Fiscal Fitness: How States Cope
Medicaid relief could be a recession remedy
As Congress and pundits debate ways to stimulate the American economy out of its current recession, lessons learned from the 2003-2004 fiscal relief that included a temporary increase in the federal share of Medicaid spending can be instructive.
A 2005 Kaiser Commission on Medicaid and the Uninsured analysis says the increased federal Medicaid matching funds helped states meet Medicaid spending increases that were driven in part by the economic downturn, successfully forestalled many additional and potentially larger reductions in Medicaid spending growth, and preserved Medicaid eligibility. "Based on these results, the temporary matching rate increase could serve as a potential model for funding Medicaid coverage during recessions," says Kaiser Commission principal policy analyst Robin Rudowitz and her colleagues.
Medicaid is described as a countercyclical program because during economic downturns, upward pressure on Medicaid spending increases as unemployment increases, individual income falls, and more people become eligible for the program. Thus, over the past several years of weak economic conditions, the rates of growth of Medicaid spending and enrollment have increased.
States have been challenged to meet the spending increases, Ms. Rudowitz says, because at the same time that Medicaid spending was increasing, state tax revenues fell dramatically. "This dynamicof a recession simultaneously driving state revenues down and Medicaid spending upis not unusual," she says. "It is inherent in Medicaid's role as a program that serves the low-income population and a financing structure that relies substantially on state tax revenue to fund the program."
The federal government's Medicaid matching rate (Federal Medical Assistance Percentage or FMAP) varies by state based on per capita income. The formula sets statutory floors at 50% and ceilings at 83%. On average across all states, the federal government typically pays for 57% of Medicaid spending, with the states responsible for the remaining 43%.
The 2003-2004 fiscal relief provided that each state's matching rate would increase by 2.95 percentage points and that states would be held harmless from any scheduled declines in their matching rates.
As a condition for receiving the higher FMAP, states were required to maintain their Medicaid eligibility levels in effect as of Sept. 2, 2003.
Lessons learned
Ms. Rudowitz says several clear results have emerged from the information that is available about states' use of the increased matching rate and its effect:
1. States used funds from the increased FMAP to meet spending increases in their Medicaid programs. States have not systematically tracked disposition of the funds that became available from the increased match, but two 50-state studies have broadly documented where the money went. Ms. Rudowitz reports that as Medicaid spending increases, often at rates exceeding the amount states had appropriated for the program at the beginning of their fiscal year, states were able to apply funds available as a result of the increased FMAP to meet the spending increases and did not need to make supplemental appropriations, additional reductions in their Medicaid programs, reductions in other state programs, or increases in fees and taxes. States used the fiscal relief funds to meet unexpected spending increases in their budgets at a level state revenues alone may not have allowed. They also used the relief funds for purposes other than helping to fund Medicaid.
2. Funds from the higher FMAP helped states maintain their Medicaid program, avoid making additional cuts in spending growth and even helped fund modest program restorations. For about half the states, the funding helped avoid making additional and larger reductions in their Medicaid spending growth than they would have made without the increased FMAP.
In Ohio, the legislature had been considering a significant rollback in Medicaid coverage for parents, but decided not to pursue it after the fiscal relief was passed. Similarly, the Kaiser report says, Missouri and New Jersey turned back planned reductions in parent coverage and Minnesota deferred a planned eligibility reduction for some 30,000 people, including pregnant women.
Some states used the fiscal relief to restore eligibility that had already been cut. Massachusetts restored coverage for about 36,000 long-term unemployed adults and Montana was able to provide coverage to about 1,300 children on a SCHIP waiting list. States such as Oregon and Louisiana reported they used the fiscal relief to avoid making additional reductions in their Medicaid spending growth.
3. Ms. Rudowitz says the requirement that states maintain their Medicaid eligibility as a condition of receiving the increased federal matching rate "proved to be a powerful incentive for states and helped preserve coverage for low-income people."
4. As a potential model for providing fiscal assistance to states, Medicaid had some unanticipated advantages, the analysis found. It was the first time that comprehensive state fiscal relief was provided through Medicaid. One advantage is that increasing the federal share of spending automatically targets increased federal support to states with the largest Medicaid programs where spending is increasing the most rapidly. Such targeting was critical, Ms. Rudowitz says, because one of the fiscal relief package's goals was to help states maintain their healthcare programs. Because Medicaid is the second-largest part of most states' general fund budgets, and its spending is growing quickly, increasing federal support for Medicaid relieves significant budget pressure for states.
Also, the 2003-2004 experience showed that increasing federal support for Medicaid can provide immediate financial assistance to states. Congress actually was able to predate the effective date of the FMAP increase before the date the economic relief legislation was passed because Medicaid was an existing program with an established structure by which states obtain quarterly federal payments.
5. The fiscal relief was received as state tax revenues were continuing to decline and helped states balance their budgets, as it was intended to do. While the relief achieved its primary objective, some have argued that if it had been implemented earlier, the impact could have been more significant as measured by different standards.
At an Alliance for Health Reform/Kaiser Commission briefing on Healthcare and the Economic Slowdown earlier this year, Urban Institute Health Policy Research Center director John Holahan reiterated the effects of the 2003-2004 fiscal relief. States did not cut Medicaid eligibility during the period covered by the temporary FMAP increase, he said, and federal funds prevented some, although not all, Medicaid cuts in many states. Delays in reaching federal agreement on the package meant many states had made large cuts before fiscal relief was available.
According to Mr. Holahan, states varied in length and depth of economic downturn, as well as beginning and ending points, so a single uniform FMAP increase mean that some states received windfalls, freeing them to devote funds to other purposes, including building reserves, while other states got less help than they needed.
Assessing state need
This time around, Mr. Holahan says, options for providing fiscal relief to states through Medicaid include: 1) a uniform FMAP increase for all states, with the amount and duration determined by Congress; and 2) providing federal funds based on changes in unemployment. In the second option, assistance could vary with the depth and length of individual states' economic distress, assistance should begin and end based on state unemployment changes, and funds should be sufficient to offset state costs associated with increased enrollment and the Medicaid share of projected revenue loss.
"As the country begins a new downturn," Mr. Holahan says, "Congress can and should design a new Medicaid/SCHIP stimulus legislation that improves on past policy by being more timely and better targeted."
Ms. Rudowitz tells State Health Watch that maintaining Medicaid during an economic downturn is "very important [because] it preserves access to services and coverage." She also notes that if Medicaid is cut by states, one result is a loss of federal revenue that then exacerbates the states' fiscal problems.
Funneling economic stimulus money through Medicaid also is good, she says, because hospitals and clinics often are an area's largest employers, so the money goes many different directions in the area economy.
Legislation (S. 2819) has been introduced by Sen. Jay Rockefeller (D-WV) to suspend implementation of several controversial new Medicaid regulations and also provide temporary fiscal relief to states.
Mr. Rockefeller says states already are responding to signs of a fiscal downturn by beginning to limit access to Medicaid and SCHIP "in preparation for the harsh economic times ahead." According to the Center on Budget and Policy Priorities, at least 10 states have implemented or are considering budget cuts that will reduce access to Medicaid or CHIP for working families.
He says economists have found that targeted state aid would generate increased economic activity of $1.36 for each $1 of cost. His bill provides some $12 billion in targeted state fiscal relief, equally divided between an increase in FMAP payments and targeted grants to states.
To qualify, states would have to meet criteria based on the average of state ranks in unemployment, food stamp participation, and foreclosures. "These three economic indicators closely align with state budget deficits and would allow us to more appropriately target state fiscal relief to the states with the most need," he says.
Download the Kaiser Commission report at www.kff.org/medicaid/upload/Financing-Health-Coverage-The-Fiscal-Relief-Experience-Policy-Brief.pdf. Contact Ms. Rudowitz at (202) 347-5270. Information on the Alliance for Health Reform presentation is online at www.allhealth.org/briefing_detail.asp?bi=121. Download S. 2819 at http://thomas. loc.gov/cgi-bin/query/z?c110:S. 2819:.
As Congress and pundits debate ways to stimulate the American economy out of its current recession, lessons learned from the 2003-2004 fiscal relief that included a temporary increase in the federal share of Medicaid spending can be instructive.You have reached your article limit for the month. Subscribe now to access this article plus other member-only content.
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