Fiscal Fitness: How States Cope

Happy days here again? States looking to make program gains under improving fiscal conditions

Buoyed by an improving fiscal environment, coupled with modest Medicaid spending and enrollment growth, states are looking at making program restorations, improvements, and expansions for acute and long-term care that were not possible in the tough economic times of the last several years.

A new report, "As Tough Times Wane, States Act to Improve Medicaid Coverage and Quality: Results from a 50-State Medicaid Budget Survey for State Fiscal Years 2007 and 2008," prepared by Health Management Associates' Vernon Smith for the Kaiser Commission on Medicaid and the Uninsured, says states are placing a high priority on measuring and improving quality of Medicaid-financed health care, often through enhancements in managed care or disease management. And almost all states in the 50-state survey of Medicaid directors reported moving forward with initiatives to address the increasing number of uninsured and said Medicaid is a key building block and critical component of financing for these strategies. Despite a more positive fiscal environment, states reported ongoing pressure to control Medicaid spending growth.

This seventh Kaiser Commission survey of state Medicaid officials found that Medicaid spending continued to grow slowly in state fiscal year 2007, after reaching an all-time low in 2006, and state revenues remained strong in most states. Total Medicaid spending growth was 2.9% in FY 2007, up from the record low of 1.3% the previous fiscal year. Lower Medicaid spending growth occurred at the same time revenue growth in most states was strong in 2006 and remained strong, although somewhat lower, into 2007.

"This picture is dramatically different from the depth of the economic downturn in 2002 when Medicaid spending growth hit a high of 12.7% at the same time state revenues plummeted, hitting a low of –10.6%," Mr. Smith said. "Moving into FY 2008, state legislatures authorized total Medicaid spending growth that averaged 6.3% as state revenue growth was projected to be still relatively strong but somewhat less robust than it was in 2007."

FMAP matters

Mr. Smith noted that for state policy-makers, a state's general fund cost for Medicaid is a key factor. For the last few years, he said, the state share of Medicaid spending has increased more rapidly than total Medicaid spending as the federal matching rate (Federal Medical Assistance Percentage or FMAP) declined for more than half the states (see story below). Declines in the FMAP place pressure on states to allocate additional state general revenues to maintain current program levels. State general fund spending for Medicaid increased on average by 3% in 2006 and 3.2% in 2007. State legislatures appropriated an increase in state general fund spending for Medicaid that averaged 7.8% for 2008. Mr. Smith reported that for each of those years, the growth in state funding was greater than for total Medicaid spending.

Got a match? You might with projected FMAP changes

With personal income in the U.S. increasing 6.6% in 2006, the strongest growth in this decade, some states are likely to see a higher Federal Medical Assistance Percentage (FMAP) in FY 2009, according to data being prepared by Federal Funds Information for States, a joint project of the National Governors Association and the National Conference of State Legislatures.

The federal match percentage is important to state Medicaid officials because a lower FMAP often means the state general fund will be asked to increase its support of Medicaid.

The FMAP calculation is based on a three-year average of state per capita personal income compared to the national average. A state with average per capita income receives an FMAP of 55%, and no state receives less than 50%.

FMAPs for FY 2009 are based on per capita incomes for calendar years 2004 to 2006. In the 6.6% growth in 2006, the western and southern regions continued to grow the fastest, led by the southwest (8.5%) and Rocky Mountains (7.7%). The slowest growth continued to be in the Great Lakes (4.8%) and the Plains (5.3%).

Some 21 states are expected to receive increased FMAPs in FY 2009 and 17 decreases. There should be 13 states receiving the minimum 50%. The most substantial increases were expected to be received by South Dakota (2.52), Michigan (2.17), Wisconsin (1.76), Oregon (1.59), Indiana (1.57), Nebraska (1.52), Georgia (1.39), Ohio (1.35), and Maine (1.10). The most substantial declines are expected to be felt by Nevada (-2.64), Alaska (-1.95), Florida (1.43), Hawaii (-1.39), Oklahoma (-1.20), Louisiana (-1.16), and Texas (-1.12).

Officials with Federal Funds Information for States said the relatively balanced set of increases and decreases appear to end a series of years in which precipitous declines occurred for many states. They said 12 states experienced declines of one percentage point or more between fiscal years 2004 and 2006, and 11 had such declines between fiscal years 2006 and 2008. By comparison, only Georgia and Ohio had sustained and substantial FMAP increases over the time period.

The impact of FY 2009 FMAPs will be a function of states' Medicaid and SCHIP spending in that fiscal year. On net, officials said, FY 2009 Medicaid grants to states are estimated to grow $389 million, with increases totaling $1.2 billion for 21 states partially offset by decreases of $816 million for 17 states. The largest increases are expected to come to Michigan, Ohio, Indiana, Georgia, Wisconsin, Pennsylvania, and North Carolina. The largest declines will affect Texas, Florida, Louisiana, Oklahoma, and Nevada.

According to Mr. Smith's analysis of state responses, the primary factors contributing to lower Medicaid spending growth were slow enrollment growth and the transition of prescription drug costs for dual-eligibles from Medicaid to Medicare Part D.

Medicaid enrollment growth was low in 2006 and actually decreased in 2007, he said. While the drop in enrollment was relatively small at one-half of one percent, it still was the first drop since 1998. Many states reported the new citizenship and identity requirements in the Deficit Reduction Act (DRA) contributed to the decline. Also a factor was the improving economy since Medicaid enrollment growth is higher in economic downturns when more people are likely to be unemployed, move into poverty, lose employer-sponsored health coverage, and subsequently become eligible for the program.

More states than in any of the last seven years removed restrictions or adopted policies to improve or expand their Medicaid programs in FY 2007 and FY 2008. Mr. Smith says every state implemented some type of provider rate increase in 2007 and 49 states planned to increase rates for at least one provider group in FY 2008. He noted that during the economic downturn, cutting or freezing provider rates was a primary mechanism states used to control Medicaid spending growth. States told Mr. Smith that improving provider rates is necessary to maintain access to services and is important for state strategies using Medicaid to expand coverage to more of the uninsured.

More than half of all states in 2007 and 2008 made positive eligibility changes such as increasing the eligibility income limit, expanding eligibility for a new group, or streamlining and simplifying the application or renewal process. A few states restored or added benefits, he said. Compared to previous years, fewer states restricted provider payments, limited eligibility, or cut benefits.

Nearly 75% of states reported the new citizenship and identity documentation requirements contributed to slowing enrollment growth, and 45 states said the requirements increased their administrative costs. Before the DRA changes, 47 states allowed applicants to self-declare their citizenship status. Some 37 states specifically identified the new citizenship and identity documentation requirements as contributing to slower enrollment growth or actual drops in the number enrolled, and several states said it was one of the most significant factors affecting Medicaid enrollment.

Administratively, states have had to train eligibility workers, make changes to their enrollment processes, set up systems for data matching of vital records, or roll-back eligibility simplifications that had been in place, such as reinstating a requirement for face-to-face interviews. States said the new requirements have caused delays in processing new applications and renewals, and that in most cases the delays were for individuals who were otherwise eligible for Medicaid.

While most states have been troubled by the DRA citizenship and identity requirements, few have taken advantage of its other provisions to change benefits or impose new cost sharing requirements. So far, Mr. Smith found, eight states have used or reported plans to use the new options related to benefits.

Kentucky, West Virginia, and Idaho moved quickly to do a comprehensive redesign of their Medicaid benefits. And five other states are using the flexibility in a much more targeted way. Thus, in FY 2007, Virginia converted its existing disease management program from a voluntary opt-in program to a voluntary opt-out benchmark program and Washington implemented a chronic care management pilot program. In FY 2008, Kansas is adding personal assistance services for participants in the state's Ticket-to-Work Medicaid buy-in program and South Carolina will implement a voluntary one-county pilot Health Savings Account plan using its State Employee High Deductible health plan as the benchmark. Wisconsin is planning to offer a modified benefit package adapted from the state's largest commercial, low-cost health care plan to the BadgerCare Plus expansion population. Kentucky was the only state to use DRA authority to impose higher-than-nominal cost-sharing amounts and to make copayments enforceable.

States expand services

The survey found that states are continuing to expand their home- and community-based care services to balance their long-term care delivery systems and some states are using new long-term care options provided under the DRA. In FY 2007, 35 states expanded LTC services, while in FY 2008 a total of 46 states planned to do so. The LTC expansion most commonly reported was expanding existing waivers or adopting new ones. States also continued to add Programs for All-Inclusive Care for the Elderly.

The DRA gave states a number of options for increased flexibility to deliver LTC services and supports, Mr. Smith said. Thus, 31 states are using the DRA "Money Follows the Person" initiative that encourages states to reduce reliance on institutional care by transitioning individuals from institutions to the community to support home- and community-based service efforts. Nearly half the states had plans to implement a Long-Term Care Partnership Program in 2008 to help increase the role of private long-term care insurance. But there have been only limited attempts to use new DRA state plan options around cash and counseling or home- and community-based service options.

Mr. Smith found states are increasingly focusing on Medicaid quality improvement and initiatives to get better value from Medicaid expenditures. In 2008, some 44 states will be using HEDIS and/or CAHPS performance data from managed care organizations to measure and provide incentives for improved performance. The survey found an increasing number of states are also requiring their health plans to be accredited by a national organization such as the National Committee on Quality Assurance or implementing Medicaid pay-for-performance policies to reward and encourage quality care. By 2008, 27 states should have managed care pay-for-performance programs. And a few states have reimbursement systems that reward performance for hospitals, physicians, and nursing homes.

While states say they are committed to program integrity, many also reported they are frustrated and concerned about the administrative burdens imposed by federal oversight activities. State officials also expressed concern over new federal interpretations of long-standing, previously approved Medicaid policies that in some cases had the effect of shifting federal Medicaid costs to the states.

Coping with uninsured

To try to cope with the growing number of uninsured people, 42 states are advancing or developing plans to expand health insurance coverage, with almost all relying extensively on Medicaid to support and finance these plans.

"Despite a year dominated by program enhancement," Mr. Smith said, "Medicaid directors said that increasing program costs remains a top concern, although the singular urgency of this issue has significantly abated as state revenues rebounded in recent years."

Strategies for reducing the number of uninsured include Medicaid or SCHIP expansions and promoting private health insurance coverage. Mr. Smith said the outlook for state revenue growth and the outcome of SCHIP reauthorization and federal support for the expansions will determine how far states feel able to go in expanding coverage. As state efforts continue, he said, Medicaid is likely to stay at the forefront of the policy debate as the larger discussions around health care reform including issues of coverage, costs, quality, and long-term care continue to play out at both the state and national level into the 2008 election cycle.

Asked whether there is a concern that states could expand too much and run into problems during the next fiscal downturn, Mr. Smith tells State Health Watch that most coverage expansions have been modest and often represented a decision not to take the kinds of restrictive actions states took in the previous five years.

"For the first time since we started this survey, there were no benefit cuts reported," he says. "And the cuts to provider payments were much less."

With regard to the potential flexibility in the DRA, he reports that many states weren't interested in pursuing the DRA options because they were involved in expanding coverage rather than restricting it. He says researchers identified some states that found ways to use the options that had not been envisioned, by enhancing benefits rather than restricting them. "The real test of those provisions is likely to come with the next economic downturn," he says.

Questioned about whether states were making decisions based on their expectations about the outcome in the 2008 presidential election, Mr. Smith said he had no sense that as states made decisions about FY 2008 they were looking forward to a time after the election in which there would be a different political environment. "Right now they're looking at what they can do with their programs in fiscal year 2008," he says. "The election is likely to be something of a factor in the FY 2009 state budgets."

Download the report at Contact Mr. Smith at (517) 318-4819 or e-mail