The analysis uses the CBO's rather than the administration's projections mainly because the CBO is the final arbiter of the cost implications of legislative proposals, although supporting analysis used the administration's data, producing similar results available upon request. In addition, the analysis used data from the CMS's national health accounts and the Bureau of Labor Statistics for a multiple linear regression analysis of how much of the past growth of Medicaid costs can be explained by the medical component of the consumer price index, actual enrollment growth, and a proxy for utilization changes.
This analysis used the national health accounts data from to and focused on the R-squared statistic, a measure of the goodness of fit. The analysis of the block grant shows that the proposed Medicaid spending levels would have reduced federal Medicaid expenditures by 6 percent in the first five years and 26 percent over the ten-year budget window Table 1.
For several reasons, the rate of Medicaid growth during this period was considerably higher than that of the gross national product GNP , which was used to adjust the federal funding cap. First, because of federal and state policy changes Schneider et al.
Census Bureau The growth in enrollment alone would have consumed more than 40 percent of the average annual increase in federal funding under the caps. Second, health care prices generally grew faster than the GNP from to ; the medical component of the consumer price index rose by an average of 4. Third, Medicaid spending began to accelerate in , in part because of a financing scheme involving DSH payments U. But even subtracting the DSH payments from actual spending assuming that block grants would have lowered the incentive to use this option , the caps would have reduced federal Medicaid funding by 25 percent during the ten-year budget window and 49 percent in Thus, had the block grant been enacted, federal Medicaid spending would have been much more constrained than anticipated at the time.
Federal spending under the cap was set in the legislation. Seven-year numbers are used because this was the budget window at the time. Federal spending under the cap estimated using actual spending and the GNP price deflator from the Bureau of Economic Analysis. Table 2 shows the impact on the federal budget of the Medicaid block grant proposal. Unlike the proposal, which underestimated the projected federal savings, the savings from the proposal were overestimated.
In fact, block grant funding would have exceeded the current law's funding from to , a trend not anticipated by the CBO. During this period, the enrollment in Medicaid unexpectedly declined, and the inflation in health costs slowed, resulting in record-low federal Medicaid cost growth in Holahan, Bruen, and Liska But by , these trends had been reversed, driven by higher Medicaid enrollment owing to the slowing economy, rapidly rising drug and hospital costs, and the growth of long-term care costs Bruen and Holahan Because of the numerous state options in Medicaid and the geographic differences in health care costs across the United States, no two state Medicaid programs or cost structures are alike.
Thus, the effects of the block grant proposals would have varied considerably across the states. For example, while the block grant would have reduced the national federal Medicaid funding for FY by 15 percent, Table 3 shows that the percentage differences in the various states ranged from a drop of 45 percent to caps that exceeded actual federal spending in two states Texas and West Virginia.
Generally, the states that would have had the greatest reductions because of the caps expanded their coverage during this period e. The federal funds for those states that expanded their coverage e. Similarly, the block grant would have disproportionately reduced funding in predominantly rural states like New Mexico and Idaho, which is consistent with the fact that a greater proportion of rural than urban people rely on Medicaid Kaiser Family Foundation b.
Federal spending in about 30 states would have dropped more than the national average, suggesting that even if the proposed federal spending had been set equal to what it actually was in , most states would have lost some federal funds.
Even though it would have lowered federal spending less than expected, the block grant would have had a significant programmatic impact on Medicaid. To put this into perspective, the one-year reduction in federal funding under the block grant would have exceeded federal Medicaid spending on prescription drugs or home- and community-based services and would have equaled half of all Medicaid spending on nursing homes U.
If this loss of federal funding had been absorbed through eligibility restrictions, then more than 6 million people would have lost Medicaid coverage in , using actual spending and enrollment data and assuming proportionate cuts across beneficiary groups data from U.
CBO The states could have responded to these reductions in federal funding by increasing their own spending in order to maintain services for their Medicaid enrollees.
Had this been included, the reductions just described would have been larger in some states. If only the architects of the Medicaid block grant plans had better captured the factors driving Medicaid cost growth and variation, one might argue, they could have achieved the goals of greater federalism and federal funding predictability without the unintended consequences.
Although it is impossible to resolve this argument, two analyses can address how well the past projections predicted the future. First, we examined for their accuracy the Congressional Budget Office's annual federal Medicaid spending projections, made as part of the budget process. Figure 1 compares the actual federal Medicaid spending with what the CBO projected it would be three years and five years before each given year not taking into account the policy changes in between.
The projections of what Medicaid spending would be three years into the future ranged from 28 percent higher than the actual spending for the year to 31 percent lower for Some of this difference resulted in changes in federal and state law between the time of the projection and the actual year. Nevertheless, the results suggest not only large differences between Medicaid projections and actual spending but also inconsistency in the difference: Sometimes they were positive, and sometimes negative.
A second analysis examines how well Medicaid spending growth was predicted by individual factors measuring changes in price, enrollment, and utilization. I conducted simple regression analyses using an R-squared test on total federal and state Medicaid spending growth to determine the extent to which major indicators of price, utilization, and enrollment changes explained the growth of costs.
The results suggest that if medical inflation in the past were used as the sole predictor of growth, it would have accounted for only about 11 percent of the actual growth in Medicaid costs over a year period from to , data not shown.
Under President Bush's optional block grant program, medical inflation was to be the only growth factor used to set the annual state payments. Adding enrollment growth should, and does, improve the explanation of the growth of Medicaid costs, raising it to about 30 percent of total Medicaid cost growth.
The last factor added to the cost equation is utilization changes. Using private health spending growth per capita as a proxy for both price and utilization changes, it appears that this factor plus enrollment changes still explain less than one-third of the growth in overall Medicaid costs. My analysis of the implications of Medicaid block grants is limited in a number of ways. While my analyses attempted to subtract this type of spending, no one really knows how much of federal Medicaid funding is spent on such activities.
Second, my analysis does not take into account potential efficiencies that might have been prompted by the proposals. Those states facing constraints on federal funding could find new ways to contain costs in order to maintain current levels of service. Third, the CBO and the CMS use complex models to project spending, whereas I considered only top-line projections, in part because policy proposals typically cap spending in the aggregate. Notwithstanding these limitations, the analyses described here provide several new insights into the potential implications of Medicaid block grants.
The first is that neither the nor the proposal came close to mirroring what actually happened in Medicaid spending. The federal funding caps in the proposal were higher than the actual spending in the first four years and then, by the proposal's final year, considerably below it. The proposal would have limited federal Medicaid spending to well below the actual amount—so much lower that Medicaid as it is currently structured could not have been sustained had it been enacted.
This suggests that although a Medicaid block grant's federal spending may be predictable, its impact relative to current law is not. Fiscal conservatives aiming to reduce federal outlays may end up spending more than they anticipated, and moderates intending to maintain current coverage may find that the funding limits are too low to do so.
A second finding, consistent with previous estimates based on simulation models, is that the effects would have been dramatically different in each state. Medicaid spending varies across states not only because of their different local costs, covered services, and mix of beneficiaries but also because of their different growth rates. Although not analyzed here, the proposal would have had especially negative effects on states in which costs were growing rapidly e. The proposal would have reduced federal spending differentially across the states, ranging from zero to 45 percent.
This would have resulted in political as well as policy concerns. The danger of this type of fight may have been why the Bush administration delegated to the governors themselves the task of coming up with the details of his block grant proposal, although this may have added to their inability to do so.
An equally contentious point in the debate was whether the Medicaid block grant would cause millions of beneficiaries to lose their coverage. Looking at the actual spending compared with what it would have been under the block grant, it appears that some people would have lost coverage. Recent state budget problems indicate that even though the states are trying to cut costs by paying providers less and controlling drug costs, 18 states reported considering cutting eligibility, and 17 states reported considering benefit cuts for Smith et al.
Could perhaps a more accurate formula for a Medicaid block grant ensure that the federal limit would be both sufficient to maintain services and constrained enough to meet federal budget targets? My examination of the accuracy of past governmental projections of actual Medicaid spending showed that predicting Medicaid costs just three years into the future was difficult, with estimates off by 30 percent in both directions. I also reported that the actual growth of enrollment and medical inflation explained less than one-third of the growth in Medicaid costs over the past 30 years.
Medicaid's multiple roles—as an insurer of low-income people, payer of long-term care, safety net for the uninsurable, and supplemental insurer to Medicare—likely contribute to the variability in its cost growth. It also may be that health programs in general have unpredictable costs.
A similar analysis that I conducted of projections of both Medicare and private health spending produced similar results available on request.
These results corroborate previous but contested assessments of the potential problems with a block grant approach to Medicaid. As such, they suggest a reexamination of the motivation for such a policy. Some of the goals of a Medicaid block grant could be achieved without changing the program's entitlement.
Laws enacted in , , , and addressed these priorities Schneider et al. The goal that cannot be achieved without a block grant is making federal Medicaid spending predictable. As this analysis suggests, achieving predictability would come at a cost. It would limit the extent to which state health programs could respond to epidemics, cover new but costly medical breakthroughs, and accommodate demographic shifts.
It would end the federal contribution to state-initiated coverage expansions for low-income working families. And it would prevent Medicaid from compensating for the loss of private coverage during recessions. Indeed, the increase in the rate of uninsured Americans that occurred between and from Moreover, as this article shows, it is unlikely that the current level of Medicaid enrollment could be sustained under most block grant policies. Since individuals losing Medicaid probably have few affordable alternatives, block grants could result in raising the number of the uninsured, making Medicaid part of the problem rather than part of the solution to the coverage gaps in the United States.
As such, the future debates over Medicaid block grants should focus on whether federal budget certainty is more important than covering low-income and vulnerable populations, since this is ultimately what is at stake. The research for this article was supported by the Kaiser Commission on Medicaid and the Uninsured. The author thanks the commission's staff for their support and input. Funding for this study was provided by the Henry J. Kaiser Family Foundation. The views expressed are solely those of the author and do not necessarily reflect those of the Kaiser Family Foundation or George Washington University.
National Center for Biotechnology Information , U. Journal List Milbank Q v. Milbank Q. Jeanne M Lambrew. Author information Copyright and License information Disclaimer. George Washington University.
Address correspondence to: Jeanne M. Lambrew, K Street N. This article has been cited by other articles in PMC. Abstract In , President Bush proposed converting Medicaid from an entitlement to a block grant program. Keywords: Medicaid, health care financing, entitlements, health reform.
Why Block Grants? Why Medicaid? Reagan's Plan President Reagan's proposal S. Gingrich's Plan In , the th Congress, under the leadership of Representative Newt Gingrich, proposed a different type of block grant, called Medigrant H. Bush's Plan Unveiled in January , President Bush's plan proposed giving the states the option of accepting federal block grant funding in return for higher federal funding in the near term, greater program flexibility, and reduced state spending.
Questions about the Impact of a Medicaid Block Grant The reasons for the failure in the past to enact block grant proposals may go beyond Medicaid. Data and Methods This article used data from several sources. Open in a separate window. If states did not do so, then the funding reductions would be larger. Impact of the Medicaid Block Grant on the States Because of the numerous state options in Medicaid and the geographic differences in health care costs across the United States, no two state Medicaid programs or cost structures are alike.
Impact of the Medicaid Block Grant on Services and Coverage Even though it would have lowered federal spending less than expected, the block grant would have had a significant programmatic impact on Medicaid. Figure 1. Conclusion My analysis of the implications of Medicaid block grants is limited in a number of ways. Acknowledgments The research for this article was supported by the Kaiser Commission on Medicaid and the Uninsured.
References Brown GD. ABA Journal. Washington, D. Department of Commerce. Table 1. Bush J. Testimony before the U. March Reforming Medicaid. Dallas: National Center for Policy Analysis; Baltimore: National Archives and Research Administration; Remarks by the president in meeting with Democratic governors.
December 8. Washington Post. June Reagan, Congress, and Health Spending. Health Affairs. During his eight years in office, President Bush spent almost twice as much as his predecessor, President Clinton.
Adjusted for inflation, in eight years, President Clinton increased the federal budget by In eight years, President Bush increased it by a whopping 53 percent. One reason offered for these large budget increases is that entitlement programs are growing rapidly.
Between FY and FY, discretionary spending rose 96 percent. Some argue that federal spending during the Bush years was so high because security needs drove up the budget. However, nondefense spending increased too. Some also argue that much of the increase in nondefense spending stemmed from increases in homeland security spending. Whether this is true, the overall rapid rise of discretionary spending indicates that, here too, the administration and Congress made no trade-offs in the budget.
If the administration and Congress wanted more security spending and wanted to be fiscally responsible, they should have found savings elsewhere in the budget. President Bush added thousands of new federal subsidy programs during his eight years in office. In , there were 1, subsidy programs in the federal budget that spread hundreds of billions of dollars annually to special interest groups such as state governments, businesses, nonprofit groups, and individuals.
The number of subsidy programs has grown by 30 percent since and by 54 percent since Each week, we will send you the latest in publications, media, and events featuring Mercatus research and scholars. Skip to main content. Sparking New Thinking Read Discourse magazine Online journal dedicated to promoting and defending classical liberal values with new and innovative thinking. Grants and fellowships for talented individuals with unique ideas for changing the world.
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