Hospital Impact: AHCA would drastically alter Medicaid

U.S. Capitol with flag
Medicaid's current flexible financing design allows coverage to be expanded during economic recessions, when more individuals are unemployed and uninsured, and during public health emergencies. (Getty/Andrea Izzotti)

The Republican plan to repeal and replace the Affordable Care Act is moving swiftly. Dismantling the ACA was a key agenda item during the presidential campaign and emerged again after the Republican congressional retreat in late January. Passing new legislation—a reconciliation bill known as the American Health Care Act—is the first part in the GOP’s three-pronged plan to overturn the ACA.

The key pieces of the bill are the repeal of the individual and employer mandate for insurance coverage, elimination of government subsidies, repeal of ACA taxes and most importantly, an overhaul of federal funding of the Medicaid program.

Medicaid has been the safety-net payer for the poor and disabled for more than 50 years. It now insures 75 million people, almost a quarter of the U.S. population, as Kaiser Health News reports. Medicaid is funded at the federal level on a matching basis with the states. This flexible financing design allows Medicaid to expand coverage during economic recessions, when there are more individuals unemployed and uninsured, and during public health emergencies.

Thirty-one states expanded Medicaid access to include low-income adults up to 138% of the federal poverty level under the ACA. More than half of the expansion was in states run by Republican governors. These states will benefit by having their funding tied to the previous expansion under ACA, but the proposed bill ends the enhanced federal medical assistance percentage under which the federal government has paid most of Medicaid costs. States that did not expand Medicaid under ACA will be funded at their historical utilization.

The ACHA proposes to do away with the federal matching and instead states will be paid by either a “per capita cap” that sends a fixed amount to the states for each beneficiary or a block grant that provides the states with a fixed amount for their entire program. In reality, the per capita cap is a form of block grant. This change ensures that, in the future, states would receive substantially less federal funding than they would get under current Medicaid payment structures. Cuts would increase and continue for the next several years. The expansion to cover Americans with incomes below 138% of the federal poverty level will be eliminated. A per capita cap or block grant eliminates the possibility of flexing the program to accommodate unexpected or new costs. 

Arizona Gov. Doug Ducey, a Republican, has characterized this legislative change as “the single largest transfer of risk ever from the federal government to the states.” As a result, many states are already looking at rolling back expansion or trimming benefits and programs in order to make up for the coming deficits. The impact on state budgets will be devastating. The federal government will save $880 billion in the next 10 years, according to the Congressional Budget Office.

Politicians are fond of block grants because they curb the growth rate at the federal level without forcing an immediate cut in benefits or enrollment. By implementing block grants, the GOP plan will turn control of Medicaid back over to the states and cap what the federal government contributes annually. However, as costs shift to the states, one can expect significant reduction in Medicaid eligibility and growth in the number of uninsured individuals as Medicaid coffers tighten. Local healthcare economies will also be affected by the increase in uninsured and resulting hospital bad debt.

States do not have budgets built to absorb these costs formerly covered by the federal government. State Medicaid plans will have to radically adjust how their dollars are spent. Currently, everyone who is eligible for Medicaid is covered. However, it is very possible that instead of an entitlement program, with automatic coverage, there will be waiting lists for Medicaid enrollment even if an individual meets the eligibility criteria.

Under new amendments to the bill, individual states will also be empowered to put more restrictions on eligibility, such as requiring adult enrollees to work in order to qualify for benefits. Each state will have the option to design its own Medicaid program and carve out certain populations, such as foster children or services like dentistry or drug rehabilitation. This may be the end of Medicaid as we know it.

Corinne Smith is a partner with the law firm of Strasburger & Price LLP in Austin, Texas. She is in the firm’s corporate practice and securities practice with a focus on healthcare. A former healthcare administrator with a master’s degree in healthcare administration, Corinne is an expert in Medicaid and Medicare reimbursement, health policy, managed care, healthcare operations and compliance. She is a Fellow in the American College of Healthcare Executives.