Congress and the new Administration are considering substantial changes to Medicaid that include replacing the current federal financing mechanism with per capita caps, which would establish per enrollee limits on federal payments to states and give states responsibility for financing spending above the fixed per capita payments. Although national per capita caps represent a major departure from current law—under which states receive federal matching funds towards allowable state expenses on an open-ended basis—some advocates for per capita caps have noted similarities between this new financing approach and two existing Medicaid practices, managed care rate setting and budget neutrality for Section 1115 demonstrations.
This issue brief explores the extent to which rate setting and the process for establishing budget neutrality limits are useful analogues in considering how per capita caps might work at the national level. It includes a review of the elements of rate setting and budget neutrality for 1115 waivers, the technical requirements and challenges in operationalizing these methods and the policy considerations they raise, particularly as they might be applied at the national level. The discussion considers why mechanisms developed to address the challenges in constructing valid state-level per capita payments do not necessarily translate to a national per capita model.