Expert Tip Sheet on Medicaid Block Grants

Scholars Strategy Network, Medicaid Working Group

January 30, 2020


On January 30, the Trump administration released guidance through the Centers for Medicare and Medicaid Services (CMS) inviting states to transform part of Medicaid into a block grant. This would effectively allow states to eliminate Medicaid’s entitlement status, which ensures that the program adapts to changes in the economy. Instead, states would be able to receive a fixed payment from the federal government and would be free from numerous Medicaid rules and minimum standards. If states adopt this path, it would represent the most significant retrenchment in a US social program since the 1996 welfare reforms. There are, however, serious concerns about whether the new guidance is legal at all, and how it would affect patients, doctors, hospitals, and state economies. This document, prepared by eleven leading health-policy scholars provides reporters with a quick summary of the key questions raised by the new guidance and links to relevant peer-reviewed research.

What does the new guidance from CMS on Medicaid say?

CMS’s “Healthy Adult Opportunity” (HAO) allows states to convert a portion of their Medicaid programs into a block grant. HAO will apply to Medicaid’s non-disabled adult population under the age of 65, which represents 34% of Medicaid enrollees. States that apply for HAO will agree to operate their program within a defined budget target. The federal share of payments under HAO will be indexed to inflation at a rate that will grow slower than medical costs, resulting in a cut to Medicaid funding relative to current law. Under HAO, states will be given the power to make significant reductions in the size and scope of Medicaid benefits. They may impose cost-sharing requirements on Medicaid beneficiaries, limit benefits to those available in commercial insurance packages, waive retroactive coverage and hospital presumptive eligibility, and make other programmatic adjustments without additional federal approval.

Are Medicaid block grants legal?

Medicaid block grants are probably not legal, but the answer to this question turns on both judicial interpretation of Section 1115 of the Social Security Act, which provides for Medicaid waivers, as well as Section 1903. Rachel Sachs and Nicole Huberfeld write in Health Affairs, at least three legal problems exist for Medicaid block grants. First, under Section 1903, the HHS Secretary is directed to “pay to each State…the [federal match] of the total amount expended…as medical assistance under the State plan….” This language cannot be waived under Section 1115. HHS cannot cap Medicaid funds because it must pay a federal match relative to the “total amount” of state spending. Simply put, the Secretary of HHS does not have authority to waive section 1903 and cannot cap Medicaid funds it disburses to states, whether per person, by population, programmatically, or otherwise.

Second, capped spending does not meet the legal standard that a section 1115 demonstration waiver must “assist in promoting the objectives” of Medicaid, which is to “furnish medical assistance.” This language has been scrutinized in work requirement litigation and the federal judge deciding these cases has interpreted Medicaid’s statutory purpose to mean that Medicaid must pay for medical care, not to promote a generalized idea of health or to decrease costs. Spending caps would lead to limits on enrollment and limit payment for care across all Medicaid beneficiaries (even a policy focusing on the expansion population) and all types of benefit coverage — the opposite of furnishing medical assistance.

Medicaid block grants also face a third legal hurdle. Administrative agencies only have authority to implement the specific laws they administer; they cannot rewrite a statute. Congress failed to create a different version of Medicaid in 2017, and HHS cannot do so now without legislative change.

How would Medicaid block grants affect access to health insurance?

Most proposals in recent years for Medicaid block grants have pegged increases over time to rates well below historic growth in Medicaid. The likely result is that states are under ever-increasing budget pressures and are unable to maintain the current scope of their programs, which means they either have to cut enrollment, reduce benefits, or cut reimbursement to providers and hospitals to balance their budgets — or a combination of all three. For these reasons, it is highly likely that the number of people with Medicaid will fall over time and the ranks of the uninsured will grow.

The federal government helps fund an array of public services through grant programs (block grants) that give states yearly fixed amounts. Because the federal funds available to states are fixed amounts, they grow at a formula-driven rate from one year to the next — or not at all, if Congress does not appropriate funding increases. This funding does not entitle individuals to services, as does health insurance via Medicaid or Medicare. Furthermore, they do not automatically take into account population growth, as would a per capita cap.

Providing federal funding for Medicaid via a block grant would disconnect the level of funding from the number of Medicaid beneficiaries and the cost of providing care. In other words, the federal government’s contribution would remain the same, or grow only according to a preset formula, no matter how large the population in need becomes or how much a state actually must spend on health care for Medicaid recipients.

To permit states to manage their Medicaid programs with a fixed amount of federal funding, the entitlement to coverage would need to be eliminated, and federal rules regarding eligibility, coverage, and payment would need to be substantially restructured or repealed.

Medicaid is the country’s largest insurer and is subject to the same cost drivers that affect all health insurance providers: population growth and demographic trends that increase enrollment, health trends that influence how often people need care and what kind of care they require, and advances in technology that drive up costs, among other factors. But unlike commercial insurers, government-funded Medicaid, in its role as first responder and safety net, is more vulnerable to these trends and to cost increases. For more than 50 years, Medicaid has been rooted in a flexible federal–state partnership, constantly restructured over time to meet current challenges.

How would Medicaid block grants affect minimum standards of care?

Evidence on block grants provide concerning indicators that block grants would undermine the main mission of the Medicaid program, which is to provide health insurance to low-income Americans. Prior experiences with Temporary Assistance to Needy Families (TANF), which was block granted, provide an excellent example of what can happen. States only spend a little more than half of their combined federal and state dollars under Temporary Assistance for Needy Families (TANF) on services to help low-income families — and a handful of states spend less than a quarter on these areas. TANF data from 2017 show fundamental flaws with the TANF block grant, which the President and Congress created under the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 and which gives states great flexibility in using the funds. Over time, states redirected a substantial portion of their state and federal TANF funds to other purposes, to fill state budget holes, and in some cases to substitute for existing state spending. Even when need rose during the Great Recession, states often didn’t bring the funds back to TANF and instead cut them. Block granting the funding for TANF has resulted in many states diverting funds.

How would Medicaid block grants affect state budgets?

Evidence suggests that block grants lead to state budget shortfalls. During the Great Recession, for example, a simple block grant structure would have increased states’ shortfalls by 2–3.5 percent of own-source revenues relative to either an explicitly countercyclical block grant (meaning the grants increase during economic downturns) or the current matching system. Changes in Medicaid financing formulas can also shift amounts from “winning” states to “losing” states. In some cases, these amounts exceed 10% of the states’ own-source revenues. States’ balanced budget requirements imply that such changes would, if not phased in gradually, require significant budgetary adjustment over short time horizons.

How would Medicaid block grants affect future Medicaid funding?

We can look to existing block-granted programs to get a sense of what would happen with Medicaid. A wide range of block grants, including the Child Care and Development Block Grant, the Community Development Block Grant, and the Social Services Block Grant have been on a trajectory of decline, retrenchment, and eroding purchasing power. Evidence from these existing block grants demonstrates that reductions and loss of services are associated with block grants as a policy tool. Examination of several decades of budget data demonstrates that funding for housing, health, and social services block grants has fallen significantly over time. These data provide a cautionary tale for proposals to merge large numbers of additional programs — especially programs serving families and individuals who are low income or otherwise vulnerable — into block grants. These large funding declines understate the drop in funding for these services in another way as well: states often substitute some federal block-grant dollars for state dollars they previously spent in these areas and then use the freed-up state dollars for unrelated purposes or to plug state budget holes, thereby shrinking the total pool of federal plus state resources used for these services. The Medicaid program in Puerto Rico is capped at an annual ceiling which grows at CPI. Once that ceiling is met, remaining funds come from territory general funds. So, unlike the states, there is no open-ended federal contribution for Puerto Rico. Not surprisingly, the territory has had to cover an increasing portion of its Medicaid costs, by 2010 the federal contribution only covered 18% of Medicaid expenditures in Puerto Rico. With the territory responsible for a greater portion of their Medicaid expenditures, Puerto Rico has limited their benefits and reimburse providers at much lower levels.

How would Medicaid block grants work if there is an economic downturn?

The literature on block grants shows that they perform poorly in economic downturns. As Marianne Bitler and Hilary Hoynes show, during the Great Recession, uptake of benefits Temporary Assistance to Needy Families (TANF) block grant lagged far behind that of other programs, such as SNAP (commonly known as food stamps) and Unemployment Insurance. Where state budgets are concerned, work by economists Jeffrey Clemens and Benedic Ippolito shows that “an acyclical block grant structure would have increased states’ shortfalls by 2–3.5% of own-source revenues relative to either an explicitly countercyclical block grant or the current matching system.”

How would Medicaid block grants affect hospitals, nursing homes, and other providers that rely on Medicaid?

Due to the reduced funding stream over time, Medicaid block grants will likely lead to significant cuts in both reimbursement to providers and hospitals, as well as fewer patients with coverage able to pay their medical bills. Major physician, nurse, and hospital groups have all been vocal in their opposition to shifting Medicaid to a block grant system.

How would Medicaid block grants affect disabled Americans, Americans with pre-existing conditions, and their caregivers?

The key issue for those with disabilities is that they comprise the majority of Medicaid spending. Fully 60 percent of Medicaid funding is spent on the elderly (20 percent) and disabled (40 percent). Most Medicaid funding spent on the elderly is effectively long term care supports similar to those provided for the disabled. If block grant funding reduces Medicaid budgets, it is very difficult to do that without targeting the elderly and disabled, effectively those needing long term care services. If the waiver is to apply to only able-bodied adults, and the entitlement nature of the program is maintained, the main concern regards how block grants would ultimately lead to funding constraints that will impact Medicaid waiver programs. Waiver programs, which cover a lot of long term care programs for the elderly and disabled, particularly noninstitutional home-based care, are discretionary. They are not entitlements. Budgetary constraints produced by waivers would likely push states to manage that loss by reducing spending on these waiver programs. More generally, Medicaid block grants pose a significant risk to Americans with chronic conditions such as diabetes, cancer, asthma, depression, and many others. For this reason, dozens of patient advocacy groups have expressed strong opposition to Medicaid block grant proposals.

Are block grants really necessary?

There is not a need for block grants to control spending because Medicaid is an efficient and effective program. There is no evidence of systematic over-spending in the Medicaid program. Indeed, over the last decade, Medicaid has cost less and delivered more than forecasters predicted at the time that legislative decisions about expanding it were made. Medicaid spending is growing more slowly than Medicare or other types of health insurance spending. Although Medicaid is one of the largest budget items for many states, Medicaid programs are actually more efficient than private insurance at providing healthcare. Medicaid spending per person is consistently lower than private insurance spending per person, when comparing similar populations. Despite arguments by critics of the program, there is abundant evidence on Medicaid’s positive effects on low-income children and families, including improved access to care, financial security, mental and physical well-being, long-term economic outcomes, and survival. Medicaid has been a lifeline for millions and a radical experiment like block grants would threaten much that the program has accomplished.



Associate Professor of Political Science // Marquette University // Coauthor, Obamacare Wars (2016) // Coeditor, APD and the Trump Presidency (2020)