The Medicaid spending morass: Medicaid continues to grow at alarming rates causing states to seek solutions.

Medicaid costs will strain state budgets considerably in the coming year. The top fiscal issue for the 200S sessions is rising costs for health care and Medicaid, say legislative fiscal officers. Sixteen states expect overruns in Medicaid early this fiscal year.

Already slated to grow 12.7 percent this fiscal year, Medicaid spending is likely to rise even further due in part to a reduction in the federal Medicaid share, rising prescription drug costs, increased costs for long-term care and expanding caseloads.

This is nothing new. Idaho's Medicaid growth rate, for example, has averaged 15 percent over the past 20 years.

"We face the same factors as other states, including rising caseloads, medical inflation and the inclusion of optional services," says Jeff Youtz, budget supervisor for the Idaho Legislative Services Office. He says Medicaid's growth means other programs suffer, and higher education, in particular, loses a large share. Idaho appointed an interim committee in 2004 to examine the Medicaid budget and present recommendations to the Legislature. The committee was asked to analyze caseloads and recommend cost containment measures.

FASTEST RATE OF GROWTH

Medicaid accounts for 17.6 percent of total general fund appropriations in FY 2005. That's up from 16.3 percent in FY 2004, and 12 percent a decade ago. As in Idaho, Medicaid increases have come at the expense of other general fund programs, particularly higher education. Only K-12 education, with its 34.1 percent share of total appropriations, accounts for more general fund spending than Medicaid.

But at 12.8 percent, Medicaid has the fastest rate of growth reported for any of the major program categories in state budgets. By comparison, overall general fund appropriations are slated to increase 4.8 percent in FY 200S. K-12 education will grow 6.3 percent, higher education 3 percent, and adult corrections 4.9 percent for FY 2005.

"The legislature is always looking for additional resources for Medicaid," says Les Boles, director of the South Carolina Office of State Budget. Similar responses resonate from other state officials as they attempt to grapple with the delicate balance of continuing to provide health care services for the state's poorest residents while attempting to address priorities in other areas of the budget.

CONTROLLING COSTS

Concerned with the rising cost of Medicaid, policymakers have attempted to craft cost containment measures that can result in real savings. Connecticut projects a $22.5 million in savings from a new preferred drug list for its Medicaid program. Florida reports that strengthening its investigative and enforcement policies has led to greater fraud recovery. Maryland has tried to reduce the number of days adults on Medicaid can stay in the hospital.

Tennessee is in the middle of what could be the largest restructuring of a state Medicaid program to date. Governor Phil Bredesen has announced that half of the adult recipients now enrolled in the state's Medicaid program, TennCare, must be dropped in order to save the program. Cutting 323,000 current recipients will save $575 million in FY 2006. Aside from reducing the caseload, other potential changes include limits on doctor visits and prescription drugs.

In Florida, Governor Jeb Bush has proposed a major overhaul of the Medicaid program to help rein in rising costs. He calls for greater use of HMOs and provider service networks. Medicaid recipients could sign up for one of three benefit packages that include basic care, catastrophic care and flexible spending or they could opt to apply their state-paid premiums to purchase insurance in the private market. His ideas must get approval from the Legislature.

New Mexico has tried to reduce payments to providers by pursuing copayments for participants in the Medicaid program and reducing benefits that totaled $40.3 million in general fund savings this fiscal year. The state also has tried to identify ineligible recipients earlier by reducing eligibility certification from 12 months to six. Savings to the general fund totaled $40.3 million this fiscal year.

"New Mexico had to do something to reduce costs," says Senator Ben Altamirano. "But by implementing cost containments, we lost some of our federal matching dollars."

FINDING MONEY

States also have increased taxes and fees earmarked for Medicaid. Oregon imposed a new tax on long-term care providers while Pennsylvania levied a 6 percent assessment on managed care organizations. Virginia created the Virginia Health Care Fund, in part with an increase in taxes on cigarettes and a new tax on other tobacco products. Combined, they will generate $109.5 million in new revenues for Medicaid. Oklahoma legislators referred a cigarette tax increase to voters who approved it. The measure earmarks $111 million for Medicaid and another $48 million for other health-related programs. These additional funds will be used to pay doctors and hospitals more, provide Medicaid to more people and beef up substance abuse services.

Some states simply reduced expenditures to help balance their budgets. Texas, for example, reduced eligibility for Medicaid to maintain program spending within available resources. Ohio eliminated chiropractic and psychologist services for adults.

THE FMAP IMPACT

Change to the Federal Medical Assistance Percentage (FMAP) rate is another factor that will affect how much more states will allocate for Medicaid spending. The majority of states will see their federal Medicaid matching rates reduced in FY 2006, according to Federal Funds Information for States. This translates into a $527 million reduction in federal Medicaid grants to the states.

Many states report they will have to fill in the gaps created from the lower FMAP rates while they address the high growth rate of Medicaid. Oklahoma, for example, reports that its projected FMAP rate reduction of 2.27 percent will require $65 million in state funds. Normal inflationary costs will add up to $50 million in addition.

"It will be hard to keep a balance in the Medicaid budget," says Oklahoma Senator Angela Monson. She notes that all the additional money for Medicaid simply sustains what the state now does without adding any new services or paying doctors and hospitals more.

Other states facing large projected decreases in federal Medicaid match funds are Alaska, Wyoming, New Mexico, Maine, West Virginia, North Dakota, Vermont, Utah and Montana. Altogether, 29 states will get less in federal matching money in FY 2006. Vic Miller a senior fellow with FFIS, says "continued FMAP rate decreases are expected through FY 2007 as FMAP calculations annually shift funds in ways that no one anticipates."

OUTLOOK FOR MEDICAID

It's no doubt that the debate on how best to address the various issues relating to Medicaid's future will take a substantial amount of time for legislators this session.

"It's paramount for states to look at the growth in Medicaid and look for solutions, like the use of HMOs or managed care, because of the major fiscal problem that it has become," says Illinois Senator Donne Trotter, chair of NCSL's Health Care Committee. He says the likely solutions for Medicaid growth lie within each of the states and that there is no single solution to rising costs.

GROWTH IN TOTAL
MEDICAID FUNDS FY
2004 TO FY 2005

State                Increase/
                     Decrease

Alabama                10.7%
Alaska                 -4.4
Arizona                19.8
Arkansas               21.7
California             22.2
Colorado                2.2
Connecticut             6.1
Delaware               -0.6
Florida                16.0
Georgia                 8.8
Hawaii                  9.1
Idaho                  19.4
Illinois               -1.8
Indiana                23.4
Iowa                    5.7
Kansas                 11.3
Kentucky *               NA
Louisiana               5.9
Maine                  18.6
Maryland                9.7
Massachusetts           8.3
Michigan               19.9
Minnesota              13.9
Mississippi            36.2
Missouri                8.9
Montana                17.4
Nebraska               22.3
Nevada                 -5.2
New Hampshire           7.2
New Jersey             41.5
New Mexico             17.3
New York                9.4
North Carolina         23.2
North Dakota            5.7
Ohio                    7.9
Oklahoma                8.8
Oregon                  1.1
Pennsylvania           17.4
Rhode Island            8.9
South Carolina          5.1
South Dakota           21.6
Tennessee              11.9
Texas                   8.1
Utah                   22.4
Vermont                21.2
Virginia               15.1
Washington              5.7
West Virginia          -0.7
Wisconsin              10.7
Wyoming                27.7
Total                  12.8

* Kentucky did not pass a budget for FY 2005

Source: NCSL survey of legislative fiscal offices,
summer 2004

FIGURING FMAP

The Federal Medical Assistance Percentage is the share of state Medicaid benefit costs paid for by the federal government. It is calculated based on a three-year average of state per capita personal income compared to the national average. A state with average per capita personal income receives an FMAP of 55 percent; no state may receive less than 50 percent. Personal income from calendar years 2001-2003 was used to calculate the FY 2006 FMAP.

--Federal Funds Information for States

THE DEFINITION

A federal-state partnership created by Congress in 1965 (Title XIX of the Social Security Act), Medicaid was designed to finance health care services for the nation's poor. Its original focus was on +recipients of cash assistance through welfare programs. The program expanded to fund health services for approximately 52 million low-income Americans in 2003, according to the Congressional Budget Office.

--Medicaid: A Snapshot for State Legislatures, NCSL, 2004

Arturo Perez is a fiscal expert at NCSL.