Block Grants Can Tame the Budget, But at What Cost?
Policy + Politics

Block Grants Can Tame the Budget, But at What Cost?

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With Republicans running both houses of Congress and budget season approaching, one thing we can expect to hear a lot about in the coming months is the idea of “block grants” for many federal programs. When House Budget Committee Chairman Tom Price (R-GA) unveils his budget proposal this morning, a centerpiece is expected to be a new payment system for Medicaid, and perhaps the Supplemental Nutrition Assistance Program-- block grants. 

The general idea behind a block grant is that rather than funding an open ended program at the state level, and requiring states to adhere to very specific rules for administering it, block grants provide a fixed sum of money to the states, and allow them significant discretion in how they spend it. 

Related: Balanced Budget Goal Means Furious Battle Ahead 

The appeal of block grants, to both states and to Congress, is fairly obvious. 

At the state level, rafts of often-onerous federal requirements are lifted, replaced by a grant of funds with only general requirements placed on their use. States will argue that rather than trying to adapt to one-size-fits-all federal programs, block grants allow them to adapt systems and procedures that work well for them and save money. 

To many conservatives, that sounds like a pretty non-controversial position. “You can make a pretty good case that state and local politicians just know more about what is going to work in their districts than Washington does,” said Douglas Holtz-Eakin, president of the American Action Forum and a former director of the Congressional Budget Office. 

At the federal level, the upside is even more obvious. Unlike open-ended entitlement programs, block grants are a fixed sum of money, making it much easier for lawmakers to know what future spending will look like. In addition, because they are typically adopted as cost-savings measures, block grants are generally funded at levels substantially below the programs they replace, and are slated to grow at a rate lower than current programs’ projected rates. 

Related: The Unintended Consequence of Expanding Medicaid 

The country has nearly 50 years of experience with block grants, and the results have been a mixed bag as far as efficiency and effectiveness go. 

In general, says Edwin Park, vice president for health policy at the Center on Budget and Policy Priorities, when it comes to social programs, the result is budgetary savings paired with reduced services. “States can’t use that flexibility except to make big cuts,” he said. “They aren’t able to avoid impacts to recipients.” 

Some of the earliest block grants were issued during the mid-1960s, with Lyndon Johnson in the White House and Congress controlled by his Democratic allies, but they made up only a tiny fraction of total federal assistance to the states, and typically either provided increased funding to states, or created new programs entirely. This extended through the Nixon and Ford administrations, both of which expanded programs through block granting. 

It wasn’t until the Reagan era that block grants came to be seen as a cost-cutting measure. Early in his first term, Reagan compromised with Democrats in Congress and folded 77 federal “categorical” spending programs into 9 different block grants at roughly 75 percent of their original funding levels. 

Related: Docs Battle States on Meager Medicaid Payments 

During the Clinton administration there was another wave of block grants. For example, the White House and Republicans in Congress block-granted the Temporary Aid to Needy Families program, commonly known as welfare. That change was part of bipartisan passage of welfare reform, known as The Personal Responsibility and Work Opportunity Reconciliation Act of 1996. 

One thing block grants have been undeniably successful at is cost-cutting. Academic studies of block grant programs have found that over a period of years, programs changed from categorical spending into block grants see the amount of money dedicated to them decline on an inflation-adjusted basis. 

However, on other measures, block grants don’t always deliver on their promises. The flip side of the grants’ fiscal effectiveness is that it can undercut the original intent of the grant by limiting and eventually reducing assistance that Congress presumably thought was necessary when the grant was originally funded. 

The promised flexibility, too, is often whittled away over the years. As legislators face pressure to place certain restrictions or requirements on the funding, the grants can begin to look more like closed-ended categorical programs again. 

Related: Government Blows $125 Billion in Improper Payments 

Often, once they become more associated with the state government than the federal government, states’ representatives in Washington sometimes have less incentive to fight for them. 

“There are lots of political dynamics involved in this,” said Holtz-Eakin. “Federal legislators want to take credit for their successes – they want to put their names on programs – and it’s hard to do that when all they’re doing is cutting a check.” 

Also, block granting an entitlement program effectively means it isn’t an entitlement program anymore. That can be seen as a feature or a bug, depending on your perspective. But what it could mean in practice is that people who used to be eligible for services won’t get them anymore. 

Under Medicaid, for instance, the federal government pays a fixed percentage of states’ Medicaid costs – generally about 57 percent – with no upper limit. That means that in major economic slowdowns, when more people apply for Medicaid, the federal government’s costs go up. If the program is block granted, Washington can’t legally compel states to supply services with no upper limit on costs. In practice, that means that cuts could take place in the areas of eligibility, services provided, and possibly provider reimbursement levels.

In recent years, when Rep. Paul Ryan (R-WI) chaired the House Budget Committee, his budget proposals regularly advocated block-granting Medicaid at levels that would have forced millions of people out of the program. 

Related: CBO—Long-Term Debt Poses Serious Negative Consequences 

“We don’t know the size of the Medicaid cuts in the budget yet,” said Park. “But the previous Ryan budget would have cut spending by about a quarter in the 10th year. That means millions of people would lose coverage and provider payments would have to go down.” 

A common complaint about block grants is that that they remove federal oversight from how federal money is spent. The implication is that states could take the money, fail to use it for the purpose specified by Congress, and spend it elsewhere. 

That, in fact, doesn’t typically happen. However, lawmakers in Washington often find themselves uncomfortable with the choices states make when determining how to fund programs and the way states disburse funds to local governments within their borders. 

In the end, block grants, like many federal programs, morph into something that their sponsors did not originally intend. Whatever Republicans propose on Tuesday may face a similar future. 

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