IMMEDIATE STATE FISCAL CRISIS SUBSIDES, BUT MEDICAID STILL FACES LONG-TERM BUDGETARY CHALLENGES

State Medicaid Officials Attribute Much of Medicaid’s Cost Growth to Factors Broader than the Medicaid Program

WASHINGTON, DC – After several years of extreme fiscal stress, state budgetary pressures are easing as the gap between Medicaid spending growth and state tax revenue growth declined to 2.6 percent, its lowest level since 1999, according to a new state survey released today by the Kaiser Commission on Medicaid and the Uninsured (KCMU).

The survey – along with two others released today by KCMU – finds the economic recovery combined with sustained state cost containment actions has contributed to the improved outlook for Medicaid and the State Children’s Health Insurance Program (SCHIP). However, state Medicaid officials expressed concern that much of Medicaid’s cost growth is due to rising health costs, declining employer-based coverage, demographic trends, and other factors beyond Medicaid’s control.

“These studies affirm the basic countercyclical nature of Medicaid. Its costs increase most rapidly when it is most in demand—in a sluggish economy,” said Diane Rowland, executive director of KCMU. “While the fiscal crisis has subsided, state budget pressure remains because the nation relies on Medicaid to forgive the failures of our larger health system.”

The budget survey of state officials, conducted by KCMU and Health Management Associates, found growth in spending slowed for the 3rd straight year – averaging 7.5 percent in fiscal year (FY) 2005. (See figure above.) The slowdown in spending growth in the program is attributable to a decline in enrollment growth in FY2005 combined with continued spending reduction measures taken by every state. The enrollment growth in FY2005 slowed to 4 percent and is expected to slow for the fourth consecutive year to 3.1 percent in FY2006. Although the fiscal outlook for states is improving, states are planning new cost-containment actions as well as expansions, such as coverage increases and provider rate hikes for their Medicaid programs in FY2006.

A second survey of state officials, conducted by KCMU and Georgetown University’s Health Policy Institute, focuses on the outpatient prescription drug benefit – a key area of state cost containment actions in recent years. All surveyed states are actively managing their prescription drug benefit, but there is diversity across states in how cost control mechanisms are applied. While 16 of the 37 surveyed states imposed limits on prescription refills, only 2 states automatically denied refills that surpassed hard limits. Most states subject overages to prior authorization. However, prior authorization, which is used by all the surveyed states, is utilized for a small percentage of total Medicaid drug claims and spending. On average, states reported that 3.4 percent of their prescription claims and 7.5 percent of their total prescription drug spending required prior authorization.

The third survey, conducted by KCMU and the Center on Budget and Policy Priorities, focuses on state actions on Medicaid and SCHIP eligibility, enrollment, and renewal procedures and cost sharing requirements for low-income families. The survey results show that two states (Missouri and Tennessee) have made deep eligibility cuts, but 20 states are taking actions to simplify procedures and requirements for beneficiaries and, in some cases, expand eligibility. Beneficiaries, however, are also facing increased premiums or copayments. Ten states either increased existing premiums or lowered the income level at which they begin charging premiums for children’s coverage and seven states introduced or increased copayments for services in their parent coverage programs.

When asked about the future outlook for Medicaid, state officials, in the budget survey, expressed more optimism than in past years, but remain concerned about the long-term fiscal sustainability of the program. They say that continuing health care cost growth, demographic trends, and the erosion of private health insurance are all factors that are worrisome for the future. With federal efforts to control Medicaid spending being considered, state officials are uneasy about the possible shift of more financing responsibility for the program to the states.

Today’s released reports:

• Medicaid Budgets, Spending and Policy Initiatives in State Fiscal Years 2005 and 2006
• State Medicaid Outpatient Prescription Drug Policies: Findings from a National Survey, 2005 Update
• In a Time of Growing Need: State Choices Influence Health Coverage Access for Children and Families

The reports and a summary of findings are available online. In addition, a live webcast of a policy briefing being held today in Washington, DC on these subjects can be viewed live at 10:30 a.m. E.T. and an archived version will be available after 5:00 p.m. E.T. today.

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.

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