Medicaid Explained: How a ‘Blended Rate’ Would Work

If Democrats and Republicans in Washington ever come together on a deal to cut trillions of dollars from the federal budget, it almost certainly would require changes to Medicaid, the state-run health care program for the poor that consumes about 8 percent of the federal budget.

House Republicans already have voted to convert Medicaid into a block grant program, a controversial move that would save the federal government hundreds of billions of dollars. During the federal debt ceiling debate, the Obama administration has issued its alternative — a plan to cut $100 billion from federal Medicaid spending over the next decade.  

To states, the most significant part of Obama’s plan is a change in a few key funding formulas that determine how many federal dollars states get for Medicaid. Obama’s so-called “blended rate” would simplify the way federal money is divvied among the states. But it also would shift a greater share of Medicaid spending to the states -which has riled numerous governors and nearly everyone in the health care community.  How would the blended rate proposal change Medicaid? Here’s a primer on the way Medicaid is currently financed, and the possible impacts of the administration’s plan.

Federal share of Medicaid
and CHIP spending, fiscal year 2011

State	Federal Medical Assistance Percentages (FMAP)	State Children’s Health Insurance Program (CHIP)
Alabama	68.5	78.0
Alaska	50.0	65.0
Arizona	65.9	76.1
Arkansas	71.4	80.0
California	50.0	65.0
Colorado	50.0	65.0
Connecticut	50.0	65.0
Delaware	53.2	67.2
D.C.	70.0	79.0
Florida	55.5	68.8
Georgia	65.3	75.7
Hawaii	51.8	66.3
Idaho	68.9	78.2
Illinois	50.2	65.1
Indiana	66.5	76.6
Iowa	62.6	73.8
Kansas	59.1	71.3
Kentucky	71.5	80.0
Louisiana	63.6	74.5
Maine	63.8	74.7
Maryland	50.0	65.0
Massachusetts	50.0	65.0
Michigan	65.8	76.1
Minnesota	50.0	65.0
Mississippi	74.7	82.3
Missouri	63.3	74.3
Montana	66.8	76.8
Nebraska	58.4	70.9
Nevada	51.6	66.1
New Hampshire	50.0	65.0
New Jersey	50.0	65.0
New Mexico	69.8	78.9
New York	50.0	65.0
North Carolina	64.7	75.3
North Dakota	60.4	72.3
Ohio	63.7	74.6
Oklahoma	64.9	75.5
Oregon	62.9	74.0
Pennsylvania	55.6	69.0
Rhode Island	53.0	67.1
South Carolina	70.0	79.0
South Dakota	61.3	72.9
Tennessee	65.9	76.1
Texas	60.6	72.4
Utah	71.1	79.8
Vermont	58.7	71.1
Virginia	50.0	65.0
Washington	50.0	65.0
West Virginia	73.2	81.3
Wisconsin	60.2	72.1
Wyoming	50.0	65.0

Source: U.S. Department of Health and Human Services

What is the blended rate proposal? Although the administration has not yet provided details, the idea is to take the current patchwork of federal funding formulas and combine them into one. Two of those formulas — for Medicaid generally and the Children’s Health Insurance Program (CHIP) — are currently in use; another one is set to kick in under the federal health care law’s Medicaid expansion, starting in 2014.

The rates would be applied to each state’s projected spending in those three separate categories to calculate total federal funding. That number would then be reduced by as much as 5 percent to achieve an overall federal spending cut of $4 to $7 billion per year, according to an by the Center on  Budget and Policy Priorities. From the lower federal contribution, a single rate would be reverse engineered on a state-by-state basis.

In contrast to the Republicans’ block-grant plan, Obama’s proposal would keep Medicaid as an open-ended entitlement program. In other words, total federal funding would automatically increase if enrollment rises during economic downturns. It also would reward states for creating efficiencies and provide greater flexibility in administering the program, the White House says. Republicans say that their block grant plan would allow states even more flexibility.

Do governors support the proposal? So far, the answer is “No.” The Obama administration’s plan takes a smaller bite out of federal Medicaid spending than the GOP block grant proposal, but governors are not pleased. “We do not believe spending reductions should be made disproportionately to state funds or result in merely shifting costs to the states,” the National Governors Association wrote in a July 9 letter to the President and congressional leaders signed by Democratic Governor Christine Gregoire of Washington state and Republican Governor Dave Heineman of Nebraska. 

Patient advocates and health care providers also oppose the plan because they say it will force financially strapped states to cut spending just as the nation prepares to expand health insurance coverage.

What are the current federal funding formulas that would be changed? The big one is known as Federal Medical Assistance Percentages or FMAP. Each state’s FMAP is calculated by comparing its per capita income to the national average, with no state getting less than a 50 percent federal match. Each state’s percentage is adjusted annually to reflect changes in income.

Historically, wealthy states such as California and New York have received a 50 percent match, while poor states such as Mississippi and West Virginia have had more than 75 percent of their costs covered. Overall, the federal share of Medicaid spending has averaged about 57 percent for the past decade, although that went up from 2009 to 2011 under the federal stimulus program.

The other existing formula is tied to the children’s program. CHIP was enacted in 1997 to encourage states to insure more children and comes with a more generous formula. That formula starts with the FMAP numbers and simply lowers the state’s share of spending by 30 percent. The result is a higher federal share that ranges from 65 percent to 84 percent, depending on the state. The national average is about 70 percent.

Total federal and state Medicaid expenditures in 2009 were $374 billion. CHIP spending was about $10 billion.

How does the national health law affect the formulas? Under the Affordable Care Act, about 17 million more people are expected to become eligible for Medicaid. For those newly eligible Medicaid recipients — people with slightly higher income levels than current recipients — the federal government is to pay 100 percent of the costs in 2014. That percentage is to taper to 90 percent by 2019 and remain at that level. 

In states that already have expanded their Medicaid programs with state money, the federal share is to be slightly lower than 90 percent in 2014 and move up to 90 percent by 2019. The Medicaid expansion is projected to cost the federal government $627 billion from 2012 through 2021, according to a March report from the Congressional Budget Office.

The federal health law did not change the existing FMAP or CHIP formulas, leaving states with three different means by which their federal funding for Medicaid is to be calculated.

Are changes in the funding formulas needed?

The administration says rolling the three different formulas into one will allow states to streamline the program and reduce overhead costs. But critics say the three separate formulas should be left as-is because they were designed to create certain incentives for states.

For example, the higher percentage funding for CHIP was designed to encourage states to sign up more children. Likewise, the enhanced percentage under the Affordable Care Act was intended to encourage states to go out and sign up newly eligible Medicaid recipients. Without those incentives, critics say states might drag their feet.

The FMAP formula, unchanged since Medicaid was created in 1965, has been criticized as overly simplistic. For big states whose populations determine the national average income level, the rate remains the same year after year, no matter how much their economic fortunes rise or fall. For poor states, critics say, the formula fails to account for the total number of residents living below the poverty line.   One thing is certain. Whether the administration’s blended rate, the Republicans’ block grant proposal or any other new formula for allocating federal Medicaid money is ultimately adopted, recalculating state-by-state funding will be fraught with controversy. Not only will states complain about a reduction in funding, but they will likely take issue with the accuracy of the calculation.