Budget Reconciliation and Medicaid Funding: Understanding Options to Reduce Federal Spending

In a previous blog post, we described the Budget Reconciliation process and its implications for Medicaid. On February 25th, the House passed its budget resolution on a party-line basis. This resolution calls for $880 billion in cuts from the House Committee on Energy and Commerce, the largest reduction in the Committee’s history. While Republican leadership has denied that they are seeking to make significant cuts to Medicaid spending, previous House Budget Committee documents include a long list of potential cuts to the Medicaid program. Put simply,  there’s no way Energy and Commerce will reach the $880 billion goal without making significant cuts to the Medicaid program.

In this second installment of Aurrera Health’s series on ongoing developments relating to Medicaid financing, we describe the five most-discussed strategies for reducing federal Medicaid spending, their budgetary implications, and the potential impacts on states.

Potential Savings for Medicaid Spending Reduction Strategies

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Source: Congressional Budget Office, Options for Reducing the Deficit: 2025 to 2034

Policy Options to Reduce Federal Medicaid Spending Through Budget Reconciliation

Reducing the Federal Medical Assistance Percentage (FMAP) Floor: A key GOP proposal includes removing the FMAP floor for states. The FMAP is the share of total Medicaid costs the federal government contributes to a state Medicaid program. As it currently stands, the minimum FMAP is 50% and the maximum is 83% for US territories, and 77% for Mississippi. Removing the FMAP floor rate of 50% would most drastically impact the ten states (CA, CO, CT, MD, MA, NH, NJ, NY, WA, WY) who are currently receiving the minimum rate and would constitute a major cut to their funding streams. The Congressional Budget Office (CBO) estimates indicate the potential for the federal government to save $530 billion over 10 years by removing the floor.

Ending the Enhanced Match for Medicaid Expansion:Another proposal under discussion is ending the 90% enhanced match rate for Medicaid expansion populations, which currently covers 21 million people nationally. This change would save an estimated $561 billion over 10 years, but it would also shift the federal contribution from a flat 90%, to instead utilizing the same FMAP formula used for other enrollees, putting a massive financial burden on states if they retain coverage for the expansion population. Nine states have passed "trigger laws" that will immediately end Medicaid expansion if the enhanced match disappears, and three others have legislation in place that would mandate a review of the expansion, potentially resulting in a reduction or elimination of the expansion. Over time, this change could effectively undo Medicaid expansion under the Affordable Care Act in many states.

Establishing Block Grants or Per Capita Caps: Currently, states receive federal funds based on their actual Medicaid spending. This system allows funding to adjust dynamically with economic conditions and enrollment numbers. Two related policy options under discussion would convert federal Medicaid funding to a fixed rate system:

• Option 1: Change Medicaid funding to block grants, creating complex formulas to determine total yearly funding the federal government would provide to states, placing the onus on states to tightly monitor their spending or restrict eligibility or benefits to stay within their allocation. CBO estimates indicate that establishing Medicaid block grants could save the federal government up to $742 billion over 10 years.

• Option 2: Per capita caps are a related concept which involve creating a per-person per-year spending limit. Per capita caps could save the federal government up to $893 billion over 10 years. Similar to block grants, per capita caps would significantly reduce the available funding to cover care.

Reducing or Eliminating Provider Taxes: All states, with the exception of Alaska, use provider taxes to help offset Medicaid costs without raising general taxes. Provider taxes are fees states levee on certain provider types, which enable states to recoup some of the federal Medicaid payments. These taxes can currently be as high as 6% of a provider’s revenues, with 38 states (including DC) using a provider tax rate above 5.5%. Nationwide, GAO estimates that provider taxes account for over 15% of non-federal Medicaid spending. Common provider taxes include those on nursing facilities and hospitals. Congress could restrict states’ use of provider taxes potentially saving the federal government up to $612 billion over the next decade. Removing this state funding vehicle would require states to either raise general taxes or reduce services to compensate for the lost revenue.

Looking Ahead: A Challenging Future for Medicaid

Any of the options to cut Medicaid funding as a lever to reduce federal spending would result in significant losses for state Medicaid programs, and will be very damaging for the millions of people who Medicaid serves. Medicaid funding consumes on average 30% of state spending, and reductions in federal funding would be difficult for states to make up—pushing them to reduce benefits or eligibility to make up for the shortfall. States will bear the responsibility for making hard decisions, which will invariably result in reduced access to services for populations with the greatest needs. Without revenue sources to make up the loss of federal funding, It is likely that states would be forced to modify coverage for optional benefits such as optometry, dental services, hospice services, and prescription drugs and reduce coverage for optional populations, as described above. With any cuts to Medicaid, increased uninsured rates and more churn between Medicaid and the Marketplace become more likely, meaning worse health outcomes, and greater uncompensated health care costs for providers, perpetuating challenges for people who need the most support.

Medicaid at a Crossroads: Funding & Policy Implications

For more information regarding the potential impacts of Budget Reconciliation on Medicaid programs, be on the lookout for Aurrera Health’s continued analysis as discussions progress in our blog series Medicaid at a Crossroads: Funding & Policy Implications. If you would like to discuss how these developments might affect your state, please reach out to Aurrera Health Managing Principal Kristal Vardaman.

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Authors

Erik Hirschman [Policy Consultant]

Kristal Vardaman [Managing Principal]