Per Capita Caps’ Growth Rate: Leaving States in the Dark

Per Capita Caps’ Growth Rate: Leaving States in the Dark

The proposed American Health Care Act (AHCA), pending in the Senate, would, if enacted, forever compromise Medicaid’s 50-year federal-state partnership. By imposing a per capita cap, the federal government would put a strict upper limit on its Medicaid support, leaving states to cover all costs that exceed the cap. Caps put states at considerable extra financial risk because the federal government reneges on its partnership responsibility. But the raw deal for states gets even worse when you read the fine print. Medicaid can become more cost efficient but arbitrarily cutting funds will not do the trick and caps would turn administering Medicaid into a complete nightmare for state officials.

First, no state will know what the actual cap is until after each fiscal year is over. The inflation rate for the cap in the House bill is determined after the fiscal year closes. That rate – based on the medical Consumer Price Index (CPI-M) – fluctuates considerably and unpredictably. Twice since 2012 it has increased or decreased 1.1 percent from the beginning of the year to the end. That may sound like a small difference but an analysis from Manatt Health shows how dramatic the effects can be. Under current AHCA projections, an average-sized state would have to cut $477 million to stay under the cap in 2026. If, however, the CPI-M ends up just 0.5% lower than projected, the needed cut would balloon to $826 million that year alone. Think about that again. States can’t control the CPI-M but would pay a steep penalty if they exceed their annual budget target which they can’t determine until after all the expenses are in.

Second, the CPI-M measures change in what consumers pay for medical expenses, not the growth in total cost of health care (such as what Medicaid pays). Moreover, Medicaid costs depend on factors unrelated to the components of CPI-M. For example, CPI-M does not include long-term care costs, but long term care accounts for around 25 percent of Medicaid’s budget. These discrepancies increase the chance that CPI-M will not accurately reflect the cost growth for Medicaid-covered services. Worse yet, recent discussions in the Senate suggest the final bill may switch from medical to “regular” CPI in 2025. This would cut even more funds from states because the CPI grows substantially slower. CPI measures inflation across multiple sectors, with medical care comprising only 8.5 percent of the total. Growth in other sectors of our economy has consistently lagged growth in medical costs.

Third, per capita caps are all stick and no carrot.States can only lose. If a state spends over its cap in a given year, it alone covers all excess costs and has to repay any additional funds erroneously paid by the federal government. But if the state spends under its cap, it gets nothing beyond what it would currently receive. So states gain no federal “windfall” for extra efficiency, but they certainly pay the price every time their growth projections exceed the final growth rate or they exceed their targeted calculations. Said another way, even if Congress could set a growth rate to exactly match actual Medicaid annual spending, the federal share of the Medicaid partnership would still shrink because states above the national Medicaid spending average would have to pay back their excess spending while states below the average get nothing. Talk about a rigged system.

Given all the uncertainty and all the risk per capita caps would create, each state will operate Medicaid in a budgetary fog with a sword of Damocles hanging over their heads (or rather, over the heads of all Medicaid enrollees.) Every incentive pushes states to cut services, reduce enrollment for high cost populations, and slice provider rates to keep far below a projected cap, even if it means pulling the rug out from people who really need care.

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