As states stagger into worse crisis in a decade, report targets budget-cutting for Medicaid

A new report from the washington, DC-based American Legislative Exchange Council (ALEC) offers 10 strategies states should follow to cut their budget deficits, including a radical restructuring of benefits programs such as Medicaid.

In Show Me the Money: Budget-Cutting Strategies for Cash-Strapped States, Manhattan Institute senior fellow William Eggers, author of the report, says, "States are facing their worst fiscal crisis in a decade or more. As hard as it is to fathom, budget problems in fiscal year 2003 might be even worse than they were in 2002."

ALEC was formed more than 25 years ago by state legislators and conservative policy advocates as a membership organization committed to the notion that "the government closest to the people [is] fundamentally more effective, more just, and a better guarantor of freedom than the distant, bloated federal government in Washington, DC."

Among those who were involved with ALEC in its formative years were Robert Kasten and Tommy Thompson of Wisconsin; John Engler of Michigan; Terry Branstad of Iowa, and John Kasich of Ohio, all of whom moved on to become governors or members of Congress. Congressional members who were active during this same period included Sens. John Buckley of New York and Jesse Helms of North Carolina, and Congressmen Phil Crane of Illinois and Jack Kemp of New York.

In his report, Eggers say the causes of deficits estimated at $40 billion are clear — the recession, Sept. 11, spiraling Medicaid costs, and high spending in the mid and late 1990s.

"Add them all up," he says, "and you have the budgetary equivalent of a perfect storm."

His review of state actions to date reveals that while many different approaches and tactics are being followed, there is one overriding theme in this election year: How little can I get away with doing? Here are some highlights of his review:

"Everyone is raiding the rainy-day fund. Many states are hiking cigarette taxes; some of the states are also plundering the tobacco settlement money. [Of course, the more cigarette tax hikes reduce demand, the less money the states get in tobacco settlement money.] Another popular strategy is rifling through other portions of the budget — education endowments, transportation funds — hunting for stray money to pay down the deficit.

"Big tax hikes are, for the most part, politically untouchable during this heated election season. But targeted tax hikes, especially sin taxes,’ with their whiff of social engineering, are quite popular…. Many states have tried some variety of across-the-board spending cuts. . . . Some states have been forced into temporary shutdowns of major state activities.

"The bottom line: Some states are making serious spending cuts, but most are not doing much to reduce the medium- and long-term costs of operating government. This objective can be accomplished by reducing the size and scope of government in strategic and imaginative ways, whether by reorganizing or redesigning departments and programs. Absent large tax increases, such steps will soon become unavoidable."

Given the reasons Eggers sites for state budget deficits, one of his most important recommendations is to modernize government by reforming entitlement programs, especially Medicaid.

Changing entitlement structure

He says that states simply have no chance to solve their long-term budget problems if they don’t get a handle on the rising cost of entitlements.

"Next to the recession, the runaway cost of Medicaid — the biggest cost driver in most states — is the biggest cause of the current state fiscal crisis. Medicaid now accounts for one-fifth of total state expenditures, second only to education."

With 10-year projections from the Centers for Medicare & Medicaid Services calling for double-digit cost increases well into the future, states are experimenting with a variety of approaches to reducing Medicaid costs, including cutting mental health care; tightening eligibility requirements; reducing payments to providers; lowering drug costs through use of generic drugs and drug rebates; and reducing coverage for acupuncture, podiatry, dental care, home health care, and chiropractic care.

"Some of these proposals make sense," Eggers says. "Some will even save money. But none of them are likely to have more than a marginal impact on the long-term problem of rising Medicaid costs."

He says that the real problem (as outlined in an ALEC Medicaid study; see cover story) lies in Medicaid’s defined benefits structure, which fixes benefits and eligibility and makes costs variable — a recipe for skyrocketing costs. The most promising reform plans from Eggers’ viewpoint allow consumers to choose among multiple providers; customize benefits according to patients’ needs and circumstances; target benefits to the truly needy; and recognize that the Medicaid population consists primarily of three distinct groups — older people, blind and disabled people, and low-income families — each of which needs to be treated differently.

Egger’s recommendations for entitlement program reform include:

Adopt market-based, consumer-choice Medicaid reform under which consumers are given vouchers or refundable tax credits to purchase personal insurance through independent brokers from a variety of state-approved plans, including medical savings accounts, fee-for-service plans, and managed care plans. This approach would require a change in federal law to turn Medicaid over to the states. Absent such a change, some of it could be accomplished through Medicaid consumer-choice waivers.

• If comprehensive Medicaid reform is not possible, reduce costs through more targeted approaches such as implementing home- and community-based alternatives to institutional long-term care; instituting private pharmacy contracts to manage drug consumption; imposing copayments; contracting for specialized services; eliminating coverage of optional services; using buying pools; and changing the service utilization of existing populations. Eggers says use of disease management programs has been one of the most successful Medicaid reforms.

Use technology to reduce fraud, abuse, and overpayments. Currently, Eggers says, billions of dollars worth of welfare and Medicaid benefits go to people who are ineligible for the programs. Data brokers and on-line eligibility systems can help fix the problem by instantly verifying the income and assets of Temporary Assistance for Needy Families (TANF) and Medicaid applicants.

Other strategies for cutting state costs and reforming government proposed in the ALEC paper are:

• Reduce work force costs since state employee salaries and benefits account for a large portion of state costs. "Most states," Eggers says, "will find it almost impossible to balance their budgets without impacting their employees."

• Impose broad-based spending cuts, even though they are not the best approach because they don’t provide any guidance about what services government should deliver or how services should be delivered.

• Sell or lease government assets or enterprises to private entities, turning dormant physical capital into financial capital that can be used for more pressing needs such as rebuilding decaying infrastructure, reducing debt, or cutting taxes.

• Introduce competition into service delivery because private vendors often are able to produce savings through innovation, advanced technology, and a commitment to customer service. Also, Eggers suggests, once public employees are exposed to competition, they will find ways to reduce their own costs.

• Reduce or eliminate programs that perform poorly. Eggers says that governments typically focus on inputs, measuring the quality of a service by the amount of money spent on providing it. In such a system, he says, poor outcomes lead to more inputs rather than an improved process. If the performance measurement and budgeting systems implemented in the 1990s are going to work, all state programs have to be graded on their performance and resources shifted from those that perform poorly to those that are successful. Programs that continue to fail over time should be eliminated entirely.

• Reward employees for saving money. Eggers says that while most public employees are smart, industrious people, traditional state compensation systems treat all workers the same, giving them little incentive to increase efficiency and perhaps even rewarding inefficiency. He suggests finding ways to link pay to performance such as performance contracts and performance bonuses.

• Reduce duplication and overlap. With duplication and overlap costing billions of dollars, the first steps should be to implement performance-based budgeting, coordinate information technology purchases, and consolidate state data centers and small state agencies.

• Use technology to slash overhead. The private sector has started to realize cost savings and productivity increases from information technology investments not yet seen in states, Eggers says. He suggests that what’s needed is a willingness to adopt new approaches based on information technology such as e-procurement and web-based human resources and payroll services.

• Create cost-cutting brigades, powerful independent agencies that conduct periodic top-to-bottom reviews of state programs, agencies, and departments and make recommendations to maintain, eliminate, redesign, or restructure them.

"It is important to remember," the report concludes, "that no matter how successful state governments are in employing short-term measures to close deficits, the seeds of fiscal crisis will remain. Only by fundamentally restructuring government will state policy-makers be able to contain spending growth and return accountability to state finance."

[Find additional information and download the full report from Contact Eggers at (202) 223-5450.]