How Medicaid Block Grants Would Be a Bad Deal for the States

What Trump wants to do has a long history in Canada. It hasn't worked out that well for the provinces.
January 12, 2017
By Roger Chafe  |  Contributor
An associate professor of medicine at Memorial University of Newfoundland

One of the proposals being put forward by the incoming Trump administration is to change the funding formula for the Medicaid program, moving from the current system of cost sharing to one employing block-grant funding. While this proposal has not received as much attention as vows to repeal or replace the Affordable Care Act, it would likely have as significant an impact on the American health-care system.

Canada offers an example of some of the potential impacts a move to block-grant funding would have, particularly for state governments. For American advocates of expanding access to health care, Canada's experience should be troubling.

Medicaid is the largest health program by enrollment in the United States, providing access to care to more than 73 million Americans. Since its inception, the program has been funded through a cost-sharing arrangement between the federal government and the states. Washington currently covers between 50 percent and 75 percent of the cost of care, depending on the economic strength of the state, with state governments picking up the rest.

President-elect Trump's proposal is for states to receive a fixed sum for Medicaid, in the form of federal block grants, rather than a percentage of the actual costs. Canada's federal government made a similar move 40 years ago, and the result has been a significant reduction in the federal contribution to the provinces for health care. In the U.S., a similar reduction in federal contributions to Medicaid should be expected under a block-grant system.

Perhaps more concerning for state governments is that blocks grants offer the federal government an easier and quicker mechanism for reducing its contribution than could occur under any cost-sharing arrangement. Several times since Canada's federal government moved to block grants, it has unilaterally lowered its contribution, leaving the provinces to deal with the consequences.

In the U.S., the burden of covering unexpected cuts in federal contributions would likely be borne by Medicaid recipients, who could face stricter program eligibility, higher co-pays or reductions in benefits; by providers, who could face reductions in reimbursements or increases in their costs for uncompensated care; or by state governments, through increases in taxes, reductions in other expenditures or increases in debt.

The Canadian experience also shows that it is not the mechanism itself but rather the amount of funding transferred that really matters. Between 2004 and 2014, there were 10 years of 6 percent annual increases in Canadian federal contributions for health care, easing much of the tensions between the federal and provincial governments. With this arrangement now expired, the most important issue on the agenda between the provinces and Justin Trudeau's government is negotiating a new funding arrangement. If block grants for Medicaid are adopted in the U.S., similar negotiations with the federal government will play a bigger role in the financial health of state governments going forward.

While many of the critical details of the Trump proposal are still to be determined, there are things state governments can do now to prepare. Democratic and Republican governors should work together to make their position on this issue clear and to clearly communicate it to their federal counterparts. State governments should demand that any move to block grants ensures sufficient and stable program funding. The more united and determined the states are, the better deal they will ultimately get.

States also could consider whether to match any reduction in federal income taxes, also proposed by the Trump administration, with offsetting tax increases at the state level, as the Canadian provinces did. Such tax increases could provide the states with extra resources needed to address any shortfalls in federal Medicaid contributions without noticeably affecting Americans' take-home pay. Finally, given the likely reduction in federal responsibility over the Medicaid program, states should continue to work together to reduce program costs.

The move to block-grant funding was one of the most significant events in the history of Canada's health-care system, reducing the federal government's role and increasing the provinces' responsibility. American state governments, providers and Medicaid recipients need to engage on this vital issue now, before they are left paying the price.