This month, the Republican Party opted not to present its most recent healthcare bill, the Graham-Cassidy Bill, to the US Senate, once again halting its efforts to repeal the Affordable Care Act (ACA). As the latest attempt of many to replace the ACA, the Graham-Cassidy Bill has been highly controversial. Among the most debated measures in the bill is a provision for changing the federal government’s funding scheme for Medicaid programs.

Under the current US healthcare system, the following are currently in effect:

  1. Federal funding for Medicaid is distributed on an open-ended entitlement basis, with state and federal funding combining to cover the costs of Medicaid.
  2. The ratio of federal to state funding varies by state, with poorer states contributing less to the overall cost.
  3. There are no limits placed on the level of federal funding; it is entirely dependent on the funding needs of each state.
  4. States are able to decide whether to expand their Medicaid services or keep them at the federal minimum. The expanded Medicaid covers a wide number of circumstances, including the coverage of a larger number of poor individuals. As of September 2017, a total of 32 states (including Washington, DC) have either expanded their Medicaid access or are in the process of doing so. The funding for these expansion-covered patients is almost entirely covered by the federal government until 2020. Following 2020, the federal coverage will fall to 90% of the total cost, with the possibility of further reductions in the future. Medicaid expansion has led to higher overall federal spending due to increased funding obligations in expanded Medicaid states.

Changes to the federal funding of Medicaid proposed by the Graham-Cassidy Bill are designed to restrict the potential for increases in federal spending on Medicaid. One strategy put forth by the bill is a per-capita cap on funding, meaning that states would receive a set amount of funding per Medicaid-eligible individual. The per-capita funding would initially increase at a rate higher than the healthcare inflation rate, but would start to reduce in 2025. The bill also allows for states to switch from the per-capita funding arrangement to a block-funding scenario, where each state receives a set amount of funding each year, regardless of Medicaid enrollment numbers; however, in this scenario, the rate of growth is limited from its inception rather than beginning to reduce in 2025.

Another aspect of the block-funding scenario would be the method of distribution of the federal funds set aside for Medicaid every year. Currently, states that offer expanded Medicaid coverage enjoy a more generous federal funding match. Under the Graham-Cassidy Bill, this federal funding match would be phased out, and some of the resulting savings would be redistributed to states that have chosen not to offer expanded Medicaid programs. The result of this would be severe budget shortfalls for states that have offered expanded Medicaid coverage by lowering the requirements for entry into the program. States facing funding shortfalls would have to make decisions whether to find alternative funding for expanded Medicaid services, or roll back to provide only the federal minimum Medicaid coverage.

Based on the assumption that a number of states would be unable to continue to offer their current level of Medicaid coverage, a number of inferences for the US pharmaceutical market can be made. A reduction in pharmaceutical use among the population that will be newly uninsured is likely, as these would largely be low-income individuals without other means of payment. Reductions in spending on chronic or non-life-threatening diseases are expected to be among the highest to come from the bill, as these areas are some of the largest beneficiaries of the expanded Medicaid coverage.

With the expiry of special circumstances associated with the Budget reconciliation instruction that allow a bill to be passed with a simple senate majority (51 votes) rather than the 60 votes normally needed, the efforts to repeal the ACA will likely cease in the short term. The Republican Party can pass new budget-passing measures to reintroduce these arrangements, but with the current administration’s current focus on tax reform, GlobalData believes this to be unlikely in the short to medium term. The ACA and its associated federal funding will continue to be utilised until the Republican Party can settle its internal differences and agree on a bill that appeals to enough Senators to pass.