Medicaid Reform Proposals in Congress–What to Know

As Republicans seek ways to cut federal spending, the possibility of a per capita limit on state Medicaid payments takes center stage.

Illustration by The Epoch Times

Republican lawmakers are divided over a potential change in Medicaid funding that pits moderates against fiscal hawks and threatens to further delay the budget reconciliation process.

Two proposals at the center of contention would shift additional responsibility for funding the program—which provides health coverage for millions of low-income Americans—from the federal government to the states.

One proposal would reduce the Federal Medical Assistance Percentage (FMAP), which sets the Medicaid reimbursement states receive from the federal government.

The other proposal would, for the first time, cap the total reimbursement a state could receive from the federal government, basing the cap on the number of Medicaid enrollees in each state.

Both ideas would further the Republican goal of trimming $1.5 trillion from federal spending over 10 years.

Moderates have balked at both ideas, fearing the loss of coverage or benefits among constituents.

House Speaker Mike Johnson (R-La.) told reporters on May 6 that both ideas had likely been ruled out, “but stay tuned.”

Rep. Chip Roy (R-Texas), a longtime health care reform advocate and fiscal conservative, responded to Johnson by posting, “Well—I haven’t ruled it out,” on social media platform X.

Here’s what Medicaid spending looks like now and what it might look like if Congress adopts either the reimbursement rate reduction or the per capita cap.

Now: Limited Percentage, Unlimited Reimbursement

The federal government oversees Medicaid and reimburses states for a portion of their Medicaid costs.

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Each state has discretion in setting its own income-based eligibility requirements, adding optional coverages, setting provider reimbursements, and adding enrollment fees and copays.

Basic Medicaid coverage is for low-income people who are children, disabled, parents of dependent children, or elderly.

The Affordable Care Act expanded Medicaid in 2014 to include non-elderly adults who would not qualify for Medicaid under traditional guidelines.

About 21 million people are currently covered under the expansion, according to enrollment data from the Centers for Medicare and Medicaid Services (CMS).

Under traditional Medicaid, the federal government reimburses each state based on the state’s per capita income level. That amount—the Federal Medical Assistance Percentage, or FMAP—ranges from 50 percent in 10 states to 76.9 percent in Mississippi.

However, states receive a 90 percent reimbursement for the expenses of those covered under the Medicaid expansion, regardless of the state’s income.

Since expanded Medicaid coverage began, the federal government’s costs for Medicaid have grown to $614 billion a year, according to CMS data.

At the same time, the share of Medicaid costs paid by the federal government has increased by 10 percent, and the share of the cost paid by state governments has decreased by 10 percent.

FMAP Reduction: Limited Percentage, Unlimited Reimbursement

A Federal Medical Assistance Percentage reduction would decrease the percentage of state Medicaid costs reimbursed by the federal government.

Under this scenario, states would be reimbursed at a lower rate, although the total reimbursement states could receive would remain open-ended.

This direct reduction in federal payments is a non-starter for Democrats and for some moderate Republicans.

“Changes to FMAP ... would have a devastating impact on New York, and I’m not doing it,” Rep. Mike Lawler (R-N.Y.) told The Epoch Times.

Other Republicans are more open to the idea.

Rep. Dusty Johnson (R-S.D.) noted that each state’s reimbursement rate is variable to begin with, so modest changes might be possible. “As states’ economies grow at different rates, their FMAP changes,” Johnson told The Epoch Times. “So changes to FMAP are something that states are very comfortable with.”

When calculating possible reductions in federal Medicaid spending, one option provided by the Congressional Budget Office (CBO) was to gradually lower the floor—the lowest possible reimbursement rate for a state—from 50 percent to 45 percent between 2025 and 2034.

Lowering the floor by 5 percent would reduce federal spending by $530 billion, according to the budget office.

That’s about 7 percent of the cumulative $7.5 trillion in projected federal Medicaid spending over that same period.

Leveling the Federal Reimbursement Rate

In an alternative scenario, the CBO calculated the reduction generated by lowering the federal reimbursement rate for the Medicaid expansion population. The rate is currently 90 percent for this group.

Under this scenario, the rate would be reduced to whatever the reimbursement rate is for other Medicaid enrollees in the state.

That could reduce federal spending by $596 billion through 2034, or about 8 percent of cumulative federal Medicaid spending during that period, according to CBO calculations.

This idea is popular with some Republicans who believe the higher reimbursement given to states for their expanded Medicaid groups is unfair.

“It’s necessary to stop robbing from the vulnerable to fund the able-bodied,” Roy wrote on X.

Per Capita Cap: Limited Reimbursement Based on Enrollment

A per capita cap would limit the total amount provided to states, based on the number of people enrolled in their Medicaid programs. However, it would not limit the coverage provided to individuals. States would be responsible for costs that exceed the cap.

Further, any cap would likely be structured to take into account differences in medical costs among various groups of enrollees, so that states would be compensated based on those enrollment groups.

In 2021, the average cost of care for all Medicaid beneficiaries was about $7,600.

For adults, the cost averaged about $5,500 for people in original Medicaid, and $6,500 for those covered under the Medicaid expansion. Spending on children averaged about $3,000 each.

However, the cost for seniors and people with disabilities averaged more than $18,000 each.

Projected Savings

The exact parameters of a cap are uncertain, because legislators have not presented a specific plan.

The Congressional Budget Office forecast the savings that would be generated by a per capita cap. That forecast assumes an initial cap based on spending per beneficiary in 2024, and adjusted annually to match the rate of inflation.

A second analysis assumed a 1 percent increase in the cap each year, in addition to the rate of inflation.

Based on those assumptions, the Budget Office calculated a cumulative reduction in the federal deficit of between $588 billion and $893 billion  if a per capita cap were put in place through 2034.

That equates to between 8 percent and 12 percent of the $7.5 trillion in projected federal Medicaid spending over the nine-year period.

Some lawmakers and analysts think the cap would also cause states to manage their programs more carefully.

Under the current system, states have less incentive to ensure the eligibility of beneficiaries and providers, because federal reimbursement increases with expenses.

In 2024, according to data from the Department of Health and Human Services, some $600 million in federal payments was made to providers who were not enrolled in Medicaid.

More than $10 billion was paid for services where no information on beneficiary eligibility was provided.

“The per capita caps would make the states live within their means,” Rep. Nick Langworthy (R-N.Y.) told The Epoch Times on May 1.

Risks

There are potential drawbacks as well.

A per capita cap on Medicaid would leave states responsible for all expenses that exceed the cap.

If a cap had been instituted in 2018, nearly all states would have exceeded the cap for most beneficiary categories over the last five years—and lost significant federal funding—according to the Center on Budget and Policy Priorities, a progressive think tank.

In addition, some analysts fear a per capita cap might not adequately account for cost increases due to rising medical costs, new medicines and technologies, and changes in medical practices.

“Changes in these factors are impossible to predict and extremely difficult for states to control,” Gideon Lukens and Elizabeth Zhang wrote in a report for the Center on Budget and Policy Priorities.

Medicaid is the largest item in many state budgets. While states could choose to leave their Medicaid coverage the same and find needed revenue elsewhere, some analysts predict a loss of coverage or a reduction in benefits would be inevitable.

“States would face tough choices about Medicaid’s future under a per capita cap,” according to a report by KFF, a health care think tank.

If states pare back eligibility requirements to match their loss of federal funding, some 15 million people could lose Medicaid coverage, KFF predicts. States that maintain their current coverage could face an additional cost of $1,500 or more per beneficiary by 2034.

Other researchers believe the per capita cap would cause some states to discontinue their Medicaid expansion programs. Some states have laws that mandate discontinuing expanded coverage if the federal reimbursement rate drops below 90 percent.

If that were to happen, “Many of the nearly 21 million low-income people who have gained coverage through the Medicaid expansion [will end] up uninsured,” according to Edwin Park, a professor at the Georgetown University McCourt School of Public Policy’s Center for Children and Families.

Other analysts told The Epoch Times that those worst-case scenarios are unlikely and the specifics of a per capita plan have yet been announced.

Other Cost Saving Measures

The cap is one of several cost-saving measures under consideration.

Others include adding work requirements for able-bodied, non-elderly adults who are not responsible for the care of children or other dependents.

Indiana passed a work requirement for certain Medicaid beneficiaries in April, though it must gain federal approval  from the Centers for Medicare and Medicaid Services before taking effect. It’s one of more than a dozen states currently seeking federal approval to add work requirements to their Medicaid coverage.

If implemented, that move could reduce the state’s Medicaid rolls by 100,000, according to the Robert Wood Johnson Foundation, a philanthropic organization focused on health issues. That could potentially reduce state costs by hundreds of millions of dollars.

Another proposal would address a quirk in the system that allows a state to tax Medicaid providers, return most of the money to the providers through increased payment for services, and simultaneously increase the state’s reimbursement from the federal government.

Republicans have said they will act to reduce fraud and waste in the Medicaid system as well, though no specific plan has been announced.

The House Energy and Commerce Committee, which has jurisdiction over Medicaid, is expected to consider the matter during the week of May 12.