Medicaid has been a vital part of the American health care safety net for more than 50 years. Today, Medicaid, along with the State Children’s Health Insurance Program (CHIP), covers more than 74 million people, ranging from children in poverty to persons with developmental disabilities and serious mental illnesses to the frail elderly requiring long-term care. In 32 states (including the District of Columbia) that took up Medicaid expansion pursuant to the Affordable Care Act (ACA), Medicaid also covers low-income, non-disabled adults. The Centers for Medicare & Medicaid Services (CMS) estimates combined federal and state outlays for Medicaid in 2017 will be $586.5 billion, or 17.3 percent of national health expenditures.

The last couple of days’ events on Capitol Hill make clear that fundamental changes to Medicaid are high on the list of targeted health care reforms. Republicans seem determined to reshape pillars of this health care safety net that serves more than one of every five Americans. Key questions we answer are:

  • What is the future of Medicaid expansion, given the intent to repeal ACA? Will states that expanded under ACA be allowed to continue or be forced to cut back? Will states that have not expanded yet be allowed to do so?
  • Will federal Medicaid financing change fundamentally? Are block grants or per capita caps likely to replace the current uncapped entitlement? If so, who gains and who loses?
  • Short of changing the basic form of financing Medicaid, will Congress cut eligibility and benefits?
  • In combination with any of the above, will states gain new flexibility through waivers or loosened federal rules, and what might states do if given more latitude?

Answers to these questions may take a long while to form, but this is what we see happening in these early days:

Expansion: Many Republicans in Congress are clamoring for total ACA repeal, which would eliminate Medicaid expansion. But governors and representatives of states that expanded, including a number of Republican-governed states such as Ohio, argue that the continuation of Medicaid expansion is crucial to their states’ economies and the health of their people.

In fact, some Republican-led states are seeking to update/extend Medicaid expansion waivers. The principle of “personal responsibility” is prominent. For example, Indiana, home of Vice President Mike Pence and soon-to-be CMS Administrator Seema Verma, filed for an extension of its Healthy Indiana Plan 2.0 through January 2021. The plan would widen beneficiary access to substance abuse treatment and add incentives to quit smoking, use disease management programs, and take part in voluntary job-referral and training programs. Arizona filed to amend its expansion program to (i) require able-bodied adults to get or seek employment or job training; (ii) ban from enrollment for one year persons who fail to report changes in income or work status; and (iii) limit lifetime coverage for able-bodied adults to five years, with several exceptions.

On the other hand, representatives of states that didn’t take up Medicaid expansion argue that it would be unfair for the federal government to lock in higher federal contributions to the states that did expand without also compensating their states. Congress would not look kindly upon states that pop up now to request Medicaid expansion as a way to secure extra federal dollars, but Congress might restore some of the uncompensated care subsidies (disproportionate share hospital, or DSH) that ACA removed in contemplation of all states expanding Medicaid.

Expect to see Medicaid expansion remain for an extended period of time, even if other major features of ACA are repealed. Perhaps look for the federal contribution to be cut from 90 percent, the terminal rate under ACA, to the standard federal match percentage that each state gets for regular Medicaid enrollees.

Medicaid financing: Republican budget hawks have long wanted to move away from the unlimited entitlement model wherein the federal government matches all dollars that states spend on approved Medicaid services. (The federal match ranges from 4:1 in poorer states down to 1:1 in wealthier states.)  Changing to a block grant means that the federal government would give each state a fixed sum of money each year. If a state spends more than expected, the state alone must make up any shortfall. A per capita allotment is similar to a block grant, but it is more forgiving in that the amount floats up or down with changes in the number of Medicaid beneficiaries in a state; it may or may not float based on changes in the mix of enrollees. Congressional Republicans seem to lean toward per capita allotments, with an option for states to choose block grants in return for as-yet-unidentified sweeteners.

How much money the federal government saves—and states lose—under either block grants or per capita caps depends on the funding formula. One issue is how the baseline is set: Should all states’ current programs be deemed to be their baselines despite differences in eligibility and benefits, or should some leveling occur first?

Another issue is the trend rate to be applied over time to the federal allotment. The presumption is that the annual rate of increase in the federal allotment would be tied to a broad economic index, such as the Consumer Price Index or the growth rate of gross domestic product (GDP). But health care costs typically trend higher. CMS has just issued National Health Expenditures figures and projections showing that health spending is expected to rise 5.4 percent in 2017, while GDP rises just 4.3 percent and general price inflation runs only 2.0 percent. Compounded over time, such differentials would heighten pressure on the states to contain Medicaid costs. For relief, Congress would give states much more freedom than they have today to define who is eligible for Medicaid, what services will be covered, how their programs will be administered, and the rates of payment to providers and managed care organizations.

Republicans will try to push this change to Medicaid’s financing structure through under budget reconciliation, which requires only a simple majority in the Senate. However, it is generally thought, though uncertain, that this sort of change would need a filibuster-proof majority in the Senate. Democrats are loath to see the longstanding entitlement model undone, and they will make a lot of noise.

Eligibility and benefits: In the traditional Medicaid program, the federal government sets minimum standards for beneficiary eligibility and the benefits to be covered. States can add to eligibility and benefits, in many cases without the need for special federal waivers, simply by checking boxes and agreeing to pay their shares, and the federal government will still apply its standard matching percentage. Most states do both. For example, 40 states offer coverage to “medically needy” individuals—people whose incomes exceed normal thresholds but whose health status threatens their finances.

Expect Congress to take a piecemeal approach to reducing coverage, even while debating the more fundamental reforms. A group of Republicans in Congress in January asked the Medicaid and CHIP Payment Advisory Commission (MACPAC) to report on optional eligibility groups and optional benefits. And some small measures to chip away at eligibility have surfaced. The

House Energy and Commerce Health Subcommittee recently approved two such bills: One would require states to count lottery winnings in making eligibility determinations, and the other would change how a married couple’s income is counted in deciding whether one spouse qualifies for Medicaid long-term care benefits.

Waivers and rule rollbacks: The executive branch already has considerable latitude to let states deviate from the federal Medicaid provisions by granting waivers. States can request “program waivers” to do things that are allowed under current law for any state that satisfies certain conditions. For instance, all states have received waivers to allow substitution of home- and community-based services for nursing facility services for beneficiaries who require long-term services and supports. States can also request “demonstration waivers” to pursue bolder Medicaid initiatives. Under authority granted long ago by Section 1115 of the Social Security Act, the Secretary of Health and Human Services, acting through the Administrator of CMS, can approve a wide array of waivers without the need for new authority from Congress, provided that there is no increase in federal spending.

Often, CMS will encourage states to seek waivers of a certain type, believing the experiments will serve the public interest. For example, in 2015, CMS issued a call to states to propose delivery system transformation programs to improve access to, and the quality of, care for persons with substance use disorders. This was, in part, a response to the growing opioid epidemic.

It is too early to gauge exactly what sorts of waivers the new administration will promote or approve. However, expect the sentiment to be one of openness to the idea of greater state control over the shape and functioning of Medicaid. One hint: The incoming CMS Administrator has a background as a consultant to states that are pursuing demonstration waivers. At the same time, watch for federal Medicaid rules generally to be loosened in ways thought to help states cut costs.

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There is no doubt that, in 2017 and 2018, Medicaid—not just the ACA-driven Medicaid expansion but fundamental features of the 50-year-old program—will be the subject of concerted efforts at change and that a lot of those efforts will be met with resistance. Many stakeholders are deeply affected. Medicaid is either the largest or second largest (after education) budget line item in every state, and the federal government, on average, pays about three-fifths of the Medicaid bill. Health care providers, while often fretful that Medicaid pays well below costs, still very much rely on Medicaid to pay for care that might otherwise go uncompensated. Managed care plans, through which nearly half of all Medicaid dollars now flow, identify Medicaid as a prime revenue source. And for the 74 million beneficiaries, who, for the most part, represent the most vulnerable segment of our population, having Medicaid means being able to receive access to care needed to stay healthy and functional.