Medicaid facing financial crisis, hard choices in cuts

The program's fiscal challenge is expected to continue even if the nation's economy turns around. The prediction: reductions for many patients and doctors.

By Joel B. Finkelstein — Posted Feb. 23, 2004

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Washington -- Doing more with less. That is the mission of states struggling with the rising cost of Medicaid.

While economic indicators may point to better times ahead, there will be years of lag between an economic recovery and when states get back on their feet financially. That spells trouble for physicians who participate in the program and for the low-income patients who rely on it.

"I have been observing Medicaid budgets now for over 35 years," said Vernon Smith, PhD, principal with Health Management Associates, a national health care research and consulting company. "I have never seen a more difficult time for Medicaid than 2003 and 2004."

Many state Medicaid directors reported that they were able to sustain the program last year only because of a temporary increase in matching funds from the federal government. Others relied heavily on rainy-day funds and money from tobacco settlements to buoy the program. Both sources are expected to run out soon.

"States are trying to climb out of a deep hole," said Victoria Wachino, associate director of the Kaiser Commission on Medicaid and the Uninsured. "But really, all they've got is a stepstool to stand on."

Future program cuts seem inevitable. Physician payment rates in most states have been frozen for so long that legislatures are hesitant to cut them for fear of losing even more Medicaid practitioners. On the other hand, states are unlikely to start raising rates any time soon.

"I would like to do more in my own state for provider reimbursement because I see this problem every day, but we don't have the resources," said David Parrella, executive committee chair of the National Assn. of State Medicaid Directors and director of Connecticut's Medicaid program.

Cuts to eligibility predicted

Already this year, 39 states have plans to freeze or reduce practitioner payment, 18 to reduce or restrict eligibility, 17 to cut back on benefits and 21 to raise co-payments.

"It's not easy to take away benefits. Medicaid only covers medically necessary services," Dr. Smith said. "It's not easy to cut eligibility. Medicaid only covers persons who are low-income and don't have another way of paying for the health care that they need. It's not easy cutting provider payments when providers are already serving the Medicaid population at discounted rates."

Cuts in past years have helped slow the increase in Medicaid spending growth considerably. The program's cost is projected to grow an average 8.2% this year -- far less than the 12% growth rate seen in recent years and the 16% increase in national health spending. Enrollment is expected to grow by 5.5% this year compared with 8.8% in 2003 and 8.5% in 2002.

"It's very unusual to see that kind of fall off in enrollment growth at a time when the economy is still weak," Wachino said. "[It] raises the question of whether the Medicaid program right now is meeting the needs of a growing low-income population."

While states nibbled around the edges of eligibility last year by making it harder to enroll or stay enrolled in Medicaid, full-blown eligibility reductions are likely in the future.

The spending slowdown may be a help to states, but Medicaid still makes up such a large proportion of their budgets that any growth makes an impact.

"You could handle a 10% growth rate when the program was only 8% of states' budgets, but not when it is 21% of states' budgets," said Raymond Scheppach, executive director of the National Governors Assn.

But the worst of the cuts may be over, Parrella said. "The major work of trying to contain Medicaid spending was last year, not this year," he said. "Having said that, I don't know that the economic situation in a lot of states has improved to the extent that you're going to see restoration of cuts."

The states are stuck between a rock and a hard place, Scheppach said.

They don't have enough money to support the program, leaving little choice but to cut people who make up the optional population covered by Medicaid, mainly women and children. Even these measures won't save much because the nursing-home population uses the bulk of Medicaid resources and is part of the mandatory population.

Many experts have concluded that the problem with Medicaid is actually Medicare. The majority of Medicaid spending buys prescription drugs, nursing-home care and long-term care for dual-eligible patients -- Medicare enrollees who are poor enough to qualify for Medicaid, too.

"There has to be a new conversation about the state and federal roles for the financing of the care of the duals, and the time for that conversation is growing very short," Parrella said, referring to the looming retirement of baby boomers, the first of whom reach age 65 in 2011.

If the federal government were to assume the entire cost of the dual-eligible population -- as had been suggested but dropped during debate over Medicare reform -- it would go a long way toward relieving the financial pressures on the states, Scheppach said.

But Congress is a long way from doing that or even considering new federal funding along the lines of the sum that was passed last year and runs out in June, experts said.

Instead, the Bush administration is focused on reducing the amount of money the federal government commits to Medicaid. Health and Human Services Dept. officials recently announced plans to crack down on loopholes in the law that allow many states to garner more federal Medicaid money.

"It's ironic, but at a time when I think states are legitimately struggling, the level of scrutiny of how federal dollars are funneled to the states is increasing," Scheppach said. "That's the biggest problem state Medicaid programs are going to face."

For the time being, the states may have to come up with their own solutions to the Medicaid crisis.

"The federal government is bogged down in its ideological battles over tax credits or public program expansions and the like," said Alan Weil, director of the Assessing the New Federalism project at the Urban Institute in Washington, D.C. "Meanwhile, the states are making public policy every day and are often able to work through partisan and ideological differences, perhaps not achieving as dramatic and high-profile results as a few states, but making progress nonetheless."

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Continuing crunch

Despite drastic Medicaid cost-containment steps in the past two years, many states are planning further cuts this year.

Number of states taking action each fiscal year:

2002 2003 2004
Controlling drug costs 32 46 43
Reducing or freezing reimbursements 22 50 39
Reducing or restricting eligibility 8 25 18
Reducing benefits 9 18 17
Increasing co-pays 4 17 21

Source: Kaiser Commission on Medicaid and the Uninsured, January

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Enrollment slowdown

Medicaid enrollment is projected to slow for the first time since the 1990s, despite large increases in the number of Americans who have lost private health coverage.

1998 -2.3%
1999 2.1%
2000 3.7%
2001 8.3%
2002 8.5%
2003 8.8%
2004 5.5%

Source: Kaiser Commission on Medicaid and the Uninsured, January (2004 increase is projected)

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