New Federal Medicaid Proposals Could Provide Texas Over $3.5 Billion

UPDATE (March 19, 2021)

We previously analyzed the potential impact of language under consideration by Congress.  As that language has been finalized and signed into law, we have learned more details about the potential financial impact to Texas.  Accordingly, we are updating our estimates as follows:

We previously had estimated that the impact to state general revenue would be $3 Billion over a two-year period.  We are now increasing that to $3.5 Billion over the two-year period.  At issue is the 5% increase in the base FMAP – additional clarity surrounding which programs would be eligible for the 5% increase.  Our previous estimate only included programs we were sure would be eligible.  This updated estimate takes a different approach, only excluding programs we are sure would be excluded.  Those programs include all expenditures receiving EFMAP (sometimes referred to as “CHIP FMAP”, including the Medicaid for Breast and Cervical Cancer), all programs receiving 100% FMAP, all programs paid for 100% by the state, administrative costs, and the costs that would be transferred to the new 90% FMAP program as a result of the eligibility changes.

Additionally, we now have greater certainty that the 5% increase would also apply to supplemental funding streams, such as Uncompensated Care and CHIRP.  The impact of the increase to these funding streams would accrue to local funding sources, and not to state general revenue.  Unfortunately, it is difficult to project what the impact would be, because it is incredibly difficult to project what the baseline amounts of these funding streams will be.  These funding streams currently total about $11.0 Billion annually, and may reach as much as $11.5 Billion post-extension of the 1115 Waiver that supports funding.  A simple calculation would suggest that a 5% impact would provide about $1.15 Billion over two years.  However, this method is not reliable to project the impact in the future.  The reasons for this uncertainty are as follows:

• Re-Basing – While these funding streams were extended by the recent 1115 Waiver extension, they are also set to be “re-based” in 2023. Re-basing is a process that occurs in Waiver programs periodically to ensure that federal budget neutrality is met.  We do not know what the result of this re-basing will have on the amounts of these funding streams.
• Uncompensated Care – Any state that increases the number of people with insurance will see an impact to the pool of funding to help mitigate effects of uncompensated care (care that hospitals are required to provide to individuals regardless of their ability to pay). Other states that have expanded Medicaid have seen uncompensated care costs drop by an average of 45%.  However, the impact to Texas is uncertain because of Texas’ unique demographics.
• Negotiation Process – This is the biggest unknown. If Texas increases eligibility through a unique “Texas Plan” process, this would require an additional 1115 Waiver.  These Waivers are enacted through a complex series of negotiations between the state and the federal government.  It is possible that the federal government would require, as a condition of any waiver approval, revisiting the amounts of money provided in the 1115 Waiver that was recently extended, particularly for the Uncompensated Care component, especially as that Waiver extension was approved at the last minute by the Trump administration.  There is no way to reliably project the results of such a political negotiation process.   Further, any shift in the eligibility and coverage dynamics may change the programs funded under a waiver – as some increase in importance/need and others decrease based on the changed healthcare access landscape.

[March 2, 2021] If new Medicaid proposals being considered by Congress pass as currently drafted, the State of Texas could gain an additional $3 billion in federal dollars if we  made Medicaid available to most Texas adults who make up to 138% of the federal poverty level ($17,774 annual income for an individual or $36,570 for a family of four).

Last month, Texas 2036 launched the Health Coverage Policy Explorer, a new online tool that allows Texans to explore the costs and benefits of more than 500 possible policy scenarios that Texas legislators could adopt to make health insurance available to more Texans who do not have it today.

The Explorer models the impact on Texas without this newly proposed federal incentive. Currently, the tool models two options that would qualify for this extra “sweetener”:

1. By expanding the existing Medicaid program, the tool estimates that by 2025, 723,000 out of nearly 5 million Texans who lack health insurance today would be enrolled at a net state cost of $1.3 million per year;
2. By improving the Medicaid program to include greater personal responsibility components (like co-pays, premiums, healthy behavior incentives, and work requirements) and increasing eligibility thresholds, the tool estimates that by 2025, 647,000 Texans would gain coverage, with an annual net savings to the state of about $28 million.

The new state incentive Texas 2036 has analyzed is based on the U.S. House Committee on Energy and Commerce’s draft language for the COVID-19 Relief Budget Reconciliation Legislation that was released on Tuesday, Feb. 9.  Notably, the Medicaid portions included a large financial incentive for states that have not yet increased Medicaid eligibility thresholds – which include Texas and 11 other states — to do so.

State Medicaid programs are funded through a mix of Federal and State money.  The Federal share is determined by a formula, and that amount is known as the “FMAP” (Federal Medical Assistance Percentage).  The new incentive works by temporarily increasing the “FMAP” for two years.

In Texas, the base FMAP is 61.81%, meaning that the Federal government pays 61.81% of most expenditures made by the Medicaid program. Today, Texas makes the state’s Medicaid program available to parents who are at or below 14% of the Federal Poverty Level, which translates to a family of four earning no more than $3,500 per year to qualify. Unless disabled or over the age of 65, childless adults are ineligible for Medicaid today.

Existing federal law provides that if a state provides Medicaid eligibility to able-bodied adults earning less than 138% of the Federal Poverty Level, the Federal government will pay for 90% of the cost of that program.  38 states and the District of Columbia have chosen to do so.

If this legislation passes as written and Texas legislators agree to increase income eligibility thresholds for Medicaid to 138% of the Federal Poverty Level, not only would the Federal Government agree to pay 90% of the cost of doing so (into perpetuity), but they would also agree to increase the amount they pay for (most of) the existing Medicaid program by 5% for two years.

If Texas were to develop a coverage program that included the qualifying eligibility standards discussed above (incomes at or below 138% of Federal Poverty Level), the Federal Government would send an additional estimated $3 Billion dollars to Texas over the following two years.

Unlike other Federal funding initiatives, because this would be supplanting spending the state was planning on doing anyway, this would free up $3 billion in state general revenue for Texas to spend how it pleases.  The additional federal payments start flowing once the increased eligibility thresholds have been implemented.  One option for Texas to qualify is to negotiate a Waiver with the Federal government to implement an improved Medicaid program with increased eligibility thresholds.  If Texas were able to successfully negotiate that waiver during the upcoming legislative interim, those federal funds could become available for the next budget biennium as existing federal stimulus begins to phase out.

The January 12-18 Texas Voter Poll conducted by Baselice & Associates for Texas 2036 shows that if legislators made the decision to make Medicaid available to Texans earning 138% of the Federal Poverty Level, 64% of voters support that income eligibility standard. Three out of every four Texas voters think eligibility thresholds should be higher than they are today.

You can explore the Health Coverage Policy Explorer here.