Medicaid Explained: How Would Block Grants Work?

One of the most controversial ideas in Washington right now is to turn Medicaid into a block grant program. Republicans say the idea is crucial to lowering the federal budget deficit and would give states needed flexibility over how to run their Medicaid programs. Democrats say it would end up gutting an essential piece of the social safety net.  

How would block grants change a program that currently serves more than 50 million people? Here’s a primer on how Medicaid works, what’s being proposed and what the impacts might be.

How does Medicaid work now?
Medicaid is a joint federal-state program that began in 1966. It is an open-ended entitlement program, meaning that anyone who is eligible for it is guaranteed coverage, no matter how much the program costs.

The federal government pays much of the bill, under a matching formula based on median income. On average, Washington pays 57 percent of the costs. Wealthy states get at least 50 percent of Medicaid costs covered by the feds; poor states get as much as 85 percent.
In return, states must meet minimum standards for benefits and eligibility. For example, states are required to provide Medicaid services to low-income children, pregnant women, some adults with dependent children, people with disabilities and frail elders. Benefits must cover doctor’s visits, hospital stays, emergency room services, diagnostic and outpatient services and long-term care.

How costly is it?
Very costly — and growing fast. The federal government spent about $216 billion on Medicaid in 2009. That’s 7 percent of the federal budget. At the state level, Medicaid consumes almost 22 percent of state budgets — more than education, corrections, transportation or any other spending category.
Most worrisome is how quickly these costs are growing. Over the past decade, Medicaid spending has been rising at a rate of more than 6 percent a year — well ahead of inflation. In the coming decade, the federal government predicts that costs will rise by at least 7 percent a year. Republicans in the U.S. House predict costs to the federal government and states will rise to $840 billion by 2019, if left unchecked.

Defenders of the program argue that underlying medical costs are the cause of most of Medicaid’s cost increases. Other insurance programs, including Medicare and private health insurance, have experienced even sharper cost increases. Historically, Medicaid costs have grown the fastest during recessions, when enrollment surges. Typically, spending growth becomes less dire when the economy improves.

How would the GOP block grant proposal work?
The budget plan authored by U.S. Representative Paul Ryan would dramatically change the federal-state arrangement. Instead of an entitlement with open-ended funding, Medicaid would be converted into a grant program with set funding levels. The change would happen in 2013. Grants to states would start out at 2012 funding levels and would increase by about 4 percent annually to account for inflation and population growth.

In return for less federal money, states would have free rein to set their own Medicaid rules. In addition, the proposal would eliminate provisions of last year’s federal health care overhaul that would expand Medicaid substantially. According to Mississippi Governor Haley Barbour, most Republican governors would go for this deal “in a heartbeat.”

Why do Republican governors want the change?
Flexibility is the main reason. Republican governors say they want the freedom to tailor their Medicaid programs to match their residents’ needs and their states’ pocketbooks. With unemployment creating swelling Medicaid rolls, they also would rather not add another 16 million people, as required under the federal health law.
Since enactment of the federal economic stimulus plan, states have been banned from reducing their Medicaid rolls. States have been free to tweak benefits, co-pays and physician fees. But without cutting enrollment, Republican governors say they have been unable to make a dent in rising Medicaid costs that are crowding out other important programs such as education.

Don’t states already have some flexibility with Medicaid?
Yes. Historically, states have had wide leeway to decide who is eligible for Medicaid, what benefits they’ll get and how much doctors and hospitals will be paid. In fact, most states offer more services to more people than the federal program requires. According to the Kaiser Family Foundation, 75 percent of all Medicaid spending goes to optional services and populations. Essentially, the 50 states have developed 50 very different Medicaid programs, with programs in states such as Minnesota and New York seen as more generous and states such as Texas and Alabama among the most limited.

States can deviate from federal Medicaid rules, but doing so requires a waiver that can take a year or more to be approved. Earlier this year, Barbour complained to Congress that the waiver approval process moves “at a snail’s pace,” arguing that the states should not have to “kowtow” to the federal government. If given free rein to alter their programs, Barbour says states would be able to save themselves — as well as the federal government — a lot of money. For example, Barbour says he would like to require physical exams for all Medicaid recipients to head off potential illnesses. Doing this would require a lengthy waiver process.

States are not required to participate in Medicaid — it is voluntary. But all 50 states have participated since 1982 when Arizona became the last state to start a program. Last year, Texas and about a dozen other Republican led states with looming budget deficits considered dropping out of Medicaid. None followed through, however, because studies showed that quitting the federal-state program would be a major blow to the states’ economies. 

What do Democrats say will happen if Medicaid becomes a block grant?
In a letter to Congress, 17 Democratic governors attacked the plan for shifting costs to states and threatening the program’s integrity. They said it would undercut their ability to provide health care to needy residents and adequately pay providers, while doing little to address rising costs.

President Obama says the plan would leave the nation’s most vulnerable people to fend for themselves. Instead, he vowed to maintain the existing program and move quickly to give states more flexibility to cut costs by improving the program’s efficiency.

If Medicaid were converted to a block grant, it would be difficult for states to maintain the levels of coverage they have provided in the past — particularly during recessions when Medicaid rolls spike. According to the Congressional Budget Office, fewer people will be covered, benefits will shrink and payments to doctors and hospitals are likely to plummet.

Hasn’t this idea come up before?
Yes. President Ronald Reagan pushed a similar block grant proposal for Medicaid in 1981. It passed in the U.S. Senate but never became law. In 1995, Congressional Republicans, led by House Speaker Newt Gingrich, passed legislation to turn Medicaid and welfare into block grants, but President Bill Clinton agreed only to the welfare plan. President George W. Bush also proposed the idea in 2003, turning to the National Governors Association to develop the details. A bipartisan task force of governors disbanded without agreeing on a plan.

Do states get other block grants from the federal government?
Yes. But none compare in size to the proposed Medicaid block grant. And all of them come with strings attached.

Welfare is the most analogous example. Once an entitlement, welfare was changed to a block-grant program with time limits on benefits. Many see that change as a success because it resulted in lower welfare rolls and lower federal costs. But advocates for the poor say the program has been ineffective at helping low-income families climb out of poverty, particularly during economic downturns. In addition, Republican and Democratic governors alike complain that the complex program has too much red tape.

Is a Medicaid block grant likely to become a reality?
Not in the next two years. While the proposal passed in the House on Friday, the Senate is likely to reject it and President Barack Obama strongly opposes it. However, the issue is not likely to go away. It may become a top agenda item in the 2012 presidential election.