The tangled web of Medicaid and the states: Both may need fixing
The best short-term solution for Medicaid’s financial problems is a significant infusion of additional federal funds, according to Alan Weil, New Federalism program director at the Urban Institute in Washington, DC.
Long-term improvement, he added, means the structural reform of the Medicaid program.
Speaking in Washington, DC, at a Jan. 7 Robert Wood Johnson briefing on "Forum on Health Care Spending and Medicaid: The Challenges Facing Medicaid," Mr. Weil said, "The real problem with Medicaid is that there is a fundamental mismatch between what we ask it to do and what it costs to do it. In addition, there is a design flaw in asking states with cyclical revenues but balanced budget requirements and shrinking sales tax bases to bear the cost of a program that has grown and inevitably will continue to grow faster than the economy."
Mr. Weil, who once directed Colorado’s Medicaid program, said Medicaid can’t save very much money by relying on the traditional cost-saving techniques used in private plans, such as increasing copayments and deductibles, and scaling back services. For instance, he said, 85% of Medicaid prescription drug costs are associated with elderly and disabled enrollees, many of whom have multiple chronic conditions requiring multiple medications. Eligibility thresholds for these enrollees generally are below the poverty line for those who aren’t in nursing homes, he said, and most Americans "would agree that these vulnerable populations have limited resources and cannot afford to pay substantially more for their drugs."
Likewise, according to Mr. Weil, Medicaid can’t save much by cutting eligibility in areas where cuts are normally considered. "If you want to save larger sums, you must cut eligibility for the elderly and disabled where the costs are higher, but the consequences of such cuts are more obvious and more grave."
And, he said, cuts in Medicaid ultimately may not save states very much money at all because they have used the program to refinance many costs that were historically borne entirely by states or local governments, bringing them under Medicaid and thus sharing their costs with the federal government. "Cutting a person or service out of the Medicaid program likely means that the cost associated with that person or service will be shifted to another state program, to a county indigent care system, to a service provider struggling to survive."
While Mr. Weil said it’s likely that most states will again do what they’ve always done in tough times — cut provider payments and use some combination of eligibility and benefits cuts to save enough money to get through — the only real fix should be substantial additional federal funds, not as a bailout but "simply to avert grave hardship among the poor, elderly, and disabled, which in my view is an appropriate fiscal priority for the national government."
While some would look at Medicaid’s problems and say the program is broken, Mr. Weil said it is working exactly as designed. "It has its flaws, but on the whole, it provides access to health care services to tens of millions of the most economically and medically vulnerable Americans; it has low administration costs, pays low market rates to providers, and provides substantial funding to those who serve the uninsured. . . . States are not to blame for a Medicare program that fails to meet the basic needs of elders and shifts those costs to the states, and they are not to blame for the complete absence of a national system of financing the cost of long-term care in a country where medical improvements have increased life expectancy for people with a range of disabilities and increased the burden of the health care system."
In the long run, according to Mr. Weil, Medicaid would benefit from fundamental reforms in the overall health care system that yield better efficiency on quality, better coordination of care, universal coverage, and direct support of the health care safety net. "It would also benefit from a fundamental restructuring of fiscal responsibilities between the states and the federal government."
Another program panelist, Ray Scheppach, executive director for the National Governors Association in Washington, DC, said problems facing states are very different from those states have dealt with in the past. "The reason that the situation is so bad even though the economy isn’t that bad is that the problems are mostly structural in nature. We have a huge structural problem on the revenue side and a huge structural problem on the spending side."
Mr. Scheppach said the problem on the revenue side is that states have tax systems geared to the manufacturing economy of the 1950s, and not to the high technology, service-oriented economy of the 21st century. The largest tax source for states usually is the sales tax, which generally is applied on transactions involving goods, but not on services, even though goods are not growing very rapidly and services are. In addition, he said, Internet sales are increasing but they and mail-order sales undercut the sales tax because states can’t compel out-of-state sellers to collect sales and use taxes. A third revenue problem he identified is the drop in corporate profits from 8% of total revenue to about 4%.
He said he has traced statistics back to World War II and has been unable to find another year in which state revenue numbers were negative for the entire year. And yet in 2002, he said there was a reduction in state revenues of 6.3%, and "that’s a pretty traumatic change."
Problems are structural
Even when the economy comes back, things will get slightly better, but not a lot better because the problems are structural in nature. Mr. Scheppach said he expects states to start reevaluating what their core services are, which may lead to more consolidation of agencies and more downsizing. He also noted that tax reform is difficult at the state level, although there may be some efforts to expand taxes on services.
"Even if states fixed their tax systems and did some serious downsizing, they still are not going to have the fiscal capacity to handle Medicaid. And the basic problem, I think, is that a lot of costs that should be part of Medicare essentially have been shifted to the states." Mr. Scheppach also called for additional federal money to help states get through the current problem and then a long-term shift of responsibility for dual eligibles and long-term care back to the federal government.
Congress may tackle Medicaid
Congressional staff members who spoke on background at the presentation offered a cautious view of how Congress is likely to react to the recommendations made by Mr. Weil and Mr. Scheppach. There was a suggestion that since Medicaid serves diverse populations, there needs to be a multipronged approach to looking at how best to use available resources. One effort might be to pursue the notion of offering different kinds of waivers so that resources can be better spent. And it seems clear that a lot of attention will go to enactment of a Medicare prescription-drug bill, with the possibility that dual eligibles could be federalized in that bill.
There has been talk in Washing-ton of appointment of a Medicaid commission, but it is recognized that a commission could not complete deliberations and make recommendations in time to have a positive impact on state budgets now being developed. However, the congressional staff thought it might be a useful vehicle for looking at long-term structural changes.
Those present indicated that simply throwing more money at Medicaid would not be a valid solution, but they also indicated there may be recognition that Medicaid issues have not been addressed for a long time and the state financial problems are so great that there need to be efforts at a bipartisan solution.
That discussion of Medicaid financial problems was put into perspective a week later when the Kaiser Commission on Medicaid and the Uninsured released its latest state survey detailing state budget problems. Commission executive director Diane Rowland told a Jan. 13 briefing in Washington, DC, that Medicaid’s 12.8% increase last year is comparable to the 12.7% increase in private health insurance premiums in the same time period, meaning that what we’re seeing is a "return to rising costs that now will be absorbing more and more of the program’s resources." She said that 60% of the growth in federal Medicaid expenditures from 2001 to 2002 occurred on behalf of the elderly and disabled populations.
John Holahan, director for the Health Policy Center at the Urban Institute, reporting on several case studies, said states have responded to fiscal pressures by protecting K-12 education, cutting higher education a bit, and making a number of one-time fixes such as across the board reductions in agency budgets, salary freezes for state employees, reductions in state work forces, cuts in aid to local governments, and delay in capital construction. On the revenue side, he said, there was little in the way of tax increases. Rather, states used rainy-day funds or other reserves, as seen in the fact that nationally reserves have fallen from 10.4% of state expenditures in 2000 to 2.3% in 2003, and in many states are very close to zero.
There are significant differences today, he said, from conditions during the recession in the early 1990s. Then states cut payment rates and optional benefits, much as they are doing today, but they also discovered disproportionate share payments and ended up bringing in a lot more federal dollars with no state contribution. And eventually they increased taxes.
"This recession is pretty different for a number of reasons," he said. "One, revenue declines the states are facing are much greater than they were back then. One estimate has them as a shortfall of 9% in FY 2003, and nothing like that was seen in a previous recession. Compared to back then, education, particularly at the K-12 level, is a much higher priority. And it’s also protected by law. Further, the opposition to tax increases is incredibly strong."
Vern Smith, PhD, principal for Health Management Associates in Lansing, MI, reported on a survey of state Medicaid directors that indicated their spending is now increasing much faster than the rate of growth authorized by their legislatures. Although there was a 12.8% spending increase nationally last year, the program has only been authorized for a 4.8% boost this year, but Medicaid directors told Mr. Smith they were expecting to see a 9% increase.
"One reason for the higher spending increase is that Medicaid enrollment is going up faster than had been anticipated," Mr. Smith said. "Since the beginning of FY 2003, 37 states have taken midyear budget reduction actions in Medicaid. These 37 states include 32 that did not have specific Medicaid cost reduction actions in the FY 2003 budget, but are now undertaking them."
The largest group of states, he said, was taking action to try to control the rate of growth in prescription drugs. Many added additional classes of drugs to their preferred drug list, or additional classes of drugs subject to prior authorization, or reduced the price that they would pay for the products. And a couple of states increased copays. Twenty-one states took action to freeze or reduce provider payments, and 15 undertook further actions to restrict or cut Medicaid eligibility. Sixteen states reduced the benefits that were covered, with dental coverage for adults getting most of the attention. Four states looked at beneficiary copayments.
"In every way that states can cut Medicaid or control the rate of growth in Medicaid, there are more states undertaking that action now than a year ago," Mr. Smith declared.
But even with all the steps states are taking to cut costs and maximize Medicaid revenue, he said that most states contend it will not be enough to keep Medicaid spending within its legislative authorization. "Forty states told us they now expect a Medicaid shortfall in this fiscal year," he declared. When Mr. Smith asked the Medicaid directors to look ahead to FY04, they were not optimistic.
"The expectation is that there will be further cuts in benefits, eligibility, and provider rates," he said. "Even on the heels of the cutting that has taken place over the last year or two and even though Medicaid providers may not have had a rate increase for two or three years, . . . Medicaid directors communicated a sense that next year will be very difficult, but that Medicaid is just one of the programs in state government that will be constrained because of the state budget situation. As one Medicaid director said, What we have is not just a Medicaid problem. What we have is a problem of an economic downturn and a revenue shortfall.’"
[Contact Mr. Weil and Mr. Holahan at (202) 833-7200, Mr. Scheppach at (202) 624-5300, Ms. Rowland at (202) 347-5270, and Mr. Smith at (517) 482-9236.]
The best short-term solution for Medicaids financial problems is a significant infusion of additional federal funds, according to Alan Weil, New Federalism program director at the Urban Institute in Washington, DC.You have reached your article limit for the month. Subscribe now to access this article plus other member-only content.
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