Health reform bill would shrink Medicaid, and slow its growth; the bill is unlikely to pass in its present form

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Richard Evans / Scott Hinds / Ryan Baum

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March 8, 2017

Health reform bill would shrink Medicaid, and slow its growth; the bill is unlikely to pass in its present form

  • House Republicans’ healthcare bill already appears to be (politically) dead; however, the bill at least shows Republicans’ cards with respect to how they’re approaching ‘replacement’ coverage, specifically Medicaid, and premium subsidies for persons not eligible for Medicaid. This note focuses on proposed Medicaid reforms
  • The bill eliminates the ACA expansion of Medicaid by closing the door on new expansion enrollees on 12/31/19, and forcing these enrollees out of Medicaid if they lose eligibility for more than a month, or move to another state. Given that the expansion population tends to move in and out of eligibility frequently, this provision would effectively eliminate the Medicaid expansion in just a few years, reducing federal Medicaid spending by approximately 20%, and total (state + federal) Medicaid spending by about 13%
  • The bill shifts federal funding of Medicaid to per-capita caps; block grants, an option for states in a prior draft, are not an option in the current draft. Per-capita caps are calculated by beneficiary type based on actual spending, by state, in 2016, inflated to 2019 at the medical component of CPI, and at ‘medical CPI’ in years after. States can spend more than the capped amount per beneficiary but would carry 100% of the marginal costs. If states spend less than the capped amount per beneficiary they keep 100% of the savings. Medical CPI has grown as much as 2.8% slower than per-beneficiary Medicaid spending in recent years, thus indexing per-capita caps to medical CPI implies slower program growth
  • As proposed, the caps would result in per-capita federal subsidies that vary by just over 2x across the 50 states. States that would permanently receive per-capita subsides below the national median have 28 Republican senators. While per-capita caps are a structurally viable option for Medicaid, they almost certainly cannot pass unless they’re recalibrated in a manner that limits the variance in federal subsidies across states
  • The current proposal would shrink Medicaid significantly, and cause the program to grow much more slowly. By eliminating the ACA expansion the current proposal shrinks Medicaid by 13%; by indexing per-capita cap growth to medical CPI the current proposal slows per-capita spending growth by ≤2.8%; and, by eliminating the requirement for states to spend state funds in order to get federal matching, frees (and even incentivizes) states to reduce state funds used by Medicaid

Unlikely to pass in current form

The Republicans’ draft health legislation is unlikely to pass in anything approaching its current form, for multiple reasons. The leadership’s intention is to pass the bill as a reconciliation measure, which requires that the bill not add to the federal deficit, and that all elements of the bill have immediate budget relevance. The bill does not yet have a CBO score; however, it seems unlikely that the bill is deficit reducing as written (ACA taxes are repealed, but not all ACA coverage provisions are withdrawn). And, the bill’s efforts to restructure Medicaid and establish refundable tax credits may prove to be de novo policy making that exceeds the limits of the Senate’s Byrd rule[1]. Republicans are split on the bill, with defections occurring from both the right and left wings of the party; and, major stakeholder organizations[2] have already lined up in opposition – all before it’s 24 hours old. Adding to the already charged political backdrop, the bill takes dead aim at federal funding for abortion, one of the four surest ways[3] to polarize and derail the legislative process

Some elements of the reform approach could survive and become law

Nevertheless, the bill showcases structural features of the Republicans’ repeal / replace strategy that might ultimately find their way into law, chief among these being the shift of federal Medicaid contributions to a per-capita cap format, and reformatting / recalibration of the ACA’s premium tax credits as less generous, less progressive, but more widely available refundable tax credits. This note focuses on Medicaid; we’ll handle the balance of the bill in a subsequent note

Medicaid would shrink under the current proposal; per-capita caps will need to be recalibrated to get this through the Senate

The bill allows non-expansion states to join the ACA’s Medicaid expansion until 12/31/19. From 1/1/20 forward, expansion enrollees in any state can only remain on Medicaid if they maintain continuous eligibility on a month by month basis. If an expansion enrollee loses eligibility for a month, they cannot return to the Medicaid program unless they meet pre-expansion eligibility requirements. As such after 1/1/20 there are no more entries to the expansion pool, there are only exits; once the pool of expansion beneficiaries that had eligibility on 12/31/19 either loses eligibility (for at least one month), moves to another state, or dies, the expansion will have been eliminated. This is likely to happen relatively quickly, given that expansion enrollees’ incomes tend to move into and out of eligibility with fairly high frequency. Net federal spending on expansion beneficiaries was approximately $64B in 2016[4], or about 20% of federal Medicaid spending, and about 13% of total (state plus federal) Medicaid spending

States that choose not to expand their Medicaid programs will be given greater funding for payments to safety net providers. To fund these higher payments, non-expansion states will share in a $2B federal pool in proportion to the share of all non-expansion states’ persons with incomes below 138FPL living in the non-expansion state in question. This is plainly a counterincentive to states that might otherwise choose to expand. And, because a state’s share of the $2B is a function of their share of total non-expansion states’ <138FPL population, the motive not to expand only grows if other states choose to expand (thus raising the remaining states’ share of the $2B)

Aside from the roll-back of the expansion, the most important change to Medicaid is the shift from federal matching to per-capita caps. The caps are calculated for five beneficiary classes[5], and are equal to 2016 per-capita spending in each category, inflated forward to 2019 at the rate of inflation in the medical component of the consumer price index (CPI). Using 2015 actual federal spending by beneficiary category, we estimated the average (across all beneficiary types) federal per-capita cap for each state in 2015 dollars. Exhibit 1 shows the estimated average federal per-capita cap by state (black line, left axis), and each state’s senators by party (Republicans=red, Democrats=blue). As written, the bill would result in federal per-capita caps that vary by just over 2x (excluding DC), and that are below the national median for states with 28 Republican senators. With only 52 Senate seats the Republicans can afford only 2 Senate defections, making Senate support for the measure unlikely in its present form. The annual cost of bringing all below-median states’ per-capita caps up to the median would be approximately $36B (in 2015 Medicaid dollars); the annual cost of just bringing to the median the per-capita caps of states with Republican senators would be approximately $18B. Either figure is unrealistically high

The bill inflates per-capita caps forward at the medical component of CPI, which has generally been slower than growth in per-beneficiary spending. Exhibit 2a shows growth in the medical component of CPI (black) v. growth in per-capita Medicaid spending (green), with the latter exceeding the former until the inclusion of relatively healthier enrollees as a result of both the financial crisis and the ACA expansion. The relative rates of growth in medical CPI and per-beneficiary spending for Medicaid’s Children’s Health Insurance Program (CHIP) is relatively unaffected by changes in average health of beneficiaries, and so may be a better proxy for the relative rates of growth in medical CPI (3.7% since 1999) and per beneficiary Medicaid spending (5.5% since 1999) (Exhibit 2b)


We’re convinced the Republican bill can’t pass in its current form, and that the Medicaid per-capita caps are structurally feasible, but unlikely to pass as presently calibrated. If we assume the per-capita caps are recalibrated, and that the remaining Medicaid reforms ultimately are passed, we would expect real spending on Medicaid to decline for three reasons: 1) federal expansion funding eventually would be withdrawn as expansion beneficiaries lose eligibility, reducing federal Medicaid spending by roughly 20% and total program spending by roughly 13%; 2) states would no longer be required to spend in amounts proportional to federal funding received, and accordingly would be more likely to reduce their own spending, though we have no immediate means of estimating the degree; and, 3) the rate of growth in federal per-capita caps looks to be substantially (≤ 2.8%) slower than historic growth in per-capita Medicaid spending


  1. The Byrd rule requires that all elements of a reconciliation measure be immediately budget relevant. Importantly, Byrd rule challenges are permitted at the level of words and phrases, meaning opponents of the bill have an opportunity to effectively gut the bill’s meaning during floor debate
  2. In particular AARP, the American Hospital Association (AHA), and the American Medical Association (AMA), among others
  3. The others being gun control, flag burning, and school prayer. In all likelihood gun control will find its way into the final bill
  4. Table 2, Page 31:
  5. Elderly, blind and disabled, children, adults, and expansion enrollees


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