Politico reported late last week that the Center for Medicare and Medicaid Services (CMS) wants to block grant Medicaid through the 1115 waiver process.
SEEMA VERMA wants Medicaid block grants to be official policy of the Trump administration.
— Dan Diamond (@ddiamond) January 11, 2019
A block grant transfers all shock risk to the state while potentially allowing the state wider flexibility to cut services and not cover certain, current mandatory populations.
I want to look at the risk transfer component first. Right now if a state has a significant expense shock to its Medicaid population, the federal government absorbs at least half of the expense and in some states, up to three quarters of the incremental expense will be paid for by the federal government through the normal FMAP process. For the expansion population, an expense shock will have the state only bear up to 10% of the incremental and unexpected shock. Conversely a state that manages to save money will only see a small portion of the effort show up on the state budget.
What could an expense shock look like?
I spent some time a few years ago freaking out about Zika.
We also know that locally transmitted Zika infections will not be uniformly distributed. Alaska will have far fewer proportional Zika infections than Florida. We also know that one of the major policy planks of the Republican trifecta will be to block grant Medicaid on a per capita basis…. States with disproportionate clustering of high cost conditions will be significantly worse off….
There could be other emerging, infectious diseases that have expensive long run prognosis that are not uniformly and randomly distributed.
Technological shocks are also a major concern within block grant schemes. The Hep-C anti-viral cures are a massive technological shock. They are very cost effective for the improvement in the quality and quantity of life but they are very expensive as they bring forward significant future costs to a three month treatment window. They are a cash flow problem for Medicaid entities even with high federal matches. They would be a cash flow disaster for states with block-granted federal funds as the technological/financial shock of a state being required to pay for effective, efficient but expensive cures would be entirely on the state’s marginal costs.
Enrollment shocks are another major issue. Enrollment eligibility goes up when the economy goes down. A state has the least capacity to take on new enrollment during the time of the highest demand in the middle of recession. It would be worsened under a block grant schema unless Congress relaxes funding in a counter-cyclical manner. Right now, the funding shock of 51 mini-Hoovers is at least partially counter-acted by the automatic stabilizer of the federal matching component.
The most notable shock is the natural disaster shock. Puerto Rico was walloped by Hurricane Maria. Population health declined significantly after the hurricane. Puerto Rico’s Medicaid program is running out of resources and funding for treatment. Puerto Rico is currently on a block granted Medicaid program and it can not handle the after-effects of a massive external shock event.
The US Federal government is the globe’s biggest, deepest, and most experienced risk bearing and risk sharing entity. It can engage in massive counter-cyclical debt financed spending. It can shift resources between disparitely impacted geographies. It can spread risk over a hundred year time frame without too much effort. States can’t absorb those shocks anywhere nearly as well as the pools are far shallower and the ability to access financing in excess of immediate tax revenue is far more constrained.