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Last week, the Center for Medicare and Medicaid Services (CMS) released new guidance that it thinks will enable it to give block grants to states that want to take on an incredible amount of actuarial, economic, technological and financial risk.  The basic mechanic of the program is that a state can elect to have either a universal cap or a per-capita block grant.  Either system will have a baseline funding stream that is then increased by a fixed amount each year:

For states implementing a per capita cap model, the per capita caps determined for the base year will be increased by a growth factor based on the lesser of the growth rate in the state
over the prior five years and by the medical care component of the consumer price index for all urban consumers (CPI-M). Because states opting to implement an aggregate cap model
assume greater risk due to the uncertainty in enrollment, the annual aggregate cap determined for the base year will be increased by the lower of growth rate in the state over the prior five years and CPI-M plus one-half of a percentage point (CPI-M + .5%).

For those who remember the summer of 2017, this is reminiscent of many of the Repeal and Replace bills.  Medicaid would have been block granted to states for many eligible populations and the growth rate of federal funding would be well below historical growth rates so either beneficiaries in the form of enrollment caps or service denials or states in the form of increased funding from local resources would be making up the difference over time.

From a mechanical point of view, a state applying for a block grant will want to have the nastiest, most expensive flu season possible as part of the baseline.

The flu is a recurring variable source of healthcare spending.  Some years the flu hits vulnerable populations particularly hard and other years reasonably healthy adults are disproportionally whacked.  Some years, the flu is fairly mild and not particularly infectious and other years it spreads very readily and once someone gets it, the flu can knock them down for a long, slow recovery.  There is a lot of variability in the flu season.  Flu severity is barely in control of any insurer or clinical entity.  Good public health measures (wash your hands, don’t touch your face and if you feel ill, stay home!) can help tamper down the severity of a bad flu epidemic, but it is a shock event.  In 2009, the swine flu had significant impact on insurer profitability:

On Oct. 26 (2009), Amerigroup Corp. (AGP) announced preliminary third-quarter results, cutting its third-quarter earnings outlook and withdrawing its full-year outlook due to medical costs associated with a severe H1N1 season. The virus is particularly virulent among children, pregnant women and other high-risk groups — a category representing about 87 percent of Amerigroup’s 1.7 million members.

Despite its previous warning, AGP shares fell over 3 percent on Friday when the company reported actual results, posting a net profit fall of 41 percent to $22.5 million, or 43 cents a share. That was below estimates of 47 cents per share. Revenues rose 19 percent to $1.3 billion, but the lower profit reflected elevated medical costs associated with what appears to be a bad season for the flu…

So a state would want as many bad flu years as part of the baseline if it was to adopt a block grant approach to Medicaid.  However if a state that has a block grant has a super-bad flu season that is hitting the block grant covered population particularly hard, the state will quickly run out of federal money as people who were expected to be cheap to cover become expensive to cover.  There might be work-around with complex re-insurance contracts or a state dipping into its rainy day funds, but this is a simple, reasonably probable limitation of a block grant; it is a risk shift from an entity with near infinite risk bearing capacity to entities with far more limited risk bearing strength so shocks hit harder and more painfully.

Block grants, baselines and flu seasonsPost + Comments (6)