Health Affairs Blog, July 7, 2017

Both proposed versions of the Republican health care bill—the American Health Care Act (AHCA) and the Better Care Reconciliation Act (BCRA)–create an option for states to receive Medicaid funds in the form of a block grant (in the BCRA, the Medicaid Flexibility Program). 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.

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. Our 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.