Texas public policy foundation
How states could transform Medicaid with a block grant
 
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This commentary originally appeared in National Review Online on October 7, 2015.

Among GOP candidates who have bothered to roll out Obamacare repeal-and-replace plans, a common theme has emerged: States should have more control over Medicaid, the joint federal-state health-care program for the poor, and that control should come in the form of a block grant.

The basic idea of a Medicaid block grant is to give states maximum flexibility in exchange for their accepting a fixed amount of funding from the federal government. It’s been around for decades, but the block-grant scheme is gaining new traction as states face skyrocketing Medicaid costs. Back when he was still in the race, Wisconsin governor Scott Walker proposed what was probably the most detailed block-grant plan for Medicaid to date. Florida senator Marco Rubio and Louisiana governor Bobby Jindal also have endorsed some form of a Medicaid block grant. If a Republican moves into the White House in 2017, a block grant will likely be on the new administration’s health-care agenda.

But as often as GOP candidates invoke block grants in the abstract, they rarely say what specific Medicaid reforms state leaders should pursue with their newfound freedom.

The goal should be to make Medicaid more like private health insurance and less like an open-ended entitlement, and one way to do that is to use Medicaid funds to subsidize private health-insurance premiums. Arkansas has tried something like this with its “private option” for Medicaid expansion, which allows newly eligible enrollees the option to select private coverage through the health-insurance exchange established by the ACA.

The trouble is, as many conservatives have rightly noted, Arkansas’s plan is just another form of Medicaid expansion, because the private option must comply with onerous federal Medicaid rules. For example, the private option’s “Health Independence Accounts,” or HIAs, are supposed to mirror health savings accounts (HSAs). But because the state can’t compel enrollees to contribute their own funds (Medicaid is a federal entitlement, after all), these new HIAs don’t work at all like health savings accounts. In fact, they leave enrollees with even less skin in the game and end up costing taxpayers even more.

But then, Arkansas is trying to work within the confines of a Medicaid waiver subject to federal restrictions. A block grant, by contrast, would allow states the flexibility to subsidize private-health-insurance premiums regardless of whether the plans the enrollees selected met federal standards. It would empower Medicaid enrollees to make their own decisions about what kind of coverage they feel they need.

How much would something like that cost, and would it be worth it for states to try? My colleague Dr. Vance Ginn and I examined this question for Texas, the largest of the 20 states that have thus far refused to expand Medicaid under Obamacare.

Using average premium prices for 2015 gold and silver plans on the federal exchange in Texas, we calculated the average monthly costs to subsidize premiums for pregnant women, children, and nondisabled adults enrolled in the state’s Medicaid program — groups whose medical costs could reasonably be covered by a standard insurance product. We used a sliding scale to determine subsidy amounts based on income, taking care that enrollees’ out-of-pocket premium costs would not exceed about 6 percent of their income (far less than Obamacare’s 8 percent cap). Those at the lower end of the income spectrum would not have to pay anything, while those at the higher end would pay for a small portion of their premium out of pocket.

Using cost and enrollment data from the Texas Health and Human Services Commission, we found that Texas would save $4 billion in 2015 compared with current Medicaid costs under the status quo. Annual cost savings would continue to mount over the next decade and exceed $6 billion in 2023 relative to official state projections. Combined with other reforms not included in our model, such as changes to long-term-care services that Texas might undertake with the flexibility afforded by a block grant, cost savings could be even greater.

Under this scheme, enrollees would be responsible for any health-care costs beyond the premium subsidy, just like those purchasing subsidized coverage through the ACA exchanges. While out-of-pocket costs might be higher for some, private individual coverage would give Medicaid patients greater access to providers and therefore would likely produce better health outcomes.

States could also offer incentives for using health-care dollars wisely. If an enrollee selected a high-deductible plan with a health savings account, for example, a state could fund that HSA with additional Medicaid dollars, which the enrollee would control. Indiana has experimented with HSAs in its Medicaid program, but, constrained by federal rules, the results have been mixed. In the private sector, however, for more than a decade HSAs have helped reduce health spending and increase efficiency in employer-based plans.

If states aren’t planning how they would use a Medicaid block grant, they should be. A block grant in the hands of a state that’s serious about Medicaid reform could transform the way health care is delivered to the poor, vastly improve the program, and rescue state budgets from skyrocketing costs. The fact is, even in the 20 states that haven’t expanded, Medicaid costs are slowly overwhelming state budgets. In Florida, Medicaid accounts for about 30 percent of total state spending. The same is true for Texas, where Medicaid as a share of the budget has steadily increased during the past decade. It’s even worse in expansion states. In Ohio, Medicaid surpassed cost projections by nearly $1.5 billion in the first 18 months after expansion. In Massachusetts, spending increased by 19 percent last year because of expansion. In Kentucky, Medicaid costs doubled. In Illinois, they quadrupled.

Beginning in 2017, the 30 states that have expanded Medicaid will have to begin shouldering an increasing share of the costs. Medicaid spending at the state level is already on an unsustainable trajectory, and it’s only going to get worse from here on out. If states want to take charge of their Medicaid programs, they should spell out exactly how they would use the flexibility afforded by a block grant. This would not only quiet liberal critics who claim conservatives have no viable plans to repeal and replace Obamacare, it would also show GOP leaders in Congress that conservatives in the states have thought seriously about how to transform an outdated federal health-care entitlement.

John Daniel Davidson is director of the Center for Health Care Policy at the Texas Public Policy Foundation.