Medicaid spending heading up, says report
A new report from the Center on Budget and Policy Priorities in Washington, DC, says Medicaid spending increases are rising again after a four-year lull. While state and national policy-makers are concerned, co-author Jocelyn Guyer, an analyst with the center, tells State Health Watch it’s important to recognize that the program is not out of control, but government officials should understand the underlying causes for the increases and be prepared to ensure that adequate funding remains available.
"The message is that Medicaid spending is not out of control," Ms. Guyer says. "It is not specifically a Medicaid problem, it is reflecting the general health care situation. State and federal officials need to prepare responsibly by not enacting tax cuts that would undermine their ability to cover predictable health care costs."
The report says short- and long-term factors are contributing to the increase in Medicaid spending. In the short term, a key element is the continuing use by some states of "creative financing," allowing them to recycle federal Medicaid funds into the state’s general revenue fund and use the money for any purpose, even for items unrelated to health care. Such financing arrangements push up federal spending on Medicaid because they allow states to draw down additional federal funds.
Ms. Guyer says that although the federal government has taken steps to cap such payments, states still are coming in with plans that would make use of them. "The Clinton administration cut back on such payments but did not eliminate them. Creative financing still will be a driver for the next couple of years." The key factors influencing Medicaid spending increases are those that affect health care in general in this country — increased utilization of health services and health care inflation, including increases in the cost of prescription drugs. Ms. Guyer stresses that some factors typically blamed for spending increases, such as increased enrollment of children and parents, in reality are not a significant factor.
"Specifically, the new estimates anticipate that 6% of the increase in federal Medicaid expenditures during the current year will be attributable to the enrollment of more children [and an additional 2% due to increases in the number of adults enrolled]," the report says.
According to Ms. Guyer, it’s only a coincidence that the resurgence in Medicaid spending is occurring when many states are adding additional clients. "When you look at the situation, you see that’s responsible for just a tiny fraction of the overall cost." In addition, she says, there is little overall increase that is attributable to coping with mandates imposed by the federal government.
The report says that one reason for the resurgence of health care inflation in both Medicaid and the private sector is that cost-containment measures that began to be instituted in the mid-1990s are now largely in place. "Turning to managed care programs may yield savings for employers and publicly financed programs initially, but does not necessarily slow the long-term rate of expenditure growth. In addition, payment rates to health care providers and managed care firms could be held down for a certain period, but now providers and health plans are demanding higher payments to catch up after years of low payment and some financial losses."
Increases in prescription drug expenditures are cited as a major reason that Medicaid costs will continue to increase significantly, along with higher costs into the future for treating the elderly and disabled. Despite the use of creative financing in some states, which continues to artificially hold down state Medicaid spending, the center says a large number of states are now facing Medicaid budget shortfalls, with current spending higher than the amount appropriated. Many states in that position are considering implementing one or more of three responses:
1. containing costs, especially on prescription drugs or reimbursement rates for select types of service as well as efforts to reduce caseloads by scaling back eligibility or reducing outreach efforts;
2. obtaining more federal dollars by shifting some Medicaid expenditures to the state Children Health Insurance Program (SCHIP);
3. using tobacco settlement funds or other state resources.
Ms. Guyer says she is concerned about the continuing availability of sufficient funds for Medicaid "especially since much of the surplus is likely to disappear with the tax cut."
She says steps the federal government could have taken to help states enroll more children and families in the program may not be available. "It’s difficult to make predictions, but we’re concerned that enormous tax cuts will make things much harder."
The Center on Budget and Policy Priorities says states that were not able to spend all their initial SCHIP funds can use a little-known provision in the law to put additional funds into outreach efforts in hopes of enrolling more children. Ms. Guyer tells SHW that only 12 states were able to meet the Sept. 30, 2000, deadline for using fiscal year 1998 SCHIP funds. Many of the other states said they needed considerably more time than Congress had anticipated to design and initiate their SCHIP programs and conduct outreach campaigns.
Last December, Congress passed the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act (BIPA) with a compromise that allowed the 12 states that met the deadline to get some reallocated funds, while the remaining 39 were allowed to keep a portion of their unspent money. Officials in many of the states that didn’t spend all their money said they could have spent more if they had been allowed to use more of their SCHIP funds for outreach. As a result, BIPA created a new 10% outreach option for unspent first-year SCHIP funds, Ms. Guyer says. That option allows the 39 states allowed to retain some of their unspent funds to spend up to 10% of those funds on outreach activities and not have it count toward the 10% limit on spending for noncoverage activities.
"Thus, states need not be concerned that if they invest more of their retained funds in outreach, they will have less money for administration," the report says. "Furthermore, these states may use up to 10% of their retained funds for outreach activities even if they do not spend any other retained funds to cover children."
One concern is that states are effectively required to use up all of their retained funds before spending regular SCHIP allotments. As a result, states with substantial SCHIP costs and states with only a small amount of retained funds will likely exhaust their fiscal year 1998 retained funds quickly and have no retained funds remaining with which to take advantage of the 10% outreach option.
[Contact Ms. Guyer at (202) 408-1080.]
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