Eligibility cuts will be 'last resort' for states during economic downturn

It's not surprising that Medicaid spending and enrollment is increasing, right at the time that states can least afford it. But this economic downturn is expected to be worse than previous downturns, and states will be forced to make some hard decisions.

"The Medicaid program is responding exactly how the program was designed to respond—it is a countercyclical program. But this downturn looks like it's happening pretty close after the last one," says Robin Rudowitz, a principal policy analyst for the Kaiser Family Foundation's Kaiser Commission on Medicaid and the Uninsured (KCMU). "There hasn't been much time for states to recover, in terms of restoring some of the restrictions and cuts they had to make after the last downturn."

According to Stan Dorn, senior research associate in the Health Policy Center at The Urban Institute, "When the economy nosedives, as it's doing now, two things happen. The caseload of Medicaid, SCHIP, and other programs goes up, and revenues drop."

Since states are required to balance their budgets, hard economic times are likely to bring cutbacks in services or increased taxes, precisely when vulnerable households and stumbling economies most need shoring up.

However, the severity of a downturn doesn't necessarily determine whether Medicaid coverage is affected. "Earlier this decade, we had a downturn that caused very serious harm before Congress bailed out the states," says Mr. Dorn. The overall severity of the recession and slowdown was considered to be modest, but nevertheless, the effect on states' ability to provide health coverage was significant.

"Now, I'm worried because states have not yet fully recovered from the previous round of cutbacks," he says. "And suddenly, we are hit with a new slowdown that is probably going to be more severe than the last one. It could get really bad."

During downturns in 2001 and 2003, "what we saw was that as families lost their jobs and health insurance, more parents and children became eligible for Medicaid," says Edwin Park, a senior fellow in the health policy department at the Center on Budget and Policy Priorities. "But this downturn is more likely to be much deeper. States closed a number of deficits, but they have already made a lot of the one-time actions that they could, including drawing on rainy-day funds."

Extremely large deficits are expected for the upcoming fiscal year, which in most states starts July 2009. "States will be forced to consider cuts to their programs, as well as tax increases," he says. "And that, in turn, could worsen the downturn by adding to the ranks of the uninsured when people most need Medicaid coverage."

Thirty states were facing significant budget shortfalls as they prepared their FY 2009 budgets, according to the KCMU's recent 50-state survey. States had to close those shortfalls to adopt their budgets for 2009, but it now looks as though about 23 states will have midyear shortfalls. "Clearly, it's a very challenging fiscal environment for states," says Ms. Rudowitz. "At the time that we did our survey, states were definitely projecting an uptick in Medicaid enrollment and spending. They attributed that increase for 2009 partially to changes in the economy."

Not many states have called extra special sessions yet. But for FY 2009, states were projecting, on average, a 5.8% growth in spending. Looking ahead, two-thirds of state Medicaid directors said there was at least a 50-50 chance that they will face a shortfall in their Medicaid budgets during the current year. "So there is a strong possibility that if the economy looks like it's getting worse, states might have to go back and revisit those budgets," says Ms. Rudowitz.

States potentially will be looking for ways to trim their Medicaid programs, and in the past, the first place states have turned is to provider payment rates. "And as we report in the survey, most states are still doing provider rate increases. A lot of that is because they are still restoring cuts that they made during the last economic downturn, which wasn't that long ago," says Ms. Rudowitz. "It's one of the ways that states can have a pretty immediate effect on spending, so states might turn back to some of those changes. But we also know that Medicaid payment rates are already pretty low."

There is a fundamental paradox built into Medicaid programs, says Robert W. Seifert, senior associate at the Center for Health Law and Economics at the University of Massachusetts Medical School in Charlestown. On the one hand, it is designed to be countercyclical—as the economy falters and unemployment rises, demand and eligibility for the program rise.

In most states where employer-sponsored insurance is declining, Medicaid is the safety net that keeps the number of uninsured from growing as fast as it otherwise would. "On the other hand, Medicaid is among the largest items in any state budget, which makes it an attractive target for governors and legislatures in times of fiscal stress," he says. "This can be something of an illusion, though, because the program's financing is shared with the federal government."

This means that at least 50 cents of every dollar cut from a state's Medicaid program actually belongs to the federal government, Mr. Seifert explains. "Poorer states retain even less of the savings. Mississippi is reimbursed for 76% of its Medicaid spending," he says.

How cuts affect Medicaid enrollees depends on the savings approaches that states adopt. "Basically, there are three levers to use — eligibility, benefits, and the rates paid to providers," Mr. Seifert says. "All of these choices would somehow limit Medicaid members' access to care and could also increase medical debt and instances of people foregoing needed care for themselves or their children."

Federal assistance is needed

There is likely to be a great deal of debate about alternate strategies as legislatures reconvene next year and governors propose their FY 2010 budgets, says Mr. Seifert. One development on the federal horizon that might help states is a temporary increase in the federal Medicaid matching rate for states, as part of the economic stimulus package that Congress is now considering."But there is opposition, so it is not clear whether this will ultimately pass," he adds.

Ms. Rudowitz says, "Medicaid financing has been a perennial issue for states, and it is really highlighted during economic downturns." During the last downturn, there were some eligibility and benefits cuts, but this is a "last resort" for states, she says. "But I think states tried to be as targeted as possible. Some of those cuts did not happen until later in the downturn, because states did what they could to avoid that."

An infusion of federal dollars could prevent even deeper Medicaid cuts, provided that there is a condition on states not to cut eligibility levels in exchange for the federal dollars, says Ms. Rudowitz. "Whether or not the federal government takes action quickly with a stimulus package can partially determine what type of situation the states are in," she says. "It could help them avoid some cuts that they might otherwise have to make."

Mr. Dorn says the current situation underscores the need for automatic federal countercyclical assistance, so that when state economies nosedive, additional federal help is automatically forthcoming. "There is nothing new here. There have been economic slowdowns every few years since the country has existed. Certainly, since the creation of Medicaid, we have gone through these cycles before," he explains. "If we sit around and wait for federal policy-makers to reach agreements, the delays can be prolonged. And when federal help finally arrives, it may be too late for lots of states."

Even so, many states have persisted in their efforts to expand programs, and to cover children in particular. "This has been striking," says Mr. Dorn. "Obviously, children are less expensive to cover than adults, but in any case, it's remarkable. We will just have to see if that continues."

When people are most nervous about losing their jobs, a state health reform proposal certainly has more support, he says. But at the same time, states are experiencing budget problems that make it very hard to dedicate the resources needed to maintain coverage, much less expand it.

"It would make such a huge difference if there were an automatic federal increase in funding whenever times turn dark, so we are not forced into this absurd situation," says Mr. Dorn. "At the very time when help is needed the most is exactly when help is most likely to be cut."

The federal government plays an important role in temporarily stepping in to shore up state Medicaid programs, says Mr. Park.

During a 2003 downturn, Medicaid enrollment increased and at the same time, states were experiencing large budget deficits because of the downturn's effect on state revenues. "States were forced to cut spending and/or raise taxes," he points out. "A number of states were having to cut their Medicaid programs."

In 2003, Congress provided $20 billion in fiscal relief to states, including $10 billion as a temporary increase in the Medicaid federal medical assistance percentage (FMAP).

While this was effective, it took too long for Congress to act, says Mr. Park, and as a result, a number of states already had made significant cuts to their programs. "As many as a million people might have lost coverage," he says. "I think we are seeing a similar situation, but people think that unemployment will be much higher this time."

Some economists believe that unemployment, which currently is at around 6%, will rise to about 7% or 8%, says Mr. Park. He notes that researchers project that each percentage point increase in unemployment will increase Medicaid enrollment by between 1 million and 1.5 million.

"However, that's not including people who lose their health insurance because of health care costs," he says.

Mr. Park says the hope is that if there is another stimulus package, which Congress is currently considering, that it includes a fiscal relief package with a temporary increase in FMAP.

He says one of the key elements of 2003's fiscal relief in 2003 was that in exchange for the increase in the Medicaid matching rates for 15 months, states were required to maintain their eligibility. "And no states made eligibility cuts while receiving the FMAP—they complied," says Mr. Park. "The hope is if stimulus is enacted right away, that fiscal relief can be put in place so Medicaid programs can be shored up. That way, they can absorb the higher enrollment without making cuts."

Contact Mr. Dorn at SDorn@urban.org, Mr. Park at (202) 408-1080 or park@cbpp.org, Ms. Rudowitz at (202) 347-5270 or RobinR@kff.org, and Mr. Seifert at (617) 886-8065 or Robert.Seifert@umassmed.edu.