Medicaid Block Grants

Published March 5, 2020

In May 2019, Tennessee became the first state to pass legislation authorizing funding of its Medicaid program (TennCare) using “block grants” to replace the traditional funding mechanism. Governor Bill Lee signed the legislation shortly thereafter.

Nevertheless, by the end of 2019, it remained unclear as to whether the Trump administration would approve Tennessee’s plan. One reason for the delay was that in November of 2019, the Centers for Medicaid and Medicare Services (CMS) withdrew guidelines directing states regarding how to implement Medicaid block grants and per capita cap programs.

The political wrangling over the plan has obscured the details of the current administration’s Medicaid block grant proposal in general, and Tennessee’s plans in particular. To understand block grants, one needs to understand Medicaid’s current funding structure.

How Medicaid is Currently Funded

The federal government and several states currently fund Medicaid jointly, with a guarantee to cover eligible individuals regardless of cost. The federal government pays a fixed percentage of these costs, which have been rising steadily over time.

A major acceleration in spending was unleashed by the enactment of the Affordable Care Act (ACA). Prior to 2014, when the ACA’s major provisions came into force, coverage was confined to low-income pregnant women, individuals with disabilities, and children. The costs borne by the states were never more than 50% of the total.

The ACA expanded Medicaid eligibility to families earning at or below 138% of the poverty line, as defined by the federal government. As of January 2020, 14 states, including Tennessee, had opted out of Medicaid expansion. The federal government has been paying 100% of the costs of expansion until 2020, when their share of the expansion dropped to 90%. Given this level of assistance from the federal government, it remains puzzling why all 50 states have not agreed to the expansion.

What are Medicaid block grants?

Rather than paying a percentage of yearly costs, block grants would transfer a fixed amount of funding every year. The states would then be responsible for allocating those resources according to their needs. Tennessee’s offer to the federal government stipulated that if TennCare cost less than the block grant provided, Tennessee would be permitted to retain 50% of the surplus. By contrast, if the state overran their budget, the federal government would reimburse them at an agreed-upon percentage.

In 2019, Alaska also announced plans to explore accepting block grants, and Oklahoma has also signaled willingness to apply. None of the other 13 states that opted out of Medicaid expansion have made any public announcements regarding their stance on block grants.

The Case against Block Grants

Opponents of block grants, including the Center for American Progress, argue that Medicaid expansion has already substantially benefited patients, pointing to a study that demonstrated a 6% decrease in all-cause mortality, as well as reducing medical bankruptcies. There is also the fear that states will use the existence of block grants as an excuse to curtail services and raise taxes.

The Case for Block Grants

The concept of Medicaid block grants has been a perennial talking point among fiscal conservatives since the Reagan administration. Political scientists in favor of federalism have long argued that one-size-fits all solutions are inefficient in a country as diverse as the United States. Tennessee, for example, has argued that the state routinely spends less on TennCare than the federal government projects they’ll need, and that block grants would reduce the incentive to overspend.

Others have said that Medicaid’s current matching-grant system incentivizes waste, fraud and abuse. States decide not to pursue fraud because the amounts of money they would recover would be returned mostly to the federal government. By contrast, states would be incentivized to prosecute fraud if their own money were being wasted or stolen.

Effect on Home Care

Analysts agree that the block grant concept is likely to encourage states to cut services. There is concern that home care services will appear like low-hanging fruit for state policy-makers, although some in Tennessee assert that the block grant will actually allow funds to be directed toward programs that Medicaid had not previously covered, including home-based care for residents with cognitive disabilities.

The results of the experiment with Medicaid block grants in Tennessee will have to wait until the federal government decides if they will accept the state’s plan. Alaska and Oklahoma appear to be far behind with their own proposals. Nevertheless, for the 37 states that have agreed to Medicaid expansion under the ACA, funding for current home-based services appears to be secure.