this primarily reflects rolling back the ACA Medicaid expansion and to a lesser degree, the choice to use an inflation index lower than historic Medicaid spending growth. If states elect to receive their federal dollars as a block grant, the reductions in spending could be far greater. Under BRCA, subsequent block grants will only allow for minor adjustments for total (not low-income) population shifts and the urban Consumer Price Index. States with growing poverty and/or a shrinking population will see the largest discrepancy between funds and their projected use of Medicaid benefits under current rules. The block grant option will end the role of Medicaid as a counter-cyclical safety net — during an economic downturn, there will be no increase in federal support even as more people become eligible for Medicaid and states have fewer resources.

Medicaid spending cuts may be much greater than CBO estimates due to declines in state spending

Per its mandate, the CBO has only projected changes in federal Medicaid spending for either bill. However, the experience with welfare reform suggests Medicaid expenditures will drop substantially further when accounting for changes enacted by states.

The drafters of TANF incorporated maintenance of effort rules to keep states’ spending on the low-income families targeted by the former AFDC program. States were obligated to continue funds at a minimum of 80 percent of AFDC expenditures. States could therefore immediately cut their own expenditures by 20 percent and then drift downward, as there was no inflation adjustment included. Some states also found ways to substitute some federal TANF funds for state dollars. Over time, state contributions to TANF declined by 50 percent, both due to the nominal block grant and other considerations. Currently, the number of families served with cash benefits has fallen by more than 50 percent and maximum benefit levels have fallen by 26 percent.

Under either health care bill, states would see their obligated contributions to Medicaid fall immediately from their current federal medical assistance percentage (FMAP). The AHCA does not include a maintenance of effort requirement for the block grant option. States that elect a block grant would be freed from putting forth any state funds to receive Medicaid payments. The price to the state for another dollar of Medicaid spending would rise (from as low as $0.50 to dollar for dollar), thus considerably lowering the incentives for states to maintain their Medicaid expenditures. The BCRA does include a maintenance of effort requirement, with states matching the block grant allocation according to the enhanced FMAP. Given that the enhanced FMAP will rise to 88-100 percent in 2018, (i.e., states spend 0 to $0.12 per dollar to receive the federal match), the effective state obligation is only slightly greater than the zero-match requirement under the AHCA. Medicaid expenditures account for over 20 percent of state budgets. It seems highly unlikely that all 50 state legislatures and DC will pass up the chance to offset other state expenditures with newly available funds.

Flexibility can be a double-edged sword

States also reduced benefits to TANF enrollees by diversion of existing funds to non-TANF uses. By converting AFDC to a block grant, lawmakers hoped that states would take advantage of greater flexibility to support programs aimed at helping families to transition from cash assistance to work in innovative ways. However, states increasingly have allocated money to other programs, such as child welfare, refundable tax credits, and out of wedlock pregnancy prevention which do not always target the pre-TANF AFDC population. States also used TANF funds to cover budget gaps and pay for tax credits. Currently, less than half of TANF spending goes towards core welfare programs (cash assistance, work supports, and child care).

For states that choose a Medicaid block grant, increased flexibility could enable them to expand upon promising initiatives, from addressing social determinants of health to integration of physical and behavioral health services. However, it should be noted that recent innovations within Medicaid have been pursued in conjunction with—not in lieu of—medical care. Both the AHCA and BCRA list a limited set of required services, thus implying other benefits may not have to be provided under a block grant option. The AHCA offers little detail, with no specificity on diagnostic, mental health services, or treatment for substance use disorders. The BCRA requires those benefits but does not include prescription drugs. If total federal Medicaid funding drops by 50 percent or more, how will states choose to allocate those flexible but small dollars?

The BCRA further outlines other options that states can adopt to reduce state spending on Medicaid benefits. States can alter the amount, duration, and scope of benefits, thus opening the door for time limits (another feature of TANF). Enrollees can be charged premiums, co-payments, and deductibles (not to exceed 5 percent of individual income). In addition, the BCRA reinforces the capacity of states to divert Medicaid funds under a block grant-carryover from a prior year’s block grant can be used for “any other purpose” and the Secretary is barred from prohibiting the use of the funds for a program that is “not related to health care.” Thus, the BCRA lays out several avenues by which states could pull back from providing health care benefits to the lowest-income Americans.

Lessons for Policymakers

Following welfare reform, a number of states pursued a “race to the bottom,” with a shrinking number of families receiving cash or work or child-care related assistance and weaker capacity to protect children from the negative effects of poverty and economic shocks. During the Great Recession, TANF could not and did not expand to buffer families from the worst of the economic crisis in the way it had in the past, despite the creation of an ARRA emergency fund. Medicaid, as a block grant program, would be poised to do the same — leave more low-income adults and families vulnerable to poor health outcomes, at a time when they are least able to pay for their care.