Good, Bad News on Medicaid Costs

A state’s lagging economic performance can have a silver lining – in the form of increased federal assistance. Thanks to a Medicaid formula that currently provides more generous cost-sharing to states that are below average in per capita income, Wisconsin’s rather anemic personal income growth will save the state millions of dollars during the 2017-19 budget period.

However, that feature of Medicaid funding allocations could be gone in a few years if Congress approves the recent Republican proposals that would block grant or cap each state’s allocation.

A report issued last week by an organization called Federal Funds Information for States has estimated (based on new Bureau of Economic Analysis figures) that Wisconsin is one of 23 states that will get a boost in its Medicaid reimbursement rate in 2019. In fact, the increase in Wisconsin is the 12^th largest in the nation.

The federal share of Medicaid spending, which is known as the Federal Medical Assistance Percentage (FMAP) is based on each state’s per capita income. A state with per capita income equal to the national average gets an FMAP of 55%, while a state with lower per capita income will have a higher FMAP, and vice versa.

Per capita income has grown relatively slowly in Wisconsin over the last few years, and according to the most recent data, it was 5.0% below the national average in 2016. Because that gap has been growing, Wisconsin’s FMAP for 2019 will climb to 59.37%, which is an increase of 0.6 percentage points compared to the rate in federal fiscal year 2018 (which began on Oct. 1 of this year).

That might sound like a relatively small increase in the federal share, but because it is applied to a large amount of spending, that change will save Wisconsin taxpayers roughly $68 million during the last nine months of the 2017-19 budget period. And because the Legislative Fiscal Bureau (LFB) had assumed a smaller increase in the FMAP when it made its 2017-19 Medicaid spending estimates several months ago, the new estimate will yield a state savings of almost $40 million compared to the prior LFB projection. That’s very fortunate because it will largely offset higher cost estimates announced by DHS a couple days ago for certain Medicaid services.

The current FMAP formula, which has been in place for decades, is a very sensible way of allocating more federal support to states that need it more. However, it could be repealed soon if Congress approves the Medicaid block grants or per capita caps that have been part of the recent House and Senate bills to radically change Medicaid and the Affordable Care Act. Under those proposals, Medicaid spending will no longer be based on changes in costs and in state’s financial capacity, and instead will simply be proportional to past spending in each state.

Thankfully, the proposed changes haven’t been approved yet and they wouldn’t take effect for a few years. That’s fortuitous for Wisconsin, since it looks like our income growth is continuing to lag the national rate, and in fiscal year 2019 we will get a significant boost in federal funding from the current formula.

The capped allocations that have been proposed in Congress would be based on past spending per Medicaid participant, which is problematic for Wisconsin. Even though our federal share of Medicaid spending is above average, our total state and federal spending per participant is well below average (particularly for children and people with disabilities). As a result, the proposed changes could permanently penalize Wisconsin for past strides that we have made to lower average costs.