As soon as tomorrow, the Senate plans to vote on its version of Affordable Care Act “repeal and replace” legislation. However, much of this bill is not actually about changing the ACA itself. Instead, it would radically alter the Medicaid program and its historic financing arrangement between the state and federal government. It would fundamentally change the relationship between the federal government and the states by shifting expenses and the risk of future cost growth onto state budgets.

Medicaid is currently the largest single source of federal revenue to states. The Senate bill aims to trim that significantly by instituting a capped funding arrangement. The Congressional Budget Office estimated that, in the near term, this new financing structure would result in a 26 percent in federal funding which would eventually increase to a sobering 35 percent loss in funding to states in 2036.

These reduced federal funding limits would put pressure on states to demand that the federal government give them much more latitude in operating their Medicaid programs and force states to make substantial changes to the detriment of enrollees. States would also become much more aggressive in trimming costs, including by tightening eligibility, provider rates and benefits. As states struggle to make up for losses in federal Medicaid funding, they will also face pressure to cut other priorities like education.

Elimination of Enhanced Funding for the Expansion Population

For Medicaid Expansion states, these funding reductions will mean tough choices in the near term. If a state wants to maintain its coverage expansion, it will need to raise sufficient revenue to make up for the loss in federal funding. Although a state may be able to meet this gap in funding in the short term, the magnitude of the cuts makes it unlikely that a state will be able to generate sufficient revenue to cover the expanded Medicaid population in the mid and longer term. Given the fiscal pressure from capped funding, the most likely result is a rapid elimination of expanded coverage in most if not all states.

Reductions in Provider Payments

Although Medicaid rates of payment to providers are substantially below what Medicare and commercial insurers pay, it is nearly certain that states would decrease provider payments, which will likely reduce access to care. These payment reductions will be substantial, and will compound over time. Many providers will stop accepting Medicaid patients. Some providers that currently participate substantially in Medicaid would go out of business. Some providers would adapt and find ways to provide services with whatever payment is offered. However, safety net hospitals and community long-term care businesses will struggle to adapt to the financing levels proposed by the Senate.

Reduction or Elimination of Benefits

Prescription coverage will likely be at the top of a state’s target list for cost reduction because it is the most expensive optional benefit in Medicaid and recently prescription drug expenses have grown much more rapidly than other medical expenses. States are unlikely to immediately drop prescription drug coverage altogether because it is an integral part of medical care delivery and it avoids certain other costs such as hospitalizations. Rather than immediately eliminate coverage, states will request extensive flexibility in managing the pharmacy benefit. This flexibility would allow them to severely restrict formularies to a minimal number of drugs and dramatically reduce enrollees’ access to needed medicines.

Community-based long term services, the kind that keeping aging adults and people living with disabilities in their homes and out of institutions, are the second most expensive segment of optional services in Medicaid. States would likely target these and similar services for reduction or elimination given the extent of fiscal pressure from the Senate’s proposed capped funding structure. States will seek to reduce a number of community long-term care benefits that are seen as high cost or growing in utilization. An example is personal care attendants, which have greatly increased people’s ability to remain living in their home while accessing needed services.

Ripple Effect on Other State Programs

States may also target optional Medicaid services that support other areas of the budget, such as therapeutic services for children with special education needs that enable children to fully participate in their education. With the pressures of capped funding, state Medicaid directors could target reductions in this area, which will push significant costs onto state and local governments, since education authorities will still have the obligation to provide these services.

Increased Managed Care

Most states will need to evaluate the use of large managed care contracts that shift the risk of living within per capita reimbursement caps to private vendors.  States (with the federal government’s support) will need to give these private vendors much greater latitude to form restrictive provider networks, provide more limited services, and increase cost-sharing in order to live within those caps.  These contracts would likely be developed for virtually all populations, including the elderly and adults with disabilities.  

The Senate’s proposed Medicaid capped funding represents a fundamental shift in financial risk from the federal government to the states. In response, states will have to make more and more dramatic cuts to coverage, provider rates and benefits in order to manage the additional financial pressure.

Mark Reynolds is President and CEO of the Risk Management Foundation of the Harvard Medical Institutions Incorporated (CRICO). He has served as Medicaid Director for the states of Massachusetts and Tennessee.