Block Grant Option: States Can Learn from Puerto Rico

A new federal program called “Healthy Adult Opportunity,” which will allow States to choose block grants for part of their Medicaid funding, has been released as guidance by the Centers for Medicare & Medicaid Services (CMS)

The House quickly responded with House Resolution expressing disapproval and asking the CMS to withdraw the guidance.

The Resolution took a very firm stance, listing the benefits of the current Medicaid framework and then wrapping up with this statement:

Resolved, That it is the sense of the House of Representatives that—

(1) the illegal actions taken by the Trump administration to undermine the Medicaid program, including beneficiary protections, are a cruel attack on a program that provides for the health and well-being for some of our most vulnerable citizens;

(2) the Trump administration should immediately withdraw its illegal block grant guidance and cease its campaign to undermine and weaken Medicaid; and

(3) the Trump administration should uphold its responsibility to faithfully execute the law, including the Medicaid Act, and cease any and all efforts that threaten the care of the millions of Americans who rely on Medicaid.

The House passed the Resolution by 223-190, mostly along party lines.

What is the Healthy Adult Opportunity?

The CMS describes HAO as “a new opportunity for states to potentially achieve new levels of flexibility in the administration and design of their Medicaid programs while providing federal taxpayers with greater budget certainty.”

Rep. Frank Pallone (D-N.J.) took a different view, saying in remarks on the House floor, “This has nothing to do with increasing state flexibility. It’s about cutting Medicaid.”

The flexibility outlined in the guidance includes a number of options. First, States can but are not required to apply for a spending cap for their Medicaid funding. Currently, federal funds for Medicaid are provided without any cap. They are a percentage of the amount the State spends on healthcare for eligible people. If costs rise for the State, the reimbursement also rises. If there is a natural disaster, increased assistance can be granted automatically.  A State may receive up to 83% federal funds, based on the financial position of the State. So, if a State has $100 in Medicaid costs, the federal government will supply up to $83. If the costs for the state increase, perhaps in response to a natural disaster, the federal government will continue to supply $83 for every $100 in costs.

What is a funding cap?

If a funding cap is set, the government would pay its percentage just up to the funding cap. Once those funds were spent, the U.S. government would not be responsible for any further payments.

Puerto Rico has experience with a Medicaid funding cap, which will be discussed further below.

The guidance also says, “states that agree to an aggregate cap financing model and meet certain performance criteria may be eligible to access shared savings when expenditures for the demonstration population are less than the annual allotment provided under the aggregate cap.” In other words, States that spend less than their cap might receive some of the funding intended for Medicaid with the ability to use it for other purposes.

What kind of flexibility does HAO offer?

The additional flexibility that goes along with this deal is very open-ended. Some examples from the guidance document:

  • States could change the requirements for Medicaid eligibility. This would apply primarily to adults without children. Work requirements are one example of possible changes.
  • They could change the amounts paid to providers and refuse claims more easily. Doctors are allowed to refuse Medicaid patients.
  • They could require Medicaid recipients to pay premiums, up to 5% of their total household income.
  • States could change the services covered by Medicaid within their State, ignoring the current list of required services. For example, they could provide coverage which is more like Affordable Health Act marketplace insurance coverage, rather than current Medicaid coverage.
  • They could pay for things like housing assistance which are not currently covered by Medicaid.
  • They could refuse payment for a specific drug if there is a cheaper alternative.

There is also the option to “propose alternative approaches to compliance with statutory managed care provisions that differ from those set forth in regulations,” which could cover many more possibilities.

How have funding caps worked out for Puerto Rico?

36 Democratic members of Congress wrote a letter to Centers for Medicare and Medicaid Services Administrator Seema Verma.  “Medicaid block grants necessitate cost-cutting measures like restricting enrollment, decreasing provider reimbursement, and limiting eligibility and benefits through managed care,” they wrote. “These actions endanger the lives of the most vulnerable patients, the population Medicaid was created to protect.”

CMS calls this kind of claim “fear mongering,” but the Kaiser Family Foundation makes this statement in their analysis of the new guidance: “Unlike Medicaid in the states, the U.S. territories operate Medicaid under a federal cap, which has been set too low to meet enrollees’ needs and inflexible when responses to emerging health issues and natural disasters are required.”

Puerto Rico has had block grants for Medicaid since the mid-20th century. The cap was set at $20 million in 1968, and reached $219 million in 2005, when it covered only 14% of the Medicaid costs Puerto Rico was obligated to pay. According to the Atlantic, the executive director of the Puerto Rico Federal Affairs Administration said at that time, “If the Puerto Rico Medicaid cap enacted at $20 million in 1968 would have grown at the same rate the Medicaid program has grown, the cap today would be about $1.7 billion instead of its current $219 million.”

In the 21st century, Congress has approved numerous last-minute additions to Puerto Rico’s Medicaid funds, but has never adjusted the funding cap to reflect current needs, even before hurricanes and earthquakes increased the Island’s medical costs.

The Medicaid and CHIP Payment and Access Commission prepared a mandated report on Medicaid in Puerto Rico last year, in which they analyzed Puerto Rico’s position regarding Medicaid, and made these statements:

  • The statutorily defined Medicaid financing parameters—a capped allotment and a 55 percent federal matching rate—have resulted in chronic underfunding of the program.
  • Underfunding has led Puerto Rico to establish more limited benefit packages and lower income eligibility levels, set lower provider payment levels, and adopt and upgrade key administrative systems and processes more slowly than other states.

In other words, the funding cap directly led to chronic underfunding and a poorer quality healthcare system.

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