Fiscal Fitness: How States Cope

States stretch shrinking health care dollar through innovative money management

Despite pressing budget concerns that have limited their discretion and sometimes led to cuts in existing programs, many states still have managed to implement innovative strategies, stretching health care dollars by using a portion of state money to leverage private, federal, and additional states funds, according to a state survey conducted by the Economic and Social Research Institute (ESRI) for the Commonwealth Fund.

"States have expanded health care access, coverage, and efficiency through sound financial management, by judiciously investing a little to get a lot," says ESRI’s Sharon Silow-Carroll, who conducted the study. The study divides state activities into four categories — building on employer-based coverage, pooled and evidence-based pharmaceutical purchasing, targeted care management to enhance cost-effectiveness, and innovative use of uncompensated care funds.

Ms. Silow-Carroll tells State Health Watch no single category is the one answer for all states. "None of these actions is going to fix a state’s fiscal problems and make things easy," she cautions. "But each one helps a little. They don’t necessarily save money, but they can stretch the available money further."

States face a challenge

Ms. Silow-Carroll notes that providing health insurance coverage for vulnerable populations such as low-income, high-risk individuals with limited access to health care is a challenge for states even in good economic times, and has been especially arduous in the last few years.

But despite significant financial concerns, she explains, many states have managed to implement innovative strategies in the four areas:

1. Building on employer-based coverage.

Whether subsidizing an existing employer plan or creating a new and affordable program for uninsured workers, Ms. Silow-Carroll notes, states are using their dollars, regulatory/legislative powers, and purchasing clout to leverage employer and employee contributions to cover more people.

The effort can involve these approaches:

  • premium assistance for existing employer plans;
  • state reinsurance to cover a portion of private insurers’ claims to help reduce the price of premiums and provide a more affordable option for uninsured workers;
  • direct subsidization of a new public-private plan;
  • state negotiated health plans;
  • a pay-or-play approach in which states require businesses to either provide coverage to their workers or pay into a fund that purchases coverage, on a larger scale, for those and other workers.

2. Pooled and evidence-based pharmaceutical purchasing.

In recent years, the report says, drug costs have been a major contributor to the overall growth in health care costs generally and for Medicaid in particular. As a result, many states are implementing drug cost-containment mechanisms that don’t merely pass state expenditures on to consumers in the form of higher copayments and deductibles, but instead put innovative approaches in place that reduce state costs to expand or maintain access.

Strategies described in the report include:

  • multistate purchasing and collaboration;
  • pooling across several state agencies;
  • state-negotiated discounts and drug-only benefits;
  • substitutions, evidence-based preferred drug lists, and supplemental rebates.

3. Care management to enhance cost-effectiveness.

With more than 75% of Medicaid spending on people with chronic conditions and the number of Americans with at least one chronic condition expected to increase at least 25% by 2020, states are pursuing efficiencies through a number of care management strategies for high-cost individuals. Services can be provided directly, Ms. Silow-Carroll continues, or contracted out to specialized vendors.

Care management programs may be characterized as medical vs. long-term care oriented; targeted diagnosis such as asthma, diabetes, or congestive heart failure; high service use or cost; and key interventions that focus on a specific issue such as patient education, drug management, or advanced care interventions by nurses or other health professionals.

4. Innovative use of uncompensated care funds.

Ms. Silow-Carroll points out that hospitals are a significant element in the health care safety net because they serve the uninsured and other vulnerable people who can’t pay for service themselves. States use Medicaid disproportionate share funds and state-based revenue streams to reimburse hospitals for this otherwise uncompensated care.

Experts say hospitals’ ability to continue to provide uncompensated care in the future can be strained because of their rising costs and lower operating margins, limited state revenues, cuts in Medicaid disproportionate share payments, and a growing uninsured population.

These trends have led states to look at strategies for reducing the need for expensive uncompensated services over the long term, including using a portion of uncompensated care funds proactively to finance primary and preventive care programs that ultimately could reduce emergency and inpatient hospital costs and divert a percentage of disproportionate share or uncompensated care pool funds and combine the money with state/ county/local funds and employer contributions to support community safety net providers.

The study does not compare approaches because of the dynamic political and economic environment in states as well as the fact that initiatives typifying the four basic categories are at different stages in different states. However, Ms. Silow-Carroll explains, the study is most useful because it presents leading examples of state and collaborative efforts that can inform policy-makers and administrators who are interested in the latest innovation for stretching their limited health care dollars.

That these programs are worthy of emulation, she says, can be seen in these examples from the cases documented in the reports:

  • By accessing unused federal SCHIP funds for new FamilyCare program and a previously state-only KidCare Rebate program, Illinois stretched dollars and expanded eligibility without making cutbacks in other coverage programs.
  • New York’s Healthy New York reinsurance program offers businesses a lower-cost private insurance alternative, with recent modifications resulting in an average premium reduction of some 17%.
  • By paying a Medicaid-eligible worker’s share of his or her employer-sponsored coverage, Pennsylvania’s Health Insurance Premium Assistance Program relieves the state of having to offer direct Medicaid coverage for any of the individuals, saving $76.3 million in FY 2003.
  • West Virginia’s participation in the RXIS Multi-State Pharmaceutical Purchasing Pool saved the state $7 million in its first year, and $25 million in savings is expected over the three-year contract with the pharmacy benefits management firm that serves the five participating states.
  • Michigan’s preferred drug list, representing about 70% of the drugs used in the state’s Medicaid outpatient pharmacy benefit, saved an estimated $60.5 million its first year.
  • Colorado estimates its advanced care management initiative that integrates disease management and care management interventions for high-risk pool enrollees, generated $2.3 million in direct savings to the state from May 2002 to September 2003.
  • The General Assistance Medical Program, supported in large part by uncompensated care funds, saved Milwaukee County, WI, $4.2 million in calendar year 2000.

Ms. Silow-Carroll points out that since no one solution fits all states, the first step for state officials to follow in deciding which strategies to pursue is to conduct a needs assessment covering different populations, values, priorities, and politics. "States have to decide which population to target first, the resources that are available, what policies are politically acceptable, and who the stakeholders are that can be brought in," she explains. Out of that needs assessment can come specific policy reform.

Most states already have been involved in such assessments, she says, with federal funds coming through the state planning grant process. Looking to the future, she says that although the economy has been improving slightly and slowly, many states still are facing shortfalls and an escalation of Medicaid costs.

"We still have a few years to go before there is significant improvement," Ms. Silow-Carroll adds. "Until health care costs are under better control, they will continue to rise faster than state revenues and general inflation."

[The reports and case studies prepared by Ms. Silow-Carroll are available at Contact Ms. Silow-Carroll at (201) 836-7136 or e-mail her at]