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June 21, 2017

Senate health bill would lower the Medicaid per capita cap rate, causing greater state budget shortfalls

June 21, 2017

This post was updated on June 22, 2017 to reflect the release of the Senate's health care bill.


The Senate’s health care bill reduces the growth rate for Medicaid per capita caps from the rate used in the American Health Care Act (AHCA) passed by the House last month.

The Senate bill lowers the growth rate to the Consumer Price Index for All Urban Consumers (CPI-U) beginning in 2025, rather than the medical Consumer Price Index (m-CPI). This change would ensure a shortfall between federal Medicaid payments and projected Medicaid costs that will grow over time.

Why? The m-CPI is projected to grow at about 3.7 percent over the next decade, but the CPI-U would only grow at about 2.4 percent. 

States will have to fill this shortfall by raising taxes, cutting enrollment, reducing benefits, or reducing provider reimbursement—all of which are difficult choices.

What are per capita caps?

Among other provisions, the American Health Care Act (AHCA) changes the way Medicaid is funded by capping federal Medicaid payments per enrollee, beginning in 2020. Under the House version of the AHCA, these caps would grow at m-CPI plus 1 percent for the elderly and disabled and at m-CPI for all other Medicaid enrollees. 

The Affordable Care Act (ACA) allowed states to expand Medicaid, with the federal government paying for most of the costs of those newly made eligible (90 percent from 2019 onward). The AHCA would repeal this higher federal share beginning in 2020 and would only pay 50 to 75 percent of costs, depending on the state.

We recently estimated that the AHCA would reduce federal Medicaid spending by at least $373.6 billion from 2019 to 2028. Under a per capita cap, federal payments are tied to enrollment. If states cut enrollment, federal allotments would fall further. If states cut enrollment in response to lower federal payments, the difference in federal spending could reach nearly a trillion dollars.

What are the impacts of reducing the per capita cap growth rate?

The idea of capping federal Medicaid spending at CPI-U is not new. Most recently, Paul Ryan’s “Better Way” proposal used this growth rate. For Medicaid financing, the AHCA and “Better Way” proposals differ primarily in the rate at which per capita caps grow. 

We've compared the two proposals over the same budget window (2019 – 2028) to find the difference that lowering the per capita growth rate to CPI-U would make. The reduction of the Medicaid per capita growth to CPI-U would have major consequences.

In the figure below, we project federal Medicaid spending from 2019 to 2028 under three scenarios:

  • Under current law, or the ACA with no changes
  • Under the AHCA as passed by the House
  • Under the Better Way proposal, which is similar to the AHCA, except for the lower per capita cap rate

Impact of lowering rate of Medicaid per capita caps

To compare federal Medicaid spending under each scenario more simply, we assume Medicaid enrollment remains the same in all three scenarios.

Under the AHCA, federal Medicaid spending would be $22 billion lower than current law in 2020 and $50.3 billion lower in 2028. Between 2019 to 2028, federal spending would be $373.6 billion lower.

Capping Medicaid growth at the CPI-U over the same budget window would lead to $841 billion less federal Medicaid spending than current law from 2019 to 2028, or $467.4 billion less than the AHCA passed by the House. The difference in federal spending between CPI-U growth rates and the House AHCA increases every year, from $18.6 billion in 2020 to $63.7 billion in 2028.

Even if the Senate bill starts using the CPI-U later, such as in 2025, the result will be essentially the same: a gap between federal funding and projected cost growth that increases over time.

States would face greater costs

Reductions in federal Medicaid spending shift Medicaid costs onto states. States will then face a budget shortfall and the difficult choice of whether to raise taxes, cut Medicaid enrollment, reduce benefits, or pay providers less. In our recent analysis, we estimate that if states respond to the AHCA’s Medicaid cost shift through enrollment cuts alone, nearly 15 million people could lose coverage in 2022.

The lowered growth rates for Medicaid per capita caps in the Senate bill would result in cuts in federal funding that would shift even more Medicaid costs to the states. The gap in federal Medicaid funding would get worse every year, forcing states to deal with ever-increasing annual budget shortfalls.

U.S. Senate Majority Leader Mitch McConnell approaches the microphones before talking with reporters with Sen. Cory Gardner (R-CO) (L), Sen. John Thune (R-SD) and Senate Majority Whip John Cornyn (R-TX) (R) following the weekly GOP policy luncheon at the U.S. Capitol June 20, 2017 in Washington, DC. Senate Republicans said that Democrats were not invited to participate in the writing of new health care legislation to replace Obamacare because they would attempt to obstruct the process. Photo by Chip Somodevilla/Getty Images.

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