Capitolworks: Just the Facts...Per Capita Caps, What Are They and Why Do They Matter?

If you have been following Congress’ health care reform process or following the news outlets, you have more than likely encountered the term “per capita cap.” Unless you are an economist or health policy expert, you may have found yourself wondering what these caps are and why everyone is talking about them. This “Capitolworks: Just the Facts” is going to explain what these caps are, why they are getting so much attention, and how they will affect all of us and our healthcare delivery.

Let’s begin with a basic definition of the term. "Per capita" is a Latin phrase meaning “for each head.” This definition has taken on various interpretations over the centuries, but its Latin root still exists in the term's use today. In the context of the current health care reform debate, per capita caps are a limit setting tool for the federal government's financial contribution (per person) to the Medicaid program. Essentially. Please bare in mind that all of the concepts we tackle through our Capitolworks: Just the Facts blogs are much more dense and detailed than the scope of our posts, but we hope to at least give basic meaning to otherwise confusing policy jargon.

While per capita caps have been around for quite a while, they are currently a prominent feature of the American Health Care Act (ACHA). The AHCA proposes to use this complicated financial formula to dramatically alter the Medicaid entitlement program from its original structure dating back to the 1960’s. Our reference to Medicaid is NOT the Medicaid expansion that was born out of the ACA but the entire Medicaid program. As of this moment, the Medicaid program is currently a shared federal and program that provides insurance to various vulnerable populations including the poor, kids, disabled and the elderly. It’s an entitlement program, meaning if you meet the requirements for the program, you are eligible to enroll and receive various medical services. Some have viewed the Medicaid program as too costly and the federal investment in it too significant. Therefore, in an attempt to reduce these federal expenditures, the ACHA offered an opportunity to change the structure of the Medicaid system to one that is no longer an “open-ended” entitlement but to one that is limited in the form of per capita caps.

But how do these caps limit the federal government’s contribution? Well, we know that per capita is another way of saying “per person.” And of course “caps” are what we know them to be- limits. So, by using per person caps to set a limit on the amount of money the federal government spends on each Medicaid beneficiary, the federal government will save money. Of course, it is much more complicated than that, and we are taking liberties with the per capita cap definition, but essentially, the feds are no longer going to keep pace with the State’s Medicaid expenditures. The sharing equation between the federal government and your State will be changed forever.

The AHCA bill, passed by the House, converts how the federal government calculates its Medicaid contribution to a formula that uses past Medicaid expenditures by a State (how many people were covered, what were the expenditures) as well as the consumer price index (CPI). For example, the AHCA proposes to use 2016 State Medicaid expenditures, along with the CPI, to determine how much each State will receive. Ironically, under this equation, if your State ran an efficient and effective Medicaid program and therefore didn’t have high expenditures in 2016, your State receives less from the federal government in subsequent years.

Many advocates and even policy makers, however, are opposed to this equation and the use of the per capita cap structure. Why? First, many health policy researchers caution against relying on historical data for the purpose of predicting future Medicaid expenditures. There is tremendous variability in the Medicaid program from year to year, locking a State into a certain amount based on one year’s expenses does not provide an accurate assessment of Medicaid beneficiaries' current or future needs. For example, if in the future a State was to experience a natural disaster, a disease outbreak, or epidemic much like our current opioid epidemic, the cap does not account for the additional medical expenses that would be required. Are we saying then that there is no flexibility with caps? No, there is some flexibility, and there is a proposed growth rate that we are not delving into at this time. For example, in the event of a State emergency, States can ask the federal government for an increase in their cap should they need it to address increased populations in need, health epidemics, etc. The federal government retains the control to determine if and by how much each State’s cap may rise.

Another argument against the use of per capita caps is that they will put an additional burden on already tight State budgets. But under the per capita cap structure, the feds and States will still be sharing the expense of the Medicaid program right? Yes, it will remain a shared program. However, the federal contribution will be capped and therefore if/when a State reaches that cap, any additional expenses will be left to the State to cover. There are many resources available to help illustrate the various scenarios States might encounter under, but the one we think offers great clarity on each State’s loss can be found here.

One can safely assume States will try to avoid exceeding their cap by limiting beneficiary services, the length of services for each beneficiary, limiting reimbursement to providers, requiring higher co-pays, work requirements, etc. The detrimental possibilities are endless. If even a few of these limits are placed on beneficiaries, these already vulnerable populations will become sicker, with access to fewer providers who can afford to treat them and even ramifications for those who are privately insured.

Wait, what was that about the privately insured? Under the scenario of a sicker and larger uninsured population, health systems will undoubtedly see an increase in emergency room utilization as preventive care or any care at all will be less available. According to hospital regulations as well as the ethical standards imposed on health professionals, an individual who requires rehabilitation or some form of community/home-based care cannot be discharged from a hospital until those services are in place. Finding such placements for the insured is already difficult which means that finding those same services for the many who are at risk of becoming uninsured under a per capita cap structure will be nearly impossible. As a result, it will become more difficult for the privately insured to find a hospital bed and employ the services of specialists, logical consequences of a more restrictive public health insurance program.

So, per capita caps are a way of limiting the federal government's financial responsibility for costs associated with the Medicaid program. At this time, it is unknown if the Senate bill will adopt this same finance structure. Are making changes to the Medicaid program a bad idea? That is not for us to say. However, we hope Congress will base any policy changes on a thorough understanding of the downstream effects of implementing an entirely new Medicaid financing structure.