Spiraling Medicaid Costs Putting States in a Bind

The massive Medicaid insurance program for the poor is dragging states deep into debt as medical costs and enrollments rise and revenue plummets in a sputtering economy.

Struggling to keep their budgets in balance, states face the prospect of paring benefits to millions of poor people or slashing reimbursements to medical providers, or both.

Medicaid programs are among states’ largest expenses--and they are most needed when state budgets are at their worst.

In Georgia, a growing deficit will probably delay plans to add people with cystic fibrosis and children of the working poor to Medicaid rolls. Indiana has cut the rates it pays nursing homes and hospitals. Michigan has cut off funding for 19 school clinics and extra money for rural hospitals.

Florida lawmakers will consider rolling back eligibility for pregnant women and elderly and disabled people.

California officials are considering cuts to the $26-billion budget for Medi-Cal, the state’s version of Medicaid.

In Mississippi, where about 647,000 residents--23% of the population--are eligible for Medicaid, officials face a shortfall of $124 million. And Washington state officials anticipate a Medicaid deficit of $200 million to $300 million in their next fiscal year, which starts in July.

That means possibly cutting a hospital care program for low-income adults and rolling back generous eligibility requirements for children and some adults, said Dennis Braddock, secretary of the state Department of Social and Health Services.

“It’s difficult, of course, but it’s not too difficult if you don’t have the money to pay for it,” Braddock said. “We’re at the point where people in this next legislative session are going to have to make some tough decisions.”

At least eight states, including California, have called special sessions to deal with their budget problems, according to the National Conference of State Legislatures, and 28 states are considering budget cuts. States are looking at deficits totaling more than $20 billion in the current fiscal year.

Medicaid costs have soared with the rising costs of prescription drugs, nursing home care and new health care technologies. Its rolls have swelled because of the ailing economy and strong outreach efforts by the program, initiated in more flush times.

Nearly 6 million Californians were eligible for Medicaid last month, up 700,000 from a year earlier.

“In these downturn times, more and more people across the country are going to find themselves losing their employer coverage and needing health insurance,” said Betsy Imholz, director of Consumer Union’s West Coast regional office in San Francisco. “So it’s all the more important that it be accessible.”

Doctors already are fleeing the program because of historically low payment rates, said Charleen Milburn, managing director of government relations for the California Medical Assn. Any further cuts mean that patients will have an even harder time finding doctors, and getting good care, she said.

“If you cut rates, that means fewer providers want to be in the program,” Milburn said. “If you cut benefits, patients have less access to certain benefits. And if you cut eligibility, that just means more people are uninsured and fall to the county [public health system].”

States are limited by law in the cuts they can make. They can reduce payments to doctors and hospitals, quit offering optional dental or pharmacy benefits, or tighten income restrictions.

A report last month from the Urban Institute suggests that if the unemployment rate rises from 4.5% to 6.5% next year, as some economists predict, Medicaid rolls will jump by 3.2 million, to more than 43 million.

States are seeking more money from Congress to help pay for Medicaid, which is jointly administered by the state and federal governments. But a Senate proposal to pump more than $5 billion into Medicaid was rejected last week. Other measures would help pay health insurance costs for those laid off after the terrorist attacks of Sept. 11, but that does little to help the already shaky Medicaid programs.

“We have a real big problem [just] affording the people we have now,” said Matt Salo, director of health legislation for the National Governors Assn.

But states have a strong incentive to avoid reducing their Medicaid programs. For every $1 they cut, they lose an additional $1 to $3.31 in federal matching funds, magnifying the impact of any reduction. The matching rate is based on a complex formula that takes into account the per capita income of each state.

In essence, states can’t afford to keep their burgeoning Medicaid programs--but they can’t afford to lose them either.

“It’s kind of double jeopardy,” said Diane Rowland, executive director of the Kaiser Commission on Medicaid and the Uninsured.

Even before Sept. 11 and the precipitous economic drop-off, Medicaid costs were beginning to bust budgets. In fiscal 2001, 37 states were forced to pay more for Medicaid than they had budgeted, according to the Kaiser commission. In October, 20 states began their fiscal year expecting to exceed their Medicaid budgets.

Although only a quarter of Medicaid recipients are disabled or elderly, they account for two-thirds of the expenses because their care is so costly.

After several years of modest growth, Medicaid costs increased 9% in 2000 and 11% more in fiscal 2001. In comparison, states expect their revenues to grow by only 2.4% in 2002, according to a survey by the National Conference of State Legislatures.

The cost hikes are worrisome, health officials say, because history shows that Medicaid expenses can quickly spiral out of control. In 1992, spending increased 30% in one year, largely because of questionable financing mechanisms to generate more funds. The current problems could become far worse over time as the cumulative effects of staggered layoffs are felt, officials say.

Still, medical groups and consumer advocates have stepped up pressure to protect low-income patients. And many states are also looking to cut elsewhere first--from cultural grants, for example, or state employee raises, housing programs and transportation.

Michigan officials say they tried to leave Medicaid relatively unscathed when reconciling a $540-million state deficit. Rather than restrict eligibility or reduce benefits, they cut grants to agriculture programs, service organizations and the arts.

“These were not easy decisions,” said Kelly Chesney, a spokeswoman for the state budget office. “In fact, they were gut wrenching in many cases, but they were necessary because Michigan has an obligation to balance their budget. The longer we wait, the amount doesn’t get smaller. We just have a smaller window to remedy it.”

Doctor and hospital groups say the cuts will harm them and ultimately their patients. The state discontinued support for teenage health centers in some schools, reduced graduate medical education funding, ended subsidies for outpatient care at rural hospitals, eliminated support for psychiatric residency programs, froze ambulance rates, and cut rates to nursing homes and hospitals.

“There’s very little we’re happy about with Medicaid in this state,” said Dr. Kenneth H. Musson, a Traverse City ophthalmologist who is president of the Michigan State Medical Society. “We’re in a death spiral, and this is limiting access to care all over the state.”

Added Spencer Johnson, president of the Michigan Health and Hospital Assn.: “We’ve already been enduring cuts for the last five years. This is sort of going from zero to below zero.”