Medicaid block grants can work, but there are limitations

Momentum is building for block grants as a solution to a problem that every state faces in its Medicaid program: out of control spending. Medicaid is the most expensive line item in state budgets. Yet the amount that each state expends on Medicaid is determined by Washington, not by the state.

The 2016-17 Texas biennial state budget is $209.9 billion. The largest item, $77.2 billion, goes to Health and Human Services (HHS). Sixty-two billion dollars of the HHS budget — 30 percent of all Texas spending — is consumed by the Texas Medicaid program.

The reality of current Medicaid programs is not in keeping with the original 1965 law, which offered each state a jointly funded, state administered program to provide medical care to those unable to support themselves.

Over the decades, the federal government has taken over every aspect of state administered Medicaid programs. From eligibility standards through authorization and verification requirements, to mandated benefits packages, Washington tells the states what to do. This means that Washington mandates how much each state must spend, and because it is federally mandated spending, Medicaid is the first dollar spent.

The result is financial starvation of all the other activities that states are responsible for on behalf of their citizens: education, infrastructure, energy supply, the environment, criminal justice, even election process and border security. Everything else must make do with Medicaid’s leavings.

This is intolerable. The states cannot provide for their citizens because Washington is dictating, through Medicaid, how the state spends its money.

A current proposed solution is called Medicaid block grants, which is code for the following. Washington gives each state its federal Medicaid contribution, and the state decides how to spend the money.

The amount of federal funds given to state Medicaid programs is established by a formula called the FMAP (Federal Medical Assistance Percentage.) The FMAP is a ratio of the state’s average per capita income compared to the national average income. The lower the average state income, the more that Washington contributes. By law, the ratio cannot be lower than one meaning at a minimum, Washington will match each dollar contributed by the state.

Alabama has the nation’s lowest average per capita income ($26,338) and therefore the highest FMAP ratio, 2.35. This means for every $1.00 that the state of Alabama pays into its Medicaid program, Washington contributes $2.35.

Twelve states with high per capita incomes receive the minimum: dollar for dollar matching. They are California, Colorado, Connecticut, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Dakota, Virginia, Washington, and Wyoming.

Whether a state only gets one federal dollar for each state dollar expended on Medicaid, or like Alabama, gets more than two federal dollars per Yellowhammer dollar, the FMAP is a very powerful perverse incentive. It rewards the very outcome we wish to avoid — overspending.

Everyone (except Washington) agrees that states understand the needs of their citizens better than beltway bureaucrats, and that the state would be more efficient than the federal government in getting care to its needy citizens if it controlled the money.

There are indications that the Trump administration may be amenable to offering block grants to those states that request them. There is, however, a problem: the Affordable Care Act (ACA) is the law of the land. It controls precisely those administrative activities that the states wish to take over.

The pre-election war cry to repeal and replace, Obamacare, seems to have died down. Now, some suggest preserving Obamacare with regulatory modifications. Others advocate starving the beast — defunding the ACA.

If a defunding occurs, risk corridors, bailouts, Co-ops, subsidies, healthcare.gov, and Health Insurance Exchanges would all dry up. Either way, the legal mandates would remain in place and the controls would remain in federal, not state, hands.

Medicaid block grants can work to ameliorate financial and medical care crises in the states but only if the grants restore the original intent of Medicaid: state administration. Unless we wish to continue the Obama administration’s practice of extra-legal legislation by Executive Order, the proper authority — that is Congress — must change the law itself, not merely the rules and regulations.

Whether this means repealing the whole ACA and passing an entirely new healthcare law, or repealing parts of the law and replacing them, what matters is putting control of state spending back into the state’s’ hands. Without that, Medicaid block grants won’t work.

Dr. Deane Waldman, MD MBA, is Director of the Center for Health Care Policy at the Texas Public Policy Foundation and author of The Cancer in the American Healthcare System. He can be reached at [email protected].