Block Grants for Medicaid: What’s the Story?

March 21, 2011:  Medicaid block grants have been in the news a lot lately, with a number of governors asking the federal government to switch Medicaid funding from its current matching rate arrangement to a block grant structure.  This request is predicated on the idea that block grants would give states more flexibility to run their Medicaid programs according to state-specific needs while reducing costs.

So, what does Medicaid funding look like currently, and what do block grants look like?

Medicaid Now: Federal Matching

Currently, Medicaid is an entitlement program, wherein everyone who is eligible is guaranteed a spot.  The federal government provides a portion of the funding at a particular rate per covered life, determined on a state-by-state basis, and this match (“Federal Medical Assistance Percentage” or “FMAP”) is guaranteed.  For example, in Minnesota, the federal government covers 61.49[1] percent of the cost for each person covered.  In return, states are required to cover certain groups of people and provide certain benefits.  Mandatory populations include children, pregnant women, and parents with dependent children within specific income brackets.  Mandatory benefits include services such as inpatient hospital care, prenatal care, laboratory services, and childhood vaccinations.

Medicaid Block Grants

Block grants would end the federal matching rate approach, along with its mandate to cover particular groups and particular benefits.  Instead, states would be provided with an annual lump sum of money that they could use to structure Medicaid on their own terms, determining eligibility and benefits themselves.  Some proposals call for a national Medicaid spending allotment that would be set each year, with a formula to determine each state’s share of the allotment.  Under other proposals, each state could be given a capped amount of funding based on a specified calculation or formula, with no predetermined national grant amount.  Whether state or national, these funding allotments would be adjusted annually in order to reflect demographic and economic factors (i.e., size of the Medicaid population, GDP per capita, inflation, etc.).[2]

Arguments against Medicaid Block Grants

Opponents of block-granting Medicaid argue that it would make the program more financially unpredictable and risky for states, which would be on the hook for unanticipated Medicaid cost increases—such as those resulting from recession-related enrollment growth—after their block grant allocations are depleted.  Currently, the federal government covers half to three-quarters of such unanticipated costs (depending on a state’s matching rate) on an open-ended basis.  Under a block grant scenario, the depletion of grant funds would force states to do one of two things: (1) contribute more state funding through tax increases or cuts to other programs, or (2) institute cuts in eligibility, benefits, and/or provider reimbursement rates.  Block grant opponents also point out that states with lower FMAPs would receive less initial funding than other states under a block grant scenario, essentially locking in existing funding variations across state Medicaid programs.[3]

Do Any States Have Medicaid Block Grants Now?

Rhode Island is the only state that currently has anything resembling a block grant for its Medicaid program.  The “Rhode Island Global Consumer Choice Compact” allows the state to operate its entire Medicaid program under a single 1115 demonstration waiver, but this waiver differs in several ways from a block grant: While the waiver does have a capped federal match like a block grant, the federal portion of funding is not provided as a lump-sum allotment.  Instead, Rhode Island’s Medicaid program still uses an FMAP structure, drawing down over time against an aggregate state and federal funding cap of $12.1 billion.  Additionally, the waiver allows increased flexibility in some areas of the state’s Medicaid program while increasing oversight in others; block grants, on the other hand, would allow increased flexibility across the entire span of a state’s Medicaid program.  Finally, Rhode Island’s waiver expires on January 1, 2014, and Rhode Island can terminate the waiver at any time.  In contrast, block grants are generally permanent with no state option to revert back to regular Medicaid.[4]

SHARE grantee Edward Miller is currently analyzing the development and implementation of Rhode Island’s Medicaid waiver, with results to be released soon.  Click here for more details.