- Issue: Some federal and state policymakers support converting Medicaid into a block grant or “per capita cap” program.
- Goals: Examine how Puerto Rico’s long-standing experience operating under a Medicaid block grant may predict how states would fare under block grants and per capita caps that limit federal funding.
- Methods: Review of available data sources, policy analysis, and research related to Puerto Rico’s Medicaid program.
- Key Findings and Conclusion: Puerto Rico’s block grant funding led to large federal Medicaid funding shortfalls, which contributed to the commonwealth’s fiscal and debt crisis. Puerto Rico’s Medicaid program is already far less comprehensive than state Medicaid programs, with certain groups and benefits uncovered. Temporary federal Medicaid funding increases during the past decade sustained Puerto Rico’s existing program but led to only modest improvements in coverage and access. Puerto Rico’s experience suggests that capped federal Medicaid funding could shift significant costs to states and result in cuts to eligibility, benefits, and provider payments. One policy option that could facilitate substantial improvements to Puerto Rico’s Medicaid program would involve replacing Puerto Rico’s block grant with uncapped funding.
In 2017, the Trump administration and congressional Republicans proposed converting Medicaid into a block grant or a “per capita cap” program. Under either option, federal funding would be capped, irrespective of states’ actual costs, with states receiving a fixed amount of funding for their Medicaid programs (see box). Although that effort has been unsuccessful in Congress, the Trump administration has continued to support block grants and per capita caps as part of its annual budgets.1 In addition, in early 2020, the Trump administration issued guidance encouraging states to apply for Medicaid waivers that impose funding caps. One state, Oklahoma, has applied for such a waiver (though it subsequently withdrew its application) and another state, Tennessee, is seeking a block grant waiver outside of the guidance.2
Before such fundamental, structural financing changes are pursued, it is worth considering the case of Puerto Rico, which provides a real-life example of how states would likely fare under Medicaid block grants or per capita caps. Unlike the states and the District of Columbia, federal Medicaid funding for Puerto Rico and the other territories — American Samoa, Guam, the Northern Marianas Islands, and the U.S. Virgin Islands — is provided through a block grant.
How Medicaid Block Grants and Per Capita Caps Work
Under the existing federal–state financial partnership, the federal government pays a fixed percentage of states’ Medicaid costs, whatever those costs are. If state Medicaid costs rise because of increased enrollment or higher per-beneficiary costs, the federal government shares in those higher costs. Conversely, if state Medicaid costs fall, the federal government shares in those savings. This flexible financing structure ensures that federal Medicaid funding is responsive to state needs.
In contrast, a financing structure using block grants or per capita caps limits federal funding, irrespective of states’ actual costs. Under a block grant, states would receive a fixed amount of overall federal funding for their Medicaid programs. Under a per capita cap, states would receive a fixed amount of federal Medicaid funding for each beneficiary. Under either mechanism, states would be responsible for 100 percent of all Medicaid costs in excess of the funding cap.
Medicaid block grants and per capita caps are intended to produce federal savings by reducing how much the federal government spends on Medicaid, relative to current law. This is typically achieved by annually adjusting the capped funding amounts at a rate that does not keep pace with states’ Medicaid costs. This means that the federal funding cuts tend to grow much larger over time.
These cuts are even greater if Medicaid costs rise faster than anticipated because of unforeseen events such as economic downturns, pandemics and other public health emergencies, natural disasters, or expensive new drugs or treatments. Under capped funding, states are at full risk for these higher costs. No additional federal Medicaid funding would be automatically provided to states, which would exacerbate the effect of the Medicaid funding cuts they would face under a block grant or per capita cap.
Puerto Rico’s Block Grant Financing Leads to Large Federal Medicaid Funding Shortfalls
Puerto Rico’s only permanent federal Medicaid funding is through its annual block grant, which provides federal funding well below the levels that Puerto Rico needs. For example, from 2012 to 2019, the annual block grant financed, on average, only 15 percent of Puerto Rico’s total Medicaid spending (Exhibit 1), even though Puerto Rico’s federal matching rate (known as the Federal Medical Assistance Percentage, or FMAP) is 55 percent.3 This is because of two factors: Puerto Rico’s initial block grant amounts were set at arbitrary, low levels unrelated to Puerto Rico’s actual spending needs, and the block grant is annually adjusted at a rate that fails to keep pace with Puerto Rico’s Medicaid costs.4
Unlike the states, Puerto Rico does not automatically receive additional federal Medicaid funding when costs rise faster than expected. In recent years, Medicaid costs have increased in Puerto Rico because of economic downturns, public health emergencies like the Zika outbreak and the COVID-19 pandemic, and natural disasters like Hurricane Maria and earthquakes.
In addition, Puerto Rico’s FMAP is set low compared to state levels. If Puerto Rico’s FMAP was determined through the same formula used to calculate the FMAP for states (based on per capita income relative to national per capita income), it would equal 83 percent, the statutory maximum, not 55 percent (Exhibit 2).5 In other words, even if Puerto Rico did not receive its Medicaid funding through a block grant, the federal government would still pick up a much lower share of Medicaid costs — 55 percent — than it would if Puerto Rico were fully treated as a state (an 83% FMAP and uncapped funding).6
Puerto Rico’s low block grant funding levels and reduced FMAP have necessitated greater contributions by the commonwealth government to sustain its Medicaid program over the decades. This has been a key factor in Puerto Rico’s severe, long-term fiscal problems and debt crisis.7 Puerto Rico’s rapidly deteriorating debt burden led to Congress passing legislation in 2016 that gave a new Financial Oversight and Management Board broad authority over Puerto Rico’s budget (including its Medicaid program) and debt restructuring.8
Meanwhile, Congress has provided multiple, temporary infusions of Medicaid funding since 2011 to assist Puerto Rico. Most recently, Congress enacted two years of additional funding in December 2019. These increases were essential to help address some of the block grant shortfalls over the past decade and avert Medicaid cuts, as Puerto Rico instituted overall budget cuts in response to its fiscal and debt crisis.9
As part of these funding increases, Congress also has temporarily increased Puerto Rico’s FMAP from its regular rate of 55 percent: in the aftermath of Hurricane Maria, it was 100 percent, and it is now 76 percent through the end of fiscal year 2021. These funding increases have allowed Puerto Rico only to sustain its existing program, rather than make major improvements.
Puerto Rico’s Medicaid Program Is Far Less Generous Than State Medicaid Programs
Medicaid is the backbone of health coverage in Puerto Rico, given residents’ high poverty rate, limited access to employer-sponsored insurance, and greater health needs (Exhibit 3). About 1.4 million Puerto Ricans are covered by Medicaid and the Children’s Health Insurance Program (CHIP) today.10 In 2018, 47.8 percent of all Puerto Ricans had Medicaid coverage, and 60.8 percent of children younger than age 19 were enrolled in Medicaid and CHIP. That kept the uninsured rate low at 6.4 percent for all residents and at less than 3 percent for children in 2018.11
Restricted eligibility. Puerto Rico’s Medicaid income eligibility levels are considerably lower than the eligibility levels in the states. Like other territories, Puerto Rico uses its own, sharply lower poverty level (known as the Puerto Rico Poverty Level, or PRPL) to determine Medicaid and CHIP eligibility (Exhibit 4).12
While Puerto Rico’s Medicaid program covers pregnant women, parents, other adults, and children up to 138 percent of PRPL, this translates to only 59.6 percent of the federal poverty level (FPL) for an individual and 44.8 percent of FPL for a family of four (as of July 2020).13 That is far below the federal minimum level for pregnant women and children and below the Medicaid expansion eligibility level of 138 percent of FPL (Exhibit 5). (Through CHIP-funded Medicaid, Puerto Rico covers children up to 88% of FPL, even though the median CHIP eligibility level nationwide is 255% of FPL.14)
Unlike FPL, which is adjusted annually, PRPL has been frozen at the same level since January 2014.15 As a result, the Medicaid income eligibility levels decline in real terms every year.
In addition, Puerto Rico’s Medicaid program does not cover certain mandatory eligibility groups, such as low-income seniors and people with disabilities who are also enrolled in Medicare — who would otherwise be eligible for the Medicare Savings Programs (MSPs) but not for full Medicaid. The MSPs, which states are required to provide, pay for Medicare Part B premiums (equaling $1,735 in 2020) for those with incomes up to 135 percent of FPL (and also deductibles and other cost-sharing for those with incomes below FPL).
Limited coverage of services and drugs. Altogether, the Medicaid program in Puerto Rico does not cover seven of the 17 benefits that federal law requires states to cover. These excluded services include:
- nursing home care
- home health care
- nonemergency medical transportation
- nurse practitioner services
- nurse midwife services
- emergency care for individuals ineligible because of immigration status
- freestanding birth center services.
Puerto Rico’s Medicaid program also does not cover optional home- and community-based long-term services and supports (LTSS), such as personal care and case management services. Other optional services also are excluded, like hospice care, private-duty nursing services, and services provided by an intermediate care facility for individuals with intellectual disabilities.16
Moreover, unlike the states, Puerto Rico is not part of the Medicaid Drug Rebate Program, which significantly reduces states’ Medicaid prescription drug costs.17 This also means that Puerto Rico is not required to cover most outpatient prescription drugs. Instead, Puerto Rico uses a closed drug formulary (only a limited number of drugs are covered) to limit costs. But this also has an adverse impact on beneficiary access to medications. For example, Puerto Rico did not cover any drugs curing hepatitis C until 2020, even though such drugs first entered the U.S. market in 2014.18
Low provider reimbursement. Medicaid provider reimbursement rates in Puerto Rico are generally very low, which has likely contributed to the ongoing outmigration of health professionals and a financially stressed health care infrastructure.19 For example, Medicaid physician payment rates in 2016 were 19 percent of Medicare rates for primary care services and 50 percent of Medicare for obstetric care, well below the national average of 66 percent of Medicare for primary care and 81 percent of Medicare for obstetric care.20
Low reimbursement rates may at least partially explain why 72 of Puerto Rico’s 78 municipalities have been designated as medically underserved areas, and 32 municipalities have been designated as primary care shortage areas.21 And unlike the states, Puerto Rico does not have a Medicaid Disproportionate Share Hospital (DSH) program to provide supplemental payments that support safety-net hospitals serving Medicaid and uninsured patients.22
Additional Federal Funding Has Led to Some Program Improvements
Congress’s most recent infusion of federal Medicaid funding significantly increased Puerto Rico’s block grant to a total of $2.6 billion in fiscal year 2020 and $2.7 billion in 2021.23 The 2020 amount is more than seven times the block grant that would have otherwise been provided in that year.24 Congress provided Puerto Rico an additional $200 million for each of those two years to increase provider payment rates. Congress also increased Puerto Rico’s matching rate to 76 percent for those two years, rather than the regular matching rate of 55 percent.25
These enhanced federal funding levels have permitted Puerto Rico to make some modest improvements in its Medicaid program. For example, Puerto Rico’s Medicaid program began covering its first drug to cure hepatitis C in March 2020.26 Puerto Rico is also temporarily increasing (through September 30, 2021) physician payments to a minimum of 70 percent of Medicare rates, which is more in line with the national average for state Medicaid programs. It also is temporarily increasing capitation rates to primary care medical groups and payments to hospitals.27
Finally, if Puerto Rico receives future approval from the Financial Oversight and Management Board, it plans to significantly raise its Medicaid eligibility levels over the long term. It would do so by submitting a Medicaid state plan amendment to the federal government increasing the PRPL used for Medicaid eligibility to 85 percent of FPL: an increase of two to two-and-a-half times the current PRPL. Under this proposed change, PRPL would also no longer be frozen and would be adjusted annually for general inflation.28 The Financial Oversight and Management Board has very recently permitted Puerto Rico to increase the PRPL, but only through September 30, 2021, when the latest federal Medicaid funding increase expires.29
Two lessons emerge from examining the financing of Puerto Rico’s Medicaid program.
First, converting federal Medicaid financing to block grants or per capita caps would likely result in large federal funding cuts that would increase for states over time. That, in turn, could lead to cuts to eligibility, benefits, and provider rates that could result in state Medicaid programs experiencing many of the serious challenges Puerto Rico faces, especially if states are given flexibility to cut eligibility and benefits in ways not permitted today. As a result, the incoming Biden administration could consider withdrawing the federal guidance encouraging states to apply for Medicaid waivers that impose such funding caps.
Second, providing sufficient federal Medicaid funding to Puerto Rico on a permanent basis — not just to sustain but also to expand its program — would help ensure that Puerto Rico could make significant improvements that place it more in line with the states. This would increase access to needed care for Puerto Rico’s residents, who are disproportionately low-income and predominantly Latino (98.7% of Puerto Rico’s residents are Latino, compared with 18.3% nationally).30 This also would provide considerable relief for Puerto Rico’s overall budget and help it emerge from its fiscal and debt crisis, which has been further exacerbated by the health and economic impact of the COVID-19 pandemic.
One policy option that may be considered in Congress would involve permanently eliminating Puerto Rico’s federal funding cap. Under a House bill introduced last year (H.R. 3371), the federal government would pay a fixed percentage of Puerto Rico’s Medicaid costs without limit (as it does for the states), with the matching rate equaling 83 percent based on Puerto Rico’s low per capita income relative to the nation.
In exchange, Puerto Rico would be required to develop a transition plan describing the improvements it would make to come into fuller compliance with federal Medicaid requirements. Changes would likely include expanding eligibility to mandatory groups and providing nursing home care, home health care, nonemergency medical transportation, and comprehensive mental health care. If Puerto Rico fails to roll out these changes by certain milestones, its matching rate would be reduced. To help Puerto Rico plan for and implement these improvements, the bill also would temporarily increase the matching rate for administrative costs.31
The same approach could be applied to the other territories. The scheduled expiration of the latest Medicaid funding increases for Puerto Rico and the other territories in 2021 offers an opportunity to make similar Medicaid financing changes in American Samoa, Guam, the Northern Marianas Islands, and the U.S. Virgin Islands.
Puerto Rico’s experience with its Medicaid block grant offers valuable lessons. Puerto Rico’s Medicaid program demonstrates how capping federal funding would likely shift significant costs to states and adversely affect state budgets. It also would sharply limit the ability of state Medicaid programs to respond to future recessions, epidemics, and natural disasters, and lead to cuts to eligibility, benefits, and provider payments that reduce access to care for vulnerable, low-income beneficiaries.
A policy option permanently eliminating Puerto Rico’s block grant and replacing it with the same federal funding structure available to states would allow Puerto Rico to expand access to needed care for its more than 3 million residents.
How We Conducted This Study
This study is based on an extensive examination of available data, policy analysis, and research related to Puerto Rico’s Medicaid program. This includes federal Medicaid expenditure data from the Centers for Medicare and Medicaid Services (CMS); information from Puerto Rico’s Medicaid State Plan; Puerto Rico Community Survey data from the U.S. Census Bureau; reports from the Medicaid and CHIP Payment and Access Commission (MACPAC), the U.S. Government Accountability Office, and the Congressional Research Service; and communication with Puerto Rico’s Medicaid agency.
For estimates of Puerto Rico’s Medicaid block grant amounts and comparisons of block grant amounts to total Medicaid spending for 2012 to 2019, this study relied on data from the House Ways and Means Committee’s 2004 Green Book; Consumer Price Index data from the Bureau of Labor Statistics; analysis of federal legislation that temporarily increased block grant amounts from 2003 to 2004, 2006 to 2007, and 2009 to 2010; and CMS-64 expenditure data for Puerto Rico.32 The estimates were then compared with similar MACPAC analysis to ensure accuracy. Because of the lack of publicly available CMS-64 data for 2019, MACPAC data for Puerto Rico’s total Medicaid expenditures were used.
The author would like to thank Joan Alker, Aubrianna Osorio, Alexandra Corcoran, and Cathy Hope for their contributions to the brief.
The Georgetown University Center for Children and Families is an independent, nonpartisan policy and research center founded in 2005 with a mission to expand and improve high-quality, affordable health coverage for America’s children and families. CCF is based at the McCourt School of Public Policy.