With public attention completely focused on the wild effort to reach closure on the private health insurance provisions of the American Health Care Act (AHCA) (H.R. 1628), it was easy to overlook (at least for a moment) the extraordinary nature of its Medicaid changes. Were these provisions to become law, the AHCA would represent the most sweeping federal policy shift since the program’s 1965 enactment.

How The AHCA Would Affect Medicaid

The AHCA would end the Affordable Care Act’s enhanced funding for the adult expansion population. More profoundly, however—and completely disconnected from the AHCA’s “repeal and replace” purpose—the legislation would make seminal changes in how the federal government finances its share of Medicaid, affecting more than 74 million people. This alteration in Medicaid’s basic financing structure would come in the form of fixed upper limits on what the federal government contributes to each state’s per-enrollee spending, adjusted over time only for medical inflation, and without further adjustments for changes in the volume and intensity of care, provider payment reforms aimed at enhancing participation, or the introduction of new technologies.

According to the Congressional Budget Office (CBO), over the 2017--26 time period, the AHCA ultimately would cost states $880 billion in federal funding—a 25 percent federal funding reduction by 2026. This federal spending reduction would result from the combined effects over time of the per capita cap payment limits, the loss of enhanced funding for the ACA expansion population, an end to enhanced federal funding to the Community First Choice program, and a rollback in permissible eligibility standards for beneficiaries receiving long-term care. Ultimately, the CBO projects a 14 million-person drop in coverage.

On close inspection, the AHCA is all about federal cost avoidance and cost shifting onto states. Certain provisions at least give the illusion of state flexibility. For example, the bill would allow states to convert that part of their programs covering children and very poor parents (the least expensive populations) into virtually no-strings-attached block grants. And to be sure, the block grant option appears to give states the flexibility to eliminate coverage of adults now considered mandatory, other than pregnant women. This option would also allow states to cap enrollment of children, eliminate Medicaid’s special pediatric benefit package known as EPSDT, and greatly increase patient cost sharing.

But states would pay a steep price in return: They would be locked into a base federal funding year that grows only with the general inflation rate (rather than medical inflation) and with no population adjustments going forward. States pursuing this option would face mounting uninsured populations and services given the nonviability of other insurance options.

The bill also would give states broad discretion to impose work requirements with very few limits. But the vast majority of Medicaid beneficiaries who can do so already are working or looking for work; this form of flexibility likely would do little other than holding up enrollment, leaving states and localities facing more uninsured people and transferring the cost of care away from federal funding.

Indeed, not only does the measure provide no meaningful flexibility, but it actually constricts states’ ability to efficiently manage their programs, in the end, driving up the overall financial burden states and localities would face in trying to finance health care for poor and medically vulnerable residents. For one year, section 103 of the bill would withdraw federal funding for state payments to Planned Parenthood for covered family planning and related preventive services, among the most cost-effective forms of health care. Barred from reporting their expenditures for people who rely on Planned Parenthood, states would lose the very high federal contribution for such services, set at 90 percent of total expenditures. Despite its professed emphasis on continuity of coverage—and under a heading entitled “Providing Incentives for Increased Frequency of Eligibility Redeterminations”—section 116 of the bill would force states to redetermine Medicaid eligibility every six months for millions of low-income adults, while eliminating the current, and more efficient, 12-month eligibility redetermination process.

Under the title of “Reducing State Medicaid Costs,” section 114b of the bill would eliminate retroactive eligibility, an element of Medicaid dating back to its enactment, which works to reduce the uncompensated care costs resulting from emergency care and other costly services furnished to medically indigent patients prior to their actual Medicaid application. The bill also would eliminate temporary eligibility for poor adults (section 111) and would impose new eligibility verification requirements (section 114c). Additionally, under the heading “Updating Allowable Home Equity Limits” (section 114d), the bill would lessen states’ ability to provide long-term care assistance.

The Choices Confronting States

The federal Medicaid statute offers states virtually no good options for absorbing federal funding losses of this magnitude, nor is it likely that such options exist. The CBO, the Medicaid and CHIP Payment and Access Commission (MACPAC), and other experts agree that Medicaid’s size is a function of enrollment, not per-beneficiary cost, except in the case of the highest-need beneficiaries. Once the realities of what is driving Medicaid costs are taken into account, it becomes clear that the AHCA is nothing more than a vehicle for clawing back nearly a trillion dollars in federal funding over the next decade for a program that, according to the CBO, already costs 50 percent less per capita than providing private health insurance for an equivalent basket of services.

Assuming that they cannot significantly increase their own expenditures above their specified state share under the federal funding formula as a condition of continued federal funding, states have two basic choices under the law. First, they might eliminate optional populations. Second, they might eliminate optional services. Of course, they might do both. In its recent report examining how states exercise their existing Medicaid flexibility, MACPAC identifies a number of flexibility areas including changes in eligibility, enrollment, benefits, cost sharing, the use of premium assistance in lieu of traditional coverage, and the use of managed care. But as MACPAC notes, these flexibility areas all exist within overarching federal requirements related to who must be given coverage and for what.

Furthermore, as a practical matter, the concepts of “mandatory” and “optional” under Medicaid are themselves meaningless. The status of eligibility groups and services as “optional” simply is a function of statutory drafting; these populations and services could not be more in need or more vital to health care. Prescribed drugs are a state “option,” as are home- and community-based care for people who require institutional-level services. Women diagnosed with breast and cervical cancer are an “optional” eligibility group, as are many pregnant women. So are low-income, older working-age adults with serious preexisting conditions including physical and mental health problems, who might need to turn to Medicaid as access to affordable private insurance evaporates. Most nursing home residents, who spend down to Medicaid eligibility levels, are also an “optional” group.

In sum, other than minor adjustments (for example, raising beneficiary cost sharing to maximum allowable levels), states can do little to bring Medicaid spending in line with $880 billion in federal funding losses other than to remove entire classes of benefits and services. Even under normal circumstances this strategy would carry enormous human and fiscal consequences. But in light of the provisions of the AHCA that threaten access to coverage for older people and those with preexisting health conditions—who simply will no longer be able to afford care—a massive rollback of Medicaid programs to cope with huge federal spending reductions could cripple Medicaid’s role as a safety-net insurer just when its performance is most crucial.

The Trump administration has promised to give states new and additional flexibility options by aggressively using its section 1115 demonstration authority. But by its very terms, section 1115 is a demonstration statute that empowers the Department of Health and Human Services (HHS) secretary only to conduct reasonably designed experiments, not engage in a wholesale effort to alter the boundaries of federal law. Furthermore, in addition to the lengthy process of designing and negotiating section 1115 demonstrations, this special demonstration authority can be used only to pursue experiments and pilots that further Medicaid’s objectives. Medicaid’s core statutory objective most decidedly is not to eliminate coverage and services; it is “to furnish medical assistance on behalf of … individuals, whose income and resources are insufficient to meet the costs of necessary medical services.”

In sum, in terms of operational reality, section 1115 offers no realistic avenue for changes of the magnitude states would need to rapidly implement to deal with $880 billion in lost federal funding nor is it the purpose of section 1115 to do so. Section 1115 is an experimental statute, not a mechanism for coping with the economic disaster that would flow from passage of the AHCA.

What Can The Senate Do?

The AHCA is predicated on the theory that the Senate will use its fast-track reconciliation process to move the legislation. This process acts as a governor of sorts on the scope and types of legislative amendments that its measure can include; essentially the “Byrd Rule,” which is part of the process, bars inclusion in a reconciliation measure of amendments that are considered “extraneous” because they do not produce changes in federal revenues and outlays. Capping federal spending passes muster under the Byrd rule, as demonstrated by the reconciliation bill that was vetoed in 2016 by President Barack Obama. But, by definition, state flexibility is exactly that—the flexibility on the part of states to take variable approaches to addressing health care costs, approaches that cannot be predicted and, therefore, whose cost impact cannot be ascertained.

In a letter to Senate Majority Leader Mitch McConnell and House Speaker Paul Ryan, four influential Republican governors—John Kasich of Ohio, Rick Snyder of Michigan, Brian Sandoval of Nevada, and Asa Hutchinson of Arkansas—could not have been clearer in their opposition to Medicaid reforms that force states to continue to operate their programs on entirely new payment terms, a “gun to the head” in the words of Chief Justice John Roberts in NFIB v. Sebelius. In their letter, the governors propose a choice for states: States, they say, should be able to either retain Medicaid’s original structure or move to an alternative federal statutory design that enables them to eliminate the legal entitlement to coverage and thereby take a more selective approach to Medicaid in terms of who qualifies for assistance, how many people can be enrolled, what benefits will be made available to different populations, and whether managed care will be used for virtually the entire population including millions now exempt from mandatory plan enrollment.

This is a far-reaching proposal that requires extensive debate and consideration. Even the governors understand that what they propose is not the stuff of fast-track reconciliation. Indeed, they are correctly calling for a legislative reform effort of the type that should be undertaken when coverage of 74 million people is on the line.

At this point, the Senate has two basic choices. Its first option is to follow the House’s lead and subject Medicaid to vast federal spending reductions, forcing states to carry out existing federal obligations under a dramatically altered financial picture. Under this scenario, not even the most far-reaching—and legally questionable—use of section 1115 demonstration authority could mitigate the human and economic cost of such a pathway. Two-thirds of Medicaid spending is devoted to caring for the elderly, the nation’s most vulnerable children, and adults with disabilities. There simply is no demonstration that will make the costs associated with caring for these populations fall by 25 percent nor is section 1115 intended to enable the secretary of HHS to deprive millions of people of access to health care.

The second option—one far more suited to the serious effort at policy making that Medicaid reform entails—is to set aside any major Medicaid restructuring effort under reconciliation and focus the reconciliation vehicle on the immediate task at hand: sensible reforms that would stabilize and strengthen the private health insurance market. Medicaid reform demands a more deliberative process, one that operates in regular order and carefully considers a wide range of options for controlling costs in the nation’s single largest source of health insurance.

The governors’ letter deserves the serious and considered hearing they seek. Other reforms could be considered as well, such as giving states broader authority to negotiate the price of prescription drugs, expand their use of more fully integrated Medicare/Medicaid care delivery models, and pursue strategies that combine payment reform with the use of care delivery systems that can more effectively create a culture of health by linking health care and social services.

Medicaid simply is too big to fail. What is needed is a careful approach to reforming the nation’s largest insurer and most vital health care safety net—not a massive $880 billion cost shift that fundamentally changes the financial foundation of a program serving more than one in four Americans.

Author’s Note

The author thanks the Commonwealth Fund for its ongoing support of George Washington University’s Medicaid analytic studies.