Fiscal Fitness: How States Cope

Advocacy groups push for an extension of additional Medicaid federal match

As the June 30, 2004, date for the end to the emergency increase in the federal Medicaid match rate loomed, advocacy groups pushed Congress to extend the higher rate in recognition of the fact states still have significant financial problems and are dependent on the extra federal funds. But Congress’ General Accounting Office (GAO) released a report urging caution lest states assume there will always be federal emergency help in tough times and not take steps to stabilize their own budgets.

The deadline passed without action being taken, although bills have been introduced for some level of extension. During Congress’ midsummer recess, it was unclear whether action would be taken before a fall recess scheduled to occur earlier than usual because this is an election year.

An analysis released by the Children’s Defense Fund (CDF) said 36 states would each lose at least $100 million in federal Medicaid funding if the additional federal matches were allowed to expire, ranging from $10 million in Wyoming to more than $1 billion in California and New York. And Families USA released a report demonstrating the value Medicaid provides for state economies, using those data to encourage additional spending on Medicaid, not only for the health benefits such spending would provide, but also for the boost to local economies.

"Many states are still caught in a budget squeeze," CDF Health Division director Emil Parker explains. "Two-thirds of states are facing budget gaps for the next fiscal year that total $36 billion. While the increase in the federal match rate helped states avoid some Medicaid cuts, virtually all states still had to reduce Medicaid services last year. Many states are preparing to make even deeper cuts to Medicaid health services for poor and disabled Americans this year, in part because they expect that the federal match rate will drop on June 30, just as the new state fiscal year begins."

Mr. Parker tells State Health Watch the pressure on states to balance their budgets often forces them to slash vital public services in areas such as health care that disproportionately affect the lives of lower-income Americans. "Congress must act now to alleviate that pressure by continuing the enhanced federal match rate for another year," he adds. "The extension would protect vulnerable Medicaid beneficiaries — especially children, the elderly, and the disabled — from cuts in coverage and benefits."

CDF said that if the enhanced federal match were not extended, 29 states would each need to put up at least $100 million in additional non-federal funds to draw down the same amount of federal funding at the lower match rate. (See chart.) As examples, Arizona would have to put up an additional $200 million in state match or lose $410 million in federal Medicaid funds; Georgia would have to put up an additional $270 million or forgo $410 million in federal funding; Iowa would need to find an additional $50 million; and Mississippi would need an extra $80 million in state funding, with $260 million in federal funds at stake in that state.

"Rather than removing this lifeline while states are still fighting to keep their heads above water," the CDF analysis said, "Congress should extend the enhanced match rate for one year, until June 30, 2005. An additional year of fiscal relief through the higher Medicaid match rate would allow the recovery to take hold in some of the states that continue to face budget pressures."

The enhanced match was part of $20 billion in relief Congress approved as part of the Jobs and Growth Tax Reconciliation Act of 2003. The enhanced match rate accounted for some $10 billion of the relief and was authorized from April 1, 2003, to June 30, 2004. Each state received an increase of at least 2.95 percentage points in its federal match rate. Only states that have not reduced Medicaid eligibility (relative to the level as of Sept. 2, 2003) qualified for the enhanced match rate.

CDF said 27 states used the enhanced Medicaid funding to avoid, postpone, or minimize potential Medicaid benefit cuts or freezes.

No state has directly reduced Medicaid eligibility since enactment of the federal fiscal relief, partly because such reductions would have cost them the higher match rate.

"Due to the expiration of fiscal relief and the growth in total Medicaid spending, states with high federal matching rates may see their state [nonfederal] spending on Medicaid increase by 20% or more from FY 2004 to FY 2005," CDF warned.

Helping local economies

The Families USA contribution to the debate looks at Medicaid as "good medicine for state econ-omies." It said that while Medicaid’s role in providing essential health services is clear, "what is less clear is the unique role that Medicaid plays in stimulating state business activity and state economies. Every dollar a state spends on Medicaid pulls new federal dollars into the state — dollars that would not otherwise flow into the state.

"These new dollars pass from one person to another in successive rounds of spending. . . . The magnitude of this multiplier effect varies from state to state, depending on how the dollars are spent initially and on the economic structure of, and conditions in, the state. Because of the multiplier effect, the aggregate impact of Medicaid spending on a state’s economy is much greater than the value of services purchased directly by the Medicaid program," according to Families USA.

Congress’ approval of the enhanced federal match followed a 2003 Families USA report that demonstrated that each dollar cut from state Medicaid spending would result in significant losses in business activity, jobs, and wages in the states.

For its updated report, intended to influence the debate over extending the enhanced match, Families USA came up with updated multipliers to predict the economic impact of potential state Medicaid spending increases or cuts in FY 2005, as well as the potential stimulus to state economies if Congress extended the fiscal relief formula past June 30, 2004.

Threefold benefit

In FY 2005, according to the analysis, the 50 states will spend an estimated combined total of more than $132 billion on Medicaid, which will generate an almost threefold return in state economic benefit — $367.5 billion in increased state-level output of goods and services from increased business activity. The rate of return per state dollar invested in Medicaid in FY 2005 will range from $6.22 in Mississippi to $1.92 in Delaware.

The five states with the highest rate of return for every state dollar spent on Medicaid in FY 2005 will be:

  • Mississippi ($6.22);
  • New Mexico ($5.57);
  • Arkansas ($5.48);
  • Utah ($5.45);
  • West Virginia ($4.95).

Of the remaining 45 states, 22 will see a return of at least $3 in increased state business activity for every dollar the state invests in Medicaid.

According to Families USA, estimated FY 2005 spending will generate more than 3.3 billion jobs with wages in excess of $133 billion in the 50 states. These jobs will include Medicaid personnel, other employment in the health care sector, and jobs generated as the Medicaid dollars circulate through different sectors of the economy.

On average, investing $1 million of state funds in Medicaid will generate nearly $1.23 million in new wages. The five states with the largest increase in wages per $1 million on state funds invested in Medicaid will be:

  • Mississippi ($2.31 million);
  • New Mexico ($2.1 million);
  • Arkansas ($2.03 million);
  • Utah ($2.02 million);
  • Oklahoma ($1.81 million).

If Congress were to extend the higher match for one year, Families USA said, the 50 states taken together would realize an additional $48.4 billion in new business activity, a 13.2% increase. An additional 447,553 jobs would be created and additional wages of $17.5 billion would be generated.

Direct and indirect boosts

Medicaid spending adds to state economies in both direct and indirect ways. Medicaid payments to hospitals, nursing homes, and other health-related businesses have a direct impact, paying for goods and services and supporting jobs in the states.

Those dollars trigger successive rounds of earnings and purchases as they continue to circulate through the economy. They create income and jobs for individuals not directly, or even indirectly, associated with health care.

Thus, for example, health care employees spend part of their salaries on new cars, which adds to the income of auto dealership employees, enabling them to spend part of their salaries on washing machines, which enables appliance store employees to spend additional money on groceries, and so on. This ripple effect of spending is called the economic multiplier effect.

But Medicaid spending also provides a positive, countercyclical stimulus to a state’s economy during a recession or downturn. State Medicaid spending has a greater economic impact than other state spending.

Increases in state government spending on most programs do not have the same multiplier effect as Medicaid spending increases because most state government expenditures simply reallocate spending from one sector of the economy to another. When a state increases its Medicaid spending, however, new federal matching dollars are brought into the state’s economy.

Families USA said the magnitude of Medicaid’s unique positive impact varies from state to state, based on both the size of the state’s federal matching rate and the state’s economic conditions.

The organization’s analysis developed estimates of the positive impact of Medicaid spending for each state, showing the significant return — in increased business activity, new jobs, and additional wages — states will gain from their investment of dollars in the Medicaid program. State policy-makers can use the analyses to estimate the economic impact of both Medicaid increases and cuts, Families USA said.

The report said Medicaid is the only source of financial help for millions of families struggling to pay for nursing home or other long-term care services for a parent or family member.

"Every Medicaid spending decision made by state policy-makers affects people in very real, and often irrevocable, ways," it said. "At the same time, the economic downturn and state budget pressures have forced state policy-makers to confront hard choices about state spending priorities. As state budget options are weighed and balanced, the equation should include recognition of the economic benefit of using state spending on Medicaid to pull in new federal dollars. These new dollars are a powerful stimulus to state economies. The federal dollars that flow into a state to match state Medicaid spending generate new business activity, increase output of goods and services, create new jobs, and increase aggregate state income. In turn, these positive effects increase state revenues, which can then support further state spending," the report said.

Extension would help states

"These positive effects are even greater when the federal government provides additional federal funds for each dollar spent by the states. If Congress extends the temporary federal fiscal relief past the June 30, 2004, expiration, the additional federal funds provided will help states struggling to cope with increasing health care costs as they emerge from the economic crisis that has gripped them for the past three years. Thus, Medicaid spending is good medicine — both for the health of state residents and for ailing state economies," the report pointed out.

The report from the GAO looked at distribution of the $10 billion in unrestricted non-Medicaid temporary fiscal relief payments to states under the Jobs and Growth Tax Relief Reconciliation Act of 2003. Funds were distributed on a per capita basis, with smaller states guaranteed a minimum payment, rather than based on where the greatest need was. But the auditors maintain ed that because recessions affect states unevenly, targeting unrestricted funds to states most affected and with less available resources could yield better results.

The report said that from an economic perspective, allocation of relief payments among the states was less than optimal. The first payments were distributed to states when the overall economy was beginning to expand as measured by gross domestic product growth. "Consequently," the auditors said, "it is doubtful that these payments were ideally timed to achieve their greatest possible economic stimulus."

But the auditors also noted employment growth lagged behind the economic recovery measured by gross domestic product and state income and sales tax receipts are closely linked to employment levels. From the start of the recovery to receipt of the first fiscal relief payment overall, nonfarm employment continued to decline, and therefore, the fiscal relief payment likely helped resolve ongoing budgetary problems, the report said.

The magnitude and timing of cyclical economic downturns affects states unevenly. Also, due to variations in their underlying fiscal capacities, states differ in their ability to weather economic downturns. "Ideally," the GAO said, "countercyclical fiscal assistance should take into account when and how severely states are affected by a recession and their fiscal capacities. Failure to take these differences into account reduces the effectiveness of such assistance in terms of facilitating economic recovery or in moderating fiscal distress at the state level."

States dependent on feds?

GAO cautioned that even if countercyclical assistance were well timed and targeted, its provision could have adverse consequences for how states manage their finances. Before the recent recession, the auditors noted, many states put away reserves that they were able to draw upon to help meet revenue shortfalls. However, several states put away little or no reserves. "If states now believe that in response to any future recession the federal government will again provide unrestricted fiscal assistance, they could be less apt to fund budgetary reserves," the report declared.

Mr. Parker tells State Health Watch the legislation that was introduced would only fund a portion of the enhanced match rate into the future, but still would be a help.

A bill introduced by Sens. Jay Rockefeller (D-WV) and Gordon Smith (R-OR) would provide a 1.26% increase, less than half of the enhanced match percentage increase. Under the bill, $4.8 billion in additional Medicaid match funds would be spent over 15 months. States would be eligible for this increase only if they maintain their Medicaid eligibility levels at least at the level in effect on Sept. 2, 2003. The bill also would reimburse states for the expected $1.2 billion they will have to spend to implement the new Medicare drug bill.

In the House, Mr. Parker says, Reps. Pete King (R-NY) and Sherrod Brown (D-OH) introduced the Medicaid Relief Act of 2004 with a 1.6% match increase worth $6 billion. That bill does not specifically allocate funds for implementation of the Medicare drug bill.

Mr. Parker says there is a "pretty broad coalition" backing extension of an enhanced Medicaid match, but the effort could be hurt by the small number of legislative days remaining in this session of Congress between end of the summer recess and adjournment in time to campaign, especially given that most appropriations bills still needed to be dealt with. "It’s not clear if anything is going to happen this year," he continues, "but we want to build momentum for next year."

[Contact the Children’s Defense Fund’s Emil Parker at (202) 662-3565 and Families USA at (202) 628-3030; or go on-line to www.childrensdefense.org and www.familiesusa.org. Download the GAO report from www.gao.gov.]