Medicaid Financing Cliff: Implications for the Health Care Systems in Puerto Rico and USVI

Note: A Spanish-language version of this document is available here.

This brief provides an overview of the status of the health care systems and Medicaid programs in Puerto Rico and the U.S. Virgin Islands (USVI) about one and a half years after Hurricanes Irma and Maria struck the islands in September 2017. The hurricanes exacerbated the territories’ existing economic and health care challenges by accelerating outmigration of residents and health care providers and destroying homes, schools, health care facilities, and other infrastructure. After the storms, the territories’ Medicaid programs have served as important resources for addressing residents’ health care needs, but they have operated under longstanding financing challenges. This brief focuses on these challenges and includes KFF analysis of the implications for the territories’ Medicaid program finances, as most of the temporary federal Medicaid funds provided through the Affordable Care Act (ACA) and disaster relief are set to expire at the end of September 2019. The other U.S. territories (American Samoa, the Commonwealth of the Northern Mariana Islands, and Guam) also face challenges tied to the scheduled expiration of ACA funds. This brief draws on earlier work as well as recent public reports and on-the-ground interviews with territory officials, providers, Puerto Rico health plans, and enrollees.

Key Highlights: Medicaid Financing Cliff Implications for Puerto Rico and USVI

  • Temporary Medicaid funds from the ACA and the Bipartisan Budget Act of 2018 (BBA) have provided critical health care support to Puerto Rico and USVI, but the vast majority of these funds expire at the end of September 2019.
  • Despite an increase in temporary federal Medicaid funds, the Puerto Rico and USVI health care systems are fragile and in transition, while residents struggle with substantial mental health and other health needs.
  • The expiration of temporary federal Medicaid funds without legislation to provide additional funds would result in significant funding shortfalls and have severe consequences for territory budgets, coverage, and health care systems more broadly.
  • Options for Congress to address the Medicaid financing issues in Puerto Rico and USVI include raising or eliminating the cap on financing and maintaining or increasing the federal matching rate (federal medical assistance percentage, or FMAP). 

Key Findings

Temporary federal Medicaid funds from the ACA and the BBA have provided critical health care support to Puerto Rico and USVI, but the vast majority of these funds expire at the end of September 2019. Unlike states, Puerto Rico and USVI receive capped federal Medicaid funds and a fixed FMAP (55%) that is substantially lower than the 83% rate based on per capita income that they would receive if they were states.  ACA funds have comprised a significant share of the two territories’ overall Medicaid funding since 2011, and the post-hurricane BBA provided additional Medicaid support and temporarily eliminated Puerto Rico and USVI’s local shares of Medicaid expenditures. Longstanding economic and health care challenges that predated the hurricanes worsened post-storms. The territories have used the ACA and BBA funds to relieve pressure on local budgets for Medicaid, to expand and support coverage, and to address health system deficiencies through enhanced reimbursement rates for providers, expanded clinic capacity, and infrastructure improvements.

Despite an increase in temporary federal Medicaid funds, the Puerto Rico and USVI health care systems are fragile and in transition, while residents struggle with substantial mental health and other health needs. Some health care infrastructure, particularly USVI’s hospitals and Department of Health clinics and the facilities on Puerto Rico’s offshore islands, still have not recovered fully from the hurricanes. In addition to physical health care facilities, the storms exacerbated long-standing issues with provider recruitment and retention. Both territories struggle to address residents’ mental health needs, which worsened and remain elevated after the hurricanes. While still working on hurricane recovery, the territories are also moving ahead with delivery system reforms. Puerto Rico is engaged in major managed care and delivery system reforms, which have caused challenges for managed care organizations (MCOs), providers, and enrollees in their rollout period. Initiatives to focus on “high-need, high-cost” populations typically require upfront investments and greater standardization by plans and providers to generate long-term results. In USVI, territory leaders are engaged in ongoing efforts to improve care, particularly behavioral health services and care coordination.

If Puerto Rico reverted to pre-ACA Medicaid financing after most temporary Medicaid funds expire at the end of Sept. 2019, available funds would fall short of projected costs by $1B in FY 2020 and $1.5B in FY 2021.

The expiration of temporary federal Medicaid funds without legislation to provide additional funds would result in significant funding shortfalls and have severe consequences for territory budgets, coverage, and health care systems more broadly. The local governments in Puerto Rico and USVI would not be able to make up for lost federal funds and therefore would not be able to sustain current service levels. Some territory officials and providers described the potential effects of the funding expiration as “devastating,” “catastrophic,” and “scary.” Assuming a return to federal funding limited to the statutory cap and a 55% FMAP after remaining ACA funds expire, Puerto Rico could experience a shortfall of $1 billion in FY 2020 and $1.5 billion in FY 2021 (representing 36% and 52% of projected total spending, respectively). Estimates prepared by the Medicaid and CHIP Payment and Access Commission (MACPAC) show that such funding shortfalls could trigger coverage losses of one-third to one-half of current enrollment levels in Puerto Rico of about 1.2 million people. Federal shortfalls could reach $31.3 million in USVI, or 40% of program spending. USVI Medicaid officials assert that such shortfalls could put the 18,000 enrollees added under the ACA expansion at risk for loss of coverage (out of nearly 28,000 total enrollees).1 In both territories, lack of additional funds would exacerbate challenges with provider recruitment and retention, and uncertainty around the availability and amount of federal support has already hampered the territories’ ability to move forward with health care reforms.

Congress could consider options to address the funding shortfall under current projections as well as to provide additional funds by raising the FMAP or the cap (or both). Estimates of the funding shortfall reflect current projections for program and territory spending at the 55% FMAP. KFF analysis shows that, for Puerto Rico, additional federal funding of $2.8 billion in FY 2021 could help address the projected shortfall ($1.5 billion), increase the FMAP to 83%, and increase per member per month (PMPM) rates by 50% (an additional $1.3 billion for the FMAP and PMPM increases). For USVI, KFF analysis shows that addressing the shortfall and raising the FMAP to 83% could provide $45.9 million in federal funds, while additional funds could support an increase in the statutory cap. Raising the FMAP could reduce the share required by the territories to access federal funds, while increasing the cap beyond projected program levels could help address gaps in benefits and increase provider reimbursement rates. Options that would address funding for a longer period (or a permanent solution) could provide longer-term stability for the territories’ health care systems and avoid year-to-year solutions that result in funding cliffs and uncertainty.

Next steps for Congress may include consideration of near-term fiscal support to Medicaid programs in the territories while continuing exploration of long-term, more permanent financing changes. On May 1, 2019, Puerto Rico Governor Ricardo Rosselló submitted a letter to Congress requesting $15.1 billion in federal Medicaid funds at an 83% FMAP over the next five years. The request states that the funds would provide stability for Puerto Rico to move forward with delivery system reforms and measures intended to stem provider outmigration and improve access to services while policymakers work on longer-term financing reforms. Uncertainty over funding contributes to instability in the territories’ health care systems by requiring administrative resources to establish contingency plans, creating confusion for providers and enrollees, and limiting the territories’ abilities to move forward with complex delivery system reforms. Governors across the territories have called for more adequate and permanent federal Medicaid support, and the territories’ nonvoting elected delegates to Congress have introduced legislation that would allow the territories to receive similar treatment for Medicaid as the states without a statutory Medicaid financing cap and with an FMAP calculation based on per capita income as in the states.

Issue Brief