Medicaid and Block Grants: Lessons from Temporary Assistance to Needy Families

By and ·February 24, 2017
UC Davis Department of Economics and Center for Poverty Research

The Issue:

Republican budget plans and President Trump’s campaign pledges have proposed converting Medicaid to a block grant. This type of transformation in the way a safety net program is financed between the Federal Government and the states has been done before. The 1996 welfare reform replaced the Aid to Families with Dependent Children entitlement program with a federal block grant: the Temporary Assistance to Needy Families. A look at this assistance program two decades after the change raises some of the issues that may emerge from shifting Medicaid to a block grant.

Block grants are often promoted as controlling costs and providing states with enhanced flexibility.

The Facts:

  • As an entitlement program, Medicaid serves all who are eligible. Total federal spending depends on eligibility rules, benefit costs, the number of eligible individuals, and their medical needs. As a block grant, federal legislation would set total federal spending on Medicaid in the current or future years, and states would determine how and on whom those dollars were spent, likely within some federal requirements. Block grants are often promoted as controlling costs and providing states with enhanced flexibility.
  • Prior to the passage of welfare reform, Aid to Families with Dependent Children was an entitlement program with a similar funding and eligibility determination structure to current day Medicaid. Spending grew to meet changes in the eligible population. The program— in place since 1935 as part of the New Deal — provided financial assistance to all children whose families met stated low-income thresholds, asset thresholds, and categorical eligibility rules. Growing costs and an increasing concern that the subsidies provided by the program reduced incentives to find paid work fueled reform efforts. In 1996, the program was replaced by Temporary Assistance to Needy Families (TANF), which gives states an annual lump sum to be administered through programs designed by each state if they also commit a certain amount of state funding.
  • In the 20 years since the conversion to a block granted program, federal spending on Temporary Assistance to Needy Families has remained fixed in nominal terms at $16.5 billion, for a reduction in real, inflation adjusted federal spending of 30 percent. This reduction in spending has been accommodated through a mix of reduced real benefit levels, redirection of spending to different purposes, and reduced caseloads. The number of families receiving cash assistance from TANF has fallen by more than half since 1996. At the same time, maximum benefit levels fell by an average of 26 percent in real terms between 1996 and 2013.
  • Converting to a block grant has also coincided with changes in the mix of spending under the program. The share of federal and state TANF spending on cash assistance for basic needs dropped from 72 percent in 1997 to 32.9 percent in 2012, according to the research of James P. Ziliak. Currently, an important portion of spending goes to childcare (10.5 percent in 2013), work related activities (6.4 percent in 2013), state Earned Income Tax Credits (5.8 percent), and prevention of out of wedlock pregnancies (8.2 percent). This shift in spending occurred despite extensive maintenance of effort requirements that were part of the 1996 legislation, intended to prevent a “race to the bottom” in which states reduced assistance to needy populations.
  • What lessons can be derived for Medicaid and who is likely to be impacted? Currently, Medicaid offers assistance to very vulnerable populations. The program provides medical coverage for the needy, medically needy, disabled and elderly. While more than 40 percent of Medicaid recipients are poor children (27.5 million in 2014), disabled adults and the elderly account for the majority of Medicaid spending, because of their greater medical needs: In 2014, Medicaid spending per enrolled child was $3141, while per capita spending on elderly recipients was more than $15,000 and on disabled recipients was more than $18,000.
  • Additional groups became eligible for Medicaid coverage as part of the Affordable Care Act. Federal law now requires that state Medicaid programs cover certain groups of children and adults with incomes less than 133 percent of the federal poverty line. The Affordable Care Act provided additional federal funding for several years for states that expanded Medicaid coverage to low income adults and older children. Not all states have done so due to a Supreme Court ruling making the ACA Medicaid expansions optional for states.
  • States currently have flexibility to set certain Medicaid benefits and rules. For example, states can use Medicaid funds to provide premium assistance to help individuals purchase private insurance, and can offer “alternative benefit plans” to certain populations.
  • State Medicaid spending on required benefits qualifies for federal matching funds.  This means that, for every dollar states spend on Medicaid, the federal government also agrees to pay an amount, which depends on poverty in the state and other facts.  This ranges from an even split, where the federal government pays a dollar for every state dollar to some types of spending where the Federal government pays the entire amount and the state nothing. By contrast, under a block grant, states would get no matching for an additional dollar spent on the program.

What this Means:

Replacing Medicaid with block grants could reduce future Medicaid spending or substantially slow down its growth. This would likely occur, however, primarily through reductions in the number of individuals receiving health care under Medicaid or in the amount of medical coverage they receive. States currently have flexibility in the populations covered and services they offer under Medicaid, making efficiency arguments in favor of block grants less compelling. Recent experience with Temporary Assistance to Needy Families shows that moving from an entitlement to block grant can reduce total spending, but can also dramatically reduce the number of individuals served and the inflation adjusted level of benefits received, and change the income level at which benefits are targeted. Given the current distribution of Medicaid costs and spending, substantial costs savings would likely require reductions in the number of elderly and disabled receiving health care. Because these populations would likely receive medical care somewhere, costs of care or pressures on other parts of the health system could increase. The Affordable Care Act has already reduced funding to hospitals traditionally providing care to large numbers of uninsured patients. Additional demand from former Medicaid populations would likely stress certain hospital systems. Finally, elimination of Medicaid matching provisions could result in reduced spending by states.


Medicaid / Poverty / Public Health / Safety Net / Social Safety Net
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