Medicaid Woes Returning: After lying dormant for several years, Medicaid is again giving lawmakers headaches as they tackle budget problems.

As if lagging revenues aren't enough, many states are now feeling pinched by rising costs in Medicaid, a program that makes up more than 13 percent of general fund budgets. So when Medicaid costs are out of whack so is the rest of the state budget. No wonder lawmakers are worried. Mounting Medicaid costs mean other programs will be squeezed.

Medicaid put pressure on state budgets even before the current economic downturn. Last year, Medicaid spending grew by more than 14 percent. While this growth made lawmakers uneasy, most had some flexibility to manage costs because of strong state finances. But times have changed.

Now, the sluggish economy is driving up Medicaid spending even more. As workers lose jobs and their incomes fall, many become eligible for coverage. It is estimated that millions could be added to the rolls because of the slowdown in the economy.

The rise in enrollment comes at a time when states face a $15 billion to $30 billion shortfall in budgets because of declining revenue growth. Lawmakers are caught between a rock and a hard place-there's a need for increased coverage and spending but erosion of state revenues places severe constraints on budgets. Policymakers are scrambling to find ways to pay for their Medicaid programs. And the end is nowhere in sight.

ESCALATING COSTS

There was a modest growth rate of 4 percent annually in Medicaid spending in the mid- to late 1990s, even as states expanded their programs. The first signs of real trouble emerged in 2001 when Medicaid spending grew considerably more than lawmakers anticipated. This trend is continuing in FY 2002. "Medicaid is growing at a rapid rate and growing outside the budget, meaning we're exceeding our projections" says Jim Johnson, director of the fiscal research division for the North Carolina legislature.

So what's driving up the cost? Prescription drugs, increases in the cost of caring for elderly and disabled beneficiaries, hikes in provider reimbursements and growing enrollment because states expanded eligibility and outreach efforts. (50 state table on Medicaid growth)

The Texas budget situation is typical of many states. Medicaid accounts for 16 percent of total general revenue spending. And lawmakers budgeted for a 10 percent increase in FY 2002.

"We are experiencing the same trends in the Medicaid program as other states. There has been a sharp upturn in caseload and continued rise in medical and prescription drug expenditures. Medicaid is a major budget driver. When a small percentage change in caseload can mean tens of millions of dollars," says Senator Rodney Ellis, chairman of the Senate Finance committee in Texas. "We have to pay attention."

Lawmakers in Missouri, Utah, Washington and Arizona also approved large increases for Medicaid. Utah legislators budgeted for a 31 percent increase so the state could expand Medicaid coverage and increase its reimbursement rates for physicians and other providers. Lawmakers around the country are realizing that they have to increase provider rates to keep physicians and others in the system.

Missouri and Washington, like most states, are struggling to keep up with soaring health care costs, especially for prescription drugs. Voters in Arizona decided last year to expand Medicaid services to the working poor. This is expected to provide services for more than 100,000 individuals and will cost the state $178 million this fiscal year.

BETWEEN A ROCK AND A HARD PLACE

The situation is likely to get worse before it gets better. Many states under-funded Medicaid, even though they approved considerable increases. Fourteen states report that Medicaid is over budget in the early months of FY 2002. Medicaid spending in Virginia, for example, is currently $115 million over budget because of prescription drug costs. Maryland is facing a $173 million gap in its Medicaid budget. In some cases, the amounts are small, but these initial estimates could grow as the fiscal year progresses.

While Medicaid is not yet a budget problem in some states, lawmakers are keeping a close eye on expenditures believing they might exceed budgeted amounts.

With current revenues coming in lower than projected, many states lack enough money to cover Medicaid budget gaps. Just a year ago, lawmakers were talking about how to expand their programs; now they are faced with the challenging task of managing expenses in the face of growing enrollments, rising costs, declining revenues and requirements to balance their budgets. While it's too soon to tell exactly how states will respond, lawmakers will deal with difficult fiscal issues and tradeoffs when their legislatures convene this month.

"Medicaid is and will continue to consume a lot of money. At this point, it's not clear whether or not we will have to look at paring down the services we are providing, but it may come to that. The current budget situation makes matters worse," says Warren Deschenaux, director of the Office of Policy Analysis, Maryland General Assembly.

In the meantime, states are counting on the federal government for assistance. They are hoping Congress will provide additional Medicaid funds. Increasing the federal share would stimulate the economy and help states maintain health insurance coverage for low-income families.

"The reality is, we have to do something," says Representative Eileen Cody, a registered nurse and chair of the House Health Care Committee in Washington state. "If we don't, we will be forced to drop people from Medicaid."

"Medicaid will continue to present challenges and opportunities for us to improve our health system," says Ellis. "It is important that we maintain a safety net for our neediest citizens, while creating efficiencies in areas such as prescription drug costs and use."

Trinity D. Tomsic covers Medicaid issues for NCSL's Fiscal Affairs Program

RELATED ARTICLE: STATES FACING MEDICAID BUDGET GAPS

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Georgia

Idaho

Kentucky

Maryland

Massachusetts

Michigan

Mississippi

New Mexico 

North Carolina

Oregon

Rhode Island 

Virginia

Washington

WHAT IS MEDICAID?

Medicaid began in 1965 as a joint state and federal program to provide health care coverage for the needy. Today, it's the nation's major public financing program that provides health and long-term care to low-income people, with more than 44 million people enrolled. It also is the largest federal grant program, accounting for more than 41 percent of total state grants.

Medicaid is administered by the states and funded from federal, state and, in some instances, local revenues. Within broad national guidelines, each state establishes its own eligibility standards; determines the type, amount, duration and scope of services; sets the rate of payments for services; and administers its own program.

Medicaid spending totaled about $207 billion in FY 2000. State expenditures for medical benefits are matched by federal payments: The size of the match is determined by the state's per capita personal income compared to the national average for the three preceding years. Medicaid matching rates range from a floor of 50 percent for wealthier states to a statutory maximum of 83 percent. The rates are recalculated each year. At a 50 percent matching rate, a state draws down one federal dollar for each dollar it spends. At an 83 percent match, a state receives $4.88 in federal funds for every dollar it spends.

NO PROBLEMS YET

Five states--New Jersey, Louisiana, Kentucky, Georgia and Connecticut--project a decline in Medicaid spending for FY 2002. These states don't expect to see a reduction in costs, but attribute the decrease to such factors as shifts in funding sources, accounting changes and carry-over balances.

TAKING A CLOSER LOOK AT RISING COSTS

* Prescription drugs are among the fastest growing Medicaid costs. Under the program, drug coverage is an optional service that all states have elected to provide. The high rate is due largely to steady increases in drug expenditures for the elderly and disabled, along with increased use, replacement of older drugs with costly new ones and prescription drug price inflation.

* Enrollment growth due to expanded eligibility and outreach efforts has also contributed to the rise in Medicaid spending in some states. Many states took advantage of recent federal flexibility and expanded coverage into new areas--such as new options for people with disabilities who went to work and treatment of breast and cervical cancer. Some states have seen an increase in Medicaid enrollment of children due to extensive outreach campaigns by the State Children's Health Insurance Program.

* Also driving up Medicaid spending are rising health care costs, the increase in long-term care expenditures because of the continued increase in aged and disabled enrollees and pressure from providers to increase payment levels.