A Better Way to Contain Medicaid Costs

Focus Area:
Sustainable Health Care Costs

As the cost of health care continues to rise faster than state revenue, states’ Medicaid commitments undermine their ability to invest in education and other important priorities.1 In response, some states have embraced Medicaid block grants, in which they would receive a fixed annual sum from the federal government, as a way to avoid increasing program costs. The Tennessee legislature, for example, recently passed a bill requiring the state to submit a request for a Medicaid block grant within the next six months. But, in reality, this approach does nothing to reduce the cost of care and hurts Medicaid recipients. Let’s examine why—and look at an alternative approach we put in place in Oregon that can contain costs by improving efficiency in care delivery.

First, the problem with block grants. Suppose a state gets a block grant of $1 million in 2019 to provide care for 2,000 Medicaid recipients. That’s $500 per person. This fixes the amount of money the state spends on Medicaid but does nothing to reduce the cost of care itself. If medical inflation is 10% over the course of the year, in 2020 it will cost $1.1 million to provide the same care that was delivered in 2019, forcing the state to reduce benefits by $100,000 and shifting the cost of paying for those services to people on Medicaid.

Or suppose we have another recession. Unemployment rises and another 1,000 people become eligible for Medicaid, but the block grant is still $1 million. Now the state has only $333 to spend on each Medicaid recipient. Its options are to cut benefits further or drop 1,000 people from coverage to maintain the benefit at $500 per person. Both actions simply shift cost to Medicaid. Thus, while block grants reduce the cost of Medicaid to the state, they do nothing to reduce the cost of care being delivered.

Over time, block grants also undermine health and drive up the total cost of care because, when those without coverage get sick enough, they access the system through the emergency department, one of the most expensive care settings. The subsequent uncompensated costs are then shifted back to private-sector employers and workers through increases in their premiums, repeating the cycle.

Fortunately, there is another way. A number of states are encouraging their health care providers to address the underlying inefficiencies that drive the cost of health care while maintaining access, quality, and health outcomes by setting targets or global budgets for health care spending growth based on the total cost of care.2

Oregon’s 1115 Medicaid waiver, put into place in 2012, required the state to reduce per capita Medicaid spending by 2 percentage points below the expected rise, without reducing benefits or enrollment, while also improving quality and health outcomes. This was accomplished through new “coordinated care organizations” (CCOs), composed of physical and mental health providers that serve Medicaid beneficiaries who are paid a risk-adjusted per-capita payment that grows at 3.4% per member per year, per the waiver agreement with the Centers for Medicare and Medicaid Services. Without the ability to negotiate for extra revenues, CCOs have focused on redesigning how to deliver care more efficiently. Between 2013 and 2017, an estimated $2.2 billion in state and federal funds were saved while seeing substantial improvements in quality indicators.3 And the yearly payment increase to CCOs of 3.4% for each person covered in the Medicaid program creates a sustainable trajectory that is in line with the state’s revenue growth.

Medicaid is part of the critical infrastructure that helps people move toward self-sufficiency. The cost of care delivered through this program, however, can compromise resources available for other important programs. Block grants can trigger a reduction in health coverage and health care services to vulnerable people, leading to needless suffering and even death.3,4 As state budgets face increasing pressure from escalating health care costs, a global budget with a fair negotiated per-capita rate of increase—linked to strong access, quality, and outcome metrics—offers a way to both maintain access and manage costs.


    1. Zemel S, Riley T. Addressing and Reducing Health Care Costs in States: Global Budgeting Initiatives in Maryland, Massachusetts, and Vermont. National Academy for State Health Policy. January 2016. https://nashp.org/wp-content/uploads/2016/01/Global-Budgets1.pdf. Accessed June 6, 2019.
    2. Oregon Health Authority. Budget Presentation to Joint Ways and Means Committee. March 5, 2019. https://www.oregon.gov/oha/Budget/OHA-2019-WM-Presentation-Agency-Overview.pdf. Accessed June 6, 2019.
    3. Woolhandler S, Himmelstein D. The Relationship of Health Insurance and Mortality: Is Lack of Insurance Deadly? Ann Intern Med. 2017;167(6):424-431. https://annals.org/aim/fullarticle/2635326/relationship-health-insurance-mortality-lack-insurance-deadly. Accessed June 6, 2019.
    4. Institute of Medicine; Committee on the Consequences of Uninsurance. Care Without Coverage: Too Little, Too Late. Washington, DC National Academies Press 2002. https://www.ncbi.nlm.nih.gov/pubmed/25057604. Accessed June 6, 2019.