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FEBRUARY 2017

Capped Federal
Medicaid Funding:
Implications for Texas
Prepared by Manatt Health for the
Texas Alliance for Health Care

Deborah Bachrach, Partner


Cindy Mann, Partner
Anne Karl, Partner
This paper was commissioned by the Texas Alliance for Health Care. The Texas Alliance
for Health Care was created as a resource to lawmakers in anticipation of changes in the
Affordable Care Act. The Alliance is a diversified group of stakeholders from private and
public sectors representing hospitals, health plans, community clinics, other providers,
business and public health. Its goal is to provide well thought out research that will inform
and offer guidance as to the impact of proposed changes in the finance and delivery of
healthcare in Texas. To learn more about the Alliance contact Jon Comola at
jrcomola@wrgh.org or 512.695.8806.

About Manatt Health


Manatt Health, a division of Manatt, Phelps & Phillips, LLP, is an integrated, multidisciplinary
legal, regulatory, advocacy and strategic business advisory healthcare practice. Manatt
Healths experience spans the major issues re-inventing healthcare, including payment and
delivery system transformation; Medicaid coverage, redesign and innovation; health IT
strategy; health reform implementation; healthcare mergers and acquisitions; regulatory
compliance; privacy and security; corporate governance and restructuring; pharmaceutical
market access, coverage and reimbursement; and game-changing litigation shaping emerging
law. With 90 professionals dedicated to healthcareincluding attorneys, consultants, analysts
and policy advisorsManatt Health has offices on both coasts and projects in more than
30 states.

For more information, contact:

Deborah Bachrach
Partner
212.790.4594
dbachrach@manatt.com

Cindy Mann
Partner
202.585.6572
cmann@manatt.com

Anne Karl
Partner
212.790.4578
akarl@manatt.com
Capped Federal Medicaid Funding: Implications for Texas

Executive Summary
Executive Summary

Since its inception, Medicaid congressional leadership and to each state in a capped funding
has been financed jointly by the President Trump are seeking to model and considers how they
federal and state governments. replace the current matching might play out for the State of
There are no caps on the system with a fixed allocation Texas. Because capped funding
federal governments financial of federal dollars paid through proposals generally provide
obligations; federal funding is block grants or per capita caps. states with greater flexibility
guaranteed as a share (known Drawing on proposals advanced than the current Medicaid
as a match) of all state in recent years, this paper funding model, the paper also
expenditures that follow federal examines the factors that go into reviews the type of flexibilities
rules. Today, this open-ended calculating the amount of federal that might be available to Texas
funding model is being called dollars that would be allocated under such proposals.
into question. Republican

I. Medicaid Financing Models


Under the current system, the The base funding amount is Per capita caps limit federal
federal government matches trended annually generally using funds on a per enrollee basis.
state spending on Medicaid so a national trend rate set below Unlike a block grant, federal
long as the state follows federal the rate of medical inflation. payments would rise with
Medicaid rules, including terms And, at least to date, all such enrollment (that is, the state
and conditions authorized by proposals both cap and reduce is paid per enrollee up to the
section 1115 waivers. Texass the amount of federal dollars cap), but like a block grant,
federal matching rate for 2017 available to states. federal payments would not
is 56%meaning that the Two types of capped models vary based on healthcare
federal government generally have been advanced: costs. Notably, a per capita
pays 56% of all allowable cap could also include a
Block grants impose an
Medicaid expenditures. state or national spending
aggregate cap on federal cap, placing states at risk for
By contrast, under capped funding for each state. If costs
funding, the amount of federal increasing enrollment and
are above the federal caps rising healthcare costs in much
dollars is set in advance and due to enrollment or rising
does not increase when the the same way as a block grant.
healthcare costsstates would
states healthcare costs increase bear all of those costs.
beyond the preset amount.

3
II. Key Features of Capped Funding
Models and Considerations for Texas
To evaluate the potential impact Texas will likely have additional B
 enefits and payment rates.
of capped funding, Texas will programmatic flexibility to State decisions on covered
want to review key elements change some or all of its earlier benefits and plan and
that affect the amount of federal programmatic decisions, but provider rates likewise drive
Medicaid dollars it will receive the states previous decisions, its Medicaid expenditures
the base funding, trend rate, and which are reflected in its base and therefore the historical
the treatment of supplemental payments, will largely determine base on which the capped
payments and waiversand the funding available to make funding is calculated. While
consider how Texas fares relative any future changes. eligibility levels affect base
to current law and other states.  ligibility. In a block grant
E funding decisions with respect
In some cases, the implications context, relatively low to block grants, benefit and
for Texas depend on whether eligibility levels will translate rate decisions affect the base
capped funding is structured as into relatively low base amount with respect to both
a block grant or a per capita cap. payments. The eligibility block grants and per capita
The financial impact of capped issue that has garnered the caps because they drive both
funding will also be affected by most attention in connection total state spending as well as
the flexibility provided, which is with proposals to cap federal per enrollee spending.
considered below. Medicaid funding relates Texass relatively low eligibility
Base Funding. The proposals to whether a state has levels will mean that it has a
typically set initial state elected to expand Medicaid smaller base upon which block
allotments based on each states under the Affordable Care grant payments will be set;
historic federal payments. Block Act. The 31 states plus the those eligibility levels are less
grants are generally based on District of Columbia that informative in the context of a
a states total federal Medicaid expanded Medicaid received per capita cap. A comparison of
payments during a base year, an additional $72.6 billion Medicaid spending per enrollee
while per capita caps would in federal funding in 2016 provides further insight into
be based on historic spending funding that did not flow to how Texas would fare under
during a base year for specific the 19 non-expansion states, both types of capped funding
populations, such as children, including Texas. (Texas models as compared to other
adults, the elderly, or people would have received about states and whether it would
with disabilities. In doing $10 billion in 2016 had it have a relatively robust base
so, capped funding models expanded Medicaid.) A critical payment available to underwrite
essentially lock in prior state question for Texas is whether future costs. The most recent
decisions with respect to in setting the caps Congress data available for all states
eligibility levels, covered will address the disparities is 2011; in that year Texas
benefits, and payment rates. between expansion and non- spent more per enrollee than
expansion states. most states on children, but

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Capped Federal Medicaid Funding: Implications for Texas

considerably less on elderly and it was 5.6%; and, for disabled State spending requirement.
disabled beneficiaries, ranking individuals it was 4.7%. During Many of the proposals are
40th and 26th in the nation, that same period of time, GDP unclear as to whether states
respectively. With the elderly grew at 2.9% and the CPI grew would have to spend their
population (and particularly the at 2.5%. In a block grant context, own funds as a condition
85 plus population) expected the trend rate implications for of receiving capped federal
to grow in every state, this will Texas are especially concerning, funds. If a state-matching
disadvantage Texas under most as Texas is projected to be one requirement remains and
capped funding proposals. of the fastest growing states in the federal funds that
Ironically, Texas may also be the nation, but the trend rate is states can draw down are
disadvantaged by having made also a concern to Texas in a per themselves reduced, Texass
greater strides than many other capita cap context particularly state-spending requirement
states on lowering its spending when considered in combination will also be reduced given
on long-term services and with the low base rate for elderly that Texas law limits state
supports, by prioritizing less enrollees and the expected rise spending for Medicaid to
costly home and community- in the elderly population. those expenditures that will
based services. Supplemental Payments qualify for federal matching
Trend Rate. As important as the and Waivers. Virtually every payments. This would mean
base payment is in determining state relies on some form of that total reductions in
the amount of federal dollars supplemental payment or waiver program spending would be
that a state will receive, the funding, but it is not clear from much higher than the federal
trend rate is likewise important most of the proposals whether spending reductionsunless
particularly over time. The trend these funds would be built into Texas law was changed so that
rates in recent proposals are the base payment or continue it would absorb program costs
tied to a national, not a state- to be available to states as a above the federal caps with
specific, indicatorusually the separate stream of funding. state-only funds.
Consumer Price Index (CPI) or These issues are of particular Matching rate. Assuming
Gross Domestic Product (GDP) importance to Texas which state spending is required,
plus one. These trend rates receives a greater percentage of the capped funding proposals
are projected to grow more total Medicaid dollars through generally do not address
slowly than overall healthcare supplemental payments and the federal match rates
costs or Medicaid spending waiver funds than any other that would be applied, nor
(this is one of the ways federal state in the nation. whether higher matching
savings are achieved). States State Share. While the federal rates currently available
might be able to lower program government, on average, for certain populations and
costs, but to the extent these covers 62 percent of the cost services would continue. Texas
trend rates do not keep up with of Medicaid nationally and 56 currently receives enhanced
actual costs, states will bear percent in Texas, state spending matching funds for its IT and
these added costs. From 2000 in the program is significant. eligibility systems and certain
to 2011, Texass average annual Texas will want to look closely at program integrity initiatives.
growth in spending for children a number of features relating to Texas also was the 5th state in
was 8.4%; for elderly adults state share: the nation to take advantage

5
of the Community First Choice C
 hanges in how states can silent on this question but a
federal option, which provides raise their nonfederal share. few would limit state reliance
enhanced federal matching State spending (and therefore on intergovernmental transfers
payments (a six percentage total program spending) could (IGTs) or provider taxes. Texas
point increase) for the home also be affected if the rules currently relies heavily on both
and community-based services relating to how states can raise IGTs and provider taxes to
provided through the program. their nonfederal share are fund the nonfederal share of
changed. Some proposals are Medicaid costs.

III. Flexibility
Capped funding is typically Texass eligibility rules are Similar questions arise with
coupled with additional state set at the federal minimums respect to benefitswhich
flexibility. While states generally today; it is unclear if Texas benefits would Texas choose
welcome more flexibility, when would have the flexibility to set to drop if it had the flexibility to
that flexibility is linked to a lower eligibility levels or if it do so? Notably, certain mental
reduction of and cap on federal did, whether it would choose health services as well as
Medicaid funding, states will to take up that flexibility. Texas substance abuse and pharmacy
want to consider the flexibility might gain additional flexibility are optional benefits today, and
they are looking for and the to condition coverage on work Texas has determined to cover
extent to which it will help them or job training requirements or them. Finally, while Texas has
manage program costs with payment of a monthly premium, considerable flexibility to set
less federal funding. In addition, but the majority of program plan and provider payment rates
states will want to consider enrollees are children and the today, it might be able to reduce
whether that flexibility is majority of program spending rates even further and with
available today through waivers is for low-income elderly and fewer constraints in a capped
or administrative changes people with disabilities. Given funding model. Again, Texas will
as well as the downstream the population Texas Medicaid want to consider the impact both
implications for new flexibility covers today, Texas will want on access to care as well as the
on local governments, providers, to consider whether it would sustainability of its providers,
health plans and consumers. impose such requirements, how most particularly rural providers.
The three big drivers of spending much savings it would achieve,
in Medicaid are eligibility, and whether it could secure the
benefits, and provider payment authority to do so through a
rates. With the exception of waiver today.
children and pregnant women,

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Capped Federal Medicaid Funding: Implications for Texas

IV. Conclusion
By design, capped funding priorities; accommodating all funding. New flexibility could
proposals shift the risks of any of them would be complicated help Texas structure its program
Medicaid costs above the federal and not likely given Congresss in less costly ways, but given
caps to states. States will seek to interest in reducing federal its spending levels and the fact
ensure that any capped funding Medicaid expenditures. that most of the spending is
program that is considered by Texas comes to the capped driven by the needs of high
Congress protects them to the funding discussion with a cost, high-needs disabled and
greatest extent possible; that number of fiscal challenges elderly enrollees, it is unclear
is, that decisions on base year most notably its historically low how much Texas can save
costs, out-year trend rates, investment in Medicaid relative through any new flexibility.
state share obligations, and to other states, its relatively Texas will want to carefully
the treatment of supplemental low spending per enrollee consider all these factors as it
and waiver payments are fair for the elderly, its growing evaluates the potential impact
to the state, its residents, and population, and its high reliance of capped funding on its
its healthcare providers. And on supplemental and waiver budget, its residents, and its
each state will have different healthcare providers.

7
Capped Federal
Executive
Medicaid Summary
Funding:
Implications for Texas
Republican congressional Under a capped financing This brief looks at capped
leadership and President system, Congress predetermines funding proposals drawn from
Donald Trump have called for a the maximum amount each federal capped programs
restructuring of how the federal state receives typically based already in place as well as recent
government funds Medicaid on historic state enrollment proposals relating to Medicaid.
going well beyond repealing and spending and adjusted It focuses on how the caps
and replacing the Affordable yearly by a national trend rate. and trend rates are designed,
Care Act. Since its inception While additional adjustments and the implications for Texas.
in 1965, Medicaid has been could be added (for example, Details do matter; since many
financed jointly by the federal an adjustment for population important details are missing
and state governments with the growth), under all of the capped from the recently advanced
federal government providing funding proposals federal proposals, this brief does not
funds to match all state payments to states are divorced purport to calculate the impact
expenditures made pursuant from actual costs. At the same of capped funding on Texas or
to federal Medicaid law. There time, the proposals offer states anticipate with precision how
are no caps or limits on the new programmatic flexibility, new programmatic flexibility
federal governments financial although the proposals provide might impact the Texas Medicaid
obligations for the program, little detail on the new flexibility program under a capped funding
as long as state expenditures that would be permitted. States structure. Instead, this brief
follow federal law.1 Replacing will want to evaluate whether offers a preliminary framing of
this matching system with a the additional flexibility is a the key issues related to setting
fixed allocation of federal good trade-off for the risk they funding caps and expanding
dollars, likely coupled with must assume under a capped state flexibility. Further
fewer federal requirements, financing system.2 discussion will be needed as
has major implications for new details on capped funding
states, healthcare providers, proposals emerge.
and consumers.

Manatt, Phelps & Phillips, LLP manatt.com 8


Capped Federal Medicaid Funding: Implications for Texas

I. Overview of Models for Funding


Medicaid
Financing Medicaid Today engaging in population health
and valued-based payment
States and the federal Texas Medicaid
arrangements. However, states
government share responsibility
operate under certain federal
Today
for funding the Medicaid
program, with each covering constraints, including minimum 4.3 M enrollees
a share of all permitted standards relating to benefits $36.1 B total spending
Medicaid expenditures. Federal and requirements that payments ($14.7 B state, $21.4
contributions match state to plans be actuarially sound. B federal)
expenditures with no upper And like all healthcare payers, 56% federal match rate
limit3 on the total Medicaid states face costs that are often
Sources: Robert Wood Johnson
expenditures.4 As a result, as beyond their control. The current Foundation, Data Points to Consider
When Assessing Proposals to Cap
state Medicaid spending rises, financing model helps states Federal Medicaid Funding: A Toolkit

so do federal expenditures. State absorb these unanticipated or for States; MACStats

decisions about the populations hard-to-control costs. States


and benefits to cover and the receive more federal dollars
when Medicaid enrollment Capped Funding Proposals
amount they pay for services
are the principal drivers of the rises, as often occurs when the Two different types of capped
level of federal funding a economy falters. Federal support funding models are under
state receives. also automatically adjusts when consideration: block grants and
state costs rise due to a public per capita caps. The models
The current model affords states health crisis such as the opioid differ in several key respects,
significant but not unfettered epidemic or Zika or emerging but in both states are no longer
flexibility to tailor their Medicaid new technologies and cures. The guaranteed federal funding
programs to address shifting added federal support generally for the actual costs of their
social, economic, and clinical does not relieve the state of Medicaid programs. In addition
imperatives. States can manage its share of rising costs,5 but it and significantly, to date all
spendingand consequently
does assure that added costs such proposals contemplate
their share of the costs
are fully shared by both levels of reducing federal funding to
through a number of levers,
government (in Texas at a 56/44 states, through the way base
most significantly through
split). Since federal spending payments are set or by imposing
the choices they make on
rises and falls based on state a nationalrather than state-
covering optional populations
spending, some proponents of specificyear-to-year growth
and benefits, designing their
capped federal funding cite the rate that is below the rate
delivery system (e.g., managed
fact that the federal government of medical inflation and the
care versus fee-for-service),
lacks year-to-year certainty on projected growth in Medicaid
setting plan/provider payment
Medicaid costs as an important program costs.
rates, ensuring appropriate
reason for implementing caps.6
utilization of services, as well as

9
by design, capped federal
funding shifts all costs above
1115 Waiver Caps the caps to the states. States
States operating 1115 waivers are subject to per capita caps might have greater flexibility
on federal spending to enforce the federal policy that waivers to reduce costs, but if capped
be budget neutral to the federal government. The caps in 1115 federal funding ultimately falls
waivers differ from the proposed per capita caps in several key short of actual costs, states
respects. Budget neutrality caps apply only to the population must either invest additional
and services that are subject to the waiver, and they are state dollars or make further
negotiated based on expected growth in the states Medicaid changes to eligibility, benefits,
program to ensure that the growth under the waiver is no or payment rates.
greater than it would have been without the waiver. In contrast, Per capita caps impose a cap on
current capped funding proposals are designed to reduce federal funds on a per enrollee
federal spending, and they would be imposed by federal law basis. Base payments are set
program wide. Additionally, waiver caps apply over the life for each group of enrollees (e.g.,
of the waiver, allowing savings in one year to offset overages children, people with disabilities)
in another. Finally, waivers are voluntary and the caps are and, like a block grant, these
negotiated by states. base payments would likely
rise each year by a national
trend rate. In contrast to a block
Block grants impose an the states obligation to match
grant, under a per capita cap,
aggregate cap on federal federal expenditures, and most
total federal payments would
Medicaid funding for each state. include some additional state
rise with enrollment (that is, the
Funding under block grants is flexibility in designing and
state is paid for each enrollee
fixed and does not increase in administering their Medicaid
up to the cap), but like a block
response to a states growth programs.7 The details will
grant, federal payments would
in enrollment or healthcare matterthere might be
not vary based on states
expenditures. Block grant population or other adjusters in
decisions regarding covered
proposals differ with respect to the block grant formula but,

Figure A: Percent Cut in Federal Medicaid and CHIP Funds House FY 2017 Plan Relative
to Current Law

17 18 19 20 21 22 23 24 25 26
0%
-5%
-10%
-15%
-20%
-25%
-30%
-35%

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Capped Federal Medicaid Funding: Implications for Texas

benefits, provider payments, in much the same way as a Medicaid spending; this is
or healthcare costs. In other block grant. Like block grants, largely accomplished by setting
words, states are at cost risk, but state matching requirements a national trend rate for the
not at enrollment risk. Because vary under different per capita capped payments below the
total funding fluctuates with cap proposals, though most level of growth that is projected
enrollment, states operating proposals appear to assume under current law. For example,
under a per capita can be more states would continue to have a the House Budget Committees
certain that their Medicaid state match requirement. proposal for the FY 2017 Budget
programs will be able to respond Recent capped funding (House Budget proposal)
to financial downturns or proposals split on whether would reduce federal Medicaid
population changes. Notably, they propose block grants or spending by almost one trillion
however, some per capita cap per capita caps (or, in some dollars over ten years as
proposals also include a national cases, give states the option). compared to projected
aggregate cap,8 placing states However, they all are explicitly spending under current law.9
at risk for increasing enrollment designed to reduce federal See Figure A.10
and rising healthcare costs

II. Key Features of Capped Funding


Models and Considerations for Texas
Any change to federal Medicaid educationis just under 12 and waiversand describe
financing and program percent. Proposals to cap federal how different factors work to
rules would have significant Medicaid funding alter this advantage or disadvantage
implications for Texas. Figure source of federal funding for Texas relative to other states.13
B shows the role that state and the State. In some cases, the implications
federal Medicaid funds play in All capped funding models shift for Texas depend on whether the
Texass budget.11 risk to the states. The magnitude capped funding is structured as
Medicaid accounts for a large of risk shifted depends on a block grant or a per capita cap.
share of spending of State the funding levels: the lower In the final section, the paper
funds20 percent in State fiscal the base funding levels and compares the flexibility that
year 2015.12 applicable trend rates, the might be coupled with capped
greater the level of risk shifted federal financing to the flexibility
But it is also the single largest
to the states. We therefore begin available under current law.
source of federal funding for
Texas, representing just over this section of the paper by 1. Base Funding
50 percent of all of the federal reviewing four key elements that In setting initial allotments for
funds available to the State. By affect the amount of the cap any capped funding model,
comparison, the next largest the base funding, trend rate, proposals typically use each
source of federal funds state spending requirements, states historic Medicaid
for primary and secondary and supplemental payments spending. Block grants are

11
Figure B: Medicaids Figure C: Comparison of Current Eligibility Levels in
Role in Texass Budget Texas to Eligibility Levels under Expansion

200%
Medicaid and Other Spending as a

Income as a percentage of the federal poverty line


Share of State Funds in Texas, SFY 2015
180%
160%
20% 20%
140%
120%
9%
100%
4% 31%
80%
.02% 15%
60%
40%
Sources of Federal Funds in Texas
State Budget, SFY 2015 20%
0%
Most Childless Parents Disabled Pregnant Breast and
20.2% Adults Women Cervical Cancer

Expansion Eligibility, if Texas covered Current Eligibility


8% the new adult group
.04%
.1% 9.4% important question for Texas rate, and states will likely have
50.6% is whether the base payments the programmatic flexibility to
11.7%
incorporate spending on change those decisions (both
supplemental payments and issues are discussed below).
Medicaid waiver spending; that issue is But their previous decisions,
Elementary and Secondary discussed in section 4 below.) which are reflected in their base
Education
Higher Education In doing so, all capped funding payments, will largely determine
Public Assistance models essentially lock in prior the funding available to make
Corrections state decisions with respect any future changes. States with
Transportation to eligibility levels, covered higher base payments will have
All Other Expenditures benefits and payment rates. In more federal dollars available,
addition, the greater a states affording them a relatively
matching rate, the greater the broader array of options for
generally based on a states
cap will be for a given states running their Medicaid programs
total federal Medicaid payments
spending level. At any given in the future.
during a base year, while
spending level, a state with a Eligibility Levels
per capita caps would be
70% match will have a higher
based on historic spending The eligibility issue that has
federal cap than a state with a
during a base year for specific garnered the most attention in
50% match.
populations, such as children, the current block grant debates
adults, the elderly, or people The base payments will likely relates to whether a state has
with disabilities. (Note that an be subject to a national trend elected to expand Medicaid

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Capped Federal Medicaid Funding: Implications for Texas

under the Affordable Care eligibility levels for parents than payment in a block grant
Act. Thirty-one states (plus Texas.16 Figure D17 compares structure as compared to other
Washington DC) have expanded parent eligibility levels in Texas states with higher eligibility
Medicaid; nineteen states, relative to eligibility levels for the levels. A lower base payment,
including Texas, have not. Figure other non-expansion states. in turn, will put greater fiscal
C14 compares Texass current States with lower eligibility pressure on Texas, making it
eligibility levels to eligibility levels have lower aggregate difficult to make future changes
levels under expansion. spending relative to the size of in the program, whether those
The 31 expansion states plus their low-income populations, changes might involve covering
D.C. received $72.6 billion resulting in a lower base more people, addressing
additional federal dollars in
Figure D: Comparison of Eligibility Levels for Parents
2016.15 (For Texas, this would
Among Non-Expansion States
represent an additional 10 billion
federal dollars.) It is unclear
whether these funds will survive Rank State Parent/Caretaker Eligibility Level
an ACA repeal effort. Assuming
1 Tennessee 103%
they do, the expansion states
will want them folded into their 2 Maine 100%
capped payments as these 3 Wisconsin 95%
dollars are now baked into
4 South Carolina 62%
those states budgets. Resolving
the disparity between the 5 Nebraska 58%
expansion and non-expansion
6 South Dakota 57%
states will be one of the thornier
issues Congress will navigate if 7 Wyoming 55%
it moves ahead with a block 8 Virginia 49%
grant proposal.
9 Utah 44%
Texas is further disadvantaged
under a block grant structure 10 North Carolina 44%
because it has relatively low 11 Oklahoma 41%
eligibility levels as compared
to other non-expansion states. 12 Georgia 34%
Today, Texas does not cover 13 Kansas 33%
childless adults at any income
14 Florida 29%
level (unless disabled, pregnant
or elderly) and covers parents 15 Idaho 24%
with incomes below 15 percent
16 Mississippi 23%
of the federal poverty level.
Of the 19 states that have not 17 Missouri 18%
expanded Medicaid, most do not 18 Texas 15%
cover childless adults but only
19 Alabama 13%
one stateAlabama has lower

13
Table E: State Ranking of Medicaid Spending per Full Benefit Enrollee, FY 2011

# Aged Adults Children Disabilities

U.S. $17,522 $4,141 $2,492 $18,518

1 WY ($32,199) NM ($6,928) VT ($5,214) NY ($33,808)

2 ND ($31,155) MT ($6,539) AK ($4,682) CT ($31,004)

3 CT ($30,560) AK ($6,471) NM ($4,550) AK ($28,790)

4 NY ($28,336) AZ ($6,471) RI ($4,290) ND ($28,790)

5 DE ($27,666) VT ($6,062) MA ($4,173) DC ($28,604)

6 OH ($27,494) RI ($5,778) MN ($3,461) MN ($26,890)

7 DC ($27,336) OR ($5,631) NH ($3,241) WY ($25,346)

8 MA ($27,205) DE ($5,430) PA ($3,194) MD ($23,798)

9 NH ($26,794) MD ($5,385) CT ($3,158) DE ($22,972)

10 MT ($26,704) NY ($5,339) AZ ($3,052) AZ ($22,040)

11 MN ($25,030) KY ($5,055) TX ($3,010) OH ($21,892)

12 AK ($24,288) ID ($4,878) MO ($2,978) ID ($21,781)

13 OR ($24,253) TN ($4,852) DE ($2,942) NH ($21,545)

14 MD ($23,491) VA ($4,781) MT ($2,919) RI ($21,417)

15 WV ($23,243) WA ($4,756) KY ($2,911) IA ($20,242)

16 PA ($21,372) NJ ($4,648) DC ($2,820) CA ($20,080)

17 IN ($21,269) PA ($4,631) MD ($2,765) NJ ($19,951)

18 IA ($21,163) CT ($4,538) NY ($2,707) UT ($19,718)

19 AR ($20,484) MA ($4,496) VA ($2,696) CO ($19,718)

20 ME ($19,881) SC ($4,449) NJ ($2,616) IN ($19,488)

21 NJ ($19,160) DC ($4,446) ND ($2,531) SD ($19,156)

22 MS ($18,592) TX ($4,371) ME ($2,528) VA ($18,952)

23 CO ($18,478) NC ($4,360) WV ($2,506) NM ($18,500)

24 AL ($18,473) SD ($4,356) SD ($2,503) OR ($18,255)

25 HI ($18,328) WV ($4,284) CA ($2,475) VT ($17,789)

26 KS ($18,328) OH ($4,225) TN ($2,470) TX ($17,709)

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Capped Federal Medicaid Funding: Implications for Texas

# Aged Adults Children Disabilities

27 MI ($17,599) GA ($4,215) OK ($2,461) MO ($17,481)

28 MO ($17,020) LA ($4,168) AR ($2,458) NE ($17,449)

29 RI ($16,998) MO ($4,122) MS ($2,403) KS ($17,153)

30 SD ($16,374) NE ($4,015) NC ($2,355) HI ($17,035)

31 VA ($16,367) WY ($3,986) UT ($2,260) MA ($16,927)

32 WI ($16,344) MS ($3,983) CO ($2,241) ME ($16,920)

33 WA ($16,183) MI ($3,913) KS ($2,186) IL ($16,689)

34 AZ ($16,145) AL ($3,899) AL ($2,156) WI ($16,599)

35 KY ($15,757) MN ($3,863) IL ($2,123) PA ($16,441)

36 TN ($15,745) HI ($3,765) IA ($2,116) MT ($16,352)

37 ID ($15,558) KS ($3,762) WA ($2,111) WA ($16,208)

38 LA ($15,491) NH ($3,652) OH ($2,110) NV ($15,706)

39 NE ($14,997) ND ($3,652) OR ($2,085) MI ($15,109)

40 TX ($14,739) OK ($3,551) LA ($2,082) LA ($15,099)

41 VT ($14,258) CO ($3,469) HI ($2,062) NC ($15,060)

42 FL ($14,253) UT ($3,326) NE ($2,041) OK ($15,010)

43 GA ($14,142) AR ($3,198) GA ($2,023) FL ($15,005)

44 NV ($13,226) IN ($3,198) ID ($2,023) TN ($14,680)

45 OK ($12,315) IL ($3,184) SC ($2,008) AR ($14,023)

46 SC ($12,256) WI ($3,170) WY ($1,967) WV ($12,993)

47 CA ($12,019) FL ($2,993) NV ($1,940) MS ($12,960)

48 UT ($11,763) CA ($2,855) MI ($1,926) KY ($12,856)

49 IL ($11,431) NV ($2,367) IN ($1,858) SC ($12,830)

50 NC ($10,518) ME ($2,194) FL ($1,707) GA (10,639)

51 NM (N/A) IA ($2,056) WI ($1,656) AL ($10,142)

Source: Manatt analysis of Kaiser Commission on Medicaid and the Uninsured and Urban Institute estimates based on data from FY 2011 MSIS and
CMS-64 reports.

15
provider payment rates, or elderly beneficiary, with the than those states that have not
just keeping up with costs three highest spending states done so. States with limited
not accommodated by the (Wyoming, North Dakota and use of community-based long-
trend rate. Connecticut) spending more term care will have higher caps,
Benefits and Provider Rates than twice as much per elderly and they may also be able to
beneficiary. With respect to manage spending within caps
Eligibility levels are not the other adults and people with more easily by shifting care from
only factor that shapes capped disabilities, Texas spending is institutional to community-
funding calculations: state about in the middle of states.18 based settings once the caps are
decisions on covered benefits These spending figures suggest in effect.
and plan and provider rates that Texas will be at a significant Texas has made important
likewise drive a states Medicaid disadvantage in terms of federal strides with respect to providing
expenditures and therefore the funding levels under both a more home and community-
historical base on which the block grant and a per capita cap based services. It is ranked 13th
capped funding is calculated. with respect to spending for the in terms of the percentage of
While eligibility levels affect base elderly, which along with the long-term care provided in home
funding decisions with respect
disabled, are the two highest and community settings, placing
to block grants, benefit and rate
cost enrollee groups covered it well ahead of most states.19
decisions affect the base amount
under Medicaid. With the elderly Texass success in implementing
with respect to both block grants
population (and particularly the community-based care no
and per capita caps because they
85 plus population) expected doubt contributes to its lower
drive both total state spending
to grow in every state, this will spending on elderly and to a
as well as per enrollee spending.
significantly disadvantage lesser extent disabled enrollees.
States with more comprehensive
Texas under most capped While generally this would be
benefit packages or higher
funding formulas. considered a good thing, in the
payment ratesor bothwill
tend to have higher per enrollee Ironically, states that have context of a fixed block grant
spending and will draw down taken steps to add more cost- or per enrollee cap, Texas may
more federal dollars on both an effective benefits to their find that future options with
individual and aggregate basis. Medicaid programs may also respect to payment rates and
be at a disadvantage under benefits for these populations
As Table E shows, Texass
capped funding formulas. In are constrained.
spending per enrollee group
particular, given the high cost All of these factorseligibility
relative to other states varies
of long-term care and services levels, payment rates, and
based on eligibility category,
to the program, states that have benefits, as well as whether a
with the State spending more
successfully shifted more of state has been a good manager
than most states with respect
their long-term services and of limited resourceswill
to children ($3,010 compared supports from higher-cost determine a states base
to $2,492 for the US average). institutional settings to lower- payment rate under most
However it spends considerably
cost community-based settings capped funding proposals.
less than most states or the
will have lower caps for elderly
US average on the more costly
and disabled populations (or
elderly beneficiaries, spending
lower overall block grant caps)
just under $15,000 a year per

Manatt, Phelps & Phillips, LLP manatt.com 16


Capped Federal Medicaid Funding: Implications for Texas

Alternate Approaches disadvantages states that spend All recent proposals to cap
Although most capped funding above the national average, Medicaid funding have included
proposals allocate dollars making any movement toward a a trend rate that would grow the
based on a states historic national average disruptive and base payments year to year. This
spending, two proposals take difficult to achieve. is critical; a capped proposal
alternative approacheseach 2. Trend Rate without a growth rate will lose
with implications for Texas. The value relative to the cost of
As important as the base
Patient CARE Act, for example, healthcare. Two examples of
payment is in determining the
proposes to allocate national federal block grant proposals
amount of federal dollars that
federal Medicaid spending where the base amounts do
a state will receive, the trend
across states based on each not automatically grow are the
rate is likewise important
states number of low-income Social Services Block Grant and
particularly over time. Consider
enrollees. Texas has the second the Temporary Assistance for
a block grant or a per capita cap
largest number of low-income Needy Families (TANF).
that sets the base rate at the
residents in the nation, behind level of federal payments the While the proposals to cap
California,20 meaning that State received in 2016. The trend federal Medicaid funding have
Texas would fare better under rate will determine whether that contemplated that the base
this model than if the dollars payment is frozen over time or payments would be adjusted
were allocated based on state- whether it grows year-by-year annually, the trend rates in
historic Medicaid spending. This and, if so, by how much. Like these proposals would be
ranking includes undocumented other states, Texas will want tied to a national, not a state-
immigrants, but it is unclear to consider whether there is a specific indicator, and one
whether the Patient CARE prescribed trend rate and if so that is projected to grow more
Acts proposed allocation of what that growth rate will be. slowly than overall healthcare
federal dollars would count
undocumented immigrants in Figure F: Comparison of Growth Rates by Eligibility
calculating a states number of Category, FY 2000-2011
low-income residents since such
15.5% (HI)
individuals are not currently
14.4% (NM)
Medicaid eligible. Last years 13.3% (TN)
House Budget proposal takes 11.6% (NM)

an entirely different approach,


basing the initial cap on national
average spending per Medicaid TX: 8.4%
enrollee, rather than state-
historic spending. Texas would TX: 5.6% TX: 4.7%
7.1% (DE)
have higher caps for the elderly, 5.5% (PA)
4.2% (NV) 4.5% (OK)
but lower caps for children, TX: 6.3%

if national rather than state-


specific average expenditures
0.3% (IA) 0.4% (ME)
were used. Using a national 0.5% (NH)
-1.4% (WA)
average advantages states
that have lower spending and Aged Individuals with Adults Children
Disabilities

17
costs or Medicaid spending. The trend rates identified in the expected rise in the elderly
For example, the Patient the Medicaid capped funding populationTexass growth in
CARE Act uses CPI + 1 proposals address, to a limited terms of population age sixty-
percentage point,21 while the degree, the issue of rising five or older is projected to
HAEL Act would use GDP + 1 healthcare costs, but they do grow 45% between 20152025,
percentage point.22 not address enrollment growth. compared to 36% for the
None of the recent Medicaid None of the Medicaid block grant nation26Texas is at risk under
proposals to cap funding trend proposals or any of the existing a per capita cap, too. If Texas
the initial capped payments federal block grant programs is unable to keep costs under
based on state, or even the adjusts for enrollment, or even its per capita cap for elderly
national, growth in healthcare population growth. By contrast, enrollees, the losses will mount
costs. Medical inflation has a per capita cap model would with each new elderly enrollee.
outstripped general inflation accommodate enrollment One issue with applying
factors, like changes in CPI or growth (subject of course to multiple adjusters is that the
GDP, in recent years, with overall the limits of the base payment), more meaningful they are to
medical inflation averaging so long as the model does not a larger number of states the
3.21% over the past ten years, also include a national spending more they will add federal
nearly twice as high as general cap. Because Texas is the third costs, unless there would also
inflation, which averaged 1.82% fastest growing state in the be an allowance for downward
over the same period. And nation,25 it will be particularly adjustment (e.g., to reflect an
growth rates vary considerably disadvantaged by any capped increase in the average health
across eligibility groups. Figure funding approach that does not of an enrollee population in a
F23 shows the different average adjust for enrollment. Because state that scales back eligibility
trend rates across eligibility of the combination of a low base for long-term care or makes
groups, underscoring that a rate for elderly enrollees and other changes that substantially
single national trend factor
might not account for variation Figure G: Cumulative Growth in Texas Medicaid Spending
in spending growth across per Full-Benefit Enrollee Relative to Benchmarks, 2000-2011
different eligibility categories.
144%
Caps based on general inflation
factors are therefore likely to fall
short of Medicaid spending over 96%
time, at least in the absence of 82%
significant reductions in program 66%
costs. Figure G24 illustrates the
52%
gap between the cumulative 45%
change in Texass Medicaid
spending compared to the trend
factors proposed in the HAEL
Act and the Patient CARE Act
over the time period between Texas aged Texas Texas Texas GDP + 1 CPI + 1
2000-2011. disabled adults children percentage percentage
point point

Manatt, Phelps & Phillips, LLP manatt.com 18


Capped Federal Medicaid Funding: Implications for Texas

change its enrollee mix). In under per capita caps but not In addition, capped funding
addition, while improvements for states opting for a block proposals generally do not
are being made, the federal grant. (The Ryan proposal address whether the enhanced
government currently lacks would give states a choice of a federal match rates that are
reliable, timely data for all states block grant or a per capita cap.) currently available for certain
that can ensure an adjustment is Eliminating or reducing state- populations and certain services
applied appropriately and in real match requirements could add for everything ranging from
time. The HAEL Act would adjust state-spending reductions to health homes (for which states
per capita caps to account for the projected federal funding receive a 90 percent federal
new instances of communicable reductions, further reducing match for two years) to the
diseases or other public health the overall funding available cost of new IT investments (90
hazards, but the proposal calls for the program. Or, the percent match) to the operation
for the adjustments to be budget elimination or reduction of a of eligibility systems (75
neutral in the aggregate. In other federal requirement for states to percent match) will remain in
words, caps could be adjusted spend their own funds could be place. Texas currently receives
to account for a regional health illusory. Even without a federal enhanced matching funds for its
crisis, but other states caps obligation, states may determine IT systems (claims and eligibility
would need to be reduced to that they have to continue to systems and staffing relating
account for the increased federal spend their own dollarsand to those systems) and certain
spending. The Patient CARE Act perhaps more of their own program integrity initiatives.29
would be adjusted to reflect dollars if federal Medicaid Texas also was the 5th state in
demographic and population funds were reduced and capped. the nation to take advantage
changes, though the proposal Even if a state-matching of the Community First Choice
provides few details on how requirement remains in place, federal option, which provides
those adjustments would if the federal funds that Texas enhanced federal matching
be made. can draw down are themselves payments (a six percentage
3. State Share reduced then its state-spending point increase) for the home
requirement will also be and community-based services
While the federal government,
reduced. Currently, Texas provided through the program.
on average, covers 62 percent of
the cost of Medicaid nationally law limits state spending for State spending could also be
and 56 percent in Texas,27 state Medicaid to those expenditures affected if the rules are changed
spending in the program is that will qualify for federal with respect to how states can
significant. Several proposals matching payments.28 If that raise their nonfederal share.
to cap federal Medicaid funding law (common to many states) Proposals also vary on whether
appear to modify or eliminate remains in place and Texas they would make changes to
the requirement that states was to see a 10 or 20 percent how a state is permitted to raise
spend their own funds as a reduction in available federal its nonfederal share. The HAEL
condition of receiving capped payments due to federal caps, Act, for example, would end
federal payments. Speaker the program would experience a state reliance on funding from
Ryans Better Way proposal, for commensurate reduction in state intergovernmental transfers
example, appears to require a payments for Medicaid coverage (IGTs). The House Budget
state match for states operating and services. Proposal, by contrast, would

19
reduce the effective cap on First, how will Congress treat payments, most of which have
provider taxes to 5.5 percent of such spending in calculating been converted in Texas to
net patient revenues, down from each states base payment? waiver payments, account for
the current 6 percent cap. Most Second, will such funding be nearly 1 out of 4 dollars spent in
other proposals do not speak to permitted outside the cap going the Texas Medicaid program and
this issue. forward? Finally, will states for more than half (53 percent)
Texas currently relies heavily continue to be permitted to of all Medicaid payments to
on both IGTs and provider taxes finance the nonfederal share hospitals participating in the
to fund the nonfederal share of of supplemental payments DSH and waiver programs.32
Medicaid costs, and thus any or waiver funds through the Thus, how these payments
changes to how states may use same mechanisms currently are handled under any capped
IGTs and provider taxes would deployedprovider and funding proposal will be
have significant implications for health plan assessments, especially important to Texas.
Texas. In total, IGTs account for intergovernmental transfers, and In addition, because Texas
roughly half of the nonfederal with respect to waivers, costs relies on provider and health
share for payments to hospitals. not otherwise matchable. plan assessments, as well as
If IGTs are no longer allowed to Recent proposals, for the most IGTs, to fund the nonfederal
be used to fund the nonfederal part, do not have sufficient share of these payments, the
share, Texas may struggle to details to answer any of these State will want to track
raise the funds required to draw questions. The one exception closely any proposals to
down available federal dollars.30 is Speaker Ryans Better Way eliminate or constrain these
Texas also uses provider tax proposal that explicitly limits financing options.
revenue to fund the nonfederal the Secretary of Health and 5. The Tradeoff: Flexibility
share. Texas currently has no Human Services ability to
approve certain types of new As noted at the outset, capped
taxes above 5.5 percent of net funding is generally coupled with
patient revenue, meaning that waiver funds, though it provides
few details on how existing additional flexibility for states in
Texass provider tax structure administering their programs.
would not be affected by waiver funds would be handled
under capped funding. It also More flexibility is almost always
current proposals.31 appealing to states. However,
provides that DSH and GME
4. Supplemental Payments payments would not be included when that flexibility is linked
and Waivers in calculating a states funding to a reduction of and cap on
Virtually every state relies on cap; i.e., a state could maintain federal Medicaid funding, Texas
some form of supplemental such funding streams outside will want to evaluate carefully
payment (Disproportionate its capped federal funding the added flexibility it seeks and
Share Hospital (DSH) payments, allocation. The HAEL Act, by whether that flexibility might be
Graduate Medical Education contrast, would include DSH and available today through waivers.
(GME) payments and Upper GME payments under caps. Additionally, the State will
Payment Limit payments) or want to consider how it might
No state spends a greater exercise that flexibility and any
waiver funding, and many states, percentage of total Medicaid
including Texas, rely on both. downstream implications for
dollars on supplemental local governments, providers,
In moving to a capped funding payments and waiver funds than
model, several questions arise. health plans and consumers.
Texas (Figure H). Supplemental

Manatt, Phelps & Phillips, LLP manatt.com 20


Capped Federal Medicaid Funding: Implications for Texas

Figure H: FFY 2015 Supplemental Payments as a Share of Total Medicaid Spending


0.00% 5.00% 10.00% 15.00% 20.00% 25.00%

TX Disproportionate Share
Hospital (DSH) Payments
NC
LA Non-DSH Supplemental
AL Payments
OK
CO 1115 Waiver-based
Supplemental Payments
MS
CA
SC
IL
FL
U.S. Avg.
NV
IN
MI
NJ
NY
TN
WY
MO
GA
ID
PA
AR
WV
MT
NH
OH
RI
UT
KS
HI
AZ
WA
MA
CT
VT
NM
OR
KY
ME
VA
DE
NE
IA
WI
MD
MN
AK
SD
DC
ND

21
The proposals advanced to health services, substance Additionally, States could gain
date have little detail on the abuse services, and pharmacy flexibility in administering
scope of flexibility that would Texas has opted to cover these their managed care programs.
be permitted relative to current benefits in part because they Federal rules related to network
law. Whether Congress adopted tend to reduce spending in adequacy, for example, may no
a block grant or a per capita other parts of the program (e.g., longer apply, enabling plans to
cap, billions of federal funds emergency room and inpatient contract with fewer hospitals
would not flow to states without hospital costs). Texas will need with patients traveling longer
some federal oversight and to consider whether there are distances to obtain care. Texas
related audit and reporting benefits (or more to the point, will want to consider the impact
requirements and perhaps new costly benefits) it would like of such changes on hospitals,
quality or outcome measures. to eliminate or reduce that the especially rural hospitals, and
In addition, it should be state is constrained from doing the communities they serve.
anticipated that any capped under current law. Further, One of the more important
funding proposals will include the State will need to evaluate set of federal rules that is less
some minimal requirements on the potential impact on other likely to be dropped in a capped
eligibility levels and benefits, program costs, like emergency funding environment has to
though current proposals have room and inpatient hospital care, do with how states raise their
provided few details on what as well as other stakeholders. nonfederal share, assuming a
benefits and populations must States could also gain flexibility nonfederal share is still required.
be covered. States would have with respect to payments to States have discretion to use
flexibility over and above those plans and providers, although intergovernmental transfers and
minimums. Today, Texas covers this is an area where states provider taxes to help finance
no childless adults and covers already have significant their nonfederal share of costs
parents to 15 percent of the FPL flexibility. Federal rules require and Texas, like most other states,
and elderly and disabled adults that payments to health plans be rely heavily on these sources
to 75 percent of the FPL. These actuarially sound leaving states of funds. Given longstanding
are the lowest levels permitted significant discretion to set congressional concern about
under current law,33 and it may those rates. Probably the most these sources of financing, it
be unlikely that lower eligibility burdensome part of these rules is not at all certain that new
levels would be permitted for for states is the process they flexibility will be permitted with
these groups. Texas covers must go through with the federal respect to these rules. In fact,
pregnant women to 198 percent government to assure that the some of the capped funding
of the FPL. If Texas were to rates are actuarially sound. It proposals would reduce state
reduce eligibility, the State must is not clear whether even if the flexibility in this area.34
consider who will bear the costs federal rules no longer required In short, Texas will want to
of the additional uninsured: actuarially sound rates that consider whether the additional
consumers? hospitals? counties? Texas would change its practice flexibility that may come with the
Texas may be able to reduce the in this regard; it is, however, reduction in federal funds will be
benefits it covers, but notably likely that some of these process sufficient to enable the state to
in three areas where benefits requirements would be ended manage coverage and care for
are optional under current or reduced under a capped its lowest income residents
lawnamely, certain mental funding structure.

Manatt, Phelps & Phillips, LLP manatt.com 22


Capped Federal Medicaid Funding: Implications for Texas

including children, and elderly in the past, these waivers and With respect to the
and disabled adultswith a fixed others could well be granted administrative burden imposed
and reduced sum of money. by the new Administration. In on states by the current
Texas will also want to consider Texas, however, the majority Medicaid structure, it should
whether the additional of program enrollees are be noted that CMS could
flexibilities it seeks are available children and the majority of expedite and streamline the
already under section 1115 of program spending is for low- review process for both State
the Social Security Act. For income elderly and people with Plan Amendments and waivers
example, several states have disabilities, likely reducing the without a change in law, or
already secured waivers to allow impact of work requirements on with changes in law that are
them to collect premiums, apply Medicaid spending. not accompanied by capped
higher co-pays, and remove non- Thus, Texas will want to evaluate funding. And, while the reporting
emergency transportation and whether the flexibility the State and audit requirements might
retroactive coverage from their seeks will permit it to take be somewhat less in connection
benefit package, with respect actions it would choose to take with a capped allocation of
to expansion adults. Several to manage costs and whether, federal Medicaid dollars, they
expansion states have likewise at least in critical respects, such will certainly continue given the
sought to condition coverage for flexibility is already available size of even a reduced
the expansion adults on work or under existing law and under Medicaid program.
job training requirements. While the current open-ended
such waivers have been denied financing structure.

III. Conclusion
Capped Medicaid financing But in the context of fixed reliance on supplemental and
shifts the risk of any costs and reduced federal funding, waiver funding. States with
above the federal caps to the resolving issues favorably for higher funding caps will have
states. Particularly when capped one set of states inevitably the same flexibility as Texas
funding is coupled with the goal creates issues for other states. to modify eligibility, benefits
of reducing federal Medicaid As this paper describes, Texas and payments, but that same
spending, the risk of a significant comes to the capped funding flexibility will be coupled with
cost shift is great. If a proposal discussion with a number of more federal dollars to invest
to cap fundingeither through fiscal disadvantagesmost in their Medicaid programs.
a block grant or a per capita notably its historically low Texas will want to consider
capis proposed in the 115th investments in Medicaid relative all these factors as it evaluates
Congress, all states will seek to its low-income population, the potential impact of
to ensure that any capped its growing population, its capped funding on its
proposals protect their states relatively low spending levels budget, its residents, and its
to the greatest extent possible. for the elderly and its high healthcare providers.

23
Appendix A: Overview of Capped Funding Proposals

FY17 House Budget


A Better Way Patient CARE Act HAEL Act of 2016
Feature Comm. Budget Resolution
(Ryan) (Hatch/Upton/Burr) (Sessions/Cassidy)
(Price)

State option for block grant State option for block grant
Type Per capita cap Per capita cap
or per capita cap or per capita cap


(per capita cap)
State Match Required

(block grant)

National aggregate cap

Different caps for


?
populations

All, except acute care of


Populations covered All All All
elderly & disabled

Natl Medicaid spend


Average Medicaid spend in allocated based on Average Federal Medicaid
Base amount Unclear
state during base year state population with spend during base year
income < 100% FPL

DSH and GME payments


excluded from per capita
DSH would be excluded
Treatment of caps and paid through
Included in cap from caps and transitioned Included in cap
supplemental payments current match process;
to separate pool
unclear for other
waiver payments

Would prohibit
Changes to financing Would reduce maximum intergovernmental
None None
nonfederal share provider taxes to 5.5% transfers and certified
public expenditures

Trend rate Unclear CPI + 1 Unclear GDP +1

24
1
Some streams of funding in the Medicaid program (for example, disproportionate share hospital payments) are subject to caps or
limitations. The basic financing of program services, however, is not subject to a cap or overall limit.

2
In a letter to House leadership, the National Governors Association addressed the potential for capped funding to shift risk to the
states. The letter urged Congress to maintain a meaningful federal role in the [Medicaid] partnership and . . . not shift costs to the
states . . . [but to] protect states from unforeseen financial risks. National Governors Association, Letter to Rep. Kevin McCarthy,
January 24, 2017, available at https://www.nga.org/cms/home/federal-relations/nga-letters/health--human-services-committee/col2-
content/main-content-list/health-care-reform.html.

3
Certain types of payments, such as supplemental payments are subject to limits. See Social Security Act 1903(i) for examples of
limits on what expenditures qualify for federal match. In addition, while different from a cap on federal funding, federal law imposes
certain constraints on states use of federal funds by defining the services and populations that may be covered with federal funds.
With billions of federal dollars at stake, it is likely that even under capped funding some definitional constraints would continue to
operate.

4
The federal governments share of nearly all Medicaid expenditures is determined by each states federal medical assistance
percentage (FMAP). By statute, states FMAPs range from 50-83%, meaning that the federal government pays for between 50% and
83% of the costs of the states Medicaid program. States with higher per capita incomes have lower federal matching rates, and
states with lower per capita incomes have higher federal matching rates.

5
At times, federal law has been changed to relieve states of some of their financing obligations; most recently during the Great
Recession, states were relieved of some of their state financing responsibilities through a temporary increase in the federal
matching rate for all states.

6
See, for example, Rep. Paul Ryans Better Way proposal available online at: http://abetterway.speaker.gov/_assets/pdf/ABetterWay-
HealthCare-PolicyPaper.pdf.

7
Cindy Mann, Deborah Bachrach, et al, Capping Federal Medicaid Funding: Key Financing Issues for States, Robert Wood Johnson
Foundation, December 2016, available at: http://statenetwork.org/wp-content/uploads/2016/12/State-Network-Manatt-Capping-
Federal-Medicaid-Funding-Key-Financing-Issues-for-States-December-2016.pdf.

8
Both the House Budget Committee, FY 2017 Budget Proposal and the HAEL Act include a national cap.

9
House Budget Committee, FY 2017 Budget Proposal, Appendix IV, Table S-4, Available online at: http://budget.house.gov/
uploadedfiles/fy2017_a_balanced_budget_for_a_stronger_america.pdf.

Source for Figure A: House Budget Committee, FY 2017 Budget Proposal, Appendix IV, Table S-4, available at: http://budget.house.
10

gov/uploadedfiles/fy2017_a_balanced_budget_for_a_stronger_america.pdf.

11
Source for Figure B: Manatt analysis of National Association of State Budget Officers (NASBO) State Expenditure Report, 2016.

12
The 20% figure depicts the direct impact of Medicaid spending on the States own revenueit does not include the federal dollars
allocated to the Medicaid program through the State budget or other federal revenues received by the state for other purposes.

13
The Texas Hospital Association cited similar issues in its letter to Governor Greg Abbott dated Jan. 9, 2017.

Centers for Medicare and Medicaid Services, Medicaid and CHIP Eligibility Levels as of June 1, 2016, available at https://www.
14

medicaid.gov/medicaid/program-information/medicaid-and-chip-eligibility-levels/index.html.

15
Manatt analysis using enrollment estimates from The Urban Institute, What if More States Expanded Medicaid in 2017? Changes
in Eligibility, Enrollment, and the Uninsured and the Office of the Actuarys 2015 Actuarial Report estimate for average newly eligible
adult costs of $5,910 for 2016.

16
Centers for Medicare and Medicaid Services, Medicaid and CHIP Eligibility Levels as of June 1, 2016, available at https://www.
medicaid.gov/medicaid/program-information/medicaid-and-chip-eligibility-levels/index.html.

17
Centers for Medicare and Medicaid Services, Medicaid and CHIP Eligibility Levels as of June 1, 2016, available at https://www.
medicaid.gov/medicaid/program-information/medicaid-and-chip-eligibility-levels/index.html.

18
http://www.urban.org/sites/default/files/alfresco/publication-pdfs/2000912-Block-Grants-and-Per-Capita-Caps-the-Problem-of-
Funding-Disparities-among-States.pdf.

Manatt, Phelps & Phillips, LLP manatt.com 25


Capped Federal Medicaid Funding: Implications for Texas

Truven Health Analytics, Medicaid Expenditures for Long-Term Services and Supports (LTSS) in FY 2014, available at https://www.
19

medicaid.gov/medicaid/ltss/downloads/ltss-expenditures-2014.pdf.

20
United States Census Bureau, Small Area Income and Poverty Estimates, 2014 available at: http://www.census.gov/did/www/saipe/
data/interactive/saipe.html?s_appName=saipe&menu=grid_proxy&s_inclUsTot=n&s_state=56,01,02,04,05,06,08,09,10,11,12,13,15,16,
17,18,19,20,21,22,23,24,25,26,27,28,29,30,31,32,33,34,35,36,37,38,39,40,41,42,44,45,46,47,48,49,50,51,53,54,55&s_inclStTot=y&s_
USStOnly=y&s_year=2014

21
The Patient Choice, Affordability, Responsibility, and Empowerment Act (Senator Orrin Hatch, Senator Richard Burr,
Representative Fred Upton), https://murphy.house.gov/uploads/FINAL%20Patient%20CARE%20Act%20Plan.pdf.

Healthcare Accessibility, Empowerment, and Liberty Act of 2016 (Representative Pete Sessions and Senator Bill Cassidy), http://
22

www.goodmaninstitute.org/wp-content/uploads/2016/05/SESSIO_007_xml.pdf.

23
Rudowitz, R., Garfield, R., and Young, K., Overview of Medicaid Per Capita Cap Proposals, Kaiser Family Foundation, June 2016.
Available at: http://kff.org/report-section/overview-of-medicaid-per-capita-cap-proposals-issue-brief/.

Sources for GDP per Capita, Manatt analysis of National Health Expenditure Accounts (https://www.cms.gov/Research-Statistics-
24

Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/Downloads/Tables.zip), for CPI Medical, BLS CPI


Medical (https://data.bls.gov/cgi-bin/surveymost?cu), and for Texas Population Groups, Kaiser Family Foundation Data, (http://kff.
org/medicaid/issue-brief/medicaid-per-enrollee-spending-variation-across-states/).

25
Census Bureau, Cumulative Estimates of Resident Population Change for the United States, Regions, States, and Puerto Rico, and
Region and State Rankings: April 1, 2010 to July 1, 2016.

26
Manatt analysis of U.S.Census Bureau, Population Division, Interim State Population Projections, 2005, Table B1, https://www.
census.gov/population/projections/data/state/projectionsagesex.html.

27
MACStats December 2016, Exhibit 6.

28
See Tex. Hum. Res. Code Ann. 32.024.

See State of Texas, Advance Planning Document Updated, March 2014, available at https://assets.documentcloud.org/
29

documents/1357133/oig-graph-pattern-analysis-apd-uv16.pdf.

30
Texas Health and Human Services Commission, Evaluation of Uncompensated Care and Medicaid Payments in Texas Hospitals
and the Role of Texass Uncompensated Care Pool, September 13, 2015, available at https://www.medicaid.gov/Medicaid-CHIP-
Program-Information/By-Topics/Waivers/1115/downloads/tx/Healthcare-Transformation-and-Quality-Improvement-Program/tx-
healthcare-transformation-uncomp-care-eval-rpt-sept-2016-update.pdf.

31
Kaiser Family Foundation, State and Medicaid Provider Taxes or Fees, 2016, available at http://kff.org/medicaid/fact-sheet/states-
and-medicaid-provider-taxes-or-fees/.

32
https://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Waivers/1115/downloads/tx/Healthcare-
Transformation-and-Quality-Improvement-Program/tx-healthcare-transformation-uncomp-care-eval-rpt-sept-2016-update.pdf. The
HMA analysis included the 356 hospitals that participated in the Texas Medicaid DSH/UC Pool program in FY 2015. These hospitals
account for more than 98% of Medicaid payments to hospitals.

33
Parents must be covered up to the maximum income to qualify for the states Aid to Families with Dependent Children (AFDC)
program in 1996. Alabamas income limits to qualify for AFDC at that time were lower than Texass income limits, and thus their
eligibility for parents is slightly lower in terms of a percentage of the federal poverty level.

34
The HAEL Act would prohibit the use of intergovernmental transfers. The House Budget Committee FY 2017 proposal would
reduce the implicit cap on provider taxes from 6% to 5.5%.

26
Albany
Los Angeles
New York
Orange County
Palo Alto
Sacramento
San Francisco
Washington, D.C.

Manatt, Phelps & Phillips, LLP manatt.com 2017