Money plays a key role in the federal government’s relationship with the states. Congress gives money to the states, for example, but stipulates how this money should be used in order to force the states to cooperate with federal policies.
Federal Aid to the States
Since World War II, states have come to rely heavily on federal money. Likewise, the national government has also relied on the states to administer some federal policies, a practice called fiscal federalism. The term grants-in-aid refers to the federal government giving money to the states for a particular purpose. There are two general types of grants-in-aid:
- Block grants: Money given for a fairly broad purpose with few strings attached.
- Categorical grants: Money given for a specific purpose that comes with restrictions concerning how the money should be spent. There are two types of categorical grants:
- Project grants: Money states apply for by submitting specific project proposals
- Formula grants: Money given to states according to a mathematical formula
Example: When the Republicans retook Congress in 1994, they changed many federal grants into block grants. Instead of giving money to states to buy textbooks or repair schools, for example, Congress gave states blocks of money to spend on education in any way the states saw fit.
Federal Pressure on the States
The federal government uses a number of tactics to compel states to follow its policies and guidelines. Congress can order states to comply but usually applies pressure more subtly by threatening to withhold funds from disobedient states.
Example: When the federal government decided to raise the drinking age to twenty-one, it denied certain highway funds to states that opted not to comply.
Mandates
Sometimes the federal government orders states to do certain things, such as obeying housing laws or environmental regulations. These demands are called mandates. An unfunded mandate is one for which the federal government provides no money. For example, the federal government has required state and local governments to live up to the Americans with Disabilities Act without providing money to make buildings accessible to handicapped people. State governments resent unfunded mandates because they drain state coffers.
One way for Congress to pass mandates is to impose regulations and standards on state and local governments. In the past, Congress has forced state governments to meet certain environmental standards, for example. Scholars call this practice regulated federalism.
Preemption
Because of the supremacy clause, all laws passed by the national government take priority over state and local laws. The national government, then, can override state laws if it can demonstrate a compelling national interest; this practice is called preemption.
Horizontal Federalism
Horizontal federalism refers to the ways state governments relate to one another. States often compete or cooperate on many different issues, from environmental policy to economic development. One state, for example, may lower its tax rate in order to attract businesses away from other states. States have a great deal of leeway in how they behave toward one another.
The concept of consolidating federal assistance programs with similar or overlapping statutory purposes dates back to the late 1960s. The earliest block grant programs were comparatively narrow in scope and aimed primarily at enhancing state-local flexibility. During the Reagan Administration the focus changed, and block grants became a vehicle for shrinking the role of the Federal Government and devolving responsibility for financing and administering domestic assistance programs to state and local jurisdictions.
History of Block Grants
Over the past 40 years, there have been three major waves of federal block grants. The first wave occurred during the early 1970s when President Nixon proposed that 129 federal domestic assistance programs be consolidated into six block grant programs. Many of the President’s proposals were rejected by Congress, but three sizeable block grant programs had been established by the late 1970s. The next major wave of block grants occurred during the first year of the Reagan Administration when Congress, at the President’s request, consolidated 77 federal grant programs into nine block grant authorities. Unlike earlier block grant programs, funding for the Reagan-era block grants were significantly below the aggregate level of the categorical programs they replaced.
Finally in the mid-1990s, President Clinton signed into law a welfare reform measure repealing the Aid to Families with Dependent Children (AFDC) program and replacing it with a state block grant program called Temporary Assistance to Needy Families (TANF). Passage of this legislation marked the first and to date the only time that Congress has agreed to transform an open-ended entitlement into a state block grant authority.
Over the past 30 years, periodic attempts have been made to convert the federal-state Medicaid program into a block grant authority. The first major attempt occurred in 1981 when Congress narrowly rejected President Reagan’s proposal to block grant federal Medicaid funding. In 1995, the Republican-controlled Congress passed legislation that would have capped federal Medicaid payments to the states and transformed the program into a block grant authority, only to have the legislation vetoed by President Clinton. Congress failed to act on a Medicaid block grant plan advanced by President George W. Bush as part of his proposed FY 2004 budget. More recently, a plan to block grant federal Medicaid spending was approved by the Republican-controlled House in both 2011 and 2012 as part of broader blueprint for reducing federal spending, lowering tax rates and slicing the deficit. The U.S. Senate, however, refused to act on the House budget plan and it died at the end of the 112th Congress (see Appendix A for additional information on the history of federal block grant programs and proposals).
Lessons Learned from Past Block Grants
What can we learn from examining past experience with federal block grants? First, the real value or purchasing power of block grant funding tends to decline over time after adjustments are made for inflation. In a study of five Reagan-era block grant programs, Peterson and Nightingale found that the real dollar value of four of the programs declined between 1986 and 1995.20 A later study of 11 federal block grant programs concluded that the current value of federal funding fell by an average of 11 percent over the study period.21 The factors leading to reductions in federal support are difficult to untangle, but one possible explanation is that the consolidation of separate program authorities disrupts the targeted advocacy that previously existed for programs rolled into the block grant. It is harder to rally Congressional support for your particular cause if you know that the ultimate decision on how funds will be used rests with state or local officials.
Second, once block grants are authorized, the degree of flexibility afforded to state and local officials tends to erode over time. In a process sometimes referred to as "creeping categorization," Congress adds new restrictions, set-asides for particular purposes, or new categorical programs with similar or overlapping aims. As Feingold and colleagues point out, "[a] common explanation traces this phenomenon to members of Congress,
who seem to reap greater electoral benefits from narrowly targeted categorical programs or set-asides than from wide-ranging block grants."22 Illustrations of these recategorization patterns can be found in the first two block grant programs created by Congress. The Partnership for Health Act retained its original flexibility, but its impact waned when Congress, concerned about state administrative performance, created more than 20 new categorical grants for health services outside the block grant.23 Dissatisfied with state administration of the Safe Streets program, Congress added mandatory set-asides and other requirements that reduced state flexibility and later terminated funding for the program.24
Third, implementation of new block grant programs tends to be smoother when states administered the categorical programs replaced by the block grant. When an administrative structure is already in place and recipient and provider relationships have been established, state officials have an easier time incorporating new responsibilities into existing management systems. Conversely, problems are more likely to arise when state governments assume responsibility for administering programs where the Federal Government previously awarded grants directly to local governmental units or nonprofit organizations. The Community Services Block Grant, created by Congress in 1981, is a case in point. Here state governments had to establish administrative structures, fill new staff positions, and develop new relations with service providers in a policy area where states previously had little or no role.25
Financial Impact of the TANF Block Grant
The enactment of the TANF block grant program was an important shift in federal policy since it marked the first time an entitlement to services was replaced with a block grant authority. Block grants enacted from the 1960s through the early 1990s involved the consolidation of discretionary grant programs, with the aim of streamlining administration and enhancing state and local decision-making authority. In contrast, the statutory authority of the AFDC program created an individual right to benefits tied to state-established income eligibility standards. Similar to other entitlement programs, Title IV of the Social Security Act committed the Federal Government to share in the cost of all benefits regardless of the sums previously appropriated for AFDC payments to the states.
The TANF program severed this link between individual eligibility, benefits, and federal financial participation. Indeed, Section 401(b) of the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) explicitly indicates that "This part [of the statute] shall not be interpreted to entitle any individual or family to assistance under any State program funded under this part."26 In most instances, adult recipients of TANF benefits are required to work at least part time to receive benefits. In addition, beneficiaries are eligible to receive assistance for a maximum of five years, although some states apply a less stringent cap.
As welfare caseloads plunged and employment rates increased during the late 1990s and early 2000s, the 1996 welfare reform legislation was widely praised by politicians of both major political parties. But the depressed economic conditions of the past four years have revealed the underside of shrinking the social safety net. The number of children receiving federal cash assistance declined between 1996 and 2011 by more than half. Children made up more than three-quarters of TANF recipients in 2009. The average cash payment to a family with one child was $324 a month in FY 2009, but those payments were supplemented by noncash benefits (e.g., child care, employment training) in most states.27 The law empowers each state to set its own cash assistance level, which vary widely from state to state (ranging from a high of $923 a month in Alaska to a low of $170 a month in Mississippi in FY 2009).28
Despite $5 billion in additional federal TANF aid provided through the 2009 economic stimulus legislation,29 program caseloads have risen by only 15 percent since the recession began in 2007. Welfare caseloads remain 68 percent below their 1996 peak and just one in five low-income children currently live in a family receiving TANF funds. Meanwhile, faced with sinking revenues and increased service demands, states have sliced assistance by shortening time limits, tightening eligibility rules, and reducing benefit levels. Moreover, with the removal of statutory constraints, many states have diverted TANF funds to other purposes. Arizona, for example, currently uses only about one-third of its TANF allocation for cash benefits and work programs—core purposes of the TANF legislation. The remaining funds pay for human services, such as foster care and adoption services, or fill other holes in the state’s budget. Nationally, only about 30 percent of federal TANF payments are spent on cash benefits.30
Proposals to convert the federal-state Medicaid program into a block grant authority are more akin to the AFDC-to-TANF conversion than to other existing block grant authorities.31 The financial impact of the PRWORA on federal cash assistance to low-income children and families, therefore, offers important warning signals about the potential impact of converting Medicaid entitlement funding to a block grant authority.
Current Medicaid Block Grant Plan
The latest version of a Medicaid block grant surfaced as part of a broader plan to reduce federal spending that was unveiled by House Budget Committee Chairman Paul Ryan in January 2010. Titled "The Roadmap to Prosperity," the Ryan plan called for deep reductions in federal entitlement and discretionary spending and lower federal taxes as part of a broad-scaled effort to reduce the deficit and stimulate the national economy.32 In the spring of 2011, the U.S. House of Representatives adopted the Ryan plan for reducing the deficit as part of its FY 2012 budget resolution. Congress took no steps to implement the House-passed budget resolution, however, because of the continuing impasse between Congressional Republicans and President Obama over the most appropriate pathway to reducing the deficit.
On March 29, 2012, a somewhat modified version of Chairman Ryan’s original plan—including block granting Medicaid funds—was again adopted by the House as part of its FY 2013 budget blueprint. The resolution called for slicing $5 trillion from federal spending over a 10-year period.33 The budget resolution also included instructions to six House committees to develop legislative proposals to implement the plan, including the committees with jurisdiction over Medicaid. But, given strong opposition in the Senate and threats of a Presidential veto, no action was taken on the House-passed budget plan prior to the November 2012 Presidential and Congressional elections.
Key Features of the House-Passed Budget Plan
Under the provisions of the House-approved budget resolution (H. Con. Res. 112), the existing Medicaid program would be replaced by a block grant authority under which each state would receive a fixed sum of federal dollars beginning in FY 2014. In addition, the ACA 34 would be repealed and, consequently, the planned expansion of Medicaid benefits to individuals and families with income under 138 percent of the poverty level would not occur. Future Medicaid funding allocations would be tied to the amount of federal aid each state received in FY 2011, adjusted for inflation and population growth during the intervening years.35
A state’s allocation in subsequent years would be based on the amount it received during the prior year, also adjusted for inflation and population growth. In addition, states would be given expanded latitude in establishing eligibility and coverage standards for their program, with the precise dimensions of state flexibility to be spelled out during the legislative process.36,37
Assessment of Fiscal Impact
Because the level of funding under the House Budget Committee’s block grant plan would not keep pace with the expected growth in health care costs and the influx of new Medicaid beneficiaries—especially the anticipated growth in high-cost older recipients—federal funding would fall further and further behind actual program costs with each passing year. According to one analysis based on CBO projections, total federal Medicaid funding between 2013 and 2022 would be $1.7 billion, or 38 percent, below the projected level under current law.38
Of the total, $932 billion would be attributed to the ACA repeal (assuming that all states otherwise would implement the planned Medicaid expansion) and $810 billion would be due to the block grant funding cap.39
Federal funding losses would vary from state to state, with states currently offering broad coverage and having lower federal matching ratios experiencing smaller reductions than states with narrower programs and higher federal matching ratios. Federal allocations to states such as Arizona, Florida, Georgia, and Texas could be sliced by 45 percent or more over the 10-year period, and nine other states could experience reductions of 40 percent or more. Even states with broad Medicaid coverage and low matching rates would experience federal aid reductions in excess of 30 percent.40
Faced with sharp reductions in federal assistance, few viable options would be available to states since they generally have held Medicaid per capita expenditures and administrative costs below those of private health insurers. Between 2000 and 2009, overall Medicaid spending increased by 4.6 percent, with acute care spending increasing by 5.6 percent per enrollee and long-term care spending increasing by 3.0 percent per enrollee. Medicaid expenditures per enrollee were slightly above the medical care consumer price index (CPI) and the GDP increase during the period, but they were considerably below the growth rate of national health expenditures as well as the growth rate of employer-sponsored health insurance premiums.41
To understand the effects of a block grant on Medicaid enrollment and benefits, researchers at the Urban Institute (UI) examined two possible approaches that a state might adopt in response to a Medicaid block grant.42
In the first scenario, the team assumed that the growth in per capita spending would follow the CBO’s existing projections over a 10-year period (an average annual growth rate of 5.7%, or the projected increase in GDP + 1.6%). On a nationwide basis, they concluded, Medicaid enrollment would decline by 20.5 million, or 35 percent under this scenario. When the loss of enrollment associated with an ACA repeal was included, total Medicaid enrollment would drop by 37.5 million, or by 50 percent compared with current law assumptions. Under the second scenario, the research team assumed that states would reduce the growth in per-person expenditures (thus mitigating the need for enrollment cuts) and apply these reductions proportionally across all eligibility groups to accommodate the loss of federal aid. Medicaid enrollments would decline under this scenario by 14.3 million, or 25 percent, by 2022. When the effects of ACA repeal are added, enrollment would decline by 31.3 million over the 10-year period, or by 42 percent.43
The UI research team also estimated the increase in state expenditures that would be required to avoid enrollment reductions. If per-enrollee expenditures were to increase at the current projected rate through FY 2022, the team concluded that states collectively would have to increase their baseline share of Medicaid expenditures by $273 billion over the 10-year period to preserve program participation and benefit levels. This would represent a 77 percent increase in the states’ share of Medicaid costs by 2022. If states were able to hold per person Medicaid spending to the rate of GDP growth (instead of GDP + 1.6%), the states’ share of increased program outlays would grow by $165.2 billion over the 10-year period. This would still represent a 46 percent increase in state Medicaid outlays compared with current law projections.44
Based on its analysis, the UI research team concluded that the ACA repeal in combination with spending reductions associated with a Medicaid block grant “… would almost certainly worsen the problem of the uninsured and strain the nation’s safety net. Medicaid’s ability to continue [its] many roles in the health care system,” they added, “would be significantly compromised under the [House block grant] proposal, with no obvious alternative to take its place.” 45 The CBO reached similar conclusions after assessing the likely impacts of the House Budget Committee’s proposal. "States would have additional flexibility to design and manage their Medicaid programs and might achieve greater efficiencies in the delivery of care than they do under current law," the CBO noted, "[but] the large projected reduction in federal payments would probably require states to reduce payments to providers, curtail eligibility for Medicaid, provide less extensive coverage to beneficiaries, or pay more themselves than would be the case under current law."46
Alternative to a Block Grant
Instead of converting Medicaid into a block grant authority, some policymakers have suggested that a “per capita cap” be imposed on future federal Medicaid funding.47 Under this approach, federal assistance to each participating state would be limited to a fixed dollar amount determined by multiplying a per capita allowance times the number of eligible program beneficiaries. Typically, per capita cap proposals would limit federal financial participation on a state-specific basis, taking into account historical data on the state’s per beneficiary expenditures. Some proposals would establish a single, aggregate cap applicable to all program beneficiaries, while others would set separate caps for defined groups of beneficiaries such as children, seniors, nondisabled adults, and adults with disabilities. Most propose that the cap be adjusted annually to account for inflation using the same percentage adjustment factor in all states.
Like block grants, per capita cap proposals typically include provisions aimed at granting states wider latitude in designing and operating their Medicaid programs, such as allowing them to override statutory requirements governing benefits, premiums, and cost sharing. Unlike block grant plans, per capita cap proposals may preserve some existing Medicaid eligibility requirements, including an individual entitlement to services. If so, all people who meet state and federal eligibility requirements have a right to enroll in the program, and caseloads are likely to rise during recessionary periods. On the other hand, per capita cap proposals, like block grant plans, may allow states to restrict enrollment or eliminate the eligibility of selected groups of recipients that federal law now requires them to cover.
Although a great deal depends on the design features of the particular proposal, a recent Center on Budget and Policy Priorities analysis pointed out that per capita cap proposals share many of the same limitations as block grant plans. First, the gap between the cap on federal financial participation and actual state Medicaid expenditures is likely to widen over time. The primary aim of imposing a per capita cap is to achieve significant federal savings. This objective is usually accomplished by allowing the federal per-beneficiary cap to grow at a slower pace than the anticipated growth in per capita expenditures. Consequently, a state is forced to make up the difference with its own dollars if it is unable to achieve offsetting cost reductions—a challenging proposition given Medicaid’s low administrative costs and the reduction in provider payments and benefits that have occurred in many state programs over the past four years.48
Second, given present demographic trends, the proportion of older Medicaid recipients or those who have physical, psychiatric, or developmental disabilities will increase over the next two decades. Per capita expenditures on behalf of seniors and people with disabilities are at least five times higher than per capita expenditures on behalf of children and nondisabled adults.49 A per capita cap based on historical expenditure data will tend to understate the real costs of serving the growing number of aging Baby Boomers and people with disabilities. Consequently, a larger and larger share of total program costs is likely to be shifted to the states and possibly to beneficiaries in the form of higher cost-sharing requirements.50
Third, a federal per capita payment cap would not take into account unanticipated increases in program costs due to breakthrough advances in technology, the availability of new and costly medications, or unanticipated epidemics. The increased costs of the human immunodeficiency virus/acquired immune deficiency syndrome (HIV/AIDS) epidemic of the 1980s and early 1990s and the spike in medication expenditures during the late 1990s and early 2000s are just two examples of how Medicaid outlays have been strongly influenced in the past by unanticipated medical costs. There no reason to believe that similar developments will not impact future program costs.51
Fourth, a uniform methodology for establishing federal per capita payment caps would disadvantage some states more than others. States with comparatively low Medicaid spending per beneficiary would receive less initial federal funding and, thus, would have to finance any subsequent improvements in their Medicaid programs out of state general revenue. Moreover, a per capita cap based on historical spending would tend to lock in harsh spending reductions states have had to resort to during the current recession, and disadvantage states that experience a higher than average growth in per-beneficiary costs since future adjustments in a state’s cap would be applied uniformly across all participating states. In the past, such variations have occurred because of differences in expenditure growth rates for various health care services and utilization levels, as well as differences across states in the rate of change in the organization and delivery of health care and long-term supports.52
Finally, in all probability a per capita cap designed to produce savings would require states to bear a larger share—potentially a much larger share—of the costs of expanding Medicaid eligibility, as called for under the ACA. States, therefore, would be more likely to choose not to enroll newly eligible beneficiaries in their programs—an option afforded them under the U.S. Supreme Court’s June 28, 2012, ruling in National Federation of Independent Business v. Sebelius.53