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· Health Care,Politics,Block Grants


By Melvin J. Howard

Both proposed versions of the Republican health care bill—the American Health Care Act (AHCA) and the Graham-Cassidy Health Care Bill –create an option for states to receive Medicaid funds in the form of a block grant. What are block grants? Right now, Medicaid, which was expanded under the 2010 health law to insure more people, covers almost 75 million adults and children. Because it is an entitlement, everyone who qualifies is guaranteed coverage and states and the federal government combine funds to cover the costs. Conservatives have long argued the program would be more efficient if states got a lump sum from the federal government and then managed the program as they saw fit. But others say that would mean less funding for the program —eventually translating into greater challenges in getting care for low-income people. The lessons from welfare reform can provide valuable insights into the potential impact of Medicaid block grants: namely, states may have a considerable incentive to pursue block grants, because they pose an attractive opportunity to cut state spending and allocate Medicaid dollars for other uses should the state desire that outcome. The American people should not be fooled into thinking this is a good thing in the past the program has been fraught with fraud and corruption. The depth and scope of the poverty industry‘s role in federal grant-in-aid programs and funds is striking, spurred in part by lobbying efforts, campaign contributions, and a revolving door of personnel between private industry and government leadership. The industry surrounding block grants has grown to the point where seemingly any task regardless of possible conflicts or limitations regarding inherently governmental functions can be contracted out.

As states increasingly view federal grant-in-aid funds as a source of general revenue rather than a means to enhance program services. Once the bipartisan pick for Commerce Secretary in the Obama Administration, U.S. Senator Judd Gregg has since become a critic of the former administration‘s increased spending on federal aid programs to address the economic downturn and budget difficulties faced by states. However, when Senator Gregg was governor of New Hampshire and faced a growing state budget deficit, he initiated a process of claiming additional federal Medicaid matching funds, but with no additional net outlay of state funds. Then, rather than using the additional funds for Medicaid-related services, Gregg created a new general revenue line item in his state budget called ―Medicaid Enhancement Revenue. Gregg converted additional federal Medicaid payments into general use rather than using the federal dollars for Medicaid programs and services. The strategy led to such an increase in federal funds that the new general revenue line item accounted for 28% of New Hampshire‘s total general fund revenue in 1994.Gregg balanced the state‘s budget alright indeed, to the point of a surplus by converting federal funds intended to aid the poor into general state revenue. In 1996, Aid to Families with Dependent Children (AFDC) was converted from an entitlement to a new block grant program, Temporary Assistance to Needy Families (TANF). The TANF grant was fixed in nominal terms, so over the course of 20 years, federal spending on TANF shrunk by 30 percent as state spending also declined by 30 percent. With substantial cutbacks in funding and greater flexibility for states to tailor their TANF programs, caseloads have declined by 45 percent from the peak of AFDC, TANF provides lower benefits per family, and nearly half of current spending goes to programs outside of core welfare purposes (cash assistance, child care, work supports).

The case of welfare reform illustrates a possible scenario under Medicaid block grants: both federal and state spending drop off, with state spending diverted to other uses. To accommodate these changes, it may not be sufficient to cut enrollees, or benefits, or provider reimbursement—states will likely enact all three. Historical experience with TANF in trying to constrain states to continue spending on the targeted population via maintenance of effort requirements suggests that it is hard to do.

In addition to tax and debt instruments for raising revenue, intergovernmental grants are a primary tool for different levels of government to carry out their respective roles, and thus are a key application of fiscal federalism theory. In the United States, intergovernmental grants typically take the form of federal grant-in-aid programs, such aid programs have been to devolve more discretion and control to the states and local governments. The grant programs generally fall into three categories: matching programs such as Medicaid and Title IV-E Foster Care where state spending is required at a certain percentage match to receive additional federal funds; block grants like the current welfare cash assistance program (Temporary Aid to Needy Families, or TANF), which require states to maintain a certain level of state spending to receive the full federal block grant; and programs that are fully funded by the federal government but administered by the states, such as the Food Stamps Program.

Parallels Between Welfare Reform And Medicaid Block Grants

AFDC was similar in some respects to Medicaid: the program targeted low-income children and their families; the benefit (cash assistance) was available to all who qualified under income and asset rules; and spending was shared by states with a varying federal match at or exceeding 50 percent. In 1996, federal government converted AFDC to a block grant program and rebranded it as TANF. A proposal to convert Medicaid to block grants was passed in both the House and Senate at this time as well, but was vetoed by then-President Clinton. Then, as now, the driving arguments for block grant conversion included constraining federal spending and granting states greater flexibility.

Both AHCA and the Graham-Cassidy Health Care Bill contain a Medicaid block grant option for low-income, non-disabled, non-elderly, non-expansion adults; the AHCA also includes children (although not until several years out into implementation). In other words, families, parents and pregnant women, and even children may be targeted by states for a Medicaid block grant — the same type of population once eligible for AFDC benefits. Based on experience with TANF, we highlight a few outcomes that may result from block grants.


The Revolving Door


In addition to the influence of money and lobbying, there is a continuous flow of leadership between the ranks of government agencies and private contractors involved in federal grant-in-aid programs. While Governor of Wisconsin, Tommy Thompson was on the national forefront of the charge to privatize welfare and other poverty programs and he took his championship of privatization to the national stage as Secretary of the U.S. Department of Health and Human Services. When he left his federal post, Thompson was rewarded with multiple positions in the private sector. Simultaneously, Thompson joined Deloitte Consulting, leading the firm‘s Center for Health Solutions; became a partner with Akin Gump Strauss Hauer & Feld LLP, where he focused on developing solutions for clients in the health care industry, as well as for companies doing business in the public sector; joined former U.S. House Majority Leader Richard Gephardt as a member of the board of directors for Centene Corporation, a company that provides Medicaid managed care services in several states; became the board chairman of Logistics Health Incorporated and joined the boards of directors of several private companies in the healthcare field.


Crony Capitalism At It’s Worst


In 2007, MAXIMUS INC. an government contractor agreed to pay $30.5 million to resolve an investigation by the U.S. Department of Justice (DOJ) into False Claims Act allegations. In a deferred-prosecution agreement, the company admitted responsibility for causing the District of Columbia to request Medicaid reimbursement as if the city‘s foster care agency provided reimbursable services to every single foster child when, as Maximus then well knew, that was not true. The DOJ described the settlement as demonstrating strong commitment to vigorously pursuing those companies that defraud the Medicaid program. However, both before and during the course of the litigation, MAXIMUS was almost inextricably linked to federal and state government agencies through contracts to provide services in Medicaid, Medicare, and other aid programs. Thus, the available sanction of exclusion from continued participation in federal aid programs was explicitly avoided as part of the settlement. Within two months of the settlement regarding allegedly fraudulent Medicaid claims, MAXIMUS won a five-year contract with the state of New York to provide Medicaid fraud-consulting services talk about the fox watching over the hen house. Within three months, the District of Columbia extended the same Medicaid revenue maximization contract with MAXIMUS that resulted in the alleged false claims. From the time of the settlement through the end of 2008, MAXIMUS entered into or extended contracts related to Medicaid or Medicare worth more than $240 million, including millions of dollars in contracts directly with the Centers for Medicare and Medicaid Services (CMS) the federal agency to which the allegedly fraudulent claims had been submitted. Then, one year after the DOJ settled its possible claims against MAXIMUS, the company won a contract to insert its services within the DOJ itself, to provide investigative and analytical support, consulting, technical services, financial management, and case-related professional support during the investigation and prosecution of criminal cases.

Total federal spending on two of the largest matching grant programs, Medicaid and Title IV-E Foster Care, is projected to reach almost $520 billion in 2018. The programs are frequently targeted for contractor operational and consulting services and have been the subject of increased federal scrutiny into revenue maximization strategies. Numerous private companies have not only recognized the money to be made from poverty programs, but have concentrated on that niche as the core of their business offerings. With a mission of helping Government Serve the People, MAXIMUS provides operational and consulting services for almost all aspects of government health and human services programs. This industry thrives on bad times. While many companies‘ stocks were diving, MAXIMUS announced increased cash dividends to its shareholders. MAXIMUS also noted in its 2008 fourth quarter earnings call that there are more unemployed people and they look for job opportunities, and that plays right into the sweet spot for our welfare to work programs.


Block Grants Reduce Federal Spending But In The End It Comes Up Short


Federal TANF funding has been fixed in nominal terms under the block grant — which resulted in a decline in real, inflation-adjusted value of over 30 percent. Both AHCA and the Graham-Cassidy Health Care Bill include inflation adjustments for block grant Medicaid spending tied to the Consumer Price Index, but both are expected to be less than program requirements going forward (particularly the Graham-Cassidy Health Care Bill , which relies upon the Urban, not Medical, CPI). The Medical portion of the CPI tends to rise more quickly than overall CPI, yet the Medical CPI only includes out-of-pocket spending and thus likely understates health care inflation.


The Congressional Budget Office (CBO) estimates an effective 30 percent drop in funding under both bills, although this primarily reflects rolling back the ACA Medicaid expansion and to a lesser degree, the choice to use an inflation index lower than historic Medicaid spending growth. If states elect to receive their federal dollars as a block grant, the reductions in spending could be far greater. Under , subsequent block grants will only allow for minor adjustments for total (not low-income) population shifts and the urban Consumer Price Index. States with growing poverty and/or a shrinking population will see the largest discrepancy between funds and their projected use of Medicaid benefits under current rules. The block grant option will end the role of Medicaid as a counter-cyclical safety net — during an economic downturn, there will be no increase in federal support even as more people become eligible for Medicaid and states have fewer resources.




A few years before former Illinois Governor Rod Blagojevich faced impeachment for allegedly trying to sell a U.S. Senate seat, he faced media scrutiny for his dealings with MAXIMUS. In 2005, The Chicago Sun Times reported on possible links between the company‘s receipt of state contracts and campaign contributions to Governor Blagojevich made by MAXIMUS and the company‘s lobbyists. According to the paper, MAXIMUS initially contracted with the state to develop a new plan to maximize federal aid dollars, and the company was then ―handed a waiver from state contracting rules by Blagojevich‘s administration so it [could] bid on the lucrative contract proposal it helped the state develop. The company had apparently given Blagojevich‘s political fund $25,500, and the company‘s lobbying firm—which employed the governor‘s former congressional chief of staff—donated another $80,300 to the governor.


Such scrutiny then reached to the west coast. According to the Los Angeles Times, when MAXIMUS faced the risk of losing a $32 million welfare-to-work contract with Los Angeles County, the company reacted by outspending its competitor on lobbying efforts by eight to one. The county‘s Department of Public Social Services concluded another company‘s bid was better, and a review panel and the auditor–controller upheld the decision on appeal. But after MAXIMUS spent $200,000 in lobbying fees and thousands more in campaign contributions, the paper explains, Los Angeles‘s five county supervisors voted to ignore the year-long review process and re-bid the contract to give MAXIMUS another chance.


Medicaid Spending Cuts May Be Much Greater Than CBO Estimates Due To Declines In State Spending


Per its mandate, the CBO has only projected changes in federal Medicaid spending for either bill. However, the experience with welfare reform suggests Medicaid expenditures will drop substantially further when accounting for changes enacted by states. The drafters of TANF incorporated maintenance of effort rules to keep states’ spending on the low-income families targeted by the former AFDC program. States were obligated to continue funds at a minimum of 80 percent of AFDC expenditures. States could therefore immediately cut their own expenditures by 20 percent and then drift downward, as there was no inflation adjustment included. Some states also found ways to substitute some federal TANF funds for state dollars. Over time, state contributions to TANF declined by 50 percent, both due to the nominal block grant and other considerations. Currently, the number of families served with cash benefits has fallen by more than 50 percent and maximum benefit levels have fallen by 26 percent. Under either health care bill, states would see their obligated contributions to Medicaid fall immediately from their current federal medical assistance percentage (FMAP). The AHCA does not include a maintenance of effort requirement for the block grant option. States that elect a block grant would be freed from putting forth any state funds to receive Medicaid payments. The price to the state for another dollar of Medicaid spending would rise (from as low as $0.50 to dollar for dollar), thus considerably lowering the incentives for states to maintain their Medicaid expenditures. The Graham-Cassidy Health Care Bill does include a maintenance of effort requirement, with states matching the block grant allocation according to the enhanced FMAP. Given that the enhanced FMAP will rise to 88-100 percent in 2018, (i.e., states spend 0 to $0.12 per dollar to receive the federal match), the effective state obligation is only slightly greater than the zero-match requirement under the AHCA. Medicaid expenditures account for over 20 percent of state budgets. It seems highly unlikely that all 50 state legislatures and DC will pass up the chance to offset other state expenditures with newly available funds.


Flexibility Can Be A Double-Edged Sword

States also reduced benefits to TANF enrollees by diversion of existing funds to non-TANF uses. By converting AFDC to a block grant, lawmakers hoped that states would take advantage of greater flexibility to support programs aimed at helping families to transition from cash assistance to work in innovative ways. However, states increasingly have allocated money to other programs, such as child welfare, refundable tax credits, and out of wedlock pregnancy prevention which do not always target the pre-TANF AFDC population. States also used TANF funds to cover budget gaps and pay for tax credits. Currently, less than half of TANF spending goes towards core welfare programs (cash assistance, work supports, and child care). For states that choose a Medicaid block grant, increased flexibility could enable them to expand upon promising initiatives, from addressing social determinants of health to integration of physical and behavioral health services. However, it should be noted that recent innovations within Medicaid have been pursued in conjunction with—not in lieu of—medical care. Both the AHCA and the Graham-Cassidy Health Care Bill list a limited set of required services, thus implying other benefits may not have to be provided under a block grant option. The AHCA offers little detail as with the Graham-Cassidy Health Care Bill, with no specificity on diagnostic, mental health services, or treatment for substance use disorders. The Graham-Cassidy Health Care Bill requires those benefits but does not include prescription drugs. If total federal Medicaid funding drops by 50 percent or more, how will states choose to allocate those flexible but small dollars?


The Graham-Cassidy Health Care Bill further outlines other options that states can adopt to reduce state spending on Medicaid benefits. States can alter the amount, duration, and scope of benefits, thus opening the door for time limits (another feature of TANF). Enrollees can be charged premiums, co-payments, and deductibles (not to exceed 5 percent of individual income). In addition, the Graham-Cassidy Health Care Bill reinforces the capacity of states to divert Medicaid funds under a block grant-carryover from a prior year’s block grant can be used for “any other purpose” and the Secretary is barred from prohibiting the use of the funds for a program that is “not related to health care.” Thus, the Graham-Cassidy Health Care Bill lays out several avenues by which states could pull back from providing health care benefits to the lowest-income Americans.


Lessons For Policymakers

Following welfare reform, a number of states pursued a “race to the bottom,” with a shrinking number of families receiving cash or work or child-care related assistance and weaker capacity to protect children from the negative effects of poverty and economic shocks. During the Great Recession, TANF could not and did not expand to buffer families from the worst of the economic crisis in the way it had in the past, despite the creation of an emergency fund. Medicaid, as a block grant program, would be poised to do the same — leave more low-income adults and families vulnerable to poor health outcomes, at a time when they are least able to pay for their care.

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