To achieve federal Medicaid savings and make federal expenditures more predictable, the American Health Care Act (AHCA) and the Better Care Reconciliation Act of 2017 included a Medicaid block grant and per capita caps. In these proposals, if Medicaid program costs exceed the funding limits set by the cap, states will have to increase state spending or reduce spending to stay within the budget ceiling.

This approach is not new. Presidents Ronald Reagan and George W. Bush proposed Medicaid block grants, and Congress passed a Medicaid block grant, which was vetoed by President Bill Clinton and did not become law.

Although block grants and per capita caps do not intrinsically require Medicaid funding reductions, these proposals set the available federal funds substantially below expected expenditures. For example, the Congressional Budget Office estimates that the AHCA’s Medicaid financing changes, along with its repeal of enhanced federal matching funds for the Affordable Care Act’s Medicaid expansion, would reduce federal Medicaid spending from 2017 to 2026 by $834 billion, resulting in a 24 percent reduction in federal Medicaid funds by 2026.

Can States Cut More Than $800 Billion In Medicaid Expenditures Through System Reform?

A central policy question, which received little attention in the debate over block grants, is how states would reduce expenditures so that they met the federally established budget targets. Although states could reduce Medicaid eligibility, cut benefits, or lower provider payments, most block grant/per capita cap advocates argue that these approaches would be unnecessary. Rather, they propose that states would find creative ways to reform delivery or financing of medical care that would result in the needed efficiencies.

In a recent issue brief, we and colleagues at RTI International and the Henry J. Kaiser Family Foundation conducted an extensive literature review and found no strong evidence to indicate that large Medicaid savings were likely through delivery system and financing reform. However, some approaches, such as complex care management programs and home and community-based services, hold promise for modest cost savings. In most cases, states are already in the process of implementing these strategies.

Medicaid Reform Options: What The Evidence Says About Medical Care

Premiums And Cost Sharing Do Not Reduce Spending (Apart From Savings Associated With Lower Enrollment)

Requiring Medicaid beneficiaries to pay premiums increases the likelihood of disenrollment, leads to fewer new enrollments, and shortens periods of coverage. The fewer people enrolled and the less time individuals spend in Medicaid, the greater the potential savings to a state. However, the literature is not clear that Medicaid would realize significant savings from cost sharing beyond the savings that may accrue from individuals exiting the program because of the initiation or increase of premiums.

If premiums induce disenrollment from Medicaid, then revenues from premiums will decrease. There are also programmatic costs to implementing cost sharing. Some states have noted that administrative costs to collect premiums, track enrollees who fail to pay premiums or cost sharing in a timely manner, and reinstate individuals who lose and regain Medicaid coverage are often higher than the revenue from premiums and cost sharing. Although other forms of cost sharing, such as copayments, do reduce use, the evidence shows that consumers are not selective in how they reduce their care, potentially forgoing high-value, low-cost services care (such as outpatient care), and very few studies have explicitly examined the direct link between copayments and reductions in total Medicaid expenditures.

Wellness Incentives Could Improve Uptake Of Specific Health Services, But It’s Not Clear They Reduce Spending

Studies show that providing incentives (such as cash payments) to Medicaid beneficiaries holds some potential to improve uptake of preventive care in Medicaid (such as attending diabetes prevention classes), but evidence is lacking on whether these types of incentives can reduce Medicaid spending.

Evidence On Complex Care Management Programs Targeted At Super-Utilizers Is Limited And Mixed

Some Medicaid beneficiaries use a lot of services and incur very high costs, so focusing on this population of super-utilizers has the potential to significantly reduce costs. Some studies have shown success in reducing hospital and emergency department visits and total Medicaid expenditures, while others have reported no change.

Programs vary considerably in their design, and success may lie in being able to effectively target the right mix of care management resources to the right population at the right level of intensity. These programs can be expensive, and the return on investment as a viable cost-containment strategy is not guaranteed.

Evidence That Patient-Centered Medical Homes Reduce Use And Costs Is Mixed

The patient-centered medical home (PCMH) redesigns primary care to be comprehensive, coordinated, and team-based. The expectation is that it will promote more efficient health care use by keeping patients healthier and reducing unnecessary specialist, emergency department, and hospital use. The PCMH model has experienced widespread support, with 26 state Medicaid agencies currently operating PCMH programs.

However, the evidence that PCMHs can significantly reduce total health care expenditures and high-cost use remains inconclusive. Few rigorous evaluations examine the impact on Medicaid populations. However, some evaluations of the PCMH in non-Medicaid populations show associations between PCMHs and reduced emergency department and hospital use, lower costs of care and costs for specific services, and better quality of care relative to comparison groups. Other evaluations have found no change or minimal change in these outcomes.

By themselves, PCMHs may not substantially contain Medicaid cost growth especially of the magnitude envisioned by recent legislation, but they may serve as an integral component of a larger cost-containment strategy.

Whether Alternative Payment Models Contain Costs Is Unknown

Alternative payment models offer different strategies for paying providers; examples include accountable care organizations (ACOs), episode-based payments, and global budgets. These models task providers with managing the health care costs and quality of a defined population, sometimes within a budget, in exchange for bonus payments for staying within budget or meeting quality-of-care goals.

Medicaid programs are only now beginning to experiment with these models, so rigorous evaluations of these models are not available yet. Therefore, Medicare’s experience is instructive. Modest declines in spending attributable to Medicare ACOs one or two years after implementation suggests that lower Medicaid spending may be feasible, but it may take time before the savings generated from lower spending are greater than the bonus payments made to ACOs.

Few global budget models have been examined in depth, and episode-based payments are just now gaining traction in Medicare and Medicaid. Given the limited evidence on these emerging models, the utility of alternative payment models to reduce long-term Medicaid cost growth remains uncertain.

Medicaid Reform Options: What The Evidence Says About Long-Term Services And Supports (Such As Nursing Homes And Home Care) Reforms

Tightening Asset Limits For Eligibility Yields Small Savings Offset By Administrative Costs

To offset Medicaid spending on long-term services and supports (LTSS), some observers have proposed tightening rules related to transfer of assets, implementing more aggressive estate recovery programs, and counting retirement savings as assets in determining Medicaid eligibility.

However, a review of the literature suggests that transfer of substantial amounts of assets by people applying for Medicaid is relatively rare. Moreover, older people with substantial disabilities have limited assets in most cases, giving them little to transfer.

Because people needing LTSS have little in the way of assets, estate recovery programs and claiming retirement savings are unlikely to yield substantial additional savings. Furthermore, the program expenses to administer more aggressive estate recovery programs will offset the savings.

Private Long-Term Care Insurance Provides Little Hope For Reducing Medicaid Costs

Purchase of private long-term care insurance has been proposed as a strategy to reduce the number of middle-income individuals who spend down their assets to qualify for Medicaid LTSS. The ability of private long-term care insurance to reduce Medicaid LTSS expenditures depends partly on whether people who purchase the policies would eventually qualify for Medicaid.

Private long-term care insurance is expensive and unaffordable to many middle-class families. The likelihood that enough families who would otherwise spend down into Medicaid could purchase a policy, without substantial cost subsidies, is very small.

Microsimulation studies found that purchase of long-term care insurance is likely to have virtually no impact on Medicaid expenditures. Furthermore, the number of insurance companies selling long-term care insurance has declined dramatically over the past 15 years. It is unlikely that private long-term care insurance will be more than a niche product for higher-income people with substantial assets.

Expanding Home And Community-Based Services Shows Some Promise To Reduce Costs

Expansion of home and community-based services (HCBS) in lieu of institutional care, such as nursing home care, has long been promoted as a strategy to generate Medicaid savings. HCBS include a broad spectrum of services, including personal care, home health, adult day service centers, residential care facilities, home-delivered meals, habilitation, and job coaching.

Extensive research demonstrates that HCBS cost less per service user than institutional care, but these studies do not address whether these services successfully target people who would otherwise end up in nursing homes. Other research examining the potential for expanded HCBS to reduce the use of acute and postacute care services has shown mixed results.

Recent analyses have also shown that higher HCBS investments within a Medicaid program are associated with slower LTSS spending. However, cost savings likely depend on the states’ level of HCBS investment and the maturity of the program, with savings accruing over time.

Finally, enrollee satisfaction and improvements in health care quality and health outcomes have been linked to non-institutional services, and these are also reasons to potentially consider further HCBS expansion, even if substantial cost savings are not possible.

The Effectiveness Of Integrating LTSS With Medical Care To Lower Spending Is Unknown

With managed LTSS, a managed care organization is responsible for all of a Medicaid beneficiary’s care. The expectation is that the organization will be better able to coordinate medical care and LTSS, resulting in cost efficiencies in care delivery.

Managed LTSS programs are on the rise; in 2016, 24 Medicaid agencies were operating programs. There is limited evidence that these programs can lead to less use of some high-cost services such as emergency department visits or hospital admissions, but the impacts on costs are mixed. The Centers for Medicare and Medicaid Services (CMS) is currently conducting a large-scale demonstration of integrating Medicare and Medicaid through managed care organizations, which is being evaluated by RTI International. Cost and use results for the demonstration are not yet available.

Which Way For Medicaid Reform?

The recent debate on Medicaid block grants and per capita caps lacked detailed analyses of how states could meet their budget targets. Although states and CMS are engaged in many innovative reforms, available research does not support the notion that large Medicaid savings are likely with these approaches. Moreover, promising strategies, such as PCMHs and HCBS, are already widely adopted by state Medicaid programs. Without being able to depend on delivery system reform, states will be left with reductions in eligibility, covered services, and provider reimbursement to stay within their federal Medicaid allocation.