Do States Adjust Medicaid Enrollment in Response to Capitation Rates? Evidence from the Medicare Part D Clawback

To curb federal Medicaid costs, recent policy proposals suggest capitation financing, under which program costs are fixed per beneficiary. This study examines to what extent less generous capitated federal subsidies would cause states to decrease Medicaid enrollment. To answer this question, we identify a component of Medicaid mirroring capitation financing – the clawback provision in Medicare Part D – and use that provision to estimate state responses to capitation rates. Specifically, the clawback requires states to pay the federal government a lump sum for each Medicaid enrollee who is also eligible for Medicare (dual-eligible). The size of the lump sum varies across states, based on a historical artifact: state-level prescription drug spending for dual-eligibles in 2003. Thus, the fixed cost of enrollment after 2006, when Part D went into effect, is exogenously determined by the 2003 cost. We show that this rigidity in the clawback formula creates substantial transfers between the federal government and the states, and among the states. We further find that increasing clawback payments per dual-eligible by $100 leads to a 2-percentage-point decrease in the share of dual-eligibles enrolled in Medicaid, implying an elasticity of -0.31 of dual-eligible enrollment with respect to the fixed cost per enrollee