Budget shortfalls spread as states cope with tax troubles, recession

It wasn’t that long ago when states exerted lots of economic power in determining the path of their health care coverage. It didn’t take long for that to change. Sept. 11 is only part of the story.

Tax cuts, dramatic price hikes in Medicaid in the cost of prescription drugs, provider payment rates have risen after years of being fairly flat, and many states’ financing strategies to bring in more federal aid have combined to bring states to their knees.

The first place many are looking toward is Washington, DC. This is a large group of states, not just a handful.

"Is there a state that’s not hit hard?" Michael Collins, director of consulting for the government section of Medstat in Ann Arbor, MI, tells State Health Watch. "I’m hard pressed to come up with one. The budget problem is a function of its success. States set out to expand coverage, Medicaid or CHIP [the Children’s Health Insurance Program], and have been successful. Now they are having trouble paying. This is going to be troublesome when the legislative season starts in earnest."

This year, 35 states are predicting budget shortfalls. Cuts in services and/or tax increases are among their options and more than 30 states are thinking about one or the other in order to pay their bills. According to the Urban Institute, in Washington, DC, six states — Connecticut, Delaware, Illinois, Kansas, Kentucky, and Maine — have no reserves to meet their welfare payments.

"California is the hardest hit if not the worse because during the ’90s a tremendous portion of the state’s budget was funded through capital gains taxes, the technology boom. Now it’s got an energy crisis, a tech bust, a recession, and a general recession nationally, all at one time. They have a multibillion-dollar deficit," Mr. Collins adds. "The government is giving orders to cut its budget by 15%."

California and Washington, DC, are having a battle royal of wills and budgets. Bush administration officials say California will have to take a $17 million hit from federal cuts in Medicaid and Medicare payments. Next fall is round one: a $400 million reduction from DC to California regarding Medicaid. Those eligible in the Golden State for Medicaid rose by 700,000 in 2002, so state health officials are saying the dollars should be going up, not coming down.

California’s per-capita income is partly to blame. Federal officials saw how the state’s income was going up and determined that California would need less help in the future.

There is a lot of dependence on the California state government by its residence, Mr. Collins says. "That’s a structural issue," he says. "Besides Sept. 11th, I think their problem was coming anyway."

Part of that structural problem is the structure of California’s population. It has 12% of the U.S. population, and 14% of the nation’s poverty stricken live there, but the state only gets 11% of national Medicaid dollars because of the high incomes the rest of the state’s population brings in.

According to the Kaiser Foundation on Medicaid and the Uninsured in Washington, DC, states have a long list of questions they must ask themselves. They include:

  • Will states be able to find ways to contain Medicaid cost growth within what is affordable?
  • Will the new fiscal realities cause states to re-think recent expansions of Medicaid and CHIP coverage, or will there be a slowdown or reversal of this policy direction?
  • Will states continue to use Medicaid as a vehicle to finance health coverage for low-income uninsured workers, and to assure coverage for the low-income families and children, the elderly and disabled populations served by the program?
  • How will the safety net be affected and will budget constraints at the state and federal levels force communities to face additional challenges?
  • Will states take action to shore up state revenues in order to preserve Medicaid and other state programs?

There are 50 states pondering at least 50 ways to deal with these problems right now. Cuts are the focus.

"Some of the biggest items are optional services, like prescription drug services," Julie Hudman, Kaiser Commission associate director, tells State Health Watch. "They can put a limit on the number of drugs [someone can receive] per month. They can raise the formulary."

There are obstacles to that tactic. In Michigan, a pharmaceutical trade group has filed a suit over Medicaid changes that would make 350,000 of the state’s Medicaid fee-for-service patients get the state’s prior approval for certain prescriptions.

The suit, filed by the Pharmaceutical Research and Manufacturers of America, maintains that doctors would have to receive permission from the state before prescribing medicine that does not generate extra savings beyond those required by federal Medicaid law.

The cost of prescriptions has risen 98% for Medicaid fee-for-service patients in the last two years.

The National Governors Association (NGA) has a plan it has proposed to the federal government regarding Medicaid. Member governors say they have watched their revenues plunge and Medicaid costs soar, but Medicaid is set to decrease in 29 states in the current fiscal year. Toss in costly health care preparations related to Sept. 11, they say, and the result is a $15 billion shortfall.

NGA recommends a temporary increase in the federal share of the Medicaid program — federal medical assistance percentage — to give what they call "an immediate boost to the economy."

NGA says it sees much higher numbers of workers entering the rolls of the unemployed in coming months and cites a recent study by the Urban Institute, that estimates Medicaid recipients could increase by 800,000 adults, 2 million children, and 260,000 disabled persons if unemployment rises to 6.5%.

"If the economy does not turn around quickly, it is possible for unemployment to reach as high as 7% or 8% as a worst-case scenario," says Raymond C. Scheppach, executive director of the NGA. "Regardless of where the unemployment numbers bottom out, previously employed individuals will be coming back on the Medicaid rolls because they will lose their jobs and their health care benefits."

Other studies are just as bleak. Jocelyn Guyer, senior policy analyst with the Kaiser Commission on Medicaid and the Uninsured, says that a recent survey of the budgets in North Carolina, Indiana, Idaho, Missouri, and Texas show how previous decisions are now giving those states fits. Idaho, for instance, cut back on taxes and is now paying the price, she explains.

"Texas did some really funky things with its Medicaid budget in recent years," Ms. Guyer says. "It has a two-year budget. To save money, it opted to pay providers for 23 of the 24 months and to spill over to the next year to free up spending money. But [the state has] to pay for it. It’s just delaying payments to providers."

North Carolina also cut taxes and is struggling, Ms. Guyer says, while at the same time it is trying to not cut back on Medicaid eligibility.

"The Sept. 11th outcomes vary by states," she adds. "State budget officials say it has accelerated the downturn, but they are saying it’s not the reason for budget problems. They have concrete spending for bioterrorism; for instance, in New York, the budget officer said they will have a surplus of CHIP funding, but they have gone from being healthy to not having enough to maintain."