Perspective: A Medicaid Block Grant Is Not a Wise Idea for Illinois

State Treasurer Judy Barr Topinka, the Republican candidate for governor of Illinois, recently announced her position and plans for Medicaid, the state’s health insurance program for low-income people who are aged, disabled, children, or the children’s mostly employed parents. Medicaid and related health coverage programs now cover about 1.8 million Illinois residents, including over a million children. Among Treasurer Topinka’s ideas for the Medicaid program is to ask the federal government to change the funding of the program from open-ended matching funds to a flat block grant.

Switching to a federal block grant for Medicaid is a good strategy only if the intent is to cut the program without owning up to any intent to do so. Because of a block grant’s inherent weakness over time in keeping up with the natural growth of health care costs, a Medicaid block grant will inevitably put Illinois into a funding bind by limiting the federal share. This straitjacket will expose Illinois to inexorable fiscal pressures that will dictate program cuts or substantial new state spending to replace the lost federal dollars.

If the purpose is to cut health care spending at all costs, regardless of the public need, then a block grant may fit the purpose. But it can get a “handle” on health care costs only by providing less health care. And in so doing it sacrifices state control over health care decisions in order to attempt to avoid accountability for those decisions.

Current Medicaid Funding Method

The federal Medicaid program requires participating states to cover certain core populations and provide an array of basic medical services. Beyond that, the states have the option to cover more populations and provide more services. The states also have control over the amount paid to providers of services. Beyond the core coverages, Illinois spends as much of its own money on Medicaid as it wishes, and then the federal government reimburses half of it. The end result is a 50-50 split, with Illinois being in control of the total amount. If Illinois decides to spend $1 billion, then the federal government will reimburse $500 million. If Illinois decides to spend $10 billion, then the federal government will reimburse $5 billion.

This funding system gives Illinois the flexibility and financial security needed to respond to increases in expenses over which it has little control. For example, inflation in the overall private sector health care system in 2005 was about 14 percent. While Illinois managed to run its Medicaid program so that its inflation was only about 7 percent, this was still a significant increase. Under the current Medicaid funding scheme, however, the federal government reimbursed half of the increase. The matching grant system also helps Illinois in responding to increased health needs caused by unexpected events, such as an epidemic (AIDS, bird flu) or a natural disaster (tornadoes, floods).

Similarly, if a recession were to hit Illinois, people would lose their jobs, experience pay cuts, or experience the loss of employer-sponsored health insurance. This kind of economic cycle would fuel an increase in the Medicaid-eligible population, without any change in the Medicaid eligibility rules or coverages. Under the current Medicaid funding scheme, the expense of covering this increased need would be split with the federal government. This helps ensure that the program is there when it is needed most. The same sort of caseload growth seems certain to occur under the demographic shift anticipated with the aging of the baby boom generation. Under the current Medicaid funding system, the federal government will help Illinois by paying for half of this expected natural caseload growth.

The current Medicaid funding method gives Illinois more control over decisions about the program. Illinois may wish to cover more uninsured people by expanding eligibility as it has done in the past. Or it may decide to add new services based on emerging medical science—services that may cost more in the short run but save money in the long run. Or it may decide to increase amounts paid to medical providers (doctors, hospitals, etc.) to accomplish program goals or keep more and better providers in the system. Or it may wish to pay bills faster. Under the current Medicaid scheme, Illinois makes these decisions knowing that the federal government will help by paying for half of any increased expense. This gives Illinois much more freedom of movement than if it had to pay for the total of any such increase entirely with state funds.

How a Block Grant Would Change Medicaid Funding

Block grant funding would move away from the matching funds system. Instead Illinois would receive a predetermined amount of federal funding each year. Generally the block grant amount would be based on a base year of spending. The 1996 welfare (Temporary Assistance for Needy Families) block grant, for example, was based on the federal spending under the previous matching grant programs in 1994. However, that block grant remains at that same size ten years later, and it was recently renewed at the same level for another ten years. That block grant has lost about 30 percent of its spending power by failing to keep pace with inflation.

Most Medicaid block grant designs put forward by the Bush administration contain modest cost-of-living escalators, but none of them is based on health care inflation, which is much larger than the regular cost of living. Most block grant designs also contain some sort of front-end sweetener, so that the first year or two of the block grant seems likely to produce more federal funds than the state might otherwise get from the current matching grant system. These disappear after a short period, as the block grant fails to keep pace with inflation, caseload growth, and other cost factors that the matching grant system is sensitive to but the block grant system is not. The Bush administration, in its desire to limit federal Medicaid spending, hopes that such sweeteners will entice states to fall for block grants.

The block grant sets the upper limit of federal spending on Medicaid. Thus the entire burden of any increase in spending, whether or not due to factors the state can control, is on the state. If the state wants to meet the increased spending needs, it must do so with 100 percent state dollars. If the state does not want to or cannot produce those dollars, then it must cut the program to offset the increase either by eliminating categories of eligibility or types of services or by cutting rates to providers.

The Difference Between Medicaid and Welfare Block Grants

The welfare block grant of 1996 produced a “dividend” of federal welfare funds for the states because the welfare caseloads went down quickly and dramatically. As a result, for a number of years most states received more federal funding under the block grant than they would have under the prior matching funds system. This would not happen with a Medicaid block grant.

1. Policymakers universally wanted the welfare caseloads to go down and had new authority in the welfare law to make that happen through changes in eligibility rules and administrative tactics. Aided by the booming economy of the late 1990s, that is exactly what happened. But, quite to the contrary, most policymakers do not want the Medicaid rolls to go down, and they do not want to be responsible for adding elderly, disabled, children, and working parents to the rolls of the uninsured. Health insurance is far different from cash welfare assistance in the public mind. Treasurer Topinka herself stated in her Medicaid announcement that she had no desire or plans to deprive currently eligible Medicaid beneficiaries of health coverage.

2. Without any desire or plan to reduce caseloads dramatically, there is no likelihood of the welfare-type “dividend.” The only way to produce the “dividend” would be to find other savings that more than offset the annual pressures on Medicaid spending. That is, Illinois would have to slash either covered services or provider reimbursements. Some such economies may be possible without endangering beneficiaries’ health, but not on the scale necessary to offset the loss of federal matching funds over time.

3. There is no expectation of an economic boom similar to the late 1990s, and there is no reason to believe that such a boom would decrease the need for health insurance in any event. The numbers of uninsured went steadily upward even in the boom years.

4. All of the factors relevant to health coverage in fact point to increased need in the coming years. And most of these factors are not in the control of the states—inflation, economic conditions, demographics, unforeseen medical needs. Thus Illinois cannot “manage” its way around them. The loss of federal matching funds inevitably would produce loss of health care.

Keep State Control of Overall Spending

Medicaid is one of the last bastions of true state power with respect to federal-state finances. Yes, the federal program has coverage mandates. But Illinois is free to seek waivers of the parts of those mandates that it may feel are unwise for the state, and such waivers do not require Illinois to submit to block grant funding. And, notwithstanding the federal mandates, the matching grant funding gives Illinois control over the total spending. Whatever Illinois decides to spend or finds itself obligated to spend due to factors beyond its control, the federal government will come along for half, without any artificial ceiling on the federal share.

There certainly are economies to be obtained within Medicaid, and states can and should find and maximize them. None of those economies requires a switch to a block grant. Moreover, beyond simple “economies,” if Illinois wants to slash eligibility, provider rates, or covered services, it can do so without submitting to a block grant. Treasurer Topinka has not announced any such intent, but if that is what she intends to do, a block grant is not needed to accomplish it.

Any governor who decides to cut the Medicaid program can do so forthrightly under the matching grant system. Switching to a block grant is not the only way to make cuts, but it is the way that will irrevocably lose for Illinois control over this key source of health care funds. And what is lost is not only control over how and when to cut the program, but, more important, control over the availability of federal funds to help expand the program. This is what most Illinois residents care about the most—more decent health coverage, not less. We need to have the option to expand in order to meet inflation, meet increased demand, respond to scientific advances, or continue to make progress in covering the uninsured. A Medicaid block grant is unwise, risky, unnecessary, and ultimately a recipe for less health care in Illinois. Treasurer Topinka should reconsider her support of this strategy.

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