Trump’s Budget Calls for $610 Billion in Cuts to Medicaid—What Does that Mean for States?

WASHINGTON — President Trump’s budget, which was officially released on Tuesday, reiterates his administration’s intention to sharply cut federal funding for Medicaid—by an estimated $610 billion over the next 10 years.

The downsizing of the federal program that provides health insurance for millions of low-income Americans is being built into the budget under the assumption that the measure will remain in whatever version of the Affordable Health Care Act emerges from the U.S. Senate.

Mick Mulvaney, the director of the Office of Management and Budget explained the administration’s thinking on a call with reporters on Monday afternoon. “We assume the Affordable Health Care Act that passed out of the House passes,” he said. “That has some Medicaid changes in it. We wrapped that into our budget proposals.”

While there may be little financial impact related to this measure for state governments in fiscal year 2018, the longer term is a different story.

Under the House-passed AHCA, 2020 will be an action-packed year for Medicaid reform.

That’s when states that chose to expand Medicaid to cover more low-income adults under the Affordable Care Act will no longer receive federal matching dollars at the enhanced rate of 90 percent. That ACA expansion will be gradually phased out as individuals “churn” off and back on the program’s rolls. Under the AHCA anyone who experiences a gap in Medicaid coverage for more than one month would not be eligible for the higher matching rate if or when they return to the program.

Aside from the withering of Medicaid expansion that is all but guaranteed by the AHCA, the GOP health measure would also starkly restructure the financing mechanism for the massive federal program.

As it’s currently set up, federal funding for Medicaid is open-ended and fluctuates according to factors such as cost of health care and enrollment numbers. But, under the AHCA, in 2020 the program would be transformed into either a “per capita cap” model, where states receive capped per-enrollee payments from the federal government or a model where states receive a fixed amount of funding in the form of a block grant. If the AHCA passes, governors would be given the choice between these two systems.

If governors choose the per capita cap option, that cap would be based initially on per-enrollee spending in 2016, and thereafter would rise according to increases in the Consumer Price Index for Medical Care, CPI-M, and according to fluctuations in the number of enrollees.

And, the per capita cap system gives Congress the prerogative to alter the growth rates for that cap with greater ease—Mulvaney has already indicated that the administration would, in his words, “go another half step further and ratchet down those growth rates that are assumed in the AHCA.”

“We take a measure that we think is closer to what the actual growth rates [in health costs] look like,” Mulvaney told reporters on Monday’s conference call. Yet, health care economists seem to disagree with Mulvaney’s assessment and have noted that CPI-M has already been shown to rise slower than actual Medicaid costs—meaning the cap won’t match up with how much it actually costs to run the program.

It’s hard to overstate the enormity of this change from the perspective of those responsible for planning state government budgets.

In a phone conversation with John Hicks, the executive director of the National Association of State Budget Officers on Monday, Route Fifty suggested that the potential restructuring of Medicaid financing brings with it a “large” amount of uncertainty for state governments.

Hicks’ response came first in the form of a guffaw. “I think ‘large’ is an understatement,” he said.

When asked how he would categorize the situation, Hicks said he “would call it a generational change in the way Medicaid is financed.”

“We’ve gone 50 years-plus under an existing financing mechanism and now we’re changing it,” he added. “It’s more than a generational change.”

Medicaid is currently the second largest use of state tax dollars—behind spending on elementary and secondary education. And, at the same time, the program is the single largest source of federal funds for states. In fiscal year 2015, for example, 56.8 percent of all federal dollars for states came in the form of Medicaid funding. Therefore, any change—whether it’s in how the money gets to the states, or even more importantly, how much gets to the states—will certainly require a significant adjustment on the part of those state governments.

“It’s definitely a shift of responsibility from the federal government,” said Hicks, and with that comes a shifting of costs.

“The inference is clear,” he added. “They expect the federal government to pay less than what it would have paid under the current law.” Meaning, under a per capita cap system, state budgets would have to make do with less.

While questions remain about what exactly the long-term financial effect of such a system will be, some hints of what this might mean for states can be gleaned from a look back at health spending data from years past.

One recent study from the Brookings Institution applied the per capita cap model in the House-passed AHCA to historical Medicaid spending data gathered by the Kaiser Family Foundation found that, under this system there would be “no winners among the states, only losers.”

The analysis took a look back in time and posed this question: How would states have fared in 2011 had an AHCA-mandated cap structure been implemented in 2004, based on spending levels in 2000? That historical analysis came to the conclusion that more than half of state governments would have experienced reduced federal funding and that “no state would have received more funding under a per capita cap than under current law in any year.”

For the most part, Hicks was quick to point out, states are used to working creatively to keep the costs of their Medicaid programs as low as possible. In fiscal year 2015, state governments covered roughly 37 percent of total Medicaid spending—picking up the tab for nearly $197 billion according figures compiled by KFF. Hicks referred to that state contribution requirement as a “brake on spending growth.”

States have already enacted a number of measures intended to keep Medicaid from, as Hicks put it, becoming “the Pac-Man of the budget.” Transitioning to a managed care system for a large portion of Medicaid populations has been one technique in the state toolbox to keep costs down. Now states are wondering what new flexibility they will be given to confront the fiscal pain that may be caused by the AHCA’s Medicaid reform plan.

“It’s easy to see that everything being equal the federal government will pay less for Medicaid,” said Hicks.” What is less clear is how that will take place and what different tools states will be given by the federal government under this new law in order to react to that.”

In short: “What will [states] be able to do tomorrow that they cannot do today under an entitlement program?”

But Hicks also made it clear that any increase in Medicaid flexibility states have long been clamoring for can only go so far to ease the budget gap that may come with that loss of federal funds.

“States will say yes to flexibility, but at what price?” Hicks wondered.

“Flexibility isn’t going to be enough to fill the gap if CBO’s estimates are right,” said Hicks. “That’s more than flexibility can fix.”

According to Hicks, states will be taking a long hard look at the impact on their populations when considering their choices moving forward, but changes to Medicaid eligibility requirements, payments to providers and the types of services covered are all on the table.

And, it’s important to note that all these question marks loom particularly large for state budget officers in the current fiscal climate. Many governments are still in the difficult process of moving past the financial hardships of the great recession.

“Unlike past recoveries from previous recessions, this one has been quite a modest one,” said Hicks. “We still have nearly half of our states whose general fund spending now, adjusted for inflation, is still below where they were before the great recession.”

“So states margins are very thin, revenues are not growing for states as well as the economy is growing,” Hicks added. There’s just isn’t slack in existing budgets to contend with really large financial changes.”