Budget Options
December 8, 2016

Mandatory Spending Health Option 2

Function 550 - Health

Impose Caps on Federal Spending for Medicaid

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of Dollars 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2017-2021 2017-2026
    Caps on Overall Spending, With Growth of Caps Based on the CPI-Ua
Change in Mandatory Outlays 0 0 -35.1 -50.3 -63.6 -77.5 -92.4 -108.2 -123.4 -139.1 -149.0 -689.6
Change in Revenuesb 0 0 -0.4 -0.6 -0.8 -1.0 -1.3 -1.5 -1.8 -2.1 -1.8 -9.6
  Decrease in the Deficit 0 0 -34.7 -49.7 -62.8 -76.5 -91.1 -106.7 -121.6 -137.0 -147.2 -680.0
    Caps on Overall Spending, With Growth of Caps Based on the CPI-U Plus 1 Percentage Pointa
Change in Mandatory Outlays 0 0 -25.1 -36.5 -45.8 -55.5 -66.1 -77.4 -87.8 -98.5 -107.4 -492.7
Change in Revenuesb 0 0 -0.3 -0.4 -0.5 -0.7 -0.8 -1.0 -1.2 -1.4 -1.3 -6.4
  Decrease in the Deficit 0 0 -24.8 -36.1 -45.3 -54.8 -62.5 -76.4 -86.6 -97.1 -106.2 -486.3
    Caps on Spending per Enrollee, With Growth of Caps Based on the CPI-Uc
Change in Mandatory Outlays 0 0 0 -47.0 -59.7 -71.4 -83.0 -95.6 -107.2 -119.7 -106.6 -583.5
Change in Revenuesb 0 0 0 -0.5 -0.6 -0.8 -1.0 -1.2 -1.4 -1.6 -1.2 -7.0
  Decrease in the Deficit 0 0 0 -46.4 -59.1 -70.6 -82.1 -94.4 -105.8 -118.1 -105.5 -576.5
    Caps on Spending per Enrollee, With Growth of Caps Based on CPI-U Plus 1 Percentage Pointc
Change in Mandatory Outlays 0 0 0 -32.3 -40.2 -47.0 -53.8 -60.6 -67.4 -73.2 -72.5 -374.4
Change in Revenuesb 0 0 0 -0.4 -0.4 -0.5 -0.6 -0.7 -0.8 -0.9 -0.8 -4.2
  Decrease in the Deficit 0 0 0 -31.9 -39.8 -46.5 -53.2 -59.5 -66.6 -72.3 -71.7 -370.2

Sources: Congressional Budget Office; staff of the Joint Committee on Taxation.

CPI-U = consumer price index for all urban consumers.

a.This alternative would take effect in October 2019.

b. Estimates include the effects on Social Security payroll tax receipts, which are classified as off-budget.

c. This alternative would take effect in October 2020.

Overview of the Issue

Medicaid is a joint federal-and-state program that covers acute and long-term health care for groups of low-income people, chiefly families with dependent children, elderly people (people over the age of 65), nonelderly people with disabilities, and—at the discretion of individual states—other nonelderly adults whose family income is up to 138 percent of the federal poverty guidelines. Under current law, the federal and state governments share in the financing and administration of Medicaid. The federal government provides the majority of Medicaid’s funding; establishes the statutory, regulatory, and administrative structure of the program; and monitors state compliance with the program’s rules. As part of its responsibilities, the federal government determines which groups of people and medical services states must cover if they participate in the program and which can be covered at states’ discretion. For their part, the states administer the program’s daily operations, reimburse health care providers and health plans, and determine which eligibility and service options to adopt. The result is wide variation among states in enrollment, services covered, providers’ and health plans’ payment rates, and spending per capita, among other elements.

In 2015, the states received $350 billion in federal funding for Medicaid and spent $205 billion of their own funds for the program. Under current law, almost all federal funding is open-ended: If a state spends more because enrollment increases or costs per enrollee rise, larger federal payments are automatically generated. On average, the federal government pays about 63 percent of program costs, with a range among the states of 51 percent to the current high of 80 percent, reflecting the variation in state per capita income and in the share of enrollees (if any) in each state that became eligible for Medicaid as a result of the optional expansion of that program under the Affordable Care Act (ACA). Through 2016, the federal government paid all costs for enrollees who became eligible as a result of the ACA. The federal government will cover a slightly declining share of costs for that group from 2017 to 2019, and it will cover 90 percent of costs in 2020 and beyond.

Medicaid spending has consumed a rising share of the federal budget over the past several decades, representing a growing percentage of gross domestic product (GDP)—a trend that the Congressional Budget Office projects will continue in the future. Over the past 20 years, federal Medicaid spending has risen at an average rate of slightly more than 7 percent annually as a result of general growth in health care costs, mandatory and optional expansions of program eligibility and covered services, and the amount of state spending that receives federal matching payments.

CBO expects that although federal Medicaid spending will grow more slowly in the next decade, it will continue to increase faster than GDP growth and general inflation, in part because of continued growth in health care costs and in part because more states are expected to expand Medicaid coverage under the ACA. (To date, 31 states and the District of Columbia have done so.) Medicaid spending is projected to rise at an average rate of 5 percent a year, whereas GDP is projected to increase by about 4 percent a year on a nominal basis, and general inflation is expected to average about 2 percent a year. Under current law, CBO estimates, Medicaid’s share of federal noninterest spending will rise from 10 percent in 2015 to 11 percent in 2026.

Lawmakers could make structural changes to Medicaid to decrease federal spending on the program. Among the possibilities are reducing the scope of covered services, eliminating eligibility categories, repealing the ACA expansion, reducing the federal government’s share of total Medicaid spending, or capping the amount that states receive from the federal government to operate the program. This option focuses on the last approach, although the others could have similar implications for federal and state spending or for individual enrollees, depending on the way states were permitted to, or decided to, respond to such policy changes.

From the federal government’s perspective, capping Medicaid funding to states could confer several advantages relative to current law. For example, the caps could generate budgetary savings in greater or lesser amounts depending on their level, and setting spending limits would make federal costs for Medicaid more predictable. Federal spending caps also would curtail states’ current ability to increase federal Medicaid funds—an ability created by the open-ended nature of federal financing for the program—and could reduce the relatively high proportion of program costs now covered by the federal government. Because the federal government matches states’ Medicaid spending, an additional state dollar spent on Medicaid is worth more to a state than an additional state dollar spent outside the program. Therefore, states have considerable incentive to devote more of their budgets to Medicaid than they would otherwise and to shift other unmatched program expenditures into Medicaid. For example, states have sometimes chosen to reconfigure health programs—previously financed entirely with state funds—in order to qualify for federal Medicaid reimbursement. And most states finance at least a portion of their Medicaid spending through taxes collected from health care providers with the intention of returning the collected taxes to those providers in the form of higher Medicaid payments, thereby boosting federal Medicaid spending without a concomitant increase in state spending. Those incentives would be reduced under a capped program.

Caps on federal Medicaid spending also could present several disadvantages relative to current law. Capped federal spending would create uncertainty for states as they plan future budgets because it could be difficult to predict whether Medicaid spending would exceed the caps and thus require additional state spending. If the limits on federal payments were set low enough, additional costs—perhaps substantial costs—would be shifted to states. States then would need to decide whether to commit more of their own revenues to Medicaid or reduce spending by cutting payments to health care providers and health plans, eliminating optional services, restricting eligibility for enrollment, or (to the extent feasible) arriving at more efficient methods for delivering services. Moreover, depending on the caps’ structure, Medicaid might no longer serve as a countercyclical source of federal funds for states during economic downturns. That is, the states might not automatically receive more federal funds if a downturn caused an increase in Medicaid enrollment. In addition, because Medicaid programs differ widely from state to state—and because spending varies widely (and grows at varying rates) for different enrollee categories within a state—federal policymakers could find it difficult to set caps at levels that accurately reflected states’ costs. Finally, it might be difficult to set caps that balanced the competing goals of creating incentives for efficiency and generating federal savings, providing funding to states that was sufficient to generally maintain the scope of their programs, and designing caps that did not disadvantage states that already have established efficient programs while benefiting states that have not.

Key Design Choices That Would Affect Savings

A variety of designs for caps could be considered that would significantly affect federal Medicaid savings, and they could interact in complicated ways. The key areas to consider include the following:

  • Whether to set overall or per-enrollee caps;
  • What categories of Medicaid spending and eligibility categories to include in the spending limits;
  • Which year’s spending to use to set the base year and what growth factor, or percentage rate, to use to increase the caps over time;
  • How much flexibility to grant to states to make changes to the program; and
  • Whether optional expansion of coverage under the ACA also would be subject to the caps (thus creating special complexities for states that have not yet expanded coverage but that might do so in the future).

Overall or Per-Enrollee Caps. Among the first questions are those that involve whether to pursue a cap on federal Medicaid spending across the board or to provide each state with a fixed amount of funding for each enrollee. In general, overall caps would consist of a maximum amount of funding that the federal government would give a state to operate Medicaid. Once established, and depending on the way they were scheduled to increase, the federal caps generally would not fluctuate in response to rising or falling enrollment or as a result of changes in the cost of providing services.

Overall caps could be structured in one of two main ways. First, the federal government could provide block grants at amounts that would not change, regardless of fluctuations in costs or enrollment. Alternatively, the federal government could maintain the current financing structure—paying for a specific share of a state’s Medicaid spending—but capping the total amount provided to states. In that case, states would bear all additional costs above the federal caps, but the state and the federal government would share the savings if spending fell below the caps. In CBO’s view, however, if caps were set below current projections of federal Medicaid spending, such savings would be unlikely. Given the incentive to maximize federal funding, CBO expects that states would generally structure their programs to qualify for all available federal funds up to the amount of the caps.

Caps on per-enrollee spending would set an upper limit on the amount a state could spend on care for Medicaid enrollees, on average. Under such a plan, the federal government would provide funds for each person enrolled in the program, but only up to a specified amount per enrollee. As a result, each state’s total federal funding would be calculated as the product of the number of enrollees and the per-enrollee spending cap. (Individual enrollees whose care proved more expensive than the average could still generate additional federal payments, as long as the total per capita average did not exceed the cap.) Unlike an overall spending cap, such an approach would allow for additional funding if enrollment rose (when a state chose to expand eligibility under the ACA, for example, or as a result of an enrollment increase during an economic downturn). Funding would decline if Medicaid enrollment fell (for example, when a state chose to restrict enrollment or when enrollment fell as result of an improving economy).

Several structures are possible for per-enrollee caps. Fixed, monthly, per-enrollee federal payments could be set in the same way that public or private payers set payments to managed care companies. Caps could be set on the basis of average federal spending per enrollee for all Medicaid beneficiaries or for people by eligibility category. In those circumstances, the federal government would count the enrollees overall or the number in each category and multiply that sum by the spending limit per enrollee. For caps based on eligibility category, the overall limit on Medicaid spending for each state would be the sum of the groups’ limits. A similar but more flexible approach would be to set a total limit consisting of the sum of the limits for the groups as above, but to allow states to cross-subsidize groups (that is, to spend more than the cap for some groups and less for others) as long as the state’s total spending limit was maintained.

Spending Categories. Policy options to cap federal Medicaid spending could target all Medicaid spending or spending for specific categories of services. Most federal Medicaid spending covers acute care ($244 billion in 2015) or long-term care ($75 billion in 2015); both types of spending could be divided among various subcategories. Other spending categories include payments (known as DSH payments) to hospitals that serve a disproportionate share of Medicaid enrollees and uninsured patients, spending under the Vaccines for Children (VFC) program, and administrative spending. (The total in 2015 for those three categories was $31 billion.) In general, the more spending categories included, the greater the potential for federal budgetary savings.

Eligibility Categories. In addition to setting the types of spending to cap, policymakers would face choices about which groups of Medicaid enrollees to include. As with service categories, the more eligibility categories covered, the greater the potential for federal savings. For example, caps could limit federal spending (either overall or per enrollee) only for children and certain adults but leave spending unchanged for elderly and disabled enrollees. Because the latter two groups of enrollees currently account for about 48 percent of Medicaid spending—and are projected to account for about 45 percent in 2026—caps that did not apply to them would produce far smaller savings than caps that covered all groups (assuming that the other characteristics of the two sets of caps were the same).

Per-enrollee caps could establish one average per-person cost limit for all enrollees or establish separate limits for different types of enrollees. If there was more than one per-enrollee cap, separate caps could be established for any number of specific categories. For example, past proposals have considered separate caps for the elderly, people with disabilities, children, and nondisabled, nonelderly adults. Separate caps also could be established for pregnant women, adults added as a result of the expansion of Medicaid under the ACA, or other particular groups.

The choice of creating only one or more than one per-enrollee cap (and if so which groups to select for each cap) could affect whether and to what extent the states would have an incentive to maximize enrollment of some groups over others. A single cap for all enrollees would average the costs of groups without regard to substantial differences in health status between some groups, thus creating financial incentives for states to enroll people whose costs were expected to be below the cap. For example, per-enrollee spending for children and nonelderly, nondisabled adults, on average, is below that for elderly patients and people with disabilities. Therefore, the enrollment of every additional child and nonelderly, nondisabled adult would help a state to remain below its total spending limit, and the enrollment of every additional elderly or disabled enrollee would make that goal more difficult to achieve. However, the degree to which states could effectively maximize enrollment of people in one category compared with another would depend on the degree of flexibility states were given to keep their costs below the caps.

Base-Year Spending. Establishing caps on federal spending for Medicaid would generally begin with selecting a recent year of Medicaid outlays as a “base year” and calculating that year’s total spending for the service categories and eligibility groups to be included. The base year is not necessarily the first year in which the caps take effect, which could be any year in the budget window, but the year from which the future cap amounts are projected (as described in the next section). Thus, for overall and per-enrollee spending caps alike, the selection of the base year is important: A higher base-year amount would lead to higher caps (and lower federal savings) than a lower base‑year amount would.

An important consideration in selecting a base year is whether to use a past or future year. Most proposals use a past year because Medicaid expenditures are known and because states cannot increase spending in the base year to boost their future spending limits (by raising payment rates for providers and health plans, making additional one-time supplemental payments, or moving payments for claims from different periods into the base year).

Choosing a past year as a base also essentially locks in the spending that resulted from prior choices regarding the design of a state’s Medicaid program, including the choice of whether to expand Medicaid. Once caps were set on the basis of states’ past choices, states would find it increasingly difficult to make changes that increased spending, for example, by significantly raising payment rates or voluntarily adding covered services (which some might consider a desirable outcome if a principal goal of the cap is to constrain state spending). In contrast to the case under current law, those changes would not lead to higher federal payments. In addition, states that have made efforts to operate their programs efficiently to keep costs low would receive caps that reflected that efficiency and were, all else equal, lower than the caps of states with inefficient programs. Therefore, those efficient states would have less flexibility to reduce spending to comply with the caps while inefficient states would have more flexibility. Ways to address this issue would include supplementing base-year spending amounts or assigning higher growth rates for low-spending states to give them more room to change their programs over time. However, that approach would reduce the federal savings generated by the caps.

Growth Factors. The growth factor sets an annual rate of increase to inflate the spending limits in future years. The growth factor could be set to meet specific savings targets or achieve specific policy purposes. For example, if a growth factor was set roughly equal to the rate of increase projected for Medicaid spending under current law, little or no budgetary savings might be anticipated, but some other policy objective could be met, such as protecting the federal government from unanticipated cost increases in the future. Alternatively, a growth factor could be set to make the increase in federal Medicaid spending—overall or per enrollee—match changing prices in the economy as measured, for example, by the consumer price index for all urban consumers (CPI-U). Policymakers also could set a rate to reflect the growth in health care costs per person, perhaps as measured by the per capita increase in national health expenditures, or a rate that was consistent with economic growth as measured by the increase in per capita GDP. Growth factors that were tied to price indexes or to overall economic growth, however, would not generally account for increases in the average quantity or intensity of medical services of the sort that have occurred in the past.

For overall spending caps, which would not provide additional funds automatically if Medicaid enrollment rose, the growth factor could be tied to some measure of population growth (such as the Census Bureau’s state population estimates) or changes in the unemployment rate to account for increases in enrollment. A growth factor also could be any legislated rate designed to produce a desired amount of savings.

In general, the lower the growth factor relative to CBO’s projected growth rate for federal Medicaid spending under current law, the greater would be the projected federal budgetary savings. But the lower the growth factor, the greater the possibility that federal funding would not keep pace with increases in states’ costs per Medicaid enrollee or (in the case of overall caps) with increases in Medicaid enrollment, thus raising the likelihood that states would not be able to maintain current services or coverage. Under proposals that led to significant reductions in federal funding, many states would find it difficult to offset the reduced federal payments solely through improvements in program efficiency. Those states would have three potential approaches available to them: Raise additional revenues; cut other state programs to transfer resources to Medicaid; or change the program through some combination of reducing payments to providers and health plans, curtailing covered services, and decreasing enrollment. If reductions in federal revenues were large enough, states would probably resort to a combination of all such approaches.

New Flexibility for States. Some proponents of caps consider additional state flexibility an essential feature of proposals to limit Medicaid spending. However, the structure of Medicaid’s financing and the degree of state flexibility are, in principle, separate issues: Under a federal spending cap, the flexibility available under current law could remain the same or be altered to give states more or fewer options. (Under current law, states’ flexibility could be increased or decreased as well.) If spending caps were coupled with new state flexibility, the federal government could cede more control to states for a range of program features, including administrative requirements, managed care contracting rules, ways to deliver health care, cost-sharing amounts, work requirements, eligibility categories, and covered medical services. That new flexibility would make it easier for states to adjust their spending in response to limits on federal funding. Alternatively, federal spending caps could include a maintenance-of-effort requirement that would prevent states from changing eligibility categories or covered medical benefits before the caps took effect. In either case, the degree of state flexibility would be unlikely to affect the federal savings created by the caps; CBO expects that states would structure their programs to draw federal payments up to the caps’ amount.

The Optional Medicaid Expansion. Since January 2014, states have been permitted to extend eligibility for Medicaid to most people whose income is below 138 percent of the federal poverty guidelines. Under the terms of the ACA, the federal government currently covers a much larger share of the cost of providing Medicaid coverage to people made eligible by the expansion than it does for other Medicaid enrollees. That higher federal share is set at 100 percent through 2016 and then declines gradually to 90 percent by 2020, where it remains thereafter. The Medicaid expansion adds complexity to the design of federal spending caps, particularly for states that choose to adopt the expansion after the base year.

For states that have not yet adopted the ACA expansion, data from a prior base year would reflect spending only for groups of people who were eligible before expansion. Should any of those states subsequently adopt the expansion, the annual limits imposed by an overall spending cap would fail to account for the spending of expansion enrollees. For per-enrollee caps, the additional enrollment from the coverage expansion would generate additional federal spending, but average per capita spending for adults in the base year would not account for the higher federal payment for newly eligible people or for any differences in expected costs related to the health status of those new enrollees compared with costs for people who would have been eligible before the expansion.

In designing Medicaid caps, lawmakers could address those issues in one of several ways:

  • Select a base year far enough in the future to allow time for states that chose to do so to adopt the expansion and for enrollment to become fairly stable. Using a future base year, however, could allow states to boost their spending that year, thus increasing federal spending limits and reducing federal savings.
  • Leave spending uncapped for people who enrolled as a result of the expansion, but cap spending only for nonexpansion enrollees. That approach would remove most of the complications created by the optional-coverage group, but it also would leave a large amount of Medicaid spending uncapped and reduce the potential federal savings. (CBO projects that federal spending for adults made eligible by the ACA will total $134 billion, or 21 percent of total Medicaid spending, in 2026.)
  • Allow the Secretary of Health and Human Services to add an estimate of future spending attributable to the expansion for states that chose to adopt the expansion after the base year. For overall caps, the Secretary could adjust the spending limits to reflect the estimated additional costs of newly eligible people and previously eligible people who would enroll only in response to the expansion. For per-enrollee caps, the Secretary could modify the caps for newly eligible adults to reflect the higher federal matching rates for that group and to allow for any differences in expected costs related to the health status of that group compared with people who enrolled under the existing eligibility rules. The Secretary also could establish an entirely separate per-enrollee cap for the newly eligible enrollees that was based on estimated costs for their coverage.
  • Base the caps on total combined federal and state spending to avoid the complexity of differing matching rates for expansion and pre-expansion adults. For overall caps, the upper spending limit would still require an adjustment to reflect the additional anticipated enrollment attributable to the expansion. For per-enrollee caps, combining federal and state spending limits would circumvent problems associated with the use of different matching rates but would not account for differences in expected health costs between the two groups.

Another question related to the optional expansion concerns whether capping federal Medicaid spending might cause some states that would otherwise expand coverage to reject the option instead. Limits on federal Medicaid payments represent a potential shifting of costs to states, which in turn would affect states’ budget processes and program decisions. States could reduce Medicaid costs and lessen financial risk by dropping the optional expansion or deciding to adopt it later. CBO anticipates that the more that caps reduce federal funding below the amounts projected under current law, the greater the likelihood that states would discontinue or reject the optional expansion unless the cap’s structure was such that participating in the expansion did not make complying with the cap more difficult.

To the extent that states responded to caps by terminating or rejecting the optional expansion, most of the new or potential enrollees would lose access to Medicaid coverage, although some would gain access to the health insurance marketplaces established by the ACA. Specifically, people whose income was between 100 percent and 138 percent of the federal poverty guidelines who lost Medicaid eligibility would qualify for premium assistance tax credits to buy coverage through the marketplaces. Most of the people whose income was below the federal poverty guidelines but who no longer had access to Medicaid would become uninsured; the rest would enroll in other coverage, principally through an employer. For overall caps, enrollment changes would not affect the Medicaid savings, but would reduce net budgetary savings because of increased spending on marketplace subsides and decreased revenues from additional employer coverage. For per-enrollee caps, the net budgetary effect of fewer states’ adopting the expansion would be to increase federal savings, CBO estimates, because the savings from the reduction in Medicaid coverage would be larger than the increase in spending for marketplace subsidies and revenue loss from additional employer coverage.

Specific Alternatives and Estimates

CBO analyzed two types of limits on federal Medicaid spending: overall spending caps and per-enrollee caps. For both types, CBO chose 2016 as the base year. Overall caps would take effect in October 2019; per-enrollee caps would take effect one year later. That additional year would be the minimum necessary to allow for the complex data gathering needed to arrive at state-specific caps for each enrollee group (as discussed below in the section on data availability). For overall and per-enrollee caps alike, federal matching rates would continue as they are under current law, but Medicaid’s DSH and VFC spending would be excluded. DSH spending is already capped and VFC spending covers vaccinations for some children who might not be Medicaid enrollees. The caps also would exclude the spending that Medicaid incurs for Medicare cost sharing and premiums of enrollees who are eligible for both programs. Administrative spending would be financed in the same manner as under current law.

To illustrate a range of savings, CBO used a pair of alternative growth factors for each type of cap: either the annual change in the CPI-U or the change in the CPI-U plus one percentage point (referred to here as CPI-U plus 1). Under each alternative, states would retain their current-law authority concerning optional benefits, optional enrollees, and payment rates for providers and health plans.

For the per-enrollee spending caps, CBO assumed that separate spending limits would be set for each of the four main Medicaid eligibility groups in each state: the elderly, people with disabilities, children, and nondisabled, nonelderly adults. States would not be permitted to cross‑subsidize groups. CBO also assumed that the Secretary of Health and Human Services would make a new data source available to capture the necessary spending and enrollment information for the four groups.

To address the complexities related to the optional Medicaid expansion, CBO assumed that the Secretary would adjust each type of cap to reflect estimated additional spending in any state that adopted the expansion after the base year. Per-enrollee caps would be imposed on combined federal and state spending (overall caps would not). By that method, if combined federal and state spending exceeded the caps, the percentage of the excess spending above the cap would be cut from the federal payment to states: If a state overspent its per-enrollee cap by 5 percent, for example, the federal payment to the state would be reduced by the same amount.

Under the specifications listed here, CBO estimates that the overall caps would generate gross savings to the federal government of $709 billion between 2019 and 2026 under the CPI-U growth factor or $506 billion under the CPI-U plus 1 growth factor, for savings of about 17 percent and 12 percent, respectively, from the current-law projection of total federal Medicaid spending for the period. Gross savings from the two varieties of overall caps would represent about 23 percent and 16 percent, respectively, of projected federal Medicaid spending in 2026.

The gross savings under this option would be partially offset. Reductions in federal Medicaid spending resulting from the overall caps would represent large reductions in revenues for states. Therefore, in CBO’s assessment, the states would take a variety of actions to reduce a portion of the additional costs that they would face, including restricting enrollment. For people who lose Medicaid coverage, CBO and the staff of the Joint Committee on Taxation (JCT) estimate that roughly three-quarters would become uninsured. The rest of that group of people would instead obtain subsidized coverage through the health insurance marketplaces established under the ACA or, if available, choose to enroll in employment-based health insurance. For the CPI-U alternative, the agencies estimate that the additional marketplace and employment-based coverage would increase outlays by $20 billion and decrease revenues by $10 billion from 2019 to 2026. For the CPI-U plus 1 alternative, the agencies estimate that the additional coverage would increase outlays by $13 billion and decrease revenues by $6 billion over the same period. The effects on revenues stem from decreases in taxable compensation associated with increases in employment-based insurance and decreases in tax liability associated with increases in the number of people receiving tax credits to purchase health insurance through the marketplaces. As a result, the net effect on the deficit would be a savings of $680 billion between 2019 and 2026 under the CPI-U growth factor or $486 billion under the CPI‑U plus 1 growth factor.

CBO estimates that per-enrollee caps would generate gross savings for the federal government of $598 billion between 2020 and 2026 using the CPI-U growth factor or $383 billion using CPI-U plus 1, for savings of about 16 percent and 10 percent, respectively, from the current‑law projection of total federal Medicaid spending for the period. The gross savings would represent about 20 percent and 12 percent, respectively, of projected federal Medicaid spending in 2026.

Some of the difference in gross savings between the overall and per-enrollee caps results from the later start for per-enrollee caps. If the overall caps also took effect in 2020, the gross savings would be $673 billion for the alternative using the CPI-U and $480 billion for the one using the CPI-U plus 1.

The gross savings under this option would be partially offset because, as with overall caps, the federal savings associated with per-enrollee caps would represent large reductions in revenues for states, and CBO expects that states would take a variety of similar actions to offset a portion of the additional costs that they would face. Although per-enrollee caps provide additional federal payments for each enrollee, per-enrollee caps below projections of federal per-enrollee spending would create a loss of revenues to states for each enrollee. Therefore, CBO anticipates that some states also would take action to restrict enrollment under per-enrollee caps. As with overall caps, CBO and JCT estimate that roughly three-quarters of enrollees who lost Medicaid coverage would become uninsured. The remainder would instead either obtain subsidized health insurance through the marketplaces or enroll in an employment-based plan. For the CPI-U alternative, the agencies estimate that the additional coverage would increase outlays by $15 billion and decrease revenues by $7 billion from 2020 to 2026. For the CPI-U plus 1 alternative, the agencies estimate that the coverage would increase outlays by $9 billion and decrease revenues by $4 billion over the same period. As a result, the net effect on the deficit would be a savings of $576 billion between 2020 and 2026 under the CPI‑U growth factor or $370 billion under the CPI-U plus 1 growth factor.

Other Considerations

Because caps on federal Medicaid spending would represent a fundamental restructuring of Medicaid financing, several other considerations would need to be addressed. In addition to their consequences for the federal budget, the limits on federal spending would require new administrative mechanisms for full implementation. The Centers for Medicare & Medicaid Services (CMS, the federal agency within the Department of Health and Human Services that administers Medicaid) would need to establish a mechanism for enforcing the caps to account for the delayed availability of the necessary data to calculate the final limits. Administrative data on Medicaid spending and enrollment do not currently provide enough information to establish per-enrollee caps such as those modeled in this option. Such data would need to be developed. Beyond the challenges of implementation, the caps on Medicaid spending could have significant consequences for states and enrollees.

Enforcement. Before overall or per-enrollee caps could take effect, CMS would need to establish mechanisms to ensure state compliance. The nature of that enforcement would depend on legislative direction given to the Secretary for establishing the caps. If the growth factors for either type of cap were based on the value of some specific measure of economic activity, such as the CPI-U (as opposed to a fixed growth factor that consisted of an annual increase of a certain percentage), CMS would not know the final spending limits until after the end of the fiscal year, when the measure would be finalized, unless growth from some earlier period was used instead. Per-enrollee caps would require additional delays because final enrollment data for any year would not be available for at least several months after the fiscal year’s end. In addition, states usually make accounting adjustments to a prior year’s spending long after the end of the fiscal year. Such delays would prevent CMS from calculating and states from determining the final limits on a current year’s spending until well into the next fiscal year. Although states could attempt to forecast the limits and could update those forecasts over the course of a year, it would be difficult to precisely target spending to remain below the caps; states therefore could face reductions in funding triggered by spending above the caps.

Data Availability. States currently report enough data for CMS to determine per-enrollee spending in only two eligibility categories: newly eligible adults and all other enrollees combined. To set per-enrollee caps on the basis of currently available data, lawmakers could establish either a single overall per-enrollee cap that represented average spending in all Medicaid eligibility categories or two caps—one for each of the groups of enrollees for which data were available. As stated above, broad categories for per-enrollee caps create incentives to favor the enrollment of people in eligibility categories with lower rather than higher costs. Alternatively, if lawmakers wanted to establish caps for the four principal groups considered under this option (the elderly, people with disabilities, children, and nondisabled, nonelderly adults), they could direct the Secretary to rely on internal state data regarding enrollment among and spending for the four groups, or they could direct the Secretary to make available a new uniform state-reported data source for the relevant information. Relying on state-submitted data might create an incentive for states to submit enrollment and spending data that would maximize the caps, whereas requiring the Secretary to establish a new uniform data set would require additional time to design, develop, and implement the new system.

Effects on States. Capping federal Medicaid spending would fundamentally change the program’s federal-and-state division of financing. In particular, if the maximum federal commitment under the caps was below the federal expenditures that would have otherwise occurred (as would be the case for the alternatives discussed above), such caps would shift responsibility for the program’s costs to the states.

In the CPI-U or CPI-U plus 1 alternatives, the savings to the federal government would represent lost revenues to states, and those losses would increase over time as the gap grew larger between the states’ costs and the federal payments.

The caps on federal Medicaid payments also would expose states to increased financial risk arising from changes in the marketplaces or in the broader economy—elements over which the states have little control, if any. If overall caps were adopted and the economy entered a recession, for example, the growth of federal Medicaid payments would be unlikely to keep pace with the rising enrollment and need for services. (Between 2007 and 2010, Medicaid enrollment increased by about 14 percent.) Under a system of per-enrollee caps with growth based on the CPI‑U or CPI-U plus 1, federal payments would rise with enrollment but would not respond if cost growth for health care exceeded growth in the index. If the growth of per-enrollee caps was based on a health care–specific index, such as national health expenditures per capita, payments would adjust to average changes in the nationwide health care system but not to idiosyncratic changes in any particular state’s health care system—and the federal savings would be smaller than those under the alternative using the CPI-U.

With lower federal funding and greater budgetary uncertainty, states would have a stronger incentive than under current law to reduce the costs of their Medicaid programs. To help states reduce costs, some proponents of Medicaid caps consider new programmatic flexibility for states to be an essential feature of such a policy. That flexibility could take various forms: States could be permitted to administer their programs without the need to meet some or all of CMS’s current administrative requirements; experiment with new ways to deliver health care to enrollees; or reduce payment rates to providers and health plans, eliminate services, or reduce coverage for current-law eligibility groups. Greater flexibility could permit states to offset the losses of federal funding estimated under this option without having to raise additional revenues or cut other state programs. Whether states would have enough flexibility to prevent cuts in enrollment or in services would depend largely on how much states needed to cut spending to stay below the caps.

Effects on Enrollees. The ways in which Medicaid spending caps affected individual enrollees would depend greatly on how states responded to the caps, which in turn would be affected by the particular structure of their programs. If a state chose to leave its Medicaid programs unchanged and instead found other ways to offset the loss of federal funds, enrollees would notice little or no change in their Medicaid coverage. By contrast, enrollees could face more significant effects if a state reduced providers’ payment rates or payments to managed care plans, cut covered services, or curtailed eligibility—either in keeping with current law or to a greater extent, if given the flexibility. If states reduced payment rates, fewer providers might be willing to accept Medicaid patients, especially given that, in many cases, Medicaid’s rates are already significantly below those of Medicare or private insurance for some of the same services. If states reduced payments to Medicaid managed care plans, some plans might shrink their provider networks, curtail quality assurance, or drop out of the program altogether. If states reduced covered services, some enrollees might decide either to pay out of pocket or to forgo those services entirely. And if states narrowed their categories of eligibility (including the optional expansion under the ACA), some of those enrollees would lose access to Medicaid coverage, although some would become eligible for subsidies for private coverage through the marketplaces or could choose to enroll in employment-based insurance, if available, which would affect federal revenues, as discussed previously.