Per Capita Caps for Medicaid: Help, Hindrance, or Middle Ground?

Medicaid per capita caps, a proposed reform to Medicaid that would limit the amount of federal spending per beneficiary, may provide help to control the growth of federal spending on Medicaid, according to its supporters. However, some argue that instead of slowing the rate of spending growth, it would only shift the costs to the state, ultimately limiting poor Americans’ access to care. A recent health policy brief by Health Affairs and the Robert Wood Johnson Foundation examined this proposed “per capita cap” on federal Medicaid funding, in an attempt to determine whether it might be the key to controlling costs.

According to the brief, Medicaid spending is expected to grow to $795 billion by 2021, almost doubling from the $432 billion spent in 2011. Much of this growth in spending can be attributed to the Patient Protection and Affordable Care Act, which substantially increases the number of individuals eligible for Medicaid. Further, the federal government plans to cover 100 percent of expenses for the newly-eligible enrollees for the first few years, and then decrease that coverage to 90 percent. Covering more people costs more money, and concerns over the program’s costs at both the federal and state levels have led some policy makers to urge reforms.

Per Capita Caps Defined

One proposal to curb costs is to impose a per-beneficiary cap. Under the proposed Medicaid “per capita caps,” the federal government would no longer cover a fixed share of each state’s overall Medicaid costs but instead would limit each state to a fixed dollar amount per beneficiary. To calculate the cap, total spending and the total number of beneficiaries would each be calculated for a given base year. Then, the number representing total spending would be divided by the number of beneficiaries to calculate the initial amount spent per person, or per capita amount. This per capita amount would be adjusted annually for inflation, by some measure such as the consumer price index. Once the per capita cap is arrived at, it would be multiplied by the number of beneficiaries in the program.

Cost Control Theory

Using the per capita cap, total Medicaid spending would only increase as enrollment increases, which would give states an incentive to control other factors that lead to increased spending. Using Medicaid per capita caps is not a new idea, in theory or in practice. They are in place as an integral part of many demonstration projects as a means to control costs, and they were also part of President Bill Clinton’s budget proposal in 1997; however, they were not used.

Reluctance to Change

Despite the theory on cost control, the reluctance to move to a capitated model clearly still exists. Although many believe that the per capita cap approach would provide an incentive for states to be efficient, others question whether a per capita cap would truly save the federal government money. This is because much of the growth in Medicaid spending in the past ten years is due to increases in enrollment and less for increases in cost.

Causes for Concern

Many critics are concerned over problems inherent in determining the cap, such as population, base year and inflation. There are substantial differences in the cost of providing care to children versus adults, the elderly or the disabled. Whether the per capita cap would break the population down into various subgroups remains in question. The selection of a base year from which to develop the per capita cap cost would also be very important. Using this method, a combination of the enrolled population, payment rates, and covered services in the base year would determine how much spending would be available in future years. Spending levels from a base year marked by recession would likely reflect a narrower range of services or lower payment rates, but setting a base year during a time of improving economic conditions could well reflect more generous benefits and higher payment rates. And finally, the method used to mark inflation also gives critics pause. Both gross domestic product (GDP) and the consumer price index (CPI) are typical measures used to account for inflation. However, given that health care costs typically rise faster than either one, neither may sufficiently cover costs.

Future

Overall, whether a Medicaid per capita cap will emerge as part of entitlement reform efforts is unclear. The brief noted that per capita caps are a part of the discussion but have yet to make it into any sort of reform.