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The Biden administration watched idly as state Medicaid program costs spiraled out of control. Once inaugurated, Donald Trump could give states the opportunity to rein in those costs before it’s too late. Marc Joffe explains at the Cato Institute, writing:
Federal reforms in 2025 may give states both the flexibility and incentives they need to rein in spiraling Medicaid costs. As we discussed in a February 2024 Cato Policy Analysis, the Biden administration gave states few opportunities to improve the cost-effectiveness of their Medicaid programs, but this is likely to change under the second Trump administration.
And such a change is sorely needed. According to the Medicaid and CHIP Payment and Access Commission (MACPAC), Medicaid spending totaled $900 billion in Federal Fiscal Year 2023. This number includes costs incurred by federal, state, and territorial governments. It is up dramatically from the $498 billion the same entities spent in FFY 2014.
At the most aggressive end of potential federal reforms on tap for next year would be the conversion of Medicaid from an entitlement to a block grant program. Currently, states receive a federal match for all medical provider expenses they incur on behalf of Medicaid beneficiaries. During FFY 2025, this Federal Medical Assistance Percentage (FMAP) ranges from 50 percent in affluent states such as California and New York to 76.90 percent in Mississippi, and to 83 percent in some smaller overseas territories. The block grant proposal would replace this variable match with a fixed stipend.
Such a change could be scary for state governments because it would make them fully responsible for each incremental dollar of Medicaid spending, whereas now their share of this additional spending is half or less. But assuming the block grants come with limited strings attached, states will gain considerable new flexibility to control costs, including setting their own eligibility requirements.
Given concerns about low-income individuals losing coverage, federal policymakers may choose an alternative to block grants known as per capita caps. Under this policy, the federal government would pay each state no more than a certain amount per Medicaid beneficiary per year. Caps may vary by category because it costs much more to cover a senior in a skilled nursing facility than a healthy young adult. With per capita caps, states would be at less risk from enrollment growth, but they could lose out if per-beneficiary spending exceeds the federal cap.
But assuming per capita caps are coupled with delegation of control over program structure, states should be able to avoid this outcome. For example, states could impose significant copayments to dissuade the use of emergency rooms for non-emergency purposes. Under current law, such copayments are limited to $8. States could impose copayments on other services to discourage their overuse as well.
States could also encourage beneficiaries to use lower-cost alternatives compared to in-person physician visits, such as nurse practitioner services and telemedicine. To derive cost savings from these options, states will have to establish lower reimbursement rates for them.
Read more here.
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