Shaves $836 billion off the budget.

Medicaid is a joint federal-state program that covers acute and long-term health care for groups of low-income people, chiefly families with dependent children, elderly people (those 65 or older), nonelderly people with disabilities, and—at the discretion of individual states—other nonelderly adults whose family income is up to 138 percent of the federal poverty guidelines. The federal and state governments share in the financing and administration of Medicaid. The federal government provides the majority of Medicaid's funding; establishes the statutory, regulatory, and administrative structure of the program; and monitors states' compliance with the program's rules. As part of its responsibilities, the federal government determines which groups of people and which items and medical services states must cover if they participate in the program and which can be covered at states' discretion. For their part, the states administer the program's daily operations, determine eligibility, reimburse health care providers and health care plans, and determine which optional eligibility and service categories to adopt. The result is wide variation among states in levels of enrollment, the scope of services covered, payment rates for providers and health care plans, and spending per capita, among other aspects of how the program is implemented.

In 2021, the states received, in aggregate, $521 billion in federal funding for Medicaid and spent $260 billion of their own funds for the program. The Congressional Budget Office expects that, under current law, federal spending for Medicaid will increase faster than general inflation, in part because of continued growth in health care costs and in part because more states are expected to expand Medicaid coverage under the Affordable Care Act (ACA). (To date, 38 states and the District of Columbia have done so.)

Under current law, almost all federal funding is open-ended: If a state spends more because enrollment increases or costs per enrollee rise, larger federal payments are generated automatically. The federal government's share varies by state, by the type of cost (that is, costs for medical or administrative services), and by eligibility category. On average, the federal government pays about 65 percent of the program's costs, with a range among the states of 54 percent to the current high of 79 percent. That range mainly reflects the variation in states' per capita income and in the share of enrollees (if any) in each state that became eligible for Medicaid as a result of the optional expansion of eligibility under the ACA. The federal government currently pays 90 percent of the costs of medical services provided to those enrollees.

Under this option, the amount that states receive from the federal government to operate the program would be capped. If the combined federal and state costs of Medicaid exceeded the upper limit established by the federal government, then federal spending would not increase above the cap and states would be responsible for providing additional funds.

Key Design Choices That Would Affect Savings

There are a variety of ways to design caps that would yield significant federal Medicaid savings. If lawmakers decided to consider such caps, a number of major policy choices, with important implications, would have to be made. Those key design choices include the following:

Whether to set overall or per-enrollee caps;

What categories of Medicaid spending and what eligibility categories to include in the spending limits;

Which year's spending to select as a base year so that the specified growth factor, or percentage rate of increase, could be applied to calculations of total spending;

What growth factor to use to limit the increase in Medicaid spending over time; and

Whether spending for the optional expansion of coverage under the ACA would also be subject to the caps (thus creating additional complexities for states that have not yet expanded coverage but might do so in the future).

Overall or per-Enrollee Spending Caps. The first key design choice would be whether to establish a cap on federal Medicaid spending across the board or to cap the amount available per enrollee.

Overall Caps. In general, overall caps would consist of a maximum amount of funding that the federal government would provide a state to operate Medicaid. Once established, and depending on the way they were scheduled to increase, the federal caps generally would not fluctuate in response to rising or falling enrollment or as a result of changes in the cost of providing services. However, the rate of growth in the caps could be set so that they accounted for population growth or allowed for automatic increases during economic downturns.

Per-Enrollee Caps. For caps on per-enrollee spending, the federal government would set an upper limit on federal payments for each Medicaid enrollee, on average. Under such a plan, the federal government would provide funds based on each person enrolled in the program, but only up to a specified amount per enrollee. As a result, each state's total federal funding would be limited to the product of the number of enrollees and the capped per-enrollee spending amount. Individual enrollees whose care proved to be more expensive than the average could still generate additional federal payments, as long as the total per capita average did not exceed the cap. Unlike an overall spending cap, such an approach would allow for additional funding if enrollment rose (for example, when a state chose to expand eligibility under the ACA or as a result of an increase in enrollment during an economic downturn). Funding would decline if Medicaid enrollment fell (for example, when a state chose to restrict enrollment or when enrollment fell as a result of an improving economy).

Spending and Eligibility Categories. A second key design choice would relate to spending and eligibility categories. Options to cap federal Medicaid spending could target all Medicaid spending and eligibility categories or limited categories of services and enrollees. For example, the caps could cover all acute care services but allow long-term services and supports to remain uncapped. The caps could also target spending for nondisabled adults and children but leave spending for the disabled and elderly uncapped. Although many possible combinations of services and enrollees could be subject to caps, in general, the more categories that were capped, the greater the potential for federal budgetary savings.

Base Year. A third key design choice for establishing caps on federal spending for Medicaid would entail selecting a particular year of Medicaid outlays as a base year, calculating that year's total spending for the service categories and eligibility groups that were included, and then increasing those amounts by the selected growth factor. The base year would not usually be the first year in which the caps took effect; rather, it would be the year from which the future spending growth would be measured and limited (as described in the next section). Thus, for overall and per-enrollee spending caps alike, the selection of the base year would be important: A higher base-year amount would lead to higher caps (and smaller federal savings) than a lower base-year amount would.

An important consideration in selecting a base year is whether to use a past or future year. Choosing a past year in which actual Medicaid expenditures were known would prevent states from increasing spending in the base year to boost their future spending limits. States could increase spending in a future base year by taking the following steps: raising payment rates for providers and health care plans; making additional onetime supplemental payments; or moving payments for claims from different periods into the base year. Those responses would increase Medicaid spending and lower federal savings.

Another consideration about the base year is whether any unique policies or economic conditions were in effect that influenced Medicaid spending and enrollment in that year. The years 2020 and 2021 provide examples: Specifically, the coronavirus pandemic and the federal policy response to that public health emergency dramatically affected Medicaid spending and enrollment. The federal government increased its own share of total Medicaid expenditures by 6.2 percentage points in states that agreedto allow all eligible people to remain enrolled in the program, regardless of changes to their economic status or personal circumstances that would otherwise cause them to lose coverage. Choosing one of those years as the base year would essentially lock in the greater spending that arose from the economic disruption and the policies implemented in response, which would not persist once the public health emergency ended. To avoid the distortionary effects of the public health emergency when selecting a past year for the base year, it would be necessary to select 2019 or an earlier year; or spending in the base-year calculation would need to be adjusted to remove the effects of the public health emergency on Medicaid.

Growth Factors. A fourth key design choice would be determining the annual growth rate of the limit on Medicaid spending. The growth factor would be one of the most important drivers of savings from Medicaid caps because the caps would essentially be limits on the degree to which the federal government allowed its payments to grow over time. The growth factor could be set to meet specific savings targets or to achieve other specific policy purposes. For example, if a growth factor was set higher than the rate of increase projected for Medicaid spending under current law, little or no budgetary savings might be anticipated, but some other policy objective could be met, such as protecting the federal government from unanticipated cost increases in the future. Alternatively, the growth factor could be set to make the increase in federal Medicaid spending—overall or per enrollee—match changing prices in the economy as measured, for example, by the consumer price index for all urban consumers (CPI-U). Or the growth factor could be set to reflect the growth in health care costs per person, perhaps as measured by the per capita increase in national health care expenditures, or at a rate that was consistent with economic growth as measured by the increase in per capita gross domestic product.

Growth factors that were tied to price indexes or to overall economic growth, however, would not generally account for increases in the average quantity or intensity of medical services of the sort that have occurred in the past. Moreover, the growth factors would not account for advances in medical technology that affect health care costs and could lead to a disconnect between the cost of care and the limit on federal payments.

In general, the smaller the growth factor relative to CBO's projected growth rate for federal Medicaid spending under current law, the greater the projected federal budgetary savings would be. Smaller growth factors would increase the possibility that federal funding would not keep pace with increases in states' costs per Medicaid enrollee or, in the case of overall caps, with increases in Medicaid enrollment. If so, the likelihood that states would not be able to maintain current services or coverage would increase.

The Optional Expansion of Medicaid. A fifth key design choice would pertain to the optional expansion of Medicaid. Since January 2014, states have been permitted to extend eligibility for Medicaid to most people whose income is below 138 percent of the federal poverty guidelines. Under the terms of the ACA, the federal government covers 90 percent of the costs for this eligibility category. Designing the federal spending caps to include the expansion of Medicaid would add complexity, particularly for states that chose to adopt the expansion after the base year.

For states that have not yet expanded coverage under the ACA, data from an earlier base year would not reflect spending for this category. Should any of those states subsequently adopt the expansion, the annual limits established by an overall spending cap would fail to account for the spending of that group of enrollees. For per-enrollee caps, the additional enrollment from the coverage expansion would generate additional federal spending, but average per capita spending for adults in the base year would not account for the higher federal payment for newly eligible people under current law. In addition, the average would not reflect any differences between expected costs related to the health status of those new enrollees and costs for people who would have been eligible before the expansion. In designing Medicaid caps, those issues could be addressed in one of several ways or there could be no special adjustments for that group.

Option

CBO analyzed two approaches that would limit federal Medicaid spending: establishing overall spending caps and establishing per-enrollee caps. For both approaches, CBO analyzed limits on spending for all medical services to all eligibility groups. Further, to illustrate a range of savings, CBO used a pair of alternative growth factors for each type of cap: either the annual change in the CPI-U or the change in the CPI-U plus 1 percentage point (referred to here as the CPI-U plus 1). Under each alternative, states would retain their current authority concerning optional benefits, optional enrollees, and payment rates for providers and health care plans.

For all of the alternatives, CBO chose 2019 as the base year to avoid the impact of the public health emergency on Medicaid enrollment and spending in 2020 and 2021. Overall caps would take effect in October 2024; per-enrollee caps would take effect one year later. That additional year would be the minimum necessary to allow the Centers for Medicare & Medicaid Services (CMS) to complete the complex gathering of data needed to arrive at state-specific caps for each group of enrollees. For overall and per-enrollee caps alike, federal matching rates would continue as they are under current law. Medicaid's disproportionate share hospital payments (which are already capped), the Vaccines for Children program, and administrative spending would all be excluded, as would Medicaid assistance with Medicare cost sharing and premiums for those dually eligible for both programs.

For the per-enrollee spending caps, CBO assumed that separate spending limits would be set for five Medicaid eligibility groups in each state: the elderly (people age 65 or older); people with disabilities; children; nondisabled, nonelderly adults whose eligibility category existed before enactment of the ACA; and adults made eligible by the ACA (in states that have expanded coverage). States would be permitted to cross-subsidize groups, meaning that states could spend above the upper limit for an eligibility group as long as they spent less than the limit for another group by an amount sufficient to maintain total spending below the overall program limit. CBO also assumed that CMS would either create a new data source or modify an existing data source to capture the necessary spending and enrollment information for the five groups. CBO anticipates that no additional states would expand coverage under the ACA and therefore the Secretary of Health and Human Services would not need to adjust the caps to reflect estimated additional spending in any state that adopted the expansion after the base year.

Effects on the Budget

The savings to the Medicaid program under each alternative would vary widely. The most important factor affecting the amount of savings would be the rate by which Medicaid spending was permitted to grow under the alternatives.

Caps on Overall Spending. Under the specifications listed here, CBO estimates that the overall caps would reduce the deficit by $836 billion between 2024 and 2032 using the CPI-U growth factor and by $501 billion using the CPI-U plus 1 growth factor. Those net effects on the deficit reflect larger gross savings to Medicaid that are partially offset by increases in other types of mandatory spending and a reduction in revenues. The gross savings to Medicaid would be $921 billion between 2024 and 2032 using the CPI-U growth factor and $576 billion using the CPI-U plus 1 growth factor. Savings in 2032 would amount to about 17 percent of projected federal Medicaid spending using the CPI-U growth factor and 11 percent using the CPI-U plus 1 growth factor.