A Medicaid

Block Grant Program:

Implications for People with Disabilities

National Council on Disability

May 22, 2013
National Council on Disability

1331 F Street, NW, Suite 850

Washington, DC 20004

A Medicaid Block Grant Program: Implications for People with Disabilities

This report is also available in alternative formats upon request and on the National 

Council on Disability (NCD) Web site (www.ncd.gov).

May 22, 2013

202-272-2004 Voice

202-272-2074 TTY

202-272-2022 Fax

The views contained in this report do not necessarily represent those of the 

Administration, as this and all NCD documents are not subject to the A-19 Executive 

Branch review process.
1 

National Council on Disability Members and Staff

Members

Jonathan M. Young, PhD, JD, Chair

Janice Lehrer-Stein, Vice Chair

Gary Blumenthal

Chester A. Finn

Sara Gelser

Matan Koch

Lonnie Moore

Ari Ne’eman

Stephanie Orlando

Kamilah Oni Martin-Proctor 

Dongwoo Joseph (“Joe”) Pak, MBA

Clyde E. Terry

Fernando M. Torres-Gil, PhD

Linda Wetters

Pamela Young-Holmes

Staff

Aaron Bishop, Executive Director

Joan Durocher, General Counsel & Director of Policy

Anne Sommers, Director of Legislative Affairs & Outreach

Stacey S. Brown, Staff Assistant

Julie Carroll, Senior Attorney Advisor

Lawrence Carter-Long, Public Affairs Specialist

Gerrie-Drake Hawkins, PhD, Senior Policy Analyst

Sylvia Menifee, Director of Administration

Carla Nelson, Administrative Specialist

Robyn Powell, Attorney Advisor
2 

Acknowledgments

The National Council on Disability wishes to express its deep appreciation to the 

National Association of State Directors of Developmental Disability Services team that 

conducted the research and writing for this report: Robert Gettings, Charles Moseley, 

and Nancy Thaler.
3 

Contents

National Council on Disability Members and Staff....................................................... 1

Acknowledgments........................................................................................................... 2

Introduction ..................................................................................................................... 5

CHAPTER 1. The Fiscal Cliff and Future Federal Medicaid Funding ........................ 7

Contributing Factors.................................................................................. 7

Approaching the Fiscal Cliff ...................................................................... 8

The National Debt and Controlling Health Care Outlays........................... 9

The Affordable Care Act..........................................................................10

CHAPTER 2. Origins and Effects of Federal Block Grant Programs ......................13

History of Block Grants ...........................................................................13

Lessons Learned from Past Block Grants...............................................14

Financial Impact of the TANF Block Grant..............................................15

Current Medicaid Block Grant Plan.........................................................17

Key Features of the House-Passed Budget Plan....................................18

Assessment of Fiscal Impact ..................................................................18

Alternative to a Block Grant ....................................................................20

CHAPTER 3. Impact of a Medicaid Block Grant on People with Disabilities..........23

CHAPTER 4. Conclusion............................................................................................. 25

APPENDIX A. The History of Federal Block Grant Authorities ................................. 27

Nixon-Era Block Grants...........................................................................27

The Reagan Revolution ..........................................................................27

Gingrich Plan ..........................................................................................28

Bush Plan................................................................................................28

APPENDIX B. Deficit Reduction Plans and the Fiscal Cliff .......................................31

Debt Reduction Plans .............................................................................31

The Fiscal Cliff ........................................................................................33

Endnotes........................................................................................................................35
4 
5 

Introduction

The rapidly growing federal deficit has intensified calls for federal entitlement reforms. 

A wide variety of proposals to reduce the federal deficit have been advanced in recent 

years, many of them centered around efforts to control future spending on Social 

Security, Medicare, Medicaid, and other entitlement programs. One of the most 

controversial of these proposals involves capping federal Medicaid payments to the 

states and converting the existing program into a block grant authority. 

The aim of this paper is to examine the history of federal block grant programs in general 

and, more specifically, proposals to block grant federal Medicaid funding. The paper also 

summarizes findings from studies examining the potential impact of current and past 

Medicaid block grant proposals, and explains the broader fiscal challenges that have led 

federal policymakers to consider capping federal Medicaid funding and converting the 

program into a block grant authority. 

Medicaid plays a critical safety net role in financing health care services in the United 

States, but the future of the program is shrouded in uncertainty because of the nation’s 

heavy—and growing—debt burden. Approximately one out of five Americans relies on 

Medicaid for health care coverage, and under current law some 18 million additional 

people will begin receiving benefits in 2014 when eligibility is extended to virtually all 

adults with incomes under 138 percent of the federal poverty level (FPL).1 People with 

substantial disabilities are especially reliant on Medicaid for health care and long-term 

supports provided in both institutional and home and community-based settings. The 

9.8 million people who qualified for Medicaid benefits in 2010 on the basis of disability 

accounted for 45 percent of all nonelderly children and adults with substantial disabilities 

in the nation.2

Proponents of block grants argue that they reduce administrative costs by creating a 

single, streamlined set of federal requirements, thus eliminating confusing and 

sometimes contradictory administrative rules associated with the categorical grant 
6 

programs they replace. In addition, they offer state and local jurisdictions greater 

flexibility in using federal dollars to pursue their own program priorities. Also, when 

programs previously administered by several cabinet-level agencies are consolidated, 

proponents contend that the need for interagency coordination is greatly reduced.

Recognizing the vulnerability of people with disabilities to major structural changes in 

Medicaid policy, in the fall of 2011 the National Council on Disability (NCD) 

commissioned a study of the potential impact of converting the current Medicaid program 

into a state block grant authority. This report is intended to clarify the effects of shifting 

from open-ended, entitlement-based Medicaid funding to a block grant format under 

which states would receive a fixed amount of federal assistance each year. Specifically, 

the report— 

● Examines the underlying rationale for block granting federal Medicaid funding, 

including the factors fueling current interest in limiting the Federal Government’s 

role in financing health care and long-term supports for vulnerable, low-income 

Americans; 

● Discusses the key policy choices involved in designing a Medicaid block grant 

authority; 

● Reviews available estimates of the likely impact of a cap on federal Medicaid 

financial participation, combined with statutory provisions allowing states to 

exercise greater latitude in determining eligibility, benefits, and other key 

operational parameters of their Medicaid programs; and 

● Analyzes the potential effects of alternative approaches to controlling the growth 

in federal-state outlays for medical assistance services.
7 

CHAPTER 1. The Fiscal Cliff and Future Federal 

Medicaid Funding

Federal deficit spending reached $1.1 trillion in fiscal year (FY) 2012, marking the fourth 

year in a row that the deficit has topped a trillion dollars.3 Total U.S. government debt 

grew from $5.7 trillion in January 2001 to $16.1 trillion in September 2012.4 The 

Congressional Budget Office (CBO), the nonpartisan arbitrator of Congressional fiscal 

and economic projections, has reported that the federal debt held by the public 

exceeded 70 percent of the gross domestic product (GDP) on September 30, 2012—the 

highest level since 1950 and 75 percent higher than the debt-to-GDP percentage in 2008 

when the current, prolonged national recession began.5

Contributing Factors

By far the most prominent factors contributing to continued deficit spending are the 

structural imbalances in the three largest federal entitlement programs: Social Security, 

Medicare, and Medicaid. The growing fiscal pressure exerted by these programs can be 

traced to two interrelated factors: demographics and escalating health care costs. Over 

the next quarter century, the percentage of the U.S. population over 65 years of age is 

expected to grow from 13 percent to 20 percent, while the percentage of the population 

between 20 and 64 years of age declines from 60 percent to 55 percent. As a result of 

these demographic shifts, the number of active workers per Social Security beneficiary is 

expected to drop from 3 to 1 to 2 to 1 by 2037.6

 

As a growing number of senior citizens enroll in Medicare and Medicaid, demand for 

increasingly expensive health care services is expected to rise sharply, with federal 

health care expenditures growing from slightly more than 5 percent of GDP today to 

10 percent by 2037. Spending on Social Security benefits is expected to increase at a 

much slower pace, rising from 5 percent of GDP today to 6 percent of GDP in 2020 and 
8 

subsequent decades. When the effects of an aging population and rising health care 

costs are combined, CBO predicts that federal health and Social Security costs will 

increase from 10 percent to 16 percent of GDP over the next 25 years. Five percentage 

points of GDP may not sound like much, but they represent more than the nation spent 

on national defense (4.7% of GDP) in FY 2011—and also more than it spent on all

discretionary, nondefense programs and activities (4.3% of GDP) that same year.7

Viewed from a broader perspective, a five-point increase in the share of the domestic 

economy would translate into $850 billion in current dollars. By comparison, all federal 

expenditures, excluding interest payments on the national debt, have averaged 

18.5 percent of GDP over the past 40 years.8

 

Approaching the Fiscal Cliff

For years, the message from economists has been clear: unless the growth in health 

care costs and Social Security benefits is curtailed, either federal tax revenues will have 

to be raised to unprecedented levels or the nation’s ever-expanding debt burden will 

become economically unsustainable. Yet, despite the development of multiple deficit 

reduction plans in recent years, attempts to solve the debt crisis have stalled in 

Congress. 

During the summer of 2011, a stopgap plan was approved that called for slightly less 

than $1 billion in spending reductions over 10 years followed by another $1.3 billion in 

savings to be recommended by a bipartisan Congressional panel. When this “super 

committee” failed to reached consensus during the fall of 2011, the legislation 

authorizing the cuts (the Budget Control Act of 2011) directed the President to institute 

automatic, across-the-board reductions in both domestic and military spending totaling 

$1.3 billion over 10 years. 

These “sequestration” cuts were scheduled to take effect on January 1, 2013, but 

Congress intervened at the last minute to avert the “fiscal cliff,” a combination of tax and 

spending increases that economists predicted would stymie the fragile economic 
9 

recovery and likely lead to another recession. The American Taxpayer Relief Act of 2012 

made permanent lower, Bush-era tax rates on income up to $400,000 for individuals and 

$450,000 for families. The legislation also (1) permanently indexed the threshold of the 

Alternative Minimum Tax exemption; (2) extended emergency unemployment benefits for 

one year; (3) postponed a scheduled reduction in Medicare physician payment rates for 

an additional year; (4) delayed automatic, across-the-board spending cuts for two 

months; and (5) extended farm policies and programs through September 30, 2013.9

 

Congress, however, was unable to reach agreement on a long-term plan for reducing the 

deficit through spending cuts and revenue enhancements. As a result, the 112th

Congress will face a new fiscal crisis by the end of February 2013 when the two-month 

delay in sequestration expires and legislation to raise the debt ceiling will have to be 

enacted to avoid defaulting on the government’s outstanding obligations. Once again, 

the debate will focus on approaches to reducing Social Security, Medicare, and Medicaid 

spending as well as securing increased revenues through reforms in the tax code. The 

future of the federal-state Medicaid program is integrally tied to the outcome of this and 

subsequent battles over the proper role of the Federal Government in promoting the best 

interests of the American public. 

The National Debt and Controlling Health Care Outlays

Attempts to reduce deficit spending have been a staple of Washington politics for 

decades. Yet, despite repeated proposals to bring federal spending and revenues into 

balance, the nation’s debt has continued to mushroom. The publicly held debt of the 

United States has increased for 55 straight years, growing from $257 billion to over 

$16 trillion.10 Interest payments on the outstanding debt reached $454.4 billion in 

FY 2011,11 more than the government expended that year on any program area except 

national defense, Social Security, and Medicare benefits.

Over approximately the same period (1960–2006), aggregate health care expenditures 

in the United States grew by an average of 9.9 percent per year, while the GDP 
10

increased at an average annual rate of 7.3 percent. After adjusting for inflation, the 

average annual gap between the growth in health care spending and the growth in GDP 

was 2.5 percent.12 Average per capita health care expenditures increased by 72 percent 

between 2000 and 2010, rising from $4,878 to $8,402.13 Per capita spending on health 

care services is considerably lower in other industrialized nations such as Canada 

($4,205), Germany ($4,187), United Kingdom ($3,253), France ($3,835), and Italy 

($2,852), all of which, unlike the United States, offer their citizens universal access to 

health services.14

With 10,000 Baby Boomers retiring each day, the financial pressure on the government’s 

two principal health programs—Medicare and Medicaid—is going to intensify over the 

next several decades. According to CBO projections, Medicare expenditures under 

current law assumptions will increase as a share of GDP from 3.7 percent in 2012 to 

4.2 percent in 2022 and to 6.0 percent in 2037. Meanwhile, Medicaid expenditures will 

increase from 1.7 percent of GDP in 2012 to 3.0 percent of GDP in 2022 and 3.6 percent 

of GDP in 2037. Health outlays alone, primarily Medicare and Medicaid expenditures, 

make up about four-fifths of the anticipated growth in the federal deficit over the 25-year 

period.15 Given these realities, it is clear that curbing excess growth in health care 

outlays must be a central component of any deficit reduction strategy. 

Despite numerous attempts over the past 30 years to control costs, health expenditures 

have continued to rise at a rate in excess of the general economy. By tying Medicare 

reimbursements to standardized diagnosis-related groups (DRGs) in the 1980s and 

expanding the use of managed care techniques throughout the 1980s and into the 

1990s, government policymakers were able to slow the rate of growth in health care 

expenditures. But, growth rates subsequently bounced back to historic levels. 

The Affordable Care Act

The 2010 health reform legislation, commonly referred to as the Affordable Care Act 

(ACA),16 contains many provisions aimed at controlling the rise in near-term and longer-
11

range health care outlays. Among the short-term cost containment strategies included in 

the law are provisions reducing payments to Medicare providers (e.g., primarily Medicare 

Advantage plans and hospitals), requiring pharmaceutical firms to pay higher rebates to 

state Medicaid agencies, eliminating fraud and abuse in the Medicare and Medicaid 

programs, introducing electronic records to simplify health insurance administration, 

implementing value-based purchasing programs, and establishing an approval process 

for purchasing generic biologic agents.17 

At the same time, the ACA includes numerous provisions intended to dampen the longterm growth of health outlays by improving the efficiency and cost-effectiveness of 

delivering health services. A new Center for Innovation has been established within the 

Centers for Medicare and Medicaid Services (CMS) to support and evaluate 

experimental health care delivery models, care coordination methods and payment 

reforms. Among the center initiatives already under way are (1) a Medicare Shared 

Savings Program where groups of health care providers, called Accountable Care 

Organizations, coordinate their services and are allowed to share in any cost savings; 

(2) projects to test methods of “bundling” payments to different providers so Medicare 

and Medicaid beneficiaries receive more coordinated and efficient care; (3) patientcentered Medical Homes for patients with chronic illnesses; and (4) coordinated care 

demonstration projects for individuals dually eligible for Medicare and Medicaid services. 

The ACA also mandated the establishment of (1) a private, nonprofit Patient-Centered 

Outcome Research Institute to develop research priorities and conduct and disseminate 

findings from comparative effectiveness studies of health care interventions, including 

their risks and benefits; and (2) an Independent Payment Advisory Board to recommend 

methods of eliminating excess Medicare spending and proposing ways of slowing the 

growth of private health expenditures while preserving or enhancing service quality.18 

Although the health care reforms currently in the pipeline hold considerable promise, 

there is scant evidence at present that they will succeed in containing the growth in 

health spending on a broad scale and in diverse settings. Indeed, it will take years to fully 

evaluate the impact of the various payment and service delivery reforms presently 
12

underway or planned. Federal and state policymakers in the meantime cannot afford to 

wait until all the evidence is accumulated and conclusions are drawn. They need to act 

now to curb the growth in deficit spending and thereby preserve the integrity of the 

nation’s financial system. 

Given the importance of controlling federal health care expenditures, changes in 

Medicaid spending policies are virtually inevitable. All of the major deficit reductions 

plans advanced in recent years have sought to limit Medicare and Medicaid spending, 

but they have done so in significantly different ways and to different extents (see 

Appendix B for an expanded discussion of the major deficit reductions plans and their 

likely impact on future federal Medicaid spending). 

The question is: how will the Medicaid program be changed? Older Americans and 

people with disabilities would be at special risk should lawmakers choose to convert the 

Medicaid program into a block grant authority. At present, they constitute about onequarter of all program beneficiaries but account for almost two-thirds of Medicaid 

spending because of their elevated need for health services and high reliance on 

Medicaid to pay for long-term services and supports.19 As pointed out later in this paper, 

states would face strong pressures to scale back services to low-income seniors and 

people with disabilities if federal Medicaid funding were to be capped.
13

CHAPTER 2. Origins and Effects of Federal Block 

Grant Programs

The concept of consolidating federal assistance programs with similar or overlapping 

statutory purposes dates back to the late 1960s. The earliest block grant programs were 

comparatively narrow in scope and aimed primarily at enhancing state-local flexibility. 

During the Reagan Administration the focus changed, and block grants became a vehicle 

for shrinking the role of the Federal Government and devolving responsibility for financing 

and administering domestic assistance programs to state and local jurisdictions. 

History of Block Grants

Over the past 40 years, there have been three major waves of federal block grants. The 

first wave occurred during the early 1970s when President Nixon proposed that 

129 federal domestic assistance programs be consolidated into six block grant programs. 

Many of the President’s proposals were rejected by Congress, but three sizeable block 

grant programs had been established by the late 1970s. The next major wave of block 

grants occurred during the first year of the Reagan Administration when Congress, at the 

President’s request, consolidated 77 federal grant programs into nine block grant 

authorities. Unlike earlier block grant programs, funding for the Reagan-era block grants 

were significantly below the aggregate level of the categorical programs they replaced. 

Finally in the mid-1990s, President Clinton signed into law a welfare reform measure 

repealing the Aid to Families with Dependent Children (AFDC) program and replacing it 

with a state block grant program called Temporary Assistance to Needy Families (TANF). 

Passage of this legislation marked the first and to date the only time that Congress has 

agreed to transform an open-ended entitlement into a state block grant authority. 

Over the past 30 years, periodic attempts have been made to convert the federal-state 

Medicaid program into a block grant authority. The first major attempt occurred in 1981 
14

when Congress narrowly rejected President Reagan’s proposal to block grant federal 

Medicaid funding. In 1995, the Republican-controlled Congress passed legislation that 

would have capped federal Medicaid payments to the states and transformed the 

program into a block grant authority, only to have the legislation vetoed by President 

Clinton. Congress failed to act on a Medicaid block grant plan advanced by President 

George W. Bush as part of his proposed FY 2004 budget. More recently, a plan to block 

grant federal Medicaid spending was approved by the Republican-controlled House in 

both 2011 and 2012 as part of broader blueprint for reducing federal spending, lowering 

tax rates and slicing the deficit. The U.S. Senate, however, refused to act on the House 

budget plan and it died at the end of the 112th Congress (see Appendix A for additional 

information on the history of federal block grant programs and proposals). 

Lessons Learned from Past Block Grants

What can we learn from examining past experience with federal block grants? First, the 

real value or purchasing power of block grant funding tends to decline over time after 

adjustments are made for inflation. In a study of five Reagan-era block grant programs, 

Peterson and Nightingale found that the real dollar value of four of the programs declined 

between 1986 and 1995.20 A later study of 11 federal block grant programs concluded 

that the current value of federal funding fell by an average of 11 percent over the study 

period.21 The factors leading to reductions in federal support are difficult to untangle, but 

one possible explanation is that the consolidation of separate program authorities disrupts 

the targeted advocacy that previously existed for programs rolled into the block grant. It is 

harder to rally Congressional support for your particular cause if you know that the 

ultimate decision on how funds will be used rests with state or local officials.

Second, once block grants are authorized, the degree of flexibility afforded to state and 

local officials tends to erode over time. In a process sometimes referred to as “creeping 

categorization,” Congress adds new restrictions, set-asides for particular purposes, or 

new categorical programs with similar or overlapping aims. As Feingold and colleagues 

point out, “[a] common explanation traces this phenomenon to members of Congress, 
15

who seem to reap greater electoral benefits from narrowly targeted categorical programs 

or set-asides than from wide-ranging block grants.”

22 Illustrations of these 

recategorization patterns can be found in the first two block grant programs created by 

Congress. The Partnership for Health Act retained its original flexibility, but its impact 

waned when Congress, concerned about state administrative performance, created 

more than 20 new categorical grants for health services outside the block grant.23

Dissatisfied with state administration of the Safe Streets program, Congress added 

mandatory set-asides and other requirements that reduced state flexibility and later 

terminated funding for the program.24

Third, implementation of new block grant programs tends to be smoother when states 

administered the categorical programs replaced by the block grant. When an 

administrative structure is already in place and recipient and provider relationships have 

been established, state officials have an easier time incorporating new responsibilities 

into existing management systems. Conversely, problems are more likely to arise when 

state governments assume responsibility for administering programs where the Federal 

Government previously awarded grants directly to local governmental units or nonprofit 

organizations. The Community Services Block Grant, created by Congress in 1981, is a 

case in point. Here state governments had to establish administrative structures, fill new 

staff positions, and develop new relations with service providers in a policy area where 

states previously had little or no role.25 

Financial Impact of the TANF Block Grant

The enactment of the TANF block grant program was an important shift in federal policy 

since it marked the first time an entitlement to services was replaced with a block grant 

authority. Block grants enacted from the 1960s through the early 1990s involved the 

consolidation of discretionary grant programs, with the aim of streamlining administration 

and enhancing state and local decision-making authority. In contrast, the statutory 

authority of the AFDC program created an individual right to benefits tied to stateestablished income eligibility standards. Similar to other entitlement programs, Title IV of 
16

the Social Security Act committed the Federal Government to share in the cost of all 

benefits regardless of the sums previously appropriated for AFDC payments to the states. 

The TANF program severed this link between individual eligibility, benefits, and federal 

financial participation. Indeed, Section 401(b) of the Personal Responsibility and Work 

Opportunity Reconciliation Act (PRWORA) explicitly indicates that “This part [of the statute] 

shall not be interpreted to entitle any individual or family to assistance under any State program 

funded under this part.”

26 In most instances, adult recipients of TANF benefits are required to 

work at least part time to receive benefits. In addition, beneficiaries are eligible to receive 

assistance for a maximum of five years, although some states apply a less stringent cap.

As welfare caseloads plunged and employment rates increased during the late 1990s 

and early 2000s, the 1996 welfare reform legislation was widely praised by politicians of 

both major political parties. But the depressed economic conditions of the past four years 

have revealed the underside of shrinking the social safety net. The number of children 

receiving federal cash assistance declined between 1996 and 2011 by more than half. 

Children made up more than three-quarters of TANF recipients in 2009. The average 

cash payment to a family with one child was $324 a month in FY 2009, but those 

payments were supplemented by noncash benefits (e.g., child care, employment 

training) in most states.27 The law empowers each state to set its own cash assistance 

level, which vary widely from state to state (ranging from a high of $923 a month in 

Alaska to a low of $170 a month in Mississippi in FY 2009).28 

Despite $5 billion in additional federal TANF aid provided through the 2009 economic 

stimulus legislation,29 program caseloads have risen by only 15 percent since the 

recession began in 2007. Welfare caseloads remain 68 percent below their 1996 peak 

and just one in five low-income children currently live in a family receiving TANF funds. 

Meanwhile, faced with sinking revenues and increased service demands, states have 

sliced assistance by shortening time limits, tightening eligibility rules, and reducing 

benefit levels. Moreover, with the removal of statutory constraints, many states have 

diverted TANF funds to other purposes. Arizona, for example, currently uses only about 

one-third of its TANF allocation for cash benefits and work programs—core purposes of 
17

the TANF legislation. The remaining funds pay for human services, such as foster care 

and adoption services, or fill other holes in the state’s budget. Nationally, only about 

30 percent of federal TANF payments are spent on cash benefits.30

Proposals to convert the federal-state Medicaid program into a block grant authority are 

more akin to the AFDC-to-TANF conversion than to other existing block grant 

authorities.31 The financial impact of the PRWORA on federal cash assistance to lowincome children and families, therefore, offers important warning signals about the 

potential impact of converting Medicaid entitlement funding to a block grant authority. 

Current Medicaid Block Grant Plan

The latest version of a Medicaid block grant surfaced as part of a broader plan to reduce 

federal spending that was unveiled by House Budget Committee Chairman Paul Ryan in 

January 2010. Titled “The Roadmap to Prosperity,” the Ryan plan called for deep 

reductions in federal entitlement and discretionary spending and lower federal taxes as 

part of a broad-scaled effort to reduce the deficit and stimulate the national economy.32

In the spring of 2011, the U.S. House of Representatives adopted the Ryan plan for 

reducing the deficit as part of its FY 2012 budget resolution. Congress took no steps to 

implement the House-passed budget resolution, however, because of the continuing 

impasse between Congressional Republicans and President Obama over the most 

appropriate pathway to reducing the deficit. 

On March 29, 2012, a somewhat modified version of Chairman Ryan’s original plan—

including block granting Medicaid funds—was again adopted by the House as part of its 

FY 2013 budget blueprint. The resolution called for slicing $5 trillion from federal 

spending over a 10-year period.33 The budget resolution also included instructions to six 

House committees to develop legislative proposals to implement the plan, including the 

committees with jurisdiction over Medicaid. But, given strong opposition in the Senate 

and threats of a Presidential veto, no action was taken on the House-passed budget plan 

prior to the November 2012 Presidential and Congressional elections. 
18

Key Features of the House-Passed Budget Plan

Under the provisions of the House-approved budget resolution (H. Con. Res. 112), the 

existing Medicaid program would be replaced by a block grant authority under which 

each state would receive a fixed sum of federal dollars beginning in FY 2014. In addition, 

the ACA34 would be repealed and, consequently, the planned expansion of Medicaid 

benefits to individuals and families with income under 138 percent of the poverty level 

would not occur. Future Medicaid funding allocations would be tied to the amount of 

federal aid each state received in FY 2011, adjusted for inflation and population growth 

during the intervening years.35 A state’s allocation in subsequent years would be based 

on the amount it received during the prior year, also adjusted for inflation and population 

growth. In addition, states would be given expanded latitude in establishing eligibility and 

coverage standards for their program, with the precise dimensions of state flexibility to 

be spelled out during the legislative process.36,37 

Assessment of Fiscal Impact

Because the level of funding under the House Budget Committee’s block grant plan 

would not keep pace with the expected growth in health care costs and the influx of new 

Medicaid beneficiaries—especially the anticipated growth in high-cost older recipients—

federal funding would fall further and further behind actual program costs with each 

passing year. According to one analysis based on CBO projections, total federal 

Medicaid funding between 2013 and 2022 would be $1.7 billion, or 38 percent, below the 

projected level under current law.38 Of the total, $932 billion would be attributed to the 

ACA repeal (assuming that all states otherwise would implement the planned Medicaid 

expansion) and $810 billion would be due to the block grant funding cap.39 Federal 

funding losses would vary from state to state, with states currently offering broad 

coverage and having lower federal matching ratios experiencing smaller reductions than 

states with narrower programs and higher federal matching ratios. Federal allocations to 

states such as Arizona, Florida, Georgia, and Texas could be sliced by 45 percent or 

more over the 10-year period, and nine other states could experience reductions of 
40 percent or more. Even states with broad Medicaid coverage and low matching rates 

would experience federal aid reductions in excess of 30 percent.40 

Faced with sharp reductions in federal assistance, few viable options would be available 

to states since they generally have held Medicaid per capita expenditures and 

administrative costs below those of private health insurers. Between 2000 and 2009, 

overall Medicaid spending increased by 4.6 percent, with acute care spending increasing 

by 5.6 percent per enrollee and long-term care spending increasing by 3.0 percent per 

enrollee. Medicaid expenditures per enrollee were slightly above the medical care 

consumer price index (CPI) and the GDP increase during the period, but they were 

considerably below the growth rate of national health expenditures as well as the growth 

rate of employer-sponsored health insurance premiums.41 

To understand the effects of a block grant on Medicaid enrollment and benefits, 

researchers at the Urban Institute (UI) examined two possible approaches that a state 

might adopt in response to a Medicaid block grant.42 In the first scenario, the team 

assumed that the growth in per capita spending would follow the CBO’s existing 

projections over a 10-year period (an average annual growth rate of 5.7%, or the 

projected increase in GDP + 1.6%). On a nationwide basis, they concluded, Medicaid 

enrollment would decline by 20.5 million, or 35 percent under this scenario. When the loss 

of enrollment associated with an ACA repeal was included, total Medicaid enrollment 

would drop by 37.5 million, or by 50 percent compared with current law assumptions. 

Under the second scenario, the research team assumed that states would reduce the 

growth in per-person expenditures (thus mitigating the need for enrollment cuts) and 

apply these reductions proportionally across all eligibility groups to accommodate the loss 

of federal aid. Medicaid enrollments would decline under this scenario by 14.3 million, or 

25 percent, by 2022. When the effects of ACA repeal are added, enrollment would decline 

by 31.3 million over the 10-year period, or by 42 percent.43 

The UI research team also estimated the increase in state expenditures that would be 

required to avoid enrollment reductions. If per-enrollee expenditures were to increase at 

the current projected rate through FY 2022, the team concluded that states collectively 

19
would have to increase their baseline share of Medicaid expenditures by $273 billion 

over the 10-year period to preserve program participation and benefit levels. This would 

represent a 77 percent increase in the states’ share of Medicaid costs by 2022. If states 

were able to hold per person Medicaid spending to the rate of GDP growth (instead of 

GDP + 1.6%), the states’ share of increased program outlays would grow by 

$165.2 billion over the 10-year period. This would still represent a 46 percent increase in 

state Medicaid outlays compared with current law projections.44 

Based on its analysis, the UI research team concluded that the ACA repeal in combination 

with spending reductions associated with a Medicaid block grant “... would almost certainly 

worsen the problem of the uninsured and strain the nation’s safety net. Medicaid’s ability to 

continue [its] many roles in the health care system,” they added, “would be significantly 

compromised under the [House block grant] proposal, with no obvious alternative to take its 

place.”

45 The CBO reached similar conclusions after assessing the likely impacts of the 

House Budget Committee’s proposal. “States would have additional flexibility to design and 

manage their Medicaid programs and might achieve greater efficiencies in the delivery of 

care than they do under current law,” the CBO noted, “[but] the large projected reduction in 

federal payments would probably require states to reduce payments to providers, curtail 

eligibility for Medicaid, provide less extensive coverage to beneficiaries, or pay more 

themselves than would be the case under current law.”

46

Alternative to a Block Grant

Instead of converting Medicaid into a block grant authority, some policymakers have 

suggested that a “per capita cap” be imposed on future federal Medicaid funding.47

Under this approach, federal assistance to each participating state would be limited to a 

fixed dollar amount determined by multiplying a per capita allowance times the number 

of eligible program beneficiaries. Typically, per capita cap proposals would limit federal 

financial participation on a state-specific basis, taking into account historical data on the 

state’s per beneficiary expenditures. Some proposals would establish a single, 

aggregate cap applicable to all program beneficiaries, while others would set separate 

20
21

caps for defined groups of beneficiaries such as children, seniors, nondisabled adults, 

and adults with disabilities. Most propose that the cap be adjusted annually to account 

for inflation using the same percentage adjustment factor in all states. 

Like block grants, per capita cap proposals typically include provisions aimed at granting 

states wider latitude in designing and operating their Medicaid programs, such as allowing 

them to override statutory requirements governing benefits, premiums, and cost sharing. 

Unlike block grant plans, per capita cap proposals may preserve some existing Medicaid 

eligibility requirements, including an individual entitlement to services. If so, all people who 

meet state and federal eligibility requirements have a right to enroll in the program, and 

caseloads are likely to rise during recessionary periods. On the other hand, per capita cap 

proposals, like block grant plans, may allow states to restrict enrollment or eliminate the 

eligibility of selected groups of recipients that federal law now requires them to cover. 

Although a great deal depends on the design features of the particular proposal, a recent 

Center on Budget and Policy Priorities analysis pointed out that per capita cap proposals 

share many of the same limitations as block grant plans. First, the gap between the cap 

on federal financial participation and actual state Medicaid expenditures is likely to widen 

over time. The primary aim of imposing a per capita cap is to achieve significant federal 

savings. This objective is usually accomplished by allowing the federal per-beneficiary 

cap to grow at a slower pace than the anticipated growth in per capita expenditures. 

Consequently, a state is forced to make up the difference with its own dollars if it is 

unable to achieve offsetting cost reductions—a challenging proposition given Medicaid’s 

low administrative costs and the reduction in provider payments and benefits that have 

occurred in many state programs over the past four years.48 

Second, given present demographic trends, the proportion of older Medicaid recipients 

or those who have physical, psychiatric, or developmental disabilities will increase over 

the next two decades. Per capita expenditures on behalf of seniors and people with 

disabilities are at least five times higher than per capita expenditures on behalf of 

children and nondisabled adults.49 A per capita cap based on historical expenditure data 

will tend to understate the real costs of serving the growing number of aging Baby 
22

Boomers and people with disabilities. Consequently, a larger and larger share of total 

program costs is likely to be shifted to the states and possibly to beneficiaries in the form 

of higher cost-sharing requirements.50 

Third, a federal per capita payment cap would not take into account unanticipated 

increases in program costs due to breakthrough advances in technology, the availability 

of new and costly medications, or unanticipated epidemics. The increased costs of the 

human immunodeficiency virus/acquired immune deficiency syndrome (HIV/AIDS) 

epidemic of the 1980s and early 1990s and the spike in medication expenditures during 

the late 1990s and early 2000s are just two examples of how Medicaid outlays have 

been strongly influenced in the past by unanticipated medical costs. There no reason to 

believe that similar developments will not impact future program costs.51 

Fourth, a uniform methodology for establishing federal per capita payment caps would 

disadvantage some states more than others. States with comparatively low Medicaid 

spending per beneficiary would receive less initial federal funding and, thus, would have 

to finance any subsequent improvements in their Medicaid programs out of state general 

revenue. Moreover, a per capita cap based on historical spending would tend to lock in 

harsh spending reductions states have had to resort to during the current recession, and 

disadvantage states that experience a higher than average growth in per-beneficiary 

costs since future adjustments in a state’s cap would be applied uniformly across all 

participating states. In the past, such variations have occurred because of differences in 

expenditure growth rates for various health care services and utilization levels, as well as 

differences across states in the rate of change in the organization and delivery of health 

care and long-term supports.52 

Finally, in all probability a per capita cap designed to produce savings would require 

states to bear a larger share—potentially a much larger share—of the costs of expanding 

Medicaid eligibility, as called for under the ACA. States, therefore, would be more likely 

to choose not to enroll newly eligible beneficiaries in their programs—an option afforded 

them under the U.S. Supreme Court’s June 28, 2012, ruling in National Federation of 

Independent Business v. Sebelius.

53 
23

CHAPTER 3. Impact of a Medicaid Block Grant on

People with Disabilities 

People with disabilities are especially vulnerable to reductions in Medicaid spending; 

typically, they require more health services and often long-term supports as well. Fifteen 

and a half million Americans with disabilities depended on Medicaid as a source of 

health insurance in 2009, including 6.0 million seniors and 9.5 million nonelderly people 

with disabilities.54 Medicaid— 

● Covers almost two-thirds (63.6%) of public nursing home costs and virtually all 

costs of intermediate care facility services to people with intellectual and 

developmental disabilities (ICFs/I-DDs); 

● Pays 44 percent of Medicaid home and community-based service costs, thereby 

helping more than 3 million seniors and people with disabilities to avoid 

institutionalization; 

● Compensates millions of home health aides, attendants and other personal care 

workers. Existing shortages among such workers would be greatly exacerbated 

by reductions in Medicaid spending, especially in the face of a projected 

79 percent increase in the number of elderly citizens between 2010 and 2030; 

● Offers financial protection to husbands and wives who have spouses living in 

nursing homes, and provides support to family members who care for loved ones 

at home; 

● Helps many of the estimated 52 million family members who furnish informal 

services and supports to seniors and people with disabilities, thus allowing them 

to hold jobs, care for their families, and manage the physical and emotional 

stresses of caregiving; and
24

● Is a primary source of income for approximately 15,700 nursing facilities and 

33,000 providers of home-based care across the nation. In addition to the millions 

of Americans employed in these facilities, Medicaid also saves U.S. businesses 

an estimated $33 billion annually in absenteeism and lost productivity by workers

with home caregiving duties.
25

CHAPTER 4. Conclusion

Some federal policymakers support converting Medicaid to a block grant authority or 

instituting a per capita Medicaid spending cap because it would result in large budgetary 

savings that could be used to pursue other policy goals deemed to be of higher priority 

(e.g., permanently reducing federal tax rates and increased defense spending). If the 

federal share of Medicaid funding were capped, responsibility for making the tough calls 

on slicing benefits or trimming eligibility would be shifted to the states, which lack the 

fiscal resources to replace lost federal assistance. Instead of the Federal Government 

picking up half to three-quarters of the cost of future recessions, epidemics similar to the 

HIV/AIDS outbreak of the 1980s, and the introduction of new, high-cost pharmaceuticals 

and breakthrough treatments, states would be left to their own devices in coping with the 

financial uncertainties of the health care marketplace. Block grant funding would place 

states and program beneficiaries in a far more vulnerable financial position than they are 

today. 

Older Americans and people with disabilities would be at special risk. At present, they 

constitute about a quarter of all program beneficiaries but account for almost two-thirds 

of Medicaid spending because of their elevated need for health services and high 

reliance on Medicaid to pay for long-term services and supports. States would face 

strong financial pressures to reduce services to low-income seniors and people with 

disabilities if federal Medicaid funding were to be capped. 

Improving the overall cost-effectiveness of health care delivery systems represents a far 

more responsible approach to placing Medicaid outlays on a sustainable course. As 

noted earlier in this paper, many other industrialized nations offer universal access to 

health care and long-term supports at a fraction of the per person costs incurred in the 

United States. The ACA contains multiple initiatives aimed at improving health outcomes 

while lowering system-wide costs. With a renewed commitment to improved efficiency 

and achieving better outcomes, there is no reason why Medicaid, Medicare, and other 
26

health care costs cannot be brought into line with the general rate of inflation. This is a 

better solution to the current debt crisis for all Americans, especially for older adults and 

people with physical, mental, sensory, and developmental disabilities. 
27

APPENDIX A. The History of Federal Block Grant 

Authorities

Medicaid block grant proposals have been the leitmotif of Medicaid policy for the past 

three decades. Indeed, the tensions inherent in operating an open-ended entitlement 

program have been evident from the onset of the federal-state Medicaid program. In 

1967, the second year of program operations, Congress became so concerned by the 

rapid growth in Medicaid outlays it enacted legislation designed to curb program 

expenditures (P.L. 90-248).

55 This was the first in what was to become a recurring series 

of legislative and administrative efforts to rein in federal Medicaid outlays.

The earliest examples of federal block grant programs were enacted in the late 1960s 

when Democrats controlled both chambers of Congress and the White House. Congress 

created the Partnership for Health program in 1966 by combining several categorical 

health grants under a single program umbrella and the Safe Streets program two years 

later as part of the Omnibus Crime Control and Safe Streets Act of 1968.56 

Nixon-Era Block Grants

The first major, sustained wave of block grant proposals occurred in 1971, when 

President Nixon proposed that 129 distinct federal programs be consolidated into six 

block grants. A Democrat-controlled Congress rejected the President’s original program 

consolidation plan, but nonetheless by the end of the Ford Administration Congress had 

enacted three sizable block grant programs. In each instance, spending under the block 

grant programs of the 1970s was greater than aggregate outlays under the categorical 

programs they replaced. Even states and cities that qualified for a smaller share of 

federal aid under the applicable funding formulas received more money than they had 

under the predecessor programs.57

The Reagan Revolution

During the Reagan Administration, the focus changed and block grants became a 

vehicle for shrinking the role of the Federal Government and devolving responsibility for 

financing and administering domestic assistance program to state and local jurisdictions. 

A Medicaid block grant proposal was a major linchpin of the President’s sweeping 1981 

plan to shift fiscal responsibility and control back to state and local jurisdictions. Under 

the Medicaid portion of what came to be known as “Reaganomics,” federal financial 

participation was to grow by 5 percent in FY 1981 and be adjusted annually thereafter by 

a gross national product deflator. Administration budget officials calculated that the cap 

would save the Federal Government $1.1 billion in FY 1982, with the amount of savings 

growing steadily in future fiscal years. The President also proposed a number of 

statutory and regulatory changes designed to afford states greater flexibility in designing 

and managing their Medicaid programs. Included was a proposal to allow the Secretary 

of Health and Human Services to waive certain statutory requirements in order to permit 
28

states to substitute home and community-based services for Medicaid recipients who 

otherwise would require care in a nursing home or another type of long-term care 

institution.58 

Broad elements of the Reagan plan were approved by Congress as part of the Omnibus 

Budget Reconciliation Act of 1981 (P.L. 97-35; OBRA-81). But, after extensive debate 

and several close committee votes, Congress rejected the President’s plan to cap 

federal Medicaid spending and convert the program into a block grant authority. Instead, 

Congress enacted temporary reductions in state matching ratios over a three-year 

period, after which matching rates returned to pre-existing levels. The final Medicaid 

amendments of OBRA-81 also included a modified version of the home and communitybased waiver authority initially proposed by the Reagan Administration (Section 2176 of 

P.L. 97-35, later codified as Section 1915(c) of the Social Security Act).59 Though widely 

ignored at the time, the waiver authority was to have a far-reaching impact over the next 

three decades on rebalancing Medicaid expenditures on institutional versus home and 

community-based services. 

Gingrich Plan

In 1995, the Republican-controlled 104th Congress, under the leadership of House 

Speaker Newt Gingrich (R-GA), unveiled a Medicaid block grant proposal that deviated 

in several important ways from earlier plans to convert Medicaid to a block grant 

program. Referred to as the Medigrant program, the Speaker’s plan, as subsequently 

modified during committee mark-up sessions, would have based the federal funding cap 

on a complicated formula designed to measure each state’s relative needs. A state 

would be obligated to operate its program under an annual federal spending cap that 

took into account historical spending adjusted for state input costs (e.g., local wage 

rates), case mix (e.g., the relative acuity of need among program enrollees), and the 

number of poor people in the state. The actual amount of a state’s funding allotment then 

would be reduced on a pro-rated basis to ensure that expenditures in all states remained 

under an annual aggregate Medicaid spending cap specified in the law. The proposal, 

with modifications, was approved by the House of Representatives and the Senate as 

part of a much larger measure aimed at balancing the federal budget.60 However, 

President Clinton vetoed the legislation on December 6, 1995;61 and, although 

Republican lawmakers included a modified version of the Medigrant plan in 1996 welfare 

reform legislation, it was dropped before the bill was sent to the White House.

President Clinton signed into law a welfare reform measure that repealed the AFDC 

program and replaced it with the TANF state block grant program. Passage of this 

legislation marked the first and to date only time that Congress has agreed to transform 

an open-ended entitlement into a state block grant authority. 

Bush Plan

In January 2003, President George W. Bush unveiled a proposal that offered states the 

option of accepting federal block grant funding in return for higher federal Medicaid aid in 
29

the near term, enhanced administrative flexibility in operating their programs, and 

authority to reduce the state’s share of program costs. As sketched out in the President’s 

FY 2004 budget, an aggregate cap linked to annual budget targets was to be imposed 

on federal Medicaid and State Children’s Health Insurance Program (SCHIP) spending. 

Relative to the Administration’s Medicaid spending projections under existing law, the 

proposed federal “allotments,” or block grants, were to be higher in FY 2004 through 

FY 2010 but lower in FY 2011 through FY 2013, resulting in “budget neutral” federal 

spending over the 10-year period.62 

To qualify for federal funding under the President’s plan, a state would have to spend a 

predetermined amount on health services each year, with the amount referred to as 

“maintenance of effort” (MOE). The MOE level was to equal the amount the state spent 

in FY 2002, adjusted annually thereafter by the rate of increase in medical costs. One 

analysis of the impact of the plan estimated that spending by states accepting the block 

grant option would be hundreds of billions of dollars less over the 10-year period than it 

would be under existing law.63 States choosing the option also would have been subject 

to fewer federal rules governing optional services and population coverage. 

Instead of fleshing out the specifics of its block grant plan, the Bush Administration asked 

the National Governors’ Association (NGA) to hammer out the details. The NGA created 

a bipartisan task force charged with producing a consensus plan. But the task force 

disbanded in June 2003 after failing to achieve agreement. Preoccupied with legislation 

to add a Medicare prescription drug benefit, Congress never considered the President’s 

Medicaid/SCHIP reform proposal. The President’s FY 2005 budget stated that “the 

Administration remains committed to enacting legislation which will reform Medicaid and 

SCHIP.”

64 Specific legislation to accomplish this objective, however, was never 

submitted to Congress, and the plan was quietly shelved.
30
31

APPENDIX B. Deficit Reduction Plans and the Fiscal 

Cliff

The unprecedented, recession-related deficits of the past few years have solidified 

support across the political spectrum for adopting a long-range plan to balance the 

federal budget and lower the nation’s debt burden. But, because of the tough political 

and economic decisions required to formulate a deficit reduction plan, a consensus has 

not yet emerged in Congress concerning the principal elements of such a plan. 

Debt Reduction Plans

In late 2009, the House approved a measure establishing a national commission to 

recommend steps necessary to stabilize federal expenditures and revenues over the 

long term. The commission’s recommendations were to go into effect unless Congress 

adopted an alternative plan for reducing the deficit. The measure died in the Senate after 

proponents were unable to muster the super majority (60 votes) necessary to break a 

filibuster in January 2010. 

In an attempt to revive efforts to forge a compromise plan, President Obama established 

by Executive Order a bipartisan National Commission on Fiscal Responsibility and 

Reform on February 2, 2010, and appointed as co-chairs of the commission former 

Senator Allan Simpson (R-WY) and former White House Chief of Staff Erskine Bowles.65

The Simpson-Bowles commission issued its consensus findings and recommendations 

on December 1, 2010. The report called for reducing deficit spending by almost $4 trillion 

over 18 years (by the end of FY 2020) by (1) sharply reducing tax rates, eliminating the 

Alternative Minimum Tax (AMT), and cutting backdoor spending through the tax code; 

(2) capping federal revenue at 21 percent of GDP and reducing spending to 22 percent 

(and eventually 21%) of GDP; (3) ensuring the long-range solvency of the Social 

Security trust funds; and (4) stabilizing the debt by 2014 and reducing it to 60 percent of 

GDP by 2023 and to 40 percent of GDP by 2035.66 Eleven of the 18 members of the 

commission voted to approve the plan, but because the vote fell three votes short of the 

required three-quarters majority, Congress was not required to approve the 

commission’s plan or adopt an alternative plan of its own with at an equal amount of 

deficit reduction over the 18-year period.

During the same general timeframe of the Simpson-Bowles commission, a number of 

other deficit reduction plans were unveiled, including proposals by President Obama; 

Congressman Paul Ryan (R-WI), chairman of the House Budget Committee; and a debt 

reduction task force headed by Dr. Alice Rivlin and former U.S. Senator Pete Domenici 

(R-NM). These plans laid out competing approaches to slicing federal spending and 

generating additional revenues by revising the existing tax code. As summarized in 

Table A, all of these plans included proposals to limit federal Medicaid spending to 

varying degrees and in varying ways.
32

Table A. Medicaid Proposals: Major Debt Reduction Plans

Plan Main Medicaid Proposals

Estimated 

Savings

Nat. Comm. on Fiscal 

Responsibility and 

Reform 

(Simpson-Bowles)

Dec. 1, 2010

● Reduce/eliminate state authority to 

levy provider taxes

$58 billion 

FY 2012–

FY 2020

● Enroll dual eligibles in Medicaid 

managed care plans

● Reduce funding for admin. costs

● Expedite approval of Medicaid 

waivers

● Set federal budget targets for 

Medicaid spending post-2020

President’s 

Framework for Shared 

Prosperity and Shared 

Responsibility

April 5, 2011

● Increase flexibility, efficiency, and 

accountability w/o converting program 

to a block grant

$100 billion over 

10 years

● Replace current matching formula 

with a single matching ratio for 

Medicaid and the Children’s Health 

Insurance Program

● Ask governors to propose Medicaid 

reforms

● Limit state use of provider taxes as 

matching dollars, impose upper limit 

on purchase of durable equipment, 

and improve program integrity

Pathway to Prosperity

(Ryan’s Budget Plan)

April 5, 2011

● Convert Medicaid to a block grant 

program in FY 2013; tie future growth 

to population and inflation (CPI/U)

$1.4 trillion over 

10 years

($771 billion 

without repeal of 

health reform law)

● Afford states greater flexibility in 

designing/operating their programs

● Replace Medicare premium payments 

for dual eligibles with Medical Savings 

Plans

● Repeal the Affordable Care Act
33

Plan Main Medicaid Proposals

Estimated 

Savings

Nat. Debt Reduction 

Task Force 

(Rivlin-Domenici) 

Nov. 17, 2010

● Eliminate barriers to enrolling dual 

eligibles in managed care plans

$5 billion 

FY 2012–18

$20 billion 

through 2020; 

$202 billion 

through FY 2025; 

and $3.0 trillion 

through 2040

● Incentivize states to control Medicaid 

costs by reducing the federal aid to 

GDP inflator + 1% beginning in 

FY 2018 – possibly by redistributing 

responsibilities between the Federal 

Government and the states

Sources: The Moment of Truth: Report of the National Commission on Fiscal 

Responsibility, December 2010; “FACT SHEET: The President’s Framework for Shared 

Prosperity and Shared Responsibility,” The White House, April 13, 2011; The Path to 

Prosperity: Restoring America’s Prosperity – Fiscal Year 2012 Budget Resolution, House 

Budget Committee, April 5, 2011; Letter from Douglas W. Elmendorf, Director of the 

Congressional Budget Office, to the Honorable Paul Ryan, Chairman, House Budget 

Committee, April 5, 2011; Restoring America’s Future: Reviving the Economy, Cutting 

Spending and Debt, and Creating a Simple, Pro-Growth Tax System, The Debt 

Reduction Task Force, November 2010. 

The Fiscal Cliff

Despite multiple proposals, attempts to solve the debt crisis stalled in Congress, with 

Republicans staunchly committed to reducing the deficit almost exclusively through 

spending cuts and Democrats insisting on a mixture of spending reductions and 

increased taxes on wealthy Americans. The political impasse reached crisis proportions 

during the summer of 2011 when House Republicans refused to approve an increase in 

the debt ceiling until a long-range deficit reduction plan was adopted. With the Federal 

Government teetering on the brink of defaulting on billions of dollars in outstanding debt, 

President Obama and Congressional leaders reached a last-minute agreement calling 

for slightly under $1 trillion in spending cuts spread over 10 years and the appointment of 

a bipartisan congressional panel to prepare a long-range deficit reduction plan to present 

to Congress. If the joint congressional committee was unable to reach consensus on a 

plan to reduce the deficit by an additional $1.2 trillion over 10 years, the authorizing 

legislation, titled the Budget Control Act of 2011 (P.L. 112-25), directed the President to 

impose $1.2 trillion in automatic, across-the-board spending cuts over a 10-year period. 

Initially, half of the reductions were to be applied to national security programs and half 

to nonsecurity (mainly domestic assistance) programs and were to go into effective on 

January 1, 2012.67 Medicaid and Social Security expenditures were exempted from the 

second round of spending reductions and Medicare cuts were to be limited to 2 percent 

of program outlays. 
34

This back-up plan, called “sequestration,” was intended to drive congressional 

Republicans and Democrats toward a compromise solution. The assumption was that 

both liberals and conservatives would prefer to craft a compromise deficit reduction plan 

instead of having across-the-board cuts indiscriminately applied to virtually all areas of 

the federal budget. But, as it turns out, the Joint Select Committee on Deficit Reduction 

(commonly referred to as the “Super Committee”) was unable to reach agreement on an 

alternative deficit reduction plan by the statutory deadline (November 23, 2011) and it 

disbanded. As a result, automatic, across-the-board spending reductions will go into 

effect on January 1, 2013, unless Congress enacts a substitute plan in the interim.68

In addition to sequestration, several other critical tax and spending provisions are 

scheduled to expire at the end of 2012. First, the Bush-era tax cuts, which were 

extended for two years under legislation signed into law by President Obama on 

December 17, 2010,69 will revert to prior levels after December 31 unless Congress 

extends or revises applicable provisions of the tax code before then. The 2012 tax 

liability of virtually all individuals and corporations will increase if existing tax rates are 

not extended. Second, unless Congress extends AMT exemptions by the end of the 

year, millions of middle-income tax payers will pay higher—in some cases, significantly 

higher—2012 taxes.70 Originally enacted in 1969 and revised in 1982, the AMT was 

intended to prevent millionaires from avoiding tax liability. But, because the law does not 

adjust AMT rates for inflation, each year Congress has had to enact a “patch” to prevent 

middle-income tax payers from paying higher alternative tax rates. Finally, unless 

Congress again delays application of the Sustainable Growth Rate (SGR) adjustment 

factor, Medicare payments to physicians will be reduced by 27.4 percent effective 

January 1, 2013. The SGR is an alternative method of calculating physician fees that 

was adopted as part of the Balanced Budget Act of 1997. CMS is required by law to 

calculate the annual adjustment factor, but for the past 15 years, Congress has 

postponed the effective date of the SGR formula.71

The combined impact of sequestration, expiration of the Bush tax cuts, and the deadline 

for AMT and SGR legislative fixes has come to be known in Washington as “the fiscal 

cliff.” Unless Congress and the White House take actions to avert the fiscal cliff, CBO 

predicts that the nation will experience another recession, with GDP declining by 

1.3 percent during the first half of 2013.72
35

Endnotes 

1. Kaiser Commission on Medicaid and the Uninsured, “The Medicaid Program at a 

Glance,” Policy Brief (Washington, DC: Kaiser Family Foundation, September 2012). 

2. Families USA, “Cutting Medicaid: Harming Seniors and People with Disabilities Who 

Need Long-Term Care” (Washington, DC: Families USA Foundation, May 2011). 

3. Congressional Budget Office (CBO), An Update to the Budget and Economic Outlook: 

Fiscal Years 2012 to 2022 (Washington, DC: CBO, August 2012),

http://www.cbo.gov/publication/42905. 

4. U.S. Treasury website, based on gross national debt as of January 31, 2001, and 

September 19, 2012 (http://www.treasurydirect.gov/NP/BPDLogin?application=np).

5. CBO, The 2012 Long-Term Budget Outlook (Washington, DC: CBO, June 2012),

http://www.cbo.gov/publication/43288. 

6. Ibid. 

7. The Concord Coalition, “Structural Deficits: What Are They, Why Do We Have One, 

and Why Should We Worry About It,” Issue Brief (Arlington, VA: The Concord Coalition, 

February 27, 2012), http://www.concordcoalition.org/issue-briefs/2012/0227/structuraldeficit-what-it-why-do-we-have-one-and-why-should-we-worry-about-i. 

8. Ibid.

9. Enrolled version of H.R. 8, the “American Taxpayer Relief Act of 2012,” U.S. 

Government Printing Office, January 1, 2013 (http://www.gpo.gov/fdsys/pkg/BILLS112hr8eas/pdf/BILLS-112hr8eas.pdf).

10. U.S. Department of the Treasury, “Historical Debt Outlays,” 

http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt.htm. 

11. U.S. Department of the Treasury, “Interest Expense on the Debt Outstanding,” 

http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm. 

12. Ginsberg, P. B., “High and Rising Health Care Costs: Demystifying U.S. Health Care 

Spending,” Research Synthesis Report No. 16 (Princeton, NJ: Robert Wood Johnson 

Foundation, October 2008).

13. Centers for Medicare and Medicaid Services, “Table 1: National Health Expenditures 

Aggregate, Per Capita Amounts, Percent Distribution and Average Annual Percent Change: 

Selected Calendar Years 1960–2010” (http://www.cms.gov/Research-Statistics-Data-andSystems/Statistics-Trends-and-Reports/NationalHealthExpendData/Downloads/tables.pdf).
36

14. “OECD Health Data: Health Expenditures and Financing,” Organization for Economic 

Co-operation (http://www.oecd-ilibrary.org/), data accessed by the Kaiser Family 

Foundation, August 23, 2012.

15. CBO, The 2012 Long-Term Budget Outlook, p. 12. 

16. P.L. 146, The Patient Protection and Affordable Care Act, as amended by P.L. 111-

152, the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152), 

collectively referred to as the Affordable Care Act (ACA). 

17. Kaiser Family Foundation (KFF), “Health Care Costs: A Primer – Key Information on 

Health Care Costs and Their Impact,” (Washington, DC: KFF, May 2012), pp. 29–30 

(http://www.kff.org/insurance/7670.cfm?source=QL). 

18. Ibid.

19. Kaiser Commission on Medicaid and the Uninsured, “The Medicaid Program at a 

Glance,” pp. 1–2. 

20. Peterson, G. E., and D. S. Nightingale, “What Do We Know About Block Grants?” 

(Washington, DC: Urban Institute, 1995). 

21. Sard, B., and W. Fischer, “Housing Block Grant Bills Would Jeopardize an Effective 

Program and Likely Lead to Cuts in Assistance for Low-Income Families” (Washington, 

DC: Center for Budget Policy and Priorities, 2003). 

22. Feingold, K., L. Wherry, and S. Schardin, “Block Grants: Historical Overview and 

Lessons Learned,” New Federalism Series A, No.A-63 (Washington, DC: Urban Institute, 

April 2004).

23. U.S. General Accounting Office, Lessons Learned from Past Block Grants: 

Implications for Congressional Oversight, GAO/IPE-82-8 (Washington, DC: GAO, 

September 23, 1982). 

24. Ibid.

25. Feingold, Wherry, and Schardin, April 2004. 

26. Section 401(b) of the Personal Responsibility and Work Opportunity Reconciliation 

Act of 1996, 101 STAT. 2105, Government Printing Office. 

27. “Child Recipients of Welfare (AFDC/TANF): Indicators on Children and Youth,” Child 

Trends Data Bank, updated: July 2012 (http://www.childtrendsdatabank.org). 

28. U.S. Department of Health and Human Services, Administration on Children and 

Families, Temporary Assistance to Needy Families (TANF): Ninth Annual Report to 

Congress, 2012, Table 12:7, pp. xii-109–xii-110. 
37

29. American Recovery and Reinvestment Act of 2009 (P.L. 111-5). 

30. DeParle, J., “Welfare Limits Left Poor Adrift as Recession Hit,” New York Times

(April 7, 2012). 

31. Like AFDC, social services aid to the states began as an open-ended entitlement 

authority. However, federal financial participation was capped in 1972, nine years before 

the Social Services Block Grant program was established.

32. Website of the Budget Committee, U.S. House of Representatives 

(http://roadmap.republicans.budget.house.gov/plan/default.aspx). 

33. House Budget Committee, A Pathway to Prosperity: A Blueprint for America’s 

Renewal, FY 2013 Budget Resolution, U.S. House of Representatives, March 20, 2012

(http://budget.house.gov/uploadedfiles/pathtoprosperity2013.pdf).

34. The Patient Protection and Affordable Care Act, P.L. 111-148, as amended by the 

P.L. 111-151.

35. The enhanced federal aid that states received during FY 2009–FY 2011 as a result 

of the stimulus legislation would be excluded in calculating a state’s base allocation. 

36. Park, E., and M. Broaddus, “Ryan Medicaid Block Grant Proposal Would Cut 

Medicaid by One-Third by 2022 and More After That” (Washington, DC: Center on 

Budget and Policy Priorities, March 27, 2012). 

37. Election campaign officials have indicated that Presidential candidate Mitt Romney 

supports a Medicaid block grant that adjusts annual increases in state allocations based 

on GDP growth plus 1 percent. They indicate that the 10-year savings associated with 

the proposal would total $100 billion, compared to the $163 billion in savings associated 

with the House-passed FY 2013 budget resolution (H. Con. Res. 112).

38. Holahan, M. Buettgens, C. Carroll, and V. Chen, “National and State-by-State Impact 

of the 2012 Republican Budget Plan for Medicaid,” Issue Paper (Washington, DC: Kaiser 

Commission on Medicaid and the Uninsured, October 2012). 

39. Ibid.

40. Ibid. 

41. Holahan, J., M. Buettgens, V. Chen, C. Carroll, and E. Lawton, “House Republican 

Budget Plan: State-by-State Impact of Changes in Medicaid Financing,” Issue Paper 

(Washington, DC: Kaiser Commission on Medicaid and the Uninsured, May 2011). 

42. Holahan, M. Buettgens, C. Carroll, and V. Chen, October 2012. 

43. Ibid. pp. 8–12. 
38

44. Ibid, p. 16

45. Ibid, p. 20. 

46. CBO, “Long-Term Analysis of Budget Proposals by Chairman Ryan,” April 5, 2011 

(http://www.cbo.gov/publication/25159).

47. See, for example, H.R. 5979, the “Medicaid Accountability and Care Act of 2012” 

(Rep. Bill Cassidy (R-LA).

48. Park, E., and M. Broaddus, “Medicaid Per Capita Cap Would Shift Costs to States 

and Place Low-Income Beneficiaries at Risk,” Center on Budget and Policy Priorities 

(October 4, 2012), p.4. 

49. “The Medicaid Program at a Glance,” p. 3

50. Park et al., “Medicaid Per Capita Cap ...,” Ibid, pp. 5–6.

51. Ibid, pp. 6–8.

52. Ibid, pp. 8–10. 

53. Ibid, p.10.

54. “The Medicaid Program at a Glance,” p. 1. 

55. Gettings, R. M., Forging a Federal-State Partnership: A History of Federal 

Developmental Disabilities Policy (Washington, DC, and Alexandria, VA: American 

Association on Intellectual and Developmental Disabilities and the National Association 

of State Directors of Developmental Disabilities Services, 2011), pp. 64–65. 

56. Feingold, Wherry, and Schardin, April 2004. 

57. Ibid, p. 2. 

58. Ibid, pp. 86–88.

59. Ibid, pp. 88–92.

60. Lambrew, J., “Making Medicaid a Block Grant: An Analysis of the Implications of Past 

Proposals,” The Milbank Quarterly, Vol. 83, No. 1 (2005), p. 6.

61. Gettings, 2011, p. 108.

62. Office of Management and Budget, Budget of the United States Government: 

FY 2004 (Washington, DC: U.S. Government Printing Office, 2003), pp. 125–127. 
39

63. Kaiser Commission on Medicaid and the Uninsured, “Bush Administration: 

Medicaid/SCRIP Proposal,” Issue Paper. Washington, D.C.: Kaiser Family Foundation, 

May 2003. 

64. Office of Management and Budget, Budget of the United States Government: 

FY 2005 (Washington, DC: U.S. Government Printing Office, 2004), p.149. 

65. Executive Order 13531, dated February 2, 2010 (http://www.fiscalcommission.gov/). 

66. National Commission on Fiscal Responsibility and Reform, The Moment of Truth, 

December 2010 (http://www.fiscalcommission.gov/news/moment-truth-report-nationalcommission-fiscal-responsibility-and-reform).

67. Under revised assumptions adopted later, the sequestration would result in a 9.4 

percent reduction in nondefense discretionary funding and an 8.2 percent reduction in 

nonexempt, nondefense discretionary funding. The sequester also would impose cuts of 

2 percent cut in Medicare spending; 7.6 percent in other nonexempt, nondefense 

mandatory programs; and 10 percent in nonexempt, defense mandatory programs (OMB 

Report Pursuant to the Sequestration Transparency Act of 2012 (P.L. 112-155)). 

68. On September 14, 2012, the Office of Management and Budget issued a report 

providing a detailed, program-by-program breakdown of how to the spending reductions 

will be applied (OMB report, Ibid.).

69. The Tax Relief, Unemployment Compensation Reauthorization and Job Creation Act 

of 2010 (P.L. 111-312). 

70. “Alternative Minimum Tax, Tax Guide to Investors,” Fairmont.com 

(http://www.fairmark.com/amt/amt101.htm). 

71. KFF, “FAQ: The ‘Doc Fix” (February 17, 2012) 

http://www.kaiserhealthnews.org/stories/2011/december/15/faq-doc-fix.aspx. 

72. CBO, “Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur 

in 2013” (May 22, 2012), http://www.cbo.gov/publication/43262. 
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