June 13, 2017

Reforming Medicaid to Per-Capita Payments: An Analysis of Various Growth Rates


  • In the process of repealing and replacing Obamacare, the American Health Care Act includes structural reforms of the Medicaid program.
  • The new system will change the program from an open-ended, fee-for-service entitlement to a fixed payment to states for each enrollee.
  • The biggest question concerning this reform is how to set the rate of growth for the per-capita payment.

The House’s American Health Care Act includes structural reform of the Medicaid program. Under the changes, the program will no longer be an open-ended entitlement, but rather states will receive a fixed payment per enrollee. This change is designed to give states more flexibility in providing Medicaid benefits and at the same time put the program on a more sustainable financial footing. 

Share of Total Medicaid Enrollment and Expenditures by Enrollment Group (2015)

Estimated-Medicaid-Enrollment-and-Expenditures

MEDICAID REFORM UNDER THE AHCA

The AHCA would make a number of important changes to the Medicaid program. One of the most significant would be reforming the way federal payments are made to states. Under current law, the federal government covers about 59 percent of Medicaid’s costs on average, leaving states to cover the rest. Under reforms in the AHCA, the federal government would instead provide states with fixed per-capita allotments – changing the program from an open-ended one to one with predictable, fixed costs.

This payment reform would start in fiscal year 2020. States would, at that point, receive a capped amount of money per Medicaid enrollee based on the eligibility category into which an enrollee falls. There are currently five Medicaid categories: elderly; blind and disabled; children; non-expansion adults; and expansion adults. All five categories would remain.

As a baseline, the AHCA’s initial payment amounts for each category would be based on state Medicaid spending in 2016. The rate at which payments grow, however, would be different depending on category. Funding for the elderly and the blind and disabled would increase annually at the medical care component of the urban consumer price index inflation rate plus 1 percentage point. Funding for all other categories would be indexed to increases in the medical care component of the urban consumer price index. If a state’s spending exceeds the cap, it would have to pay back the excess funding the next year.

Although the Congressional Budget Office projects the AHCA would reduce Medicaid spending by $834 billion (2017-2026) compared to current law, CBO’s analysis does not break out how much savings come from other Medicaid changes included in the bill. Thus, the amount of savings estimated by CBO that stem solely from the per-capita allotment reforms is not yet known.

OPTIONS FOR THE SENATE

As the Senate writes its own health care bill, it will need to decide the rate at which to grow the per-capita payments. Given that the growth rate varies by eligibility category in the House’s bill, it is useful to remember that spending varies widely by type of beneficiary. For example, children made up 41 percent of total enrollment in 2015 but only accounted for 19 percent of spending. 

Historical spending compared to various measures of inflation

Projections for future spending can often be uncertain. Thus, historical spending data can be a helpful guide when evaluating possible growth rates for the Medicaid program. On average, spending growth per beneficiary was below the rate of growth for both the CPI-U and CPI-M over 2002-2012.

Given that the House bill imposes a different growth rate for certain population categories and that spending by population categories varies, breaking out historical spending by population is also informative. The following charts provide historical data on the average rate of Medicaid’s growth, as well as how fast spending has risen for different eligibility categories – and then compares them with various growth indexes.

Medicaid Per-Capita Spending: Average of All Enrollees

Average

Medicaid Per-Capita Spending: Aged

Aged

Medicaid Per-Capita Spending: Adults

Adults

Medicaid Per-Capita Spending: Children

Children

Medicaid Per-Capita Spending: Disabled

Disabled

Projected Medicaid Spending

The CBO makes projections regarding future Medicaid spending and future increases in inflation. The CBO stated that the growth in the medical care component of the consumer price index is projected to average 3.7 percent over the next decade. CBO projects growth in CPI-U to average 2.4 percent over the next decade. Medicaid spending is expected to increase an average of 4.4 percent.

However, looking at the average projected growth rate for each population category shows how different the CBO expects spending growth to be in the various Medicaid population categories over the next decade.

Projected Average Rates of Growth for Medicaid Enrollees by Category and Various Measures of Inflation (2017-2026)

Projected-Rates-of-Growth-and-Inflation

Issue Tag: Health Care