Despite new data that show Medicaid plays a small role in states’ fiscal problems, Medicaid programs in all states remain a significant target for budget cutting, according to another study. The Kaiser Commission on Medicaid and the Uninsured released Rockefeller Institute and Health Management Associates reports in September, plus one from the Urban Institute, which looked at the principal drivers of rapid Medicaid spending growth.
The Urban Institute report points especially to enrollment increases due to loss of income and private insurance coverage during the current economic downturn. It also eyed increases in hospital and prescription drug costs. Together, the three reports constitute the Commission’s third annual survey of the 50 states and the District of Columbia.
"The duration of the state fiscal crisis is impacting Medicaid coverage broadly and deeply," commission executive director Diane Rowland said when the reports were released. "With 34 states reducing eligibility and even more restricting health care benefits over the last three years, the state fiscal crisis is putting health care for low-income families and the elderly and disabled at risk. Many will get less care and others will lose it altogether," she explained.
Commission associate director Victoria Wachino points out two salient facts that demonstrate the problem Medicaid faces include:
- In many states, Medicaid is the second-largest area of general fund spending, trailing only elementary and secondary education.
- State revenue collections have made a dramatic downward shift after 10 years of strong revenue growth to a 5.6% decline in 2002.
"With such large shortfalls ($26 billion in 2003 and an estimated $69 billion in 2004) it is difficult to adequately fund this program," Ms. Wachino declares.
Health care spending is up
Health Management Associates principal Vern Smith based his Medicaid budget survey on responses from all 50 states plus the District of Columbia. "It’s not new news that this is a period of a high rate of growth in health care spending," Mr. Smith says, citing a 13.9% increase in health insurance premiums in 2003, the highest growth rate since 1990, and a much higher rate than workers’ earnings (3.1%) and overall inflation (2.2%).
After three years of efforts to curb Medicaid spending growth, states reported that the average spending growth for Medicaid in 2003 was 9.3%, down from 12.8% in 2002. It was the first time since 1996 the growth rate declined. Mr. Smith points out that the reduced growth rate was striking for several reasons — it is a significant drop, while other rates remained steady or even increased; and it’s difficult for any program to grow by as much as 9.3% when revenues are down.
When state Medicaid directors were asked about the factors that are driving the spending growth, Mr. Smith reports, they pointed to prescription drug costs, the overall inflation in the cost of health care services, and Medicaid enrollment increases. Increasingly, he says, states are identifying enrollment increases as the primary factor in Medicaid growth.
Medicaid enrollment grew 7.8% in fiscal year 2003, nearly as much as the 8.3% in 2001 and 9.2% in 2002, and much more than the 2.1% in 1999 and 3.7% in 2000. An enrollment increase of 5.3% is forecast for FY 2004. "Most of the enrollment increase has been in the low-cost categories like kids and moms," Mr. Smith adds, "while most of the spending growth is in the high-cost categories of the elderly and disabled."
Trying to control costs
He reports that half the states restricted eligibility in FY 2003 and a third are expected to do so in FY 2004. Although most represented minor reductions in eligibility, several states started out with significant reductions but ended up rolling them back after they were challenged politically or legally. And for FY 2004, as many states are planning eligibility expansions as are looking at reductions.
On the payment side, most Medicaid programs will freeze or cut some provider rates in 2004, although 37 states have set increases for one or more provider groups. Physicians typically are the provider group being cut, while hospitals and nursing homes are those most likely to see an increase.
Mr. Smith says that when asked whether they expected a Medicaid budget shortfall in FY 2004, three state Medicaid directors declined to respond, 16 said they did not expect a shortfall, and 32 said they did expect a shortfall. He points out that the enhanced federal Medicaid matching rate that was part of the Jobs and Growth Tax Relief Reconciliation Act of 2003 softened or prevented cuts that would have been made for FY 2004 and may prevent midyear cuts, but also said there is a strong concern for FY 2005 when the fiscal relief will expire but it is anticipated that state revenues will remain depressed while Medicaid costs continue to go up.
Overall, he reports that, for fiscal years 2002-2004, 50 states have implemented controls on drug costs and reduced or froze some provider payments, 35 have reduced benefits, 34 have reduced or restricted eligibility, and 32 have increased copayments. "The outlook is for continuing budget pressure on Medicaid," Mr. Smith concludes. "State officials expect Medicaid enrollment and costs to continue to grow faster than state revenues, and the task of controlling Medicaid cost growth will be more difficult."
Spending drivers examined
Urban Institute researcher John Holahan’s report addressed factors contributing to Medicaid spending growth between 2000 and 2002. Total growth in that period was 6.6 million people, including 3.7 million children (56%), 2.3 million adults (35%), 400,000 blind and disabled (6%), and 200,000 aged (3%). The growth in enrollment of families and children was attributable to recession, rising health care costs, and state expansion of Medicaid eligibility in the late 1990s, Mr. Holahan says.
Increases for aged, disabled
For the aged and disabled, there was increased participation due to rising health care costs, especially for prescription drugs; the aging of the population, which affects disability rates; medical technology; and increased participation in home- and community-based waiver programs. While the aged and disabled were only 9% of the enrollment growth combined, they accounted for 59% of the Medicaid expenditure growth in the same time period. "It’s hard to see how states will deal with this situation given their budget problems," Mr. Holahan says. "But it’s also hard to see how the federal government can give them any more relief."
State revenue drops a problem
Rockefeller Institute director of fiscal studies Donald Boyd demonstrated that state tax revenues have fallen far more sharply relative to the economy than happened in previous recessions. The current fiscal crisis is so bad, he says, because of the "bursting of our fiscal bubble."
Indicators he pointed to included a drop in capital gains of nearly 50% in 2001 after quadrupling in the late 1990s; manufacturing weakness followed by a recession and war uncertainty; consumption growth (important to sales taxes) slowed; and other positive trends of the 1990s ended (stock options gone, welfare windfall used up, Medicaid spending going up). "At this point, the economy may be recovering," Mr. Boyd adds, "but the employment decline has been steep and prolonged relative to the last recession."
He says that for the FY 2002 state budget gap, the growth in Medicaid spending contributed $6.9 billion, while drops in revenue collections accounted for $61.8 billion. "The near- and middle-term outlook is not good," Mr. Boyd states. "Employment remains weak. It will take states several years to work out of the current crisis, since one-shot solutions and other nonrecurring actions spread the problem out. Capital gains are likely to be weak. There will be downward pressure on sales taxes, and there will be continued spending pressure."
In the thick of the fight
Ohio Department of Jobs and Family Services deputy director for health plans Barbara Edwards says that as her agency planned its biennial budget for fiscal years 2004 and 2005, the governor said he could no longer protect Medicaid and an anticipated 14% increase in spending. Significant benefit cuts and a rollback in eligibility were planned, along with aggressive drug cost controls.
Ms. Edwards says that even after avoiding $1 billion in costs, the state projects a 9% increase for 2004 and 6% for 2005. At that point, she adds, advocacy groups entered the picture and sent very clear messages about the program’s value, to the point that the state Legislature added a temporary sales tax increase to restore most of the projected cuts. The enhanced federal match helped offset the problem. "We now have an appropriation for an 11% increase in 2004 and 7% in 2005," Ms. Edwards reports. "But Medicaid is going to stay in the bull’s-eye because its growth in spending remains twice the rate of revenue projections."
Robert Day, Kansas director of Medicaid policy views Medicaid as two programs:
- a program that provides health insurance to help poverty-level children and their mothers;
- a program that purchases health care services for the aged and disabled.
A very different program
"States are picking up a publicly-funded health insurance program that is no longer tied to a welfare model," Mr. Day says. "Medicaid today looks very different than it did five or six years ago."
Though Kansas is a socially and fiscally conservative state, he says it still hasn’t controlled Medicaid growth. The state agency often finds itself "up against advocacy communities who are not always in tune with what we see as our priorities," Mr. Day adds. He predicts efforts to provide a better care management model for the chronically ill, who are responsible for 60% to 70% of the state’s Medicaid budget.
[To see the three Kaiser Commission reports, go to: www.kff.org/content/2003/20030922. For a webcast of the briefing, go to: www.kaisernetwork.org/healthcast/kff/22sep03. Contact Ms. Rowland and Ms. Wachino at (202) 347-5270; Mr. Smith at (517) 482-9236; Mr. Holahan at (202) 833-7200; Mr. Boyd at (518) 443-5284; Ms. Edwards at (614) 466-4443; and Mr. Day at (785) 296-3981.]
Despite new data that show Medicaid plays a small role in states fiscal problems, Medicaid programs in all states remain a significant target for budget cutting, according to another study.
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