Featured Health Business Daily Story, Dec. 21, 2016

Medicaid Block Grants: Boom, Then Bust?

Reprinted from HEALTH PLAN WEEK, the most reliable source of objective business, financial and regulatory news of the health insurance industry. Sign up for a $91 two-month trial subscription today.

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December 12, 2016Volume 26Issue 44

Republican lawmakers have long advocated giving states the option of per capita Medicaid financing or moving to block grants. Both Rep. Tom Price, M.D. (R-Ga.) — Trump’s pick as HHS secretary — and House Speaker Paul Ryan (R-Wis.) have highlighted block grants as the centerpiece of a reformed Medicaid program.

While Medicaid is a federal entitlement program through which state funding is matched with federal dollars, block grants would be an appropriation, and would need to be approved by congressional committees each year. It’s uncertain if they would have the votes needed to move legislation forward.

Bruce Merlin Fried, a partner in Dentons’ health care practice in Washington, D.C., suggests block grants would have support from the Republican majority as well as from most, if not all, of the nation’s 33 Republican governors.

Block grants start with a fixed base-year spending amount, and it’s the state’s job to manage the program within that amount. It’s unknown whether funding under that model would include the spending for adults who gained coverage through Medicaid expansion under the ACA and, to the extent it did, how those funds would be allocated across states. For example, in 2016, expansion states received close to $60 billion in federal funding to cover the cost of services for expansion adults, notes Deborah Bachrach, a former New York Medicaid director who now is a partner in the law firm Manatt, Phelps & Phillips, LLP.

“This is where the food fight across states begins. If you are an expansion state getting these additional federal dollars, can you count on those dollars in your base allocation?”

Health Plan Week

While 31 states expanded their Medicaid program, 19 did not. Does that mean that the 19 states will never be able to access new federal dollars for coverage? And, what does a block grant mean for the progress states have made in leveraging Medicaid’s purchasing power to drive health system reform — driving down costs and improving quality, she adds.

In the near term, block grants would be good news for managed care companies because states would have a strong financial incentive to capitate most payments, and would shift risk to the private sector. But after a few years with block grants, “the bottom will start to fall out” as they fail to keep pace with medical inflation and federal capitation payments start to fall behind, suggests industry consultant John Gorman, executive chairman of Washington, D.C.-based Gorman Health Group, LLC. States would be fully responsible for all costs over the federal allotment.

“Governors might decide to take a block grant because they like the flexibility, but the reality is they have a ton of flexibility right now,” says Gorman. “States will need to decide if they’re willing to eliminate one of the biggest line items in their budget in favor of the appropriations process.” He predicts block grants would devastate state budgets over the long term.

While the first three years of block grants would be positive for managed care companies, federal grant payments would start to fall short of benefit costs, Gorman predicts.

Bachrach agrees that managed care companies might initially see more Medicaid members as states seek to manage the financial risks associated with the capped funding proposals. “That’s good news only if the premiums cover the services for which plans are responsible,” she says.

Moreover, block grants likely would allow states to set most eligibility rules and determine which services are covered. To manage the capped funding, states may need to reduce the number of people who are eligible. For members, that could mean tougher eligibility and new cost-sharing and work-related requirements. Members also might be required to take on a more active role in their health care to maintain coverage.

But states would find it difficult to respond to unexpected needs such as expensive new drugs, disasters or an aging population. The current system has the flexibility to respond to anything from a recession to the opioid crisis, says Bachrach. “We have an aging population, and Medicaid is the primary funder for long-term care services for low-income seniors. The flexibility of states to respond to the needs of an aging population would be lost.”

In a per-capita model, a fixed amount is paid to the state for each enrollee. If the aggregate to the state isn’t capped, the state can enroll more people and continue to receive a fixed amount for each enrollee. Such a model might allow different funding amounts for different eligibility groups such as children, the elderly and pregnant women.

States might also opt to trim certain benefits. Under existing rules, state Medicaid programs must provide Early and Periodic Screening, Diagnostic and Treatment (EPSDT) benefits to children under age 21. That could be eliminated under a block grant. A state also could curtail some drug benefits for people eligible for both Medicaid and Medicare, or limit the number of long-term care days that Medicaid covers. Coverage rules could vary from state to state, creating variability and uncertainty for carriers. “If there’s anything insurers hate, it’s variability and uncertainty,” Gorman quips.

Over the years, Medicaid has moved from being a small welfare program to a major payer. In partnership with managed care plans, Medicaid has become a smart purchaser of care and a leader in payment and delivery system reform, Bachrach says. “All of that gets thrown into doubt when you move to a capitated environment.”

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