Convert the Federal Share of Medicaid's Payments for Long-Term Care Services into a Block Grant

The Medicaid program funds coverage for two different types of health care: acute care (including inpatient hospital stays, visits to physicians' offices, and prescription drugs) and long-term care (services such as nursing home care and home- and community-based services). The program is financed jointly by the states and the federal government, with the federal government's share equal to a percentage determined by a formula defined in law. The formula assigns a higher federal reimbursement rate to states that have lower income per capita (and vice versa). Currently, that share--referred to as the federal medical assistance percentage (FMAP)--is approximately 57 percent, on average across the states.

The Congressional Budget Office estimates the federal share of Medicaid outlays in 2011 to be $155 billion for acute care and $71 billion for long-term care, excluding the enhanced federal matching funds established in the American Recovery and Reinvestment Act of 2009 (ARRA, Public Law 111-5) and extended under subsequent legislation.

This option would convert the federal share of Medicaid payments for long-term care services, as well as a portion of the federal share of Medicaid administrative costs, into a block grant to each state, as previous legislation did with funding for welfare programs. Starting in 2012, a state's block grant for each fiscal year would apply to long-term care services for all of its Medicaid beneficiaries, but acute care would continue to receive funding as it does under current law. This option includes two alternatives for structuring the block grants, differentiated by how they would adjust the amount of the block grant annually. Specifically, a state's block grant would equal its 2010 federal Medicaid payment for long-term care services (excluding the enhanced matching provided in ARRA) indexed annually to one of the following factors:

CBO's estimates represent weighted averages of possible savings because changes in these index factors and changes in federal spending on long-term care under current law are both uncertain. If the adjustment was based on the ECI alone, states that had faster growth in their aged, blind, and disabled populations would need to make larger reductions in the long-term care benefits they provide to each Medicaid beneficiary or undertake larger increases in their own spending to compensate for the gap in federal funding. At the same time, states with slower growth in their aged, blind, and disabled populations would be in a better position to manage the long-term care benefits they provide or reduce the amount of money they allocate to long-term care services. If the adjustment also took into consideration changes in the size of states' populations of aged, blind, and disabled Medicaid enrollees, then states' financial circumstances would not be affected by the growth of those groups. That alternative would not produce as high a level of savings, however.

A rationale for this option is that a block grant would provide greater predictability in federal spending for long-term care services, which represents a large portion of total Medicaid spending. Furthermore, it would eliminate the federal subsidy for each additional dollar that states spend on long-term care services, thereby providing a greater incentive for states to find more cost-effective ways to care for individuals who need long-term care. Another rationale is that, if the block grant policy was coupled with reductions in federal program requirements, states would have greater flexibility to design and administer long-term care benefits in ways that might better serve their populations. With greater freedom to tailor their own programs, states could modify program eligibility and the benefits provided, including the types and settings of services offered. An additional rationale for this option is that converting the federal contribution to a block grant would reduce states' ability to obtain more federal assistance than intended under the law. For example, in the past, some states have inflated Medicaid payments to institutional facilities and then required those facilities to pay special state taxes. That strategy boosted states' federal matching funds without a corresponding increase in their net costs for the program. Over the past 10 years, the Congress and the Department of Health and Human Services have acted to rein in that practice.

An argument against this option is that converting long- term care payments into a block grant would shift some of the burden of Medicaid's growing costs to the states. Depending on the extent of flexibility provided in the legislation that would create the block grant, states could drop optional Medicaid services. Ending federal matching payments for long-term care services would eliminate the existing incentive for states to spend more on long- term care, possibly reducing the options available to people in need of those services. Another argument against the option is that distinguishing between long-term care and acute care could be difficult administratively, especially in cases where individuals receive both types of care. For example, hospital patients who receive acute care services often require additional post-acute services after they are released; those services may be provided in the same venues in which long-term care services are delivered and by the same providers. Thus, rules would need to be established to define when long-term care services would be covered by the block grant and when such services would be covered by the acute care part of the Medicaid program. A further argument against this option is that greater discretion for the states in how they structure their Medicaid programs creates the potential for increased disparity from one state to another in eligibility criteria and benefit packages.