This growth not necessarily good: Medicaid set to trump education

State spending on Medicaid is poised to surpass the percentage spent on elementary and secondary education, according to a new report from the National Association of State Budget Officers (NASBO) and the National Governors Association (NGA). Between FY 2002 and FY 2003, Medicaid increased by 8%, the NASBO report said, while total state spending, including mandated federal programs, increased by only 4.5% and discretionary state spending grew by just 1.4%.

When NASBO first started doing its state expenditure surveys in 1987, Medicaid accounted for barely 10% of state budgets, while education spending held steady at 23%. In FY 2003, Medicaid accounted for 21.4% of all state spending, nearly as much as the 21.7% devoted to elementary and secondary education.

"Since Medicaid is a federal entitlement and education is discretionary, Medicaid will trump education going forward," said NGA executive director Raymond Scheppach.

NASBO reported that Medicaid continued to grow robustly. "Medicaid is crowding out other parts of state budgets," said NASBO executive director Scott Pattison. "Medicaid’s unsustainable pace of growth means that over both the short and long terms, states must find some source of relief. Other state functions are certainly being impacted."

Even with extensive cost containment efforts and last year’s temporary federal fiscal relief, states’ Medicaid expenditures have exceeded the amounts originally budgeted, with 23 states experiencing Medicaid shortfalls in FY 2003 and 18 states projected to experience shortfalls in 2004. The combined amount of the shortfalls is projected to be $7 billion.

For actual FY 2003, the pieces of the total budget pie were K-12 education, 21.7%; Medicaid, 21.4%; higher education, 10.8%; transportation, 8.2%; corrections, 3.5%; and public assistance, 2.2%. Spending on all other state functions — including information technology, parks and recreation, state police, and aid to local governments — totaled 32.2% of total state expenditures.

Meanwhile, the Kaiser Commission on Medicaid and the Uninsured’s fourth consecutive survey of state Medicaid officials about their Medicaid spending growth and cost containment plans indicated a mix of good and bad news for states as they completed FY 2004 and entered FY 2005.

Although the revenue situation in many states has started to improve, the report said, states continue under severe pressure from Medicaid. Key findings in the survey included:

• Despite severe fiscal stress, Medicaid enrollment grew by nearly one-third since the beginning of 2001 as the program maintained its role as a critical safety net for low-income populations.

• Medicaid spending in FY 2003 and FY 2004 grew faster than other state programs, but slower than growth in private health insurance premiums.

• Responding to pressure to control Medicaid costs, all 50 states and the District of Columbia implemented actions designed to control Medicaid spending growth in FY 2004, and all states planned to implement cost-containment measures in FY 2005.

• Federal fiscal relief helped states meet Medicaid shortfalls in FY 2004 and helped to maintain Medicaid eligibility levels; however, states are expecting sharp increases in the state share of Medicaid costs in FY 2005 as they replace the loss of the enhanced federal support.

• Implementation of the Medicare prescription drug benefit will generate significant fiscal and administrative challenges for state Medicaid programs, and only three states reported they have allocated resources to FY 2005 to meet these challenges.

• States are approaching FY 2005 with caution. While revenues are improving overall, many states still face budget shortfalls, and pressure to control Medicaid spending growth will continue.

In a public policy briefing on the Kaiser survey, commission executive director Diane Rowland said that what happens to Medicaid has a direct relationship with the national debate over the uninsured (see box) and the release of census data indicating that the number of uninsured has climbed to nearly 45 million people on any given day in 2003, an increase of about 5.1 million uninsured since 2000.

"If we look at what’s been changing in health insurance coverage, we see a steady erosion of the percent of the population who gets their coverage through employer-sponsored coverage and a growth in those who are now dependent on Medicaid and its companion program, the State Children’s Health Insurance Program [SCHIP], for coverage," she said. "The percent of people with employer-based coverage has dropped to 64%, while the number with Medicaid and SCHIP has risen to 11% in the period from 2000 to 2003."

Key survey findings

Vern Smith, whose Health Management Associates conducted the state survey for Kaiser, said three key survey findings were:

1. Medicaid enrollment continued to increase fairly dramatically over the last few years, responding to the economic downturn, increase in the number of people in poverty, and the increased number of people without health insurance.
2. States have used broad-based strategies to respond to the cost pressure increases.
3. The pressure on Medicaid continues to be unrelenting.

Medicaid directors told Mr. Smith that last year Medicaid spending increased in total in terms of payments to providers and dollars spent by 9.5%, almost exactly the same growth rate as in 2003. "This is a very high rate of growth in any spending category in state budgets, especially over the last couple of years," he said. "It is somewhat less than the rate of growth that occurred in the previous two or three years, but still a very significant rate."

According to the Medicaid officials interviewed, the most significant drivers of Medicaid cost growth are increases in the number of beneficiaries, increases in the cost of prescription drugs, and increases in the cost of medical services in general.

From 2001 through 2004, overall Medicaid enrollment increased by one-third, described by Mr. Smith as a very large rate of growth. The rate of enrollment growth projected for FY 2005 was 4.7%, and the expectation was expressed that the number of people served by the program will continue to grow.

States are most concerned about their own program costs when they make decisions about Medicaid, Mr. Smith says, and those numbers can be misleading this year. Thus, in 2004, the state cost of Medicaid spending increased by 4.8%, much less than the 9.5% in overall Medicaid spending increases that occurred that year. The reason, of course, is that in 2004, states benefited from a temporary enhanced federal matching rate provided by Congress in May 2003 as part of the fiscal relief package.

That state increase of 4.8% seems reasonable in the context of all that was happening until people realize that total state spending for all programs, including Medicaid, increased just 2.8%. "So Medicaid grew even with the enhanced federal matching about two-thirds faster than other programs in state government," Mr. Smith said. Because the enhanced federal match ended June 30, 2004, states entered FY 2005 without that extra boost and are seeing dramatically large increases in state share of Medicaid spending for 2005. "Based on initial appropriations, state legislatures authorized increases in states’ share of Medicaid growth of 11.7%, against overall state program growth of 2.8%, so Medicaid is authorized to grow about four times faster than other state programs," Mr. Smith declared.

Officials in 30 states told Mr. Smith there was at least a 50-50 chance their state would experience a Medicaid shortfall in FY 2005, he said. A glimmer of hope, he said, is that last year 34 states said they expected a shortfall. "But the bottom line is that even with all of the actions that states have taken over the last several years, Medicaid spending growth far exceeded the growth in state revenues," Mr. Smith concluded. He also found that even with some of the positive things that are happening in states, directors in 39 states said the pressures on their programs were actually increasing, while directors in 12 states said the pressures would remain about the same.

"Not one state in the country said that the pressures on the program were subsiding," he said. "State officials cited a number of reasons why the pressure was increasing. Foremost was a continuing pressure coming from legislators and state budget directors to control the rate of growth in Medicaid spending. As one Medicaid director said, There are no rabbits left in our hat and they’re still looking for new ways to control the rate of growth in spending.’ Secondly, states have become very much aware of their responsibilities associated with the new Medicare prescription drug benefit. . . . Third, states mentioned increasing pressure from the Centers for Medicare & Medicaid Services involving increased fiscal scrutiny. Fourth, there is concern about the increasing number of people in poverty and the increasing number of people without health coverage. . . . And finally, people are beginning to talk about demographics and its impact on Medicaid. A number of states said that they’re already seeing increases in elderly and disabled enrollment in their program, and that’s having an impact on their spending."

Center on Budget and Policy Priorities analyst Donna Cohen-Ross gave results from a survey covering April 2003 to July 2004, when nearly half the states made it harder for eligible children and families to secure and retain coverage through imposition of financial barriers such as premiums and procedural barriers as well as enrollment freezes. Ms. Cohen-Ross said most of the changes occurred in the SCHIP program rather than in Medicaid because states have more flexibility to modify SCHIP.

She reported that 33 states now have premiums or enrollment fees in children’s health coverage programs, with 16 states imposing or increasing premiums or targeting them to families at lower income levels during the survey period, making it harder for families to afford health coverage, particularly lower income families.

Also, eight states froze enrollment for children’s health coverage for some portion of the survey period. At the time of the briefing, only Florida, Idaho, and Utah still had a freeze in effect. To compound the problem, she said, states that implemented freezes also dropped waiting lists, making it impossible to determine the potential demand for the program and how many children are eligible but can’t get into the program.

While some states adopted new administrative simplification procedures, others retracted some procedures that had been found to be very effective. Thus, Ms. Cohen-Ross said there has been a decline in use of 12-month continuous eligibility and reduced verification.

She cited examples from Ohio, in which administrative simplification coincided with a marked increase in enrollment, and Washington, where simplification, including 12-month continuous eligibility, self-declaration of income, and other things was retracted and there has been a drop of more than 40,000 children in the caseload.

Also surveyed was parent coverage, and Ms. Cohen-Ross reported that expanding eligibility for parents still lags behind work that’s been done to expand coverage for children in about half the states.

She gave credit to Illinois, which moved forward despite fiscal worries, expanding eligibility in the SCHIP program, increasing coverage to 200% of the federal poverty level in children, and increasing parent coverage in a two-stage process so parents are covered if their income is at or below 133% of the federal poverty line. This year, she said, Illinois adopted new simplifications, reduced some income verification requirements, adopted presumptive eligibility for children, and continued to conduct outreach to support and recruit new community-based application assistance agents.

"We did everything that we were asked to do. We expanded coverage, and we conducted outreach. We’re still committed to that, but the bottom line for us is we need the resources to continue to pay the cost of coverage for the kids currently on our program and any new kids that may come in. It’s very difficult to invest in outreach when you’re so constrained in terms of what you have to cover the cost of the coverage itself," Ms. Cohen-Ross added.

[To see the NASBO report, go to For the Kaiser Commission report, go to Contact Mr. Scheppach at (202) 624-5300; Mr. Pattison at (202) 624-5382; Ms. Rowland at (202) 347-5270; Mr. Smith at (517) 482-0920; and Ms. Cohen-Ross at (202) 408-1080.]