Newest batch of reports show the states’ budget pressures are easing

New data indicate that the continuous deterioration that plagued state finances for the past several years appears to be easing. The reports come from the National Governors Association (NGA), National Association of State Budget Officers, and the National Conference of State Legislatures (NCSL).

"Fewer states are reporting budget gaps in the early months of fiscal year 2004," according to an NCSL report. "The rate and extent of the financial improvement, however, is uneven and has failed to reach many states. But for wary policy-makers, the lack of more bad news is good news."

NCSL president Marty Stephens, speaker of the Utah House of Representatives, said, "It’s too early to pull out the sunglasses, but the fiscal storm we’ve endured may be breaking up." NCSL executive director Bill Pound said the fiscal situation in the last few years "presented state legislators with new challenges and difficult choices. There is now reason for optimism."

NCSL said state lawmakers were very cautious in preparing their FY 2004 budgets in hopes of avoiding the midyear budget cuts and other adjustments that have created problems in recent years. Nationally, FY 2004 appropriations are slightly below FY 2003 spending levels. According to the group’s November budget update survey of states:

  • 10 states reported that a budget gap had appeared since the fiscal year began, down from 31 states with gaps a year earlier.
  • The cumulative budget gap was $2.8 billion, down from $17.5 billion last year.
  • FY 2004 budget gaps range from less than 1% in Connecticut and Rhode Island to 14% in Alaska (where officials say the amount still is smaller than originally projected).
  • Several states reported that while a gap had not opened, there were factors that could lead to one.
  • State revenue performance for FY 2004 is uneven across the states.
  • 21 states reported that revenues were performing above the original forecast, with revenues on target in 13 other states and 16 states reporting that collections are below estimates. Last year, three states had revenues above projections, 10 on target, and 37 below expectations.

NGA’s December 2003 Fiscal Survey of States found that while the economy has begun to show some signs of improvement, states continue to grapple with short-term cyclical and long-term structural problems. "Budget gaps are lingering as spending pressures persist, particularly from Medicaid and other health care, and as revenues remain sluggish," the report noted, "although in some states, recently they have shown signs of resuscitation. As in previous years, states are confronting these challenges by enacting negative growth budgets, increasing taxes and fees, reorganizing programs, and drawing from reserves."

Costs continue to strive budgets

Looking specifically at health care, NGA said that the rise in Medicaid spending, coupled with the downturn in state revenue collections, continues to strain state budgets severely. Medicaid spending increased by 9.3% in FY 2003 after going up by 12.8% in FY 2002. This growth rate of about 23% in two years compares to an actual decline of 0.3% in state revenue growth during the same time period.

"States appropriated an increase of 4.6% for fiscal 2004, an amount that most likely will prove to be too low," the NGA explained. "In fact, 32 states already assume they will have a shortfall in their fiscal 2004 Medicaid budgets. The trends in Medicaid are consistent with the rise in private insurance costs, though Medicaid growth rates, in fact, are lower. States have been able to maintain a growth rate below private insurance levels due to the aggressive cost-containment efforts used by all 50 states."

Over the past three fiscal years, according to the NGA, 50 states have reduced or frozen provider payments; 50 states have implemented policies to control prescription drug costs, such as prior authorization and preferred drug lists; 34 states have reduced or restricted eligibility; 35 states have reduced benefits; and 32 states have increased copayments. Not only are states limiting spending, the NGA said, but approximately half of them also are planning to generate additional revenue for Medicaid through fees or taxes on health care providers, reallocating tobacco settlement funds, and increasing cigarette taxes.

The NGA survey found that escalating Medicaid costs continue to place the program in the forefront of state budget issues. While the Jobs and Growth Reconciliation Act has helped states by providing a temporary increase in the federal Medicaid matching rate, which should bring states $10 billion in fiscal relief in FY 2003 and FY 2004, as states plan for FY 2005, they find that the drop-off of the federal relief will force another round of difficult decisions in Medicaid.

Over the next decade, Medicaid spending is projected to grow at an average annual rate of 8.5%, according to the Congressional Budget Office, a rate that would far exceed state revenue growth even after a full economic recovery is under way.

Signaling the difficulty states still have with health care spending, a four-month study conducted by the Gannett News Service found that children across the country are being cut off from doctors because states are rolling back health insurance for the working poor. The new service’s study found that 22 states have restricted children’s health insurance programs over the last 18 months.

"We will certainly have sicker kids because of this," said Leighton Ku, a researcher with the Center of Budget and Policy Priorities, in regard to the survey. "This will cause problems for their parents, too, because if the kids are home sick, the parents are going to miss work.

The Gannett survey found that some 270,000 children of low-income working parents have been barred from health insurance programs in the nine states where estimates are available, Texas and Florida lead the country in the number of low-income children shut out of state health insurance programs, and changes to state programs are expected to hurt immigrant children, especially Hispanics.

Schools could feel the impact

Studies have shown that children without health insurance miss more school than insured children and that their classroom performance is impaired. The researchers said that could mean trouble for schools that face new federal mandates to improve the performance of all students. Parents of sick, uninsured children are likely to seek medical care through hospital emergency departments and public clinics, even though they can’t pay for it. An increase in uncompensated care will translate into high prices for families with health insurance, according to health professionals.

NCSL pushing Medicaid reform

The health committee of the NCSL has adopted a Medicaid reform proposal that calls for increasing state flexibility to allow greater innovation in meeting needs of uninsured and underinsured residents. The committee also is proposing a funding formula that would automatically provide additional relief in bad economic times and revert to the normal federal-state cost-sharing in normal economic times. NCSL also proposes increased accountability and openness in prescription drug purchases to facilitate free market competition and slow the growth of drug costs.

Meanwhile, a study released in December 2003 by the Center for Studying Health System Change found that health care spending per privately insured American slowed in the first half of 2003, increasing 8.5%, down from the 10% increase in the second half of 2002. Despite the fact that the 1.5% decline in health care spending growth was the largest six-month drop since the early 1990s, health care spending in the first six months of 2003 still grew nearly three times faster than growth in the overall economy, as measured by a 2.9% growth in per-capita gross domestic product during the same period.

"Increased patient cost sharing is probably an important factor in the slowing of cost trends, but few experts expect this tool to substantially lower cost trends over the long term," said center president Paul Ginsburg, a co-author of the study. "Without more effective cost-control measures, the rising cost of health insurance will make coverage unaffordable to more and more Americans."

While other research shows employer-sponsored health insurance premium increases reached a 13-year high in 2003, rising an average 13.9%, the significant slowing of underlying health cost trends in 2003 could prompt the first slowdown in premium growth since the mid-1990s.

Spending growth has slowed

The slowing of the overall cost trend reflected slower growth in all four categories of health care spending analyzed — inpatient and outpatient hospital care, physician services, and prescription drugs. Prescription drug spending slowed the most, rising only 8.5% in the first half of 2003, considerably less than the 13.4% increase in the second half of 2002. The first half of 2003 was the first time since the mid-1990s that the cost of prescription drugs did not grow at a double-digit rate. Spending on hospital inpatient care grew 7.6% during the first half of 2003, down from an 8.3% increase in the last six months of 2002. Spending on outpatient care increased 12.9% in the first half of 2003, down from 14.1% in the second half of 2002.

Outpatient care remains the fastest growing category of health care spending. Spending on physician services increased 6.1% in the first half of 2003 and was the slowest growing category of health care spending.

[Additional information is available from www.nga.org and www.ncsl.org.]