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Fiscal Fitness: How States Cope
States' fiscal situations ease: NGA cautions adding to base budget
The June 2007 Fiscal Survey of States issued by the National Governors Association (NGA) and National Association of State Budget Officers (NASBO) reported stable state financial conditions in FY 2007 and the prospect of a steady FY 2008 for most states, but with some experiencing slower revenue growth and somewhat tighter fiscal conditions.
"Overall, state finance officers are concerned about the future due to anticipated trends toward at least somewhat slower growth, as well as continued expenditure pressures in areas such as health care (primarily Medicaid), education, corrections, employee pension systems, and infrastructure," the report said.
In FY 2007, state general fund spending grew by 8.6%, about two percentage points above the 29-year historical state spending average of 6.5%. But state expenditures are anticipated to drop to 4.2% based on the governors' recommended FY 2008 budgets. Expenditures include one-time spending from surplus funds, transfers into budget stabilization funds and other reserve funds, and payments to local governments to reduce property taxes.
NGA said Medicaid continues to be the dominant force in state spending and to constrict state budgets as it has for many years. Medicaid currently represents 22% of total state spending. Also, according to the report, over the past year, health insurance issues have become increasingly significant at the state level. Thus, 34 governors introduced plans to reduce the number of uninsured residents in their states in FY 2008. Their proposals rely on a variety of methods, including expanding SCHIP, expanding Medicaid, using flexibilities provided in the Deficit Reduction Act, waivers, and various state programs. Proposed FY 2008 funding for these programs totals nearly $18.4 billion, the NGA added.
While Medicaid spending rates have moderated somewhat in recent years, it continues to be a major state budget issue. Medicaid spending is estimated to increase by 5.8% in governors' recommended budgets for FY 2008, with state funds increasing by 7% and federal funds increasing by 4.9%. In FY 2007, total Medicaid spending is estimated to increase by 6.6%, with state funds increasing by 8% and federal funds by 6.1%. Since Medicaid makes up such a major portion of state budgets, these large growth rates have a major impact on states, NGA said.
Drug coverage change
In FY 2006, the Medicaid spending growth rate of 2.5% was significantly lower than in previous years due partly to passage and implementation of the Medicare Part D prescription drug legislation. Beginning in January 2006, prescription drug costs for dual-eligibles were no longer part of the Medicaid program but became part of Medicare Part D. States finance these benefits through a payment to the Medicare trust fund. The amount paid by states to the federal government for the Part D coverage represents about 5% of state Medicaid expenditures. At the federal level, lower Medicaid spending will be offset by an increase in Medicare spending on dual-eligibles. Other costs for dual-eligibles, such as long-term care, remain with Medicaid.
NGA says states have been aggressive over the past five years in pursuing cost containment measures to help moderate spending increases. The Kaiser Commission on Medicaid and the Uninsured reported that every state started cost containment measures during the time period, with the majority involving freezing or reducing provider payments and managing prescription drug costs.
According to the fiscal survey, one of the leading health care issues states have been dealing with is the number of people without health insurance. To address that concern, two-thirds of governors included plans to expand health care coverage in proposed FY 2008 budgets. Key characteristics of the governors' proposals vary widely from proposals to cover all of the uninsured in the state to targeted expansions for specific groups such as uninsured children.
The number of additional people who would be covered, ranging from 268 people to 4.8 million people, depends very much of the individual proposal's scope, the state's population, and the percentage of the state's population that is uninsured. While the national uninsured rate is about 16%, individual state rates range from about 9% to 25% of the state's population.
In 22 states, the expansion target is children, a situation that mirrors discussion at the federal level about ways to expand the SCHIP program when it is reauthorized in FY 2008. In addition to seeking greater coverage for children, some governors also are targeting childless adults, parents, and the aged and disabled. Thus, 11 states want to expand coverage for childless adults and in seven states, health care expansions are intended to cover all of the uninsured. Expansion often includes an increase in the income allowed to meet program eligibility requirements, typically defined as a percentage of the federal poverty level.
Many funding sources used
States are planning to use Medicaid, SCHIP, Medicaid waivers, Deficit Reduction Act program flexibilities, and market-based approaches for their health care expansion efforts. They often plan to use a combination of funding sources and also may include employer and individual contributions, tobacco funding, and provider taxes and fees. Expansion features include employer mandates in five states, individual mandates in five states, personal responsibility requirements in 12 states such as requiring healthy behaviors and health screenings, Deficit Reduction Act flexibilities in seven states to allow changes in benefit packages and cost-sharing, market-based components in 12 states such as use of Health Savings Accounts or purchasing pools, and capping enrollment in seven states to provide greater funding certainty. The report includes tables showing plans in individual states.
It says about one-third of the states have plans to conduct outreach and streamline eligibility in Medicaid and SCHIP to attain greater program participation, addressing concerns about those who are currently eligible but have not enrolled in Medicaid and SCHIP. It could lead to a significant reduction in the numbers of uninsured children.
"The number of health care proposals at the state level to expand coverage and the federal interest in expansion of SCHIP continue to place health care access in the limelight," NGA said. "While many proposals may not be enacted this year or may be scaled down considerably, it is clear that covering the uninsured is a high priority across many state governments. Due to the high cost of health care proposals, changes to expand health care may take more than one budget cycle to achieve and proposals to address the uninsured are expected to surface for the next several years."
The report acknowledges that states face a number of challenges in funding and providing health care within Medicaid and throughout state government. Among the issues of greatest concern for states are expanding access to health care for the uninsured, health care cost increases and greater utilization of services, the aging population and the impact on long-term care financing, reductions at the federal level for health care programs including public health programs, inmate health care, work force shortages, pressure to raise physician rates to maintain participation in Medicaid, SCHIP funding, mental health funding and access, federal changes affecting Medicaid such as proposed regulations affecting government health care providers, and generally the pressure to maintain health care spending that on average consumes a greater share of state budgets over time.
"Even with the more moderate growth rates in health care spending from the height of the most recent fiscal downturn," NGA says, "projections over the next decade remain at an average annual rate of about 8% from FY 2008 through FY 2017, according to the most recent estimates by the Congressional Budget Office. With Medicaid comprising 22% of state budgets, these long-term growth rates will continue to strain state budgets."
NGA executive director Ray Scheppach tells State Health Watch states need to be aware that there may be a downturn in revenues in coming years and cautions they should probably not make expenditures that will add to their base budgets.
Asked about a New York Times report on the fiscal survey that pictured state officials as having "coffers unexpectedly full of cash" and acting "like teenagers who went without allowance…working off pent-up demand," Mr. Scheppach says the story was "more optimistic" than he would have liked.
He says NGA recommends that states that want to spend surplus funds do it for one-time items such as deferred maintenance and infrastructure that won't add to their base budget.
"The last budget dip in 2002 was so bad that states put off that type of thing," he explains. "There is a little more money now because revenues have been growing and some Medicaid costs have gone down. But we still sense a move back to the long-term trend. States do have more flexibility in benefit packages that will help."
Mr. Scheppach says he is afraid that as revenues again slow, states that are trying to do things that add to their base may have to back off. "Basically, we need the federal government to provide vouchers or tax credits for low-income people," he says. "That plus an expansion of SCHIP could mean comprehensive health care reform for 15-20 states. How states will do depends somewhat on what happens to the economy. Our sense is that revenue growth is going to slow and Medicaid expenditures are going to come back up."
National Association of State Medicaid Directors executive Martha Roherty tells SHW states are "well aware of the ebb and flow of revenues and are doing a good job containing Medicaid costs." She says rather than looking at Medicaid as simply a payer of claims, many states are looking at it as the cornerstone for health care reform.
States know to be careful
Right now, Ms. Roherty says, with the economy as strong as it seems to be, there are not as many people who need Medicaid services, and that is helping make some surplus money available in the states. "States know they have to be careful," she says. "They are keenly aware that funds go up and down. They are not being extravagant, not thinking they can cover the world because they have a little more money. For example, some states are now trying to cover dental care in a more efficient manner by paying for preventive services. There are a number of 'expansions' like that in which states are providing a better quality of service to save money in the long run."
Download the fiscal survey from www.nga.org/portal/site/nga. Contact Mr. Scheppach at (202) 624-5300 and Ms. Roherty at (202) 682-0100.