MEDICAID CUTS CONTINUE AS IMPROVING STATE ECONOMIC CONDITIONS INSUFFICIENT TO PULL OUT OF BUDGET SLUMP

State Fiscal Pressures To Intensify When Federal Fiscal Relief Expires in June

WASHINGTON, DC—With states in their fourth year of fiscal crisis, Medicaid cost containment efforts continue and when one time federal fiscal relief ends in June, few states will have the fiscal resources to fill the gaps, according to a new survey of the 50 states and the District of Columbia by the Kaiser Commission on Medicaid and the Uninsured (KCMU). Most states used the fiscal relief to avoid larger or additional cost containment actions in their Medicaid programs. See Figure 1.

“The issue is not out-of-control Medicaid spending, but the economic downturn and sluggish state revenue growth that are pushing states to cut Medicaid,” said Diane Rowland, executive director of KCMU. “Federal fiscal relief has clearly helped to stave off deeper cuts this year, but the June end of fiscal relief is likely to bring more aggressive cost containment next year.”

In addition to the survey results, the Commission also released two new reports on state budget conditions. The first study indicates that while economic conditions are improving, state revenue growth is too weak to pull states out of their slump. Because income taxes are a major source of state revenues and unemployment remains high, current economic growth is not enough to boost states’ budgets significantly. The second study assesses ten states’ responses to budget pressures in FY2004. Health spending cuts in Medicaid and SCHIP were more severe than in earlier years of the fiscal crisis, as states generally remained reluctant to increase income or sales taxes and have already exhausted one-time budget fixes and other revenue measures, such as raising alcohol and cigarette taxes.

State Actions to Reduce Medicaid Spending

States Respond to Fiscal Pressure: A 50-State Update of State Medicaid Spending Growth and Cost Containment Actions (Pub#7001), is based on a survey conducted by Health Management Associates for KCMU in December 2003, in the middle of states’ 2004 fiscal year. The survey reveals that in response to state fiscal pressures 49 states and DC have implemented or planned Medicaid cost control strategies in FY2004, marking the third year of aggressive Medicaid cost containment. The December survey found that states’ emphasis on Medicaid cost containment is contributing to a slow down of Medicaid spending and enrollment growth. The latest state spending estimate anticipates an average growth of 8.2 percent for FY2004, down from an average rate of growth of 11.9 percent growth between 2000 and 2002 and considerably below the increases in private health insurance premiums. Medicaid enrollment is projected to increase an average of 5.5 percent in FY2004, the lowest rate of growth since 2000, when the economy was strong and low unemployment limited the need for Medicaid coverage.

“We know that 2003 and 2004 were two of the worst years financially for state Medicaid programs since its inception nearly forty years ago, and 2005 could be just as bad from the states’ perspective,” said Vern Smith, coauthor of the 50 state survey and principal of Health Management Associates.

Among state actions, Medicaid prescription drug cost containment and reducing or freezing provider payments remain a central focus for states. At the same time, many states have also reduced benefits, restricted eligibility, and increased beneficiary co-payments. See Figure 2. However, since the fiscal relief went into effect in September 2003, no state has made an eligibility reduction that would have precluded the state from receiving the fiscal relief. 

The new survey finds that the temporary increase in the federal share of Medicaid costs helped states fund their Medicaid programs by reducing budget shortfalls to avoid additional Medicaid cost containment action. However, the survey also finds great concern among states about the prospect of a dramatic rise in the state cost of Medicaid come July 1, 2004 when the federal fiscal relief ends, returning the federal share of Medicaid costs to lowest historic levels. When the fiscal relief passed in 2003 expires many states will experience their highest growth in Medicaid costs in years and few are fiscally prepared. As an example, a state that contributes 50 percent of the cost of their Medicaid program (the federal government would contribute the remaining 50 percent) and has an annual growth rate of 8 percent in their program, could experience at least a 14.8 percent growth in their state costs for FY2005 to make up the gap.

Recent Economic Growth Not Enough to End State Fiscal Crisis

While the most recent data indicates strong economic growth, it is likely not enough to help states recover from their worst fiscal crisis in over 50 years. Is the State Fiscal Crisis Over? A 2004 State Budget Update (Pub#7003), prepared by the Nelson Rockefeller Institute of Government and KCMU finds that fiscal year 2005 will be a difficult year for most states. Although the nation’s economy grew significantly (8.2 percent in the 3rd quarter of 2003) and state revenues are growing for the first time in several years. The falloff in state tax revenues over the past three years has been so steep that, even with recent tax revenue growth, it will take some time for states to recover (see Figure 3).

With opposition to raising taxes remaining strong many states will be forced to make more substantial spending cuts in the coming fiscal year. Temporary or one-time measures such as issuing new bonds, spending tobacco settlement funds, and drawing on reserve funds to fill holes in FY2003 and FY2004 budgets are largely exhausted. Finally, the expiration of $20 billion of federal fiscal relief (including $10 billion in additional federal Medicaid matching funds) in June may require states to cut spending or increase taxes, unless they experience significant revenue growth.

Factors Contributing to Medicaid Spending Growth

The third report released today, State Responses to Budget Crisis in 2004: An Overview of Ten States (Pub#7002) prepared by The Urban Institute researchers for KCMU, profiles ten states’ responses to their budget woes in FY2004. Overall, the states (Alabama, California, Colorado, Florida, Massachusetts, Michigan, New Jersey, New York, Texas, and Washington) remained reluctant, with a few exceptions, to increase income or sales taxes and tried to balance the budget by relying on one-time budget fixes and spending reductions. Spending cuts were more severe than previous years as these states aggressively cut health care programs through freezes and cuts on provider reimbursement; elimination of some optional benefits, particularly for adults; and began limiting enrollment by reducing eligibility standards, imposing SCHIP enrollment caps, reducing outreach, and making the enrollment process more cumbersome.

While health care was a major focus of state budget balancing efforts, states also reduced spending on other programs. K-12 education was generally preserved, but higher education was slashed in most of the study states and many university systems adopted significant tuition increases. States also reduced the size of their workforce and cut compensation through salary freezes and greater employee contributions for health benefits. Many states also reduced aid to localities which could affect some cities’ and counties’ ability to provide basic services.

Today’s released reports are all available online at http://www.kff.org/medicaid/kcmu012704pkg.cfm.  In addition, the webcast of a policy briefing in Washington, DC on these subjects can be viewed live and then after 3 p.m. EST today at the following link http://www.kaisernetwork.org/healthcast/kff/27jan04.  

The Kaiser Commission on Medicaid and the Uninsured provides information and analysis on health care coverage and access for the low-income population, with a special focus on Medicaid's role and coverage of the uninsured. Begun in 1991 and based in the Kaiser Family Foundation's Washington, DC office, the Commission is the largest operating program of the Foundation. The Commission's work is conducted by Foundation staff under the guidance of a bipartisan group of national leaders and experts in health care and public policy. The Kaiser Family Foundation is a non-profit, private operating foundation dedicated to providing information and analysis on health care issues to policymakers, the media, the health care community, and the general public. The Foundation is not associated with Kaiser Permanente or Kaiser Industries.