Fiscal Fitness: How States Cope

Governors ask Congress for Medicaid reform, but don’t want cost shifted to state budgets

Saying that reform of the Medicaid program is their highest priority, the nation’s governors asked Congress for changes that will result in cost savings and efficiencies for both the federal and state governments. However, they said reform should not be part of a FY 2006 budget reduction and reconciliation process, especially if it does nothing more than shift additional costs to states.

In a Dec. 22, 2004, letter to House and Senate leaders of both parties, National Governors Association (NGA) chairman Mark Warner, governor of Virginia, and vice chairman Mike Huckabee, governor of Arkansas, said the nation’s governors are "committed to administering the Medicaid program in a very cost-effective way, and as equal partners in the program have a tremendous incentive to continue doing so."

They said commitment is reflected in the fact that the annual growth in Medicaid per capita spending has not exceeded approximately 4.5% per year, substantially lower than the growth rate of private health insurance premiums, which the governors say averaged 12.5% per year in the last three years.

But total Medicaid costs, Warner and Huckabee said, are growing at a rate of 12% per year and note total Medicaid expenditures exceed those for Medicare, primarily, the governors claim, due to two factors beyond the control of states — large caseload increases of some 33% in the last four years and the impact of long-term care and the dual-eligible population.

According to the letter, Medicaid accounts for 50% of all long-term care dollars and finances the care for 70% of all people in nursing homes. Also, 42% of all Medicaid expenditures are spent on Medicare beneficiaries, despite the fact that they comprise a small percentage of the Medicaid caseload and already are fully insured by Medicare. The governors say benefits for the dual-eligible population should be financed 100% by Medicare.

Things must change

"We agree that maintaining the status quo in Medicaid is not acceptable," Mr. Warner and Mr. Huckabee wrote. "However, it is equally unacceptable in any deficit reduction strategy to simply shift federal costs to states, as Medicaid continues to impose severe strains on state budgets. Our most recent survey of states shows Medicaid now averages 22% of state budgets.

"This commitment has caused a strain on funding for other crucial state responsibilities. These funding challenges will become more acute as states absorb new costs to help implement the Medicare Modernization Act for the millions of dual-eligible beneficiaries," they pointed out.

The NGA survey of states referenced in the letter was conducted along with the National Association of State Budget Officers and also released at the end of 2004. The report said that for proposed FY 2005 state budgets, states estimated Medicaid growth rates of 12.1% in state funds and 3.9% in federal funds.

The large variance in rates of growth for federal and state shares is attributable to the temporary increase of 2.95% in the Federal Medical Assistance Percentage that was in effect from April 2003 through June 2004 as part of state fiscal relief. "Even with extensive cost containment and fiscal relief, Medicaid expenditures have exceeded the amount that had been originally budgeted for the program," the report said.

Some 23 states experienced Medicaid shortfalls in FY 2003 and 18 states anticipated shortfalls in FY 2004.

All states have cut costs

States have been able to maintain a growth rate below private insurance levels due to the cost containment efforts used by all 50 states, the governors said.

Every state implemented at least one new Medicaid cost containment strategy in FY 2004. But states continue to feel pressure in funding Medicaid and long-range projections of Medicaid spending growth by both the Congressional Budget Office and the White House’s Office of Management and Budget range from 8% to 9%.

"Even after state budgets begin to recover fully," the report concluded, "Medicaid cost increases will far outstrip the growth in state revenues into the future."

Meanwhile, a November 2004 report from the National Conference of State Legislatures (NCSL) echoes the concerns expressed by the governors and budget officers, saying that although more money is coming into state coffers, it’s not expected to be enough to relieve health and education funding pressures for FY 2006 in many states.

The NCSL report shows that revenues for the first few months of FY 2005 (starting July 1, 2004) are at or above projections in almost every state.

Budget overruns are less severe than in recent years, and budget gaps are practically nonexistent. (See chart.) But at the same time, officials in 22 states said budget problems will occupy much of legislators’ attention in the upcoming session as they develop spending plans for the next fiscal year, beginning July 1, 2005.

Looking for revenue streams

Lawmakers will be looking for ways to replace one-time revenues they used to balance FY 2005 budgets and also will contend with rising health care costs, a reduction in the federal Medicaid match, and funding needs in elementary and secondary education.

Personal income and sales tax collections — an estimated two-thirds of state tax collections — are above targets in almost every state, NCSL said. Corporate income taxes — a comparatively small state revenue source —  also are running higher than expected.

"The 2005 sessions will pose challenges for legislators across America," said Bill Pound, NCSL executive director. "There will be challenges in preparing the FY 2006 budgets, including changes in Medicaid funds distribution and the continued fiscal strain of No Child Left Behind. State legislators look forward to the continued improvement of the national economy and are grateful for the direction it’s headed," he added.

(For more information from the NGA, go to, and for information from the NCSL, go to