What Does the Draft ACA Repeal/Replace Legislation Tell Us About the Future of Medicaid?

SaraRosenbaumBy Sara Rosenbaum, The Commonwealth Fund
Twitter: @commonwealthfnd

Recently, draft U.S. House of Representatives Affordable Care Act (ACA) repeal-and-replace legislation surfaced. While preliminary and incomplete, the draft offers the best evidence to date on where lawmakers may go as they work to translate ambiguous policy proposals into legally binding legislation that will determine the future of health insurance coverage for tens of millions of people.

Two aspects of the bill are of particular interest. The first is how it addresses ACA insurance reforms affecting some 10 million people who previously faced virtually insurmountable coverage barriers based on income, health status, or a combination of the two. For this group the draft appears to dramatically scale back both the ACA’s market protections and the level of financial subsidies it offers, particularly to older people.

Also of keen interest is the bill’s treatment of Medicaid—not only how it deals with the ACA eligibility expansion for poor working-age adults, but also the Medicaid program as a whole, which, along with its companion Children’s Health Insurance Program, today reaches some 74 million people, including nearly one in two pregnant women, nearly two in five children, and the majority of those using long-term services and supports. In fact, the draft bill alters how this indispensable safety net for the entire U.S. health care system will function for those who need it.

End of Medicaid Expansion Funding
Under the draft bill, the ACA’s Medicaid expansion funding would end as of December 31, 2019. Expansion until this date appears to be an option for the 19 states that have not already expanded their programs, although the law is unclear on how federal funding, if available, would be calculated. And given the amount of time it would take a state to implement a major policy change such as expansion, the notion that these states would do so is far-fetched. (This helps explain why, according to reports, nonexpansion states are now seeking payments in lieu of the funds they would receive by expanding eligibility.)

But even for those states that qualify for continued expansion funding at least through the end of 2019, the bill would cause harm. First, it would significantly reduce what the federal government allocates to states for the ACA expansion by setting a lower match, leaving these states with major funding holes. Second, the bill would further cut funding by making payments only for beneficiaries who “do not have a break in eligibility for medical assistance” exceeding one month. Medicaid beneficiaries frequently experience coverage breaks because of earnings upticks, especially those who work at jobs where the hours fluctuate seasonally. Whether states would receive any federal funding for beneficiaries with breaks in coverage is unclear.

Per Capita Payments for Medicaid
Beyond ending the ACA’s Medicaid expansion, the draft would replace the current Medicaid funding system with per capita cap payments tied to enrollment. The complexity of the bill’s approach reveals how hard it will be to implement a per capita payment system that can work well in real time and ensure that states are not left with the financial fallout that could come from federal underpayments.

The draft lays out something akin to a prospective rate-setting system accompanied by an annual reconciliation process. During a year, a state would receive payments based on the estimated number of beneficiaries and the per capita cost of serving each population subgroup, such as children or adults or people with disabilities or elderly. Federal payments would be divided into several separate funds. The principal per capita payment would reflect a state’s expenditures that “directly” result from spending on health care. The term “directly” is undefined, however. This potentially leaves room for the U.S. Department of Health and Human Services (HHS) Secretary to define the term in ways that exclude legitimate expenditures stemming from clinical innovations. Because the only updating in the law is for inflation (which would be tied to the medical component of the consumer price index), HHS would define what constitutes permissible medical assistance payments.

The bill also provides for certain other payments: disproportionate share hospital (DSH) supplemental payments for safety-net providers; administrative costs; vaccines for children; and state expenditures on cost-sharing for low-income Medicare beneficiaries. The bill also appears to establish a new payment pool for hospitals with exceptionally great indigent care responsibilities, but its provisions are too vague to know whether these funds would be anything like what states spend on their safety-net hospitals today. The bill makes no mention of other crucial Medicaid spending functions, such as the additional payments states make to teaching hospitals that serve large numbers of beneficiaries.

Using this complicated rate structure, HHS would make interim payments to states with no negotiation process for determining those payments or how the per capita payment formula would work in practice. Presumably the federal government would have a great interest in keeping its provisional payments as low as possible; as a result, the absence of a prospective negotiation process is especially striking.

Furthermore, the bill makes no provision for real-time adjustments if advance federal population estimates turn out to be too low. And there is no way to adjust for payments that fall below appropriate medical practice as the intensity of care changes and as technology advances. Where federal overpayments are concerned, however, the bill describes a swift recoupment process. In short, states bear all of the risk, ranging from underestimation of per capita costs and the amount of available payment supplements to an undercount of the number of people served.

Medicaid is the nation’s largest insurer, and this draft bill changes the entire financial basis on which the program has rested for a half century. Per capita caps have a conceptual appeal, but making them work fairly and effectively would require multiyear pilots implemented in select states, not the sudden nationwide imposition of this complicated reconfiguration of the program. Medicaid is simply too important to the health care system, to state economies—and above all, to the people it serves—to be turned into a grand fiscal experiment on an unprecedented scale.

This article was originally published on the Commonwealth Fund Blog.