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The economic impacts of a reduction in TennCare Program Expenditures on both the State of Tennessee and Shelby County.

Introduction

Growing numbers of uninsurable citizens within the state of Tennessee, increasing numbers of citizens unable to afford health insurance, and the growing cost of providing healthcare services to those citizens are placing a greater burden on state and local budgets each fiscal year. Healthcare-related budget pressures have mounted to the point where the state has been forced to implement significant reductions in TennCare expenditures. Considering the projected growing need for quality and affordable healthcare in the state of Tennessee and in Shelby County, the proposed reductions in TennCare expenditures raise concerns about the direct impacts on the health of its citizens as well as the overall economic impact.

TennCare funding, like all Medicaid programs, is governed by a Federal Medical Assistance Percentage (FMAP) based on the state's average income. For Tennessee in 2005, the FMAP resulted in the federal government paying 64.8 percent of TennCare expenditures. As a result of this funding formula, a reduction in state expenditures for TennCare results in a greater reduction in federal matching funds. This study was undertaken to estimate the economic impact to the state of Tennessee and to Shelby County of the reduction in the influx of federal funds resulting from a substantial reduction in state TennCare funding.

This study analyzed the economic impacts of the loss of federal matching funds that would result from three hypothetical reductions in state expenditures on TennCare. Only the impacts of the loss of federal matching funds were estimated, rather than the impact of both state and federal fund reductions, based on the assumption that state funds would be redirected to other needs and would remain within the state economy, although redistributed. In contrast, the loss of federal matching funds would represent a real loss of income into the state. Specifically, this study addressed:

* How large is the overall economic impact on the state of Tennessee and on Shelby County of the reduction in federal matching funds associated with the currently proposed reduction in state expenditures of $740 million? (1)

* How large is the overall economic impact on the state of Tennessee and on Shelby County of two scenarios that reflect reduction levels of 75.0 percent and 50.0 percent respectively of the amount of the TennCare reduction currently proposed at the state level?

* How large are the net savings to the state of Tennessee budget taking into consideration the loss of tax revenues from reduced economic activity associated with the loss of federal matching funds?

Study Methodology

To assess economic impact, many studies utilize either the RIMS II (Regional Input-output Modeling System) or IMPLAN[R] (Impact Analysis for Planning) input-output models. These models are used for assessing economic impacts resulting from an event or major capital input. Input-output economic models estimate the effects of changes in expenditures on state industries and the economy as a whole. Looking at Figure 1, both models are based on similar theory--a change in input (e.g., an increase or decrease in Medicaid expenditures) will produce direct impacts that will then flow through other sectors of the economy producing indirect and induced impacts. This process continues at a decreasing rate with each round of spending, since a portion of the dollars is used for purchases made outside the state, or is taxed or saved. (2)

As previously discussed, the models are based on similar economic theory; however, there are inherent differences in the models, primarily related to the types of multipliers each model uses and the approach used to compute multipliers. (3) This study utilized the IMPLAN[R] model because the tax impact details and output category details produced by the model were closely aligned to the data requirements of this study.

This study was limited to the impacts of the loss of federal matching funds resulting from a reduction in state TennCare expenditures. These estimates included direct, indirect, induced, and total economic impacts from a change in TennCare funding. The direct impacts include the changes in overall output of the economy and in jobs that result from the initial expenditures on services provided to TennCare recipients. Indirect impacts represent the changes in purchases from businesses that supply goods and services to TennCare providers. Induced impacts include the economic and job changes caused by changes in household spending of workers stimulated by the direct and the indirect impacts. The total impact of a change in funding equals the sum of these three components. The IMPLAN[R] model also predicts changes in federal and state tax revenues caused by the change in TennCare funding.

The Results

The analysis conducted in this study consisted of three scenarios. The first scenario, Case 1, analyzed the impacts on economic output, employment, and taxes of the current proposal to reduce state expenditures on TennCare by $740 million for the state fiscal year 2006. Considering the uncertainty surrounding the magnitude of the cut that will be approved by the Legislature, two other cuts of a smaller magnitude (75.0 percent and 50.0 percent of the original proposed reduction level) were analyzed for their impact on output, employment, and taxes. The results of those hypothetical reductions are presented as Case 2 and Case 3, respectively.

Impact of Proposed Cut for FY 2006

Case 1

Results are presented for the loss of $1.3 billion in federal matching funds associated with the $740 million reduction in state spending on TennCare in FY2006. A FMAP of 63.99 percent was used in the calculations. (4)

The impacts on the state's economy of a $740 million reduction in state expenditures on TennCare are shown in Figure 2. The $740 million reduction results in a $1.3 billion reduction in federal matching funds. Of this, $1.153 billion would flow into the state's general economy (the remaining federal monies projected to leave the state). This $1.153 billion represents the direct impact (loss) on the state's economy during the year of the state reduction in TennCare expenditures. Indirect and induced impacts create an additional $989 million economic loss. The total economic impact of a $740 million cut in state TennCare funding is thus a $2.142 billion loss in economic activity.

[FIGURE 2 OMITTED]

Shown in Figure 3 are the impacts on jobs in the state. The cut in federal matching funds is projected to reduce jobs in the state by 19,873. Of this total, 10,381 jobs are lost due to direct impacts, and 9,492 jobs are lost due to indirect and induced impacts. The model also estimates the sector(s) of the economy in which these impacts will occur. Almost half of the economic and job market impacts are predicted to occur outside the health sector (Figure 4).

[FIGURE 3-4 OMITTED]

The impacts of the reduction in federal matching funds were also estimated for Shelby County (Figure 5).

[FIGURE 5 OMITTED]

The IMPLAN[R] model estimated that the Shelby County economy will experience a $371 million reduction in overall output and will loose 3,437 jobs as a result of a cut in state spending of $740 million on TennCare.

Finally, the lost state and federal tax revenues resulting from these economic impacts were estimated. The model estimated that a $740 million cut in state spending would produce a loss of $114.5 million in federal and $69.2 million in state tax revenues. Thus, the net impact of the $740 million in state expenditures on the state's budget would be $670.8 million available for other state expenditures (that is, the reduced expenditures minus the reduced tax revenue).

Figure 2 showed the economic impact to the state of Tennessee of the loss of the federal contribution to Medicaid (TennCare) funding resulting from a reduction of $740 million in state program expenditures (blue). Impacts (Y-axis) are measured as millions of dollars. Losses due to direct (red), indirect (green), and induced (white) are shown.

Figure 3 showed the impact of the loss of the federal contribution to Medicaid (TennCare) funding resulting from a reduction of $740 million in state program expenditures. Impacts (Y-axis) are measured in number of jobs lost in the state. The loss due to the direct loss of federal match is shown in red, indirect and induced impacts are shown in green and white, respectively.

Figure 4 showed the proportion of the statewide financial (left) and job (right) impacts of the loss of the federal matching contribution due to a $740 million reduction in state TennCare expenditures occurring in the health sector (blue) and in other sectors (red) of the economy.

Figure 5 showed the financial and job impacts in Shelby County of the loss of the federal matching contribution due to a $740 million reduction in state TennCare expenditures (blue). Financial loss is plotted as millions of dollars. Direct (red), indirect (green), and induced (white) losses are shown.

[FIGURE 5 OMITTED]

Scenario Analysis

Case 2

Results are presented for a scenario that represents 75.0 percent of the Case 1 level of state TennCare spending reductions. This is composed of a $555,046,093 pro posed reduction in state spending on TennCare in FY2006 and an accompanying $982,431,584 reduction in federal matching funds. The output impacts on the state's economy of a $982.4 reduction in federal matching funds associated with TennCare are shown in Table 1. Of the $982.4 million reduction in federal matching funds, $861.6 million would flow into the state's general economy (the remaining federal monies projected to leave the state). This $861.6 million represents the direct impact on the state's economy during the year of the state reduction in TennCare expenditures. Indirect and induced impacts create an additional $739 million economic loss. The total economic impact of a $555 million cut in state TennCare funding is thus $1,600,838,864.

Also shown in Table 1 are the impacts on jobs in the state. The cut in federal matching funds is projected to reduce jobs in the state by 14,805. Of this total, a loss 7,734 jobs is due to direct impacts, and 7,071 jobs are due to indirect and induced impacts.

The impacts of the reduction in federal matching funds were also estimated for Shelby County in Table 1. The IMPLAN[R] model estimates that the Shelby County economy will experience a $277 million reduction in overall output and will loose 2,561 jobs as a result of a cut in state spending of $555 million on TennCare.

Finally, the loss in state and federal tax revenues resulting from these economic impacts were estimated. The model estimated that a $555 million cut in state spending would produce a loss of $85.5 million in federal and $51.7 million in state tax revenues. Thus, the net impact of the reduction of $555 million in state expenditures on the state's budget would be $503.3 million available for state expenditures (that is, the reduced expenditures minus the reduced tax revenue).

Case 3

Results are presented for a scenario that represents 50.0 percent of the Case 1 level of state TennCare spending reductions. This is composed of a $370,030,729 proposed reduction in state spending on TennCare in FY2006 and an accompanying $657,544,605 reduction in federal matching funds. A FMAP of 63.99 percent was used in the calculations. The impacts on the state's economy of a $658 million reduction in federal matching funds associated with TennCare are shown in Table 1. Of the $658 million reduction in federal matching funds, $577 million would flow into the state's general economy (the remaining federal monies projected to leave the state). This $577 million represents the direct impact on the state's economy during the year of the state reduction in TennCare expenditures. Indirect and induced impacts create an additional $495 million economic loss. The total economic impact of a $370 million cut in state TennCare funding is thus $1,071,446,579.

Also shown in Table 1 are the impacts on jobs in the state. The cut in federal matching funds is projected to reduce jobs in the state by 9,857. Of this total, a loss of 5,149 jobs is due to direct impacts, and 4,708 jobs are lost due to indirect and induced impacts.

The impacts of the reduction in federal matching funds were also estimated for Shelby County in Table 1. The IMPLAN[R] model estimates that the Shelby County economy will experience a $185 million reduction in overall output and will loose 1,705 jobs as a result of a cut in state spending of $370 million on TennCare.

Finally, the lost state and federal tax revenues resulting from these economic impacts were estimated. The model estimated that a $370 million cut in state spending would produce a loss of $57.2 million in federal and $34.6 million in state tax revenues. Thus, the net impact of the reduction of $370 million in state expenditures on the state's budget would be $335.4 million available for other state expenditures (that is, the reduced expenditures minus the reduced tax revenue).

Cases 1,2, and 3 are summarized in the Table 1. Please note that all figures represent reductions in either budgets, economic output, or jobs associated with the proposed reductions in TennCare expenditures at the state level for fiscal year 2006.

Conclusion

The findings presented here provide estimates of the economic impacts of the loss of federal matching funds that would result from three scenarios of reductions in state expenditures on TennCare. Only the impacts of the loss of federal matching funds were estimated, rather than the impact of both state and federal fund reductions, based on the assumption that the state funds would be redirected to other needs and would remain within the state economy. In contrast, the loss of federal matching funds would represent a real loss of income into the state.

The results depict the substantial role that the federal matching formula has on the state's overall economy. The impact of the federal match, including the direct, indirect, and induced impacts, is almost three times as great as the reduction in state expenditures (Figure 2 and Figure 4) and almost half of the impact occurs in portions of the economy outside the healthcare sector (Figure 4). Much (over 40.0 percent, Figures 2 and 3) of this impact is due to the indirect and induced effects, factors often not considered in assessing the overall impact of an economic change.

One consequence of this multiplier effect of federal matching funds on state expenditures is the resulting difficulty that states experience in reducing Medicaid expenditures. Note that in Cases 1,2, and 3, the net available funds released for other state expenditures is always substantially less than the targeted reduction in TennCare expenditures due to the loss of tax revenues associated with the reduced economic output associated with the TennCare cut. More significantly, the impact on state economic output is substantially greater than the state spending reductions on TennCare. As shown in Case 1 (and to a proportional degree in the Case 2 and 3 scenarios), a $740 million reduction in state TennCare expenditures resulted in a $2.1 billion dollar loss in economic output and a loss of over 19,000 jobs. The loss of jobs and output serves only to exacerbate the problem of the uninsured in Tennessee and most certainly will adversely affect those citizens who are currently not beneficiaries of TennCare. While the ability to transfer much of the cost of expanding Medicaid services to the federal government is very appealing both financially and politically to states, the very high total cost of even modest reductions in state spending caused by the associated loss of federal matching funds (as shown here) makes program reductions financially and politically painful.

(1) Tennessee Hospital Association, "Estimated Impact of Governor's to Reform TennCare," Nashville: March 2005.

(2) Kaiser Commission on Medicaid and the Uninsured, "The Role of Medicaid in State Economies: A Look at the Research" (Washington, DC: The Henry 1. Kaiser Family Foundation, April 2004).

(3) Ibid.

(4) V. Miller and A. Schneider, "The Medicaid Matching Formula: Policy Considerations and Options for Modifications, (Washington, DC: AARP Public Policy Institute, September 2004).

David Mirvis, M.D., Director, Center for Health Sciences Research, The University of Tennessee health Science Center; Dennis Wilson, Ph.D., Senior Research Associate, Sparks Bureau of Business and Economics Research, The University of Memphis; Cyril Chang, Ph.D. Director, Methodist LeBonheur Center for Healthcare Economics, The University of Memphis; John Gnuschke, Ph.D., Director, Sparks Bureau of Business and Economic Research The University of Memphis; and Crescent Rowell, B.S., The University of Memphis
Figure 2. Economic Impact to Tennessee from the Loss of the
Federal Contribution to Medicaid (TennCare) Funding
Resulting from $740 Million Reduction in State
Program Expenditures Reduction ($000,000)

Total Impact = $2,142,486,123

State $740
Direct $1,153
Indirect $364
Induced $625

Note: Table made from bar graph.

Figure 3. Job Impact to Tennessee from the Loss of the
Federal Contribution to Medicaid (TennCare) Funding
Resulting from $740 Million Reduction in State
Program Expenditures ($000,000)

Total Impact = 19,873 Jobs

Direct 10,381
Indirect 3,301
Induced 6,191

Note: Table made from bar graph.

Figure 4. Impacts of the Loss of Federal Matching
Contributions Resulting from a $740 Million
Reduction in State TennCare Expenditures

Total Impact = $2,142,486,123

Health 58%
Other 42%

Total Impact = 19,873 Jobs

Health 57%
Other 43%

Note: Table made from pie chart.

Figure 5. Financial and Job Impacts to Shelby County Due to the
Loss of Federal Matching Contribution Resulting from
$740 Million Reduction in State TennCare Expenditures
($000,000)

Total Impact = $371,386,677

State $740
Direct $213
Indirect $68
Induced $90

Total Impact = 3,437 Jobs

Direct 1,987
Indirect 581
Induced 869

Note: Table made from bar graph.

Table 1. Cases 1, 2, and 3 Summarized

 Total $
 State Federal Total $ Economic
 TennCare Net State Matching Economic Impact-
 Expenditure Budget Fund Impact- Shelby
 Reduction Reduction Reduction State County

Case 1 $740 $671 $1,300 $2,142 $371
Case 2 $555 $503 $982 $1,601 $277
Case 3 $370 $335 $658 $1,071 $185

 Total Jobs
 Total Jobs Impact-
 Impact- Shelby
 State County

Case 1 19,873 3,437
Case 2 14,805 2,561
Case 3 9,857 1,705

Note: All dollars in millions.
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Author:Mirvis, David; Wilson, Dennis; Chang, Cyril; Gnuschke, John; Rowell, Crescent
Publication:Business Perspectives
Geographic Code:1U6TN
Date:Sep 22, 2006
Words:3064
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