Wrap-around Medicaid gives states administrative headaches

Medicaid premium assistance, where Medicaid acts as wrap-around coverage for a private health insurance plan, is administratively complex for states and may not work well. In an issue brief, the Kaiser Family Foundation (KFF) considered what is known about wrap-around Medicaid coverage, and looked at financial implications of such a program.

Wrap arounds

According to KFF, states with Medicaid premium assistance programs use Medicaid funds to purchase private coverage for Medicaid beneficiaries. Federal law requires these programs to make the purchased private coverage on par with what the state’s Medicaid program would cover, but private insurance generally covers less than Medicaid and requires more out-of-pocket payments. Therefore, states with these programs must provide supplemental benefits and cost-sharing protections, known as “wrap arounds,” to insure that cost sharing does not exceed Medicaid limits. In general, states with these programs have low enrollment rates, and therefore, there is limited data available to determine how well the programs work.

Administrative complexity

States have found that Medicaid premium assistance programs require a lot of administrative work to determine exemptions, track and manage cost sharing under multiple private plans, and track wrapped covered benefits. The administrative burden led multiple states to discontinue Medicaid premium assistance programs and to merely use their own managed care delivery systems. However, that burden can be minimized. When Arkansas created its Medicaid premium assistance program under the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148), it contracted with a limited number of standardized plans. The standardization made it easier for the state to track and manage the wrap-around payments.


KFF looked at legislative proposals that would expand wrap-around Medicaid coverage and noted that, in order for such a program to be effective, it would need adequate federal funding, because such programs are required to be cost effective compared with traditional Medicaid coverage. It also noted that, if these programs were done under a waiver program rather than through traditional Medicaid, the funding would be limited in duration and amount, leaving it uncertain whether the program would be able to continue in the future.

Analysts say block grants, per capita caps an ineffective, problematic strategy

Block grants and per capita caps that have been proposed to replace the current Medicaid funding model have sparked concerns about states’ inability to effectively manage their programs by limiting enrollment and reducing benefits. An Urban Institute publication focuses on a slightly different issue, pointing out that the amount of federal funding each state receives varies significantly, and that basing allotments on historical spending would lock states in to these relative amounts. This strategy could limit states’ ability to expand benefits and coverage.

How they work

States currently receive federal matching based on a certain percentage of expenditures. If Medicaid were to be financed through block grants, states would receive a fixed payment based on historical spending levels, adjusted for growth. Per capita caps would similarly set allotments for specific group based on historical rates of spending per enrollee, adjusted for growth. Per capita income affects the percentage of federal match, favoring low-income states, and state benefit design (which populations are covered and which additional benefits are provided) impacts spending levels.

Block grants would essentially base allocation on the current level of expenditures, which is intended to give state programs a fixed budget leading to additional efficiency and federal savings. Per capita caps would impact spending per enrollee instead of overall, and would provide additional funding if the number of Medicaid enrollees increases. However, the predetermined cap may not be sufficient to provide current services, and in such a case the burdens would be passed on to the state government, patients, and providers.


The Urban Institute assessed current spending levels in the aggregate, per low-income resident, and for subgroups. The results emphasized the differences in spending and federal funding. In the District of Columbia, almost $12,000 is spent per low-income resident, and the federal spending comes out to $2.4 million. In New York, spending per low-income resident was about $5600, while federal spending was almost $38 million. Ultimately, spending per low-income person varied by a factor of almost 10 to 1 (cut roughly in half by excluding the District of Columbia).


Freezing aggregate payments and growing them at the same rate would make such stark federal spending differences permanent. Although applying different growth rates to states based on different spending levels could help, analysts believe that this approach would not have a significant impact for some time. Similarly, applying per capita caps would vary significantly by state. The Urban Institute believes that applying either of these approaches to Medicaid programs would be problematic, and noted that Medicaid spending is not a significant issue when compared to other types of spending.