WASHINGTON, D.C. -- Faced with the end of stimulus money and a continuing weak economy, Medicaid officials in virtually every state are enacting a variety of cost cutting measures as states’ spending for Medicaid is projected to increase 28.7 percent this fiscal year to make up for the loss of federal funds, according to a new survey by the Kaiser Family Foundation’s Commission on Medicaid and the Uninsured.

The substantial but temporary increase in the federal share of Medicaid spending under the American Recovery and Reinvestment Act (ARRA) brought about the only declines in state spending on Medicaid in the program’s history in fiscal years 2009 and 2010, even as the deep recession sharply increased Medicaid enrollment and overall Medicaid spending during that period. With that money having expired in June 2011, however, states must ramp up their own spending to replace the lost funds, even though states project total spending in the Medicaid program -- which is jointly financed by the federal government and the states -- to increase on average by a modest 2.2 percent this year.

The Commission’s 11th annual 50-state Medicaid budget survey captured cost containment actions ranging from restrictions on payments to providers and benefits, to new copayments for beneficiaries and additional efforts to contain the costs of prescription drugs. At the same time, states are trying to make their programs more efficient by increasing their reliance on Medicaid managed care, moving long-term care toward community-based care models, and streamlining enrollment procedures. Even with such measures, Medicaid officials in more than half the states estimate at least a 50-50 chance that they will see a budget shortfall this fiscal year as enrollment continues to grow.

"Unemployment remains high with increasing numbers of poor and uninsured keeping pressure on state budgets and Medicaid programs to meet growing needs," said Diane Rowland, Executive Vice President of the Kaiser Family Foundation and Executive Director of the Foundation’s Commission on Medicaid and the Uninsured. "But the cumulative effect of two recessions since 2001 and a decade of constrained spending has left no cushion and many of the latest cuts will hit at the core of the Medicaid program."

The state focus on cutting costs renews a theme seen much of the last decade. It occurs against a backdrop of deficit reduction efforts in Washington that could reduce federal support for Medicaid and shift costs to state capitols at a time when states are coping with historically difficult budget conditions and must also lay the ground work for a significant expansion of Medicaid under the health reform law.

Cost Containment Efforts A Dominant Theme

Due to maintenance of effort requirements included in the ARRA and health reform legislation, states have been prohibited from enacting new restrictions on Medicaid eligibility or enrollment procedures.  Instead they have turned to other measures that in some cases build on efforts in play for the last decade, including:

• Provider rate restrictions. This was the most commonly reported strategy, with 39 states restricting rates in 2011 and 46 reporting plans to do so in 2012. But a number of states also increased or imposed new provider taxes that can generate more federal matching revenue and help mitigate the effects of cuts to some providers.
• Benefit reductions and restrictions. States continued to eliminate, restrict or reduce Medicaid benefits in areas such as dental, therapies, medical supplies, durable medical equipment and personal care services. Almost all states have been making substantial changes in Medicaid pharmacy programs, including preferred drugs lists, supplemental rebates and prior authorization requirements and states are now focusing on controlling costs for specialty drugs, a rising share of prescription drug spending.
• New and higher copayments for beneficiaries. Five states in FY 2011 and 14 states in FY 2012 increased copayment amounts or imposed new copayments, compared to only one in FY 2010. Most copayment changes were for pharmacy and emergency room visits, although a few states are requesting federal waivers to implement broader changes that would have higher amounts and apply to populations traditionally exempt in federal law.   

Changes In The Delivery of Services

Even amid strained budgets, states worked to enact reforms to better deliver care and prepare for health reform, which calls for a major expansion of Medicaid beginning in 2014.  Key areas of change observed in the survey included:

• Medicaid managed care. Seventeen states in FY 2011 and 24 states in FY 2012 reported expanding their managed care programs, primarily by expanding the areas and populations covered. Two-thirds of the nation’s 54 million Medicaid beneficiaries in October 2010 were enrolled in some form of managed care.
• Dual eligibles. States are expanding the use of disease and care management programs and patient centered medical homes to help coordinate care for duals and other populations with chronic medical conditions.  Thirty-seven states submitted letters of intent to pursue additional opportunities to coordinate care for duals based on guidance released by the federal Centers for Medicare and Medicaid Services (CMS) in July 2011.  
• Long-term care. States continued to shift the delivery of long-term care away from institutions and into community settings. Thirty-two states in FY 2011 and 33 in FY 2012 expanded long term care services, primarily by expanding Medicaid Home- and Community-Based Service programs (HCBS). Most states are still considering whether to adopt new options in the health reform law designed to increase community-based long-term care, but six states reported that they are moving forward with the new options.

Looking Ahead  

Although Medicaid officials were focused on the here and now, they also reported moving forward to prepare for the major expansion of Medicaid under health reform.  Medicaid directors say the law holds the opportunity to significantly reduce the number of uninsured, but they also cite several administrative and fiscal challenges, including tight state budgets and limited staff and resources to absorb the required new tasks. Medicaid directors said that their programs are poised for a greater role in health care delivery and they are committed to assuring access to high quality care delivered in the most effective manner possible.

The new survey, Moving Ahead Amid Fiscal Challenges: A Look at Medicaid Spending, Coverage and Policy Trends, Results from a 50-State Medicaid Budget Survey for State Fiscal Years 2011 and 2012, was conducted with Health Management Associates and is available online. Also available are two related papers - Impact of the Medicaid Fiscal Relief Provisions in the American Recovery and Reinvestment Act, which examines the impact of the enhanced federal funding provided by the Recovery Act that expired in June 2011, and Update on State Budgets in Recession and Recovery, which provides a brief overview both of the effect of the recent recession on state budgets as well as the current condition of state budgets as they continue to recover in the recession’s aftermath.