Establish Caps on Federal Spending for Medicaid

Medicaid is a joint federal-state program that covers acute and long-term health care for groups of people with low income, chiefly families with dependent children, elderly people (those 65 or older), 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. State governments contribute to the financing and administration of Medicaid, but the federal government provides the majority of Medicaid's funding. 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 generated automatically. In 2023, the states received a total of $614 billion in federal funding and contributed $280 billion in state funds. The Congressional Budget Office expects that, under current law, federal spending for Medicaid will increase faster than overall inflation because of several factors, including increases in health care prices that exceed the rate of overall inflation, enrollment growth, and changes in utilization and technology.

This option consists of two alternatives that would limit federal Medicaid spending: The first would establish overall spending caps, and the second would establish per-enrollee caps. Both alternatives would limit federal spending for all medical services for all eligibility groups but would not affect states' current authority concerning optional benefits, optional enrollees, and payment rates for providers and health care plans. To illustrate a range of savings, CBO used two growth factors for updating each type of cap over time: the annual change in the consumer price index for all urban consumers (CPI-U) and the change in the CPI-U plus 1 percentage point.

The first alternative would set an annual maximum amount of funding that the federal government would provide to each state to operate Medicaid. That amount would be based on spending on medical services in 2024 inflated by the growth factor. The second alternative would set an annual upper limit on federal payments per Medicaid enrollee. Under this alternative, each state's total federal funding would be limited to the product of the number of enrollees and the capped per-enrollee spending amount, which would vary for the different Medicaid eligibility groups in each state. Unlike an overall spending cap, the upper limit on federal spending would depend on the number of enrollees in each eligibility category.

The effects of this option on the deficit stem from lower federal costs per enrollee and changes in Medicaid enrollment, subsidized coverage in the nongroup market, and employment-based coverage. In response to lower federal payments for Medicaid, CBO expects states would reduce the size of their Medicaid programs by lowering payment rates to providers, cutting some optional services, and reducing enrollment. About half of people who would no longer enroll in Medicaid would instead obtain other federally subsidized health insurance through an employer or the health insurance marketplaces established by the Affordable Care Act, which would lead to both an increase in outlays and a decrease in revenues.