Medicaid Block Grants:  The Bush Administration Plays Hardball with Cash-Strapped States

By Laura Hermer

Medicaid, the joint federal-state health program for impoverished families, pregnant women, children, and disabled and elderly individuals, has provided federally-mandated and optional health care services to all qualifying applicants since the program’s inception in 1965.  Both the federal and state governments share in the expenses:  for each state dollar spent, the federal government matches it with a certain percentage.

Because states must cover a significant portion of their residents’ Medicaid costs, many states’ Medicaid programs have been reeling under the present budget crisis affecting states nationwide.  Some states have refused to make any cuts in their Medicaid programs, leaving tens of millions to be cut from other core programs, such as education.  See, e.g., Kit Wagar, Missouri Rejects Plan to Rein in Skyrocketing Cost of Medicaid, THE KANSAS CITY STAR (April 30, 2003).  Others plan to cut significant Medicaid services or drop thousands from the rolls and let those affected by the cuts (and the local services and health care systems which will likely have to pick up their care) fare as best they can.  See, e.g., Robin Toner and Robert Pear, Cutbacks Imperil Health Coverage for States’ Poor, NEW YORK TIMES A1 (April 28, 2003).

The Bush administration is taking advantage of the states’ fiscal crises to promote a plan that, if allowed to proceed, will likely chip away at the foundations of the Medicaid program.  It has proposed changing Medicaid from a fully funded entitlement program to a block grant program, in exchange for giving participating states cash up front. Under President Bush’s proposal, states could choose to continue under the present system, or they could elect to receive a set amount of funding for their Medicaid (and SCHIP) programs for the next ten years, to be determined based on a statutory formula.  In testimony before the House Energy and Commerce Committee, Secretary of Health and Human Services Tommy Thompson said that states electing the latter option would likely receive more funding in their grant in the first several years of the program than they would if they opted to continue under the present system.  Unlike the present system, however, if these states opted to or were required to spend more than the amount that could be covered by the block grant, they would not receive any federal matching funds to make up the difference.  In exchange for this uncertainty, states would have greater flexibility to use their federal funds to fund health care coverage for populations that may not normally be presently covered under Medicaid and SCHIP, or to reduce or eliminate coverage for various optional populations and services.  They would still be required, however, to continue to cover mandatory Medicaid populations.  See Testimony of Secretary of Health and Human Services Tommy Thompson to the House Ways and Means Committee, February 6, 2003.

According to the Center on Budget Policy Priorities, if all states took up the administration’s proposal, they would receive approximately $12.7 billion more than the projected federal share of their Medicaid and SCHIP costs from 2004 – 2010.  See CINDY MANN ET AL., ADMINISTRATION’S MEDICAID PROPOSAL WOULD SHIFT FISCAL RISKS TO STATES  5 (April 22, 2003), viewed at on April 30, 2003.  For cash-strapped states presently faced with the choice of dropping certain poor children and others from their Medicaid and SCHIP rolls, further lowering already abysmally low provider reimbursement rates, cutting optional services such as mental health and dental care, or retaining their Medicaid programs intact and instead gutting other essential state programs, Bush’s proposal may sound like a godsend.

It is not.  First, it caps federal reimbursements.  Thus, if a state’s actual Medicaid or SCHIP expenditures exceed the projections, then the state must make up the difference.  In such a case, it would be forced to pay out more than it would have been required to under the present Medicaid program.  This scenario is not merely hypothetical; the Congressional Budget Office’s projection for Medicaid expenditures from 1998 through 2002, for example, turned out to have been $17 billion short.  See MANN, supra, at 6 – 7.  Should such a gross mismatch between projected and actual expenditures arise again for states taking up Bush’s proposal, such states may very well choose to cut enrollment or services in response, or take other measures designed to ensure that their costs do not exceed a set amount.  Alternatively, rather than taking advantage of times of future fiscal prosperity to expand their public health insurance programs, they may instead choose to offer private alternatives such as tax subsidies for health insurance that require no direct governmental commitment to the needs of its populace, and that are often wholly inadequate to meet the realities faced by the impoverished.  As such, the proposal may serve to undermine the Medicaid program itself, which is the foundation of America’s health care safety net.

Second, the increased payments from 2004 – 2010 would effectively function as a loan to the states.  Under the administration’s plan, states taking up Bush’s proposal would have to repay the “extra” money they received up front over the final three years of the plan.  According to the administration’s own figures, states would receive  $150 million less from the block grant than they are projected to receive under the present Medicaid system in 2011, $4.4 billion less in 2012, and $8.3 billion less in 2013.  See, e.g., MANN, supra, at 5.  There is no way to know whether states could absorb such a significant reduction in federal Medicaid and SCHIP funds without serious hardship to the programs’ recipients or to other segments of the states’ budgets.  Particularly given the projected dramatic increase in the number of retirees at that time, many of whom may be impoverished and will need to take advantage of Medicaid, the administration’s block grant proposal merely becomes a way of forestalling a present crisis at great likely expense to the state’s future coffers, to us, and to our children.

At the most recent meeting of the National Governors’ Association, Secretary Thompson called on governors to back “[b]uilding on the success of the State Children’s Health Program (SCHIP) and the Health Insurance Flexibility and Accountability (HIFA) demonstrations” by endorsing President Bush’s block grant plan for Medicaid.  Missouri’s Medicaid director, Gregory A. Vadner, commented that “From the states’ point of view, flexibility is great, but when you stop to think about it, I don’t see any new money in this.  I welcome a dialogue with the federal government, but I am concerned that we may end up with a short-term good deal that causes huge problems in later years.”  See Robert Pear, Health Secretary Wants States to Back Bush’s Medicaid Plan, NEW YORK TIMES A1 (February 19, 2003).  Vadner is correct.  Bush’s proposal for Medicaid offers states short-term relief at enormous – and unreasonable - future cost.