Medicaid Block Grants and the Prospective Effects on States

In the last edition of The Capital Issuewe detailed Medicaid spending trends and explored how recent block grant proposals would affect health care providers. In this issue, we examine the effects of block granting on states in general while also providing a detailed analysis focused on three specific states—Illinois, Michigan and Ohio.

There is no doubt that block grants would radically change Medicaid and its reimbursement structure while also changing industry dynamics for health care providers. Medicaid currently accounts for approximately 17% of national health care expenditures and approximately 75 million Americans are covered under Medicaid, almost a quarter of the U.S. population. Almost two out of three people in nursing homes pay for their care using Medicaid, and hospitals and clinics regularly treat large volumes of Medicaid patients. Current block grant proposals hope to achieve nearly $1 trillion of federal Medicaid spending cuts over the next decade, which would inevitably impact elderly benefits and the operations of Medicaid-reliant hospitals. Block grants would force health care providers to rethink budgets, service offerings, and staffing decisions, as cutting provider payment rates is usually the first option that states use to achieve short term Medicaid savings.

States would effectively have the following options to compensate for the funding gap created by block grants: increase the total state budget, devote a larger portion of the budget to Medicaid, decrease the dollars spent per enrollee, reduce the number of Medicaid enrollees by changing eligibility requirements, or a combination thereof.

In theory, some states would be in a better position to deal with this funding gap than others. States with a stronger credit profile would be better suited to increase total state spending. In addition, states that currently accept a smaller percentage of Medicaid spending from the federal government are in a better position to deal with a decline in federal funding. States with above average spending per enrollee could also afford to lower spending without drastically reducing the level of care for patients and without materially impacting the profitability of providers. Based on these considerations, it is possible to compare states based on their projected preparedness for the negative effects of block grants on Medicaid funding. Take, for example, Illinois, Michigan and Ohio. These states feature similar demographics, population, and industry makeups and are all located in the Midwest. Furthermore, all three states accepted Medicaid expansion. However, the current position of each state’s budget and Medicaid program paints a drastically different picture for the future of patient care and provider sustainability.

Case Studies: Illinois, Michigan and Ohio

For the following case studies, we rely on credit ratings as a proxy for each state’s financial strength. The percentage of total Medicaid funding coming from the federal government is taken as an indication of each state’s reliance on federal Medicaid dollars. Lastly, Medicaid spending per enrollee is compared against national figures to quantify each state’s capacity to rein in spending without risking potential decreases in quality care and substantial weakening of provider investment incentives. Credit ratings are per Standard and Poor’s (S&P), while spending data is based on State Expenditure Reports from the National Association of State Budget Officers.

Overall, Ohio’s Medicaid program seems most prepared to deal with a decline in federal funding as a result of block grants. Ohio maintains a strong credit profile, above average Medicaid spending rates per enrollee, and funds over 75% of its current Medicaid program with state dollars. This suggests that a decline in federal funding may not have an extreme impact on patient care and provider reimbursements within the state.

Illinois has the worst credit rating of the three states, which serves as an indication of the state’s inability to increase state spending or reallocate state funding to counteract the effects of declining federal Medicaid dollars. While the percentage of Illinois’ Medicaid program that is funded by federal dollars is in line with the national average, Illinois is already spending significantly less per Medicaid enrollee than its peers. This suggests that any further cuts to Medicaid funding within the state may have detrimental effects on care quality and create an even more difficult environment for Medicaid-heavy providers that are already under significant reimbursement pressure.

Michigan falls somewhere in between Ohio and Illinois in terms of preparedness for a decline in federal Medicaid funding. Michigan has a strong credit profile, but accepts the largest percentage of Medicaid dollars from the federal government. However, the state’s current spending per enrollee is close to national averages. This suggests that there is room to cut spending within the state, to some extent, without potentially sacrificing care quality or provider investment incentives.

Takeaways

Examining the current Medicaid spending pictures in Illinois, Michigan and Ohio brings a number of takeaways to the forefront. First, a state’s financial stability could potentially play a key role in determining whether it is able to devote the necessary funds to its Medicaid program. In addition, a state’s current reliance on federal Medicaid dollars may serve as an indication of the state’s vulnerability to a cut in federal Medicaid spending. These factors may also have a direct effect on a state’s Medicaid spending per enrollee and whether there is room to tighten Medicaid spending in the event of block granting without putting an undue burden on patients and providers.

All state Medicaid programs will likely suffer as a result of Medicaid block grants. However, certain states have Medicaid programs that seem less prepared to deal with a decrease in Medicaid funding than others. States with a history of financial stability and devotion to Medicaid spending are likely more equipped to maintain care quality and provider profitability under a block grant system.

A state’s current Medicaid spending per enrollee is one potential factor that may affect care quality and investment incentives for providers in the event of block granting. States that spend more than the national average per enrollee are likely more prepared to decrease reimbursements without endangering patient outcomes and reducing investment incentives for providers. States on the low end of the spending per enrollee spectrum have less room for further spending cuts. In these states, cuts to federal Medicaid spending could potentially endanger patient outcomes and further reduce the operating margins of providers.

A state’s financial position may also play a role in its ability to combat a decrease in federal Medicaid funding. States with a stronger financial profile would presumably be more prepared to grow budgets or re-route funds to accommodate declining federal Medicaid contributions. On the contrary, states with weak financial profiles would likely find this process more challenging.

Decreased federal Medicaid funding would also put tremendous political pressure on leaders in less prepared states. Politicians in these states would essentially have to choose between reducing spending per enrollee or tightening Medicaid eligibility requirements. In addition, politicians and administrators in these states will be forced to make difficult decisions regarding which populations receive funds if Medicaid budgets tighten. For instance, states will have to determine how to route Medicaid funding towards children, mothers, seniors, etc. Political pressure will be especially strong in swing states, where elections can be won or lost on major issues and plans for major government programs.

Although the future of current block grant proposals is certainly unclear, there is no doubt that if any form of block granting is ever enacted, there will be serious challenges in store for both health care providers and state legislators.

About The Authors

Steven W. Kennedy Jr.
Senior Managing Director
65 East State Street
16th Floor
Columbus, OH 43215
(614) 224-8800

Steven W. Kennedy Jr.

Senior Managing Director

Steven W. Kennedy Jr. is Senior Managing Director and a member of the Executive Committee, Strategy Committee and Operations Committee at Lancaster Pollard.

Steve is regional manager for the central United States, overseeing banking production of the firm’s Columbus headquarters, as well as its regional offices in Chicago, Austin, Kansas City and Minneapolis. He also manages the firm’s relationships with Washington DC as the company’s senior governmental liaison. Since joining Lancaster Pollard in 2001, he has closed a variety of financing structures totaling over $2.5 billion. Steve has been named the firm’s Top Health Care Banker multiple times and structured and underwrote the firm’s “Deal of the Year” in 2010, 2013 and 2016.

Steve earned his MBA from the Fisher College of Business at The Ohio State University in Columbus, Ohio. He received a bachelor’s degree (magna cum laude) in economics and political science as well as a certificate in organizational studies from Denison University.

Bradley Granger
Vice President

Bradley Granger

Vice President

Bradley Granger is a vice president, operational and clinical underwriting with Lancaster Pollard, a financial services firm based in Columbus, Ohio, that specializes in providing capital funding to the senior living and health care sectors. In addition to underwriting tax-exempt and taxable bond offerings, Lancaster Pollard provides organizations a complete range of funding options through its Fannie Mae/FHA/GNMA/ USDA-approved mortgage lender subsidiary. It can also provide bridge-to-agency lending, private equity, balance sheet lending and investing, and M&A services.

The Clinical Risk Group significantly enhances Lancaster Pollard’s ability to analyze and assess risk factors in senior care facilities and to pass that knowledge on to our clients. Brad also assists clients in developing business opportunities relating to improving managed care relationships, hospital referral patterns and reimbursement enhancement.

The expertise and perspective of the Clinical Risk Group enables Lancaster Pollard to create best-in-class credit narratives and offering memoranda which demonstrate and convey the most thorough understanding of seniors housing and care in the industry. Our clients benefit from more efficient review processes that lead to better outcomes, whether the objective is closing a loan or preparing to acquire or divest an asset.

Post-closing, the Clinical Risk Group works collaboratively with our clients who have obtained debt to proactively address operational benchmarks identified as key success factors. The group continuously monitors various operational characteristics of the facilities in our portfolio, developing benchmarks that identify opportunities for improvement.

Prior to joining Lancaster Pollard, Mr. Granger worked for Ultra Risk Advisors as a vice president and underwriting manager for the long-term care professional liability program. His past experience also includes American Safety Insurance, PointRight Analytics, Inc., Trilogy Health Services and HCR Manor Care, where he was a regional director of operations for nine facilities.

Mr. Granger is a licensed nursing home administrator and licensed property and casualty (P&C) insurance broker. He holds a BSBA in finance from The Ohio State University and an MBA from Franklin University.

Kelly Parnell
Associate

Kelly Parnell

Associate

Kelly Parnell is an Associate with Lancaster Pollard in Columbus. Previously, she worked in middle market mergers and acquisitions and health care. She earned a Bachelor’s degree in Business Economics from Miami University and a Master of Finance from The Ohio State University. She holds a Series 79 and Series 52 licensure. As a member of the analytical team, Kelly is responsible for financial modeling, valuation, credit analysis, and project management throughout the funding approval and the closing process for FHA senior living construction projects.

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