States try to balance their Medicaid spending by cutting back and looking for other sources

A 50-state survey conducted for the Kaiser Commission on Medicaid and the Uninsured by Health Management Associates has found that nearly all states have taken steps to reduce the growth in their Medicaid funding. Of the states surveyed, 41 said they had plans in place to cut Medicaid funding growth.

But it should also be noted that 36 states reported they had added funds to their Medicaid programs from sources such as general revenue, tobacco settlement funds, and rainy- day and trust funds, and such additions have helped them avoid making additional funding restrictions.

The data show a worsening trend in total Medicaid spending growth rates. (See chart). After several years of relatively low growth rates following the disastrous opening years of the 1990s (when there also was a recession), growth rates are beginning to spike again.

As most analysts have noted, (see chart) the reasons include drug benefit costs, provider rates, enrollment, and long-term care costs.

Victoria Wachino, Kaiser Commission associate director, who put together an analysis of the data compiled by Health Management Associates, tells State Health Watch that it is hard to generalize about state actions because "every state is in a different situation. We get very concerned when states look at major changes in eligibility. At least four states have scaled back eligibility and others are modifying benefits and increasing cost-sharing requirements. Those kinds of moves are very controversial because of their impact on the indigent."

Variety of state actions likely

Actions states are planning for fiscal year 2003, according to Ms. Wachino’s analysis, include prior authorization for some prescription drugs; preferred drug lists; lower payments for drug products; Rx drug copays; payment cuts, freezes, or limited increases for providers; cuts and restrictions in eligibility and benefits; and cuts and freezes in administrative budgets.

The report says that "states’ Medicaid cost-reduction plans for fiscal year 2003 will reduce the growth of their financial commitment to the Medicaid program, freeing limited state funds and helping to balance state budgets. However, these reductions have an impact on Medicaid beneficiaries, health care providers, and state treasuries."

Because few Medicaid beneficiaries have access to alternate sources of insurance, reductions in eligibility are likely to mean that some beneficiaries will become uninsured. And reducing the benefits the program covers or imposing substantial cost-sharing charges may leave beneficiaries unable to obtain the medical services they need. Some providers also may leave the program when faced with lower payment levels.

The study also suggests the possibility that some providers will find they are providing increased levels of uncompensated care as a result of Medicaid actions taken in some states. There also is a potential negative financial impact on states when they cut Medicaid funding because of the way the federal match works. How much federal funding any given state stands to lose depends on its matching rate, which varies from 50% to 70% in FY ’03. Thus, in a state with a 50% match rate, such as New York or Illinois, $1 in federal funds will be lost for every $1 in state funding reductions. And in a state with a 75% match such as West Virginia, the state loses $3 in federal funds for every $1 that it cuts.

Ms. Wachino says that in Missouri, changes to Medicaid include reducing parent coverage, modifying the medically needy spend-down policy, eliminating adult dental coverage, changing pharmacy policies, and reducing the rate paid for some medical services. The changes will result in an estimated total savings of some $140 million to the state in FY ’03, but because of Missouri’s 61% matching rate, the state will lose approximately $221 million in federal funds as a result of the cutbacks.

Unfortunately for state officials, Ms. Wachino’s analysis is that as difficult as the choices states faced in preparing their 2003 budgets were, they are likely to become even more difficult in the months ahead. That’s because state revenue growth will lag behind any economic recovery and there also is the possibility that economic conditions generally will not improve as quickly as now hoped.

She says there also is some evidence that states have underestimated the health care spending pressures they will face in coming years. Survey data indicate that on average, state legislatures appropriated an increase in Medicaid funds of only 5.3% for FY ’03, even though state Medicaid costs have risen at 9% to 13% over the last three years.

"Because the growth of underlying health care costs is likely to continue," she says, "it seems reasonable to expect that this fiscal year legislatures will face Medicaid costs that outpace the low levels states have appropriated. In addition, many states are exhausting sources of funds that can temporarily fill budget gaps."

Ms. Wachino concludes that the number of states choosing to make significant reductions in their Medicaid funding is likely to increase in the months ahead. Since the federal government also is experiencing reduced revenues and increasing deficits, significant federal fiscal relief to states seems unlikely. (And in fact, Centers for Medicare & Medicaid Services director Tom Scully warned this summer that states should not expect financial help from Washington.)

"Unless fiscal conditions improve and the rate of growth in Medicaid spending slows significantly," she says, "state officials will face even more difficult decisions ahead."

Their job will not be made any easier by advocates for key Medicaid constituencies who are prepping their members to lobby for continued Medicaid spending. A paper developed by the Washington, DC-based American Association of Retired Persons (AARP) for its senior citizen members points out that in times of economic crisis, there are four actions a state can take to address a deficit — cut spending, increase revenue, spend-down reserve funds, and look to short-term accounting fixes. All states are considering one or more of these options, AARP warns.

The group suggests reminding lawmakers about the potential loss in federal dollars as a result of Medicaid cuts, even while acknowledging that Medicaid spending is growing at a rate that would be difficult to sustain even in times of strong revenue collections. "When spending is increasing at unsustainable rates, prescription drugs and long-term care services become probable targets because they represent a large percentage of Medicaid spending. Yet if reductions are made to those Medicaid benefits, the elderly and disabled will be directly affected because they are the largest users of prescription drugs and long-term care services."

Advocates need to be aware, AARP says, that states usually follow some basic rules of thumb for reducing Medicaid expenditures:

  1. Reduce or eliminate staff and impose travel and hiring freezes.
  2. Cut provider reimbursement rates.
  3. Increase or start copayments and cut the amount, duration, and scope of optional benefits.
  4. Drop optional services such as vision, dental, chiropractic, and podiatric care.
  5. Tighten eligibility criteria and limits.

When advocates know the basic strategies and look into how their state responded in the past, they then need to realize that opposing one cut in Medicaid could result in an undesirable cut of another Medicaid benefit.

"Advocates should weigh the pros and cons of increasing revenues to reinstate Medicaid costs," the training paper says. "It makes sense to increase the cigarette tax to support health and human services rather than cut health care. It also is logical to advocate spending rainy-day or surplus funds instead of cutting Medicaid benefits and losing federal matching funds."

The AARP document details the ways in which each individual state is trying to cut its Medicaid spending.

AARP legislative representative Cathy McDougall tells State Health Watch that states are looking at changes to Medicaid because the program represents such a large expenditure.

She says members of AARP benefit from optional services and prescription drug coverage often provided through Medicaid.

"Right now, states are tinkering with their programs. Nothing major has happened yet. We don’t foresee any major groups being cut out of Medicaid completely. It’s too much of a revenue generator, and it’s not popular to hurt people who have great needs." Ms. McDougall says she thinks a long-term solution to state problems with Medicaid may lie in a federal prescription drug benefit that would not require any state money, freeing state funds to go toward long-term care costs and helping people stay in their homes as they age. (See Table 1 and 2)

[Download the Kaiser report from Contact Ms. Wachino at (202) 347-5270 and Ms. McDougall at (202) 434-3933.]