Medicaid budget woes expected to persist

Washington -- Medicaid reform could be on the table next year, but any changes Congress makes to the program are unlikely to forestall cuts in several states, experts said.

States have been struggling in recent years with rising Medicaid costs. Congress helped out this year with an additional $10 billion. Those augmented federal matching funds ran out June 30, and new federal money for the program seems doubtful in the near future, they said.

Medicaid is also eating up an increasing share of state money. It now makes up more than 20% of the average state's budget, according to an October report from the National Assn. of State Budget Officers.

Spending on the program continues to grow by around 8% a year on average, while total state spending grows an average of 4.5%. The report also shows that 23 states had Medicaid shortfalls in 2003, and this year 18 will have losses, adding up to a cumulative $7 billion gap.

Another recent report, published by the Kaiser Commission on Medicaid and the Uninsured, shows that next year more states plan to cut or freeze reimbursement to physicians than any other group, including hospitals, nursing homes and managed care organizations. This year, 42 states cut or froze physician payments.

Efforts to reduce spending growth have been somewhat successful, but states also have had to deal with the effects of the recession, which has led to an increase in the Medicaid-eligible population.

Without help from the federal government, states will continue to trim their Medicaid programs to bring spending growth down, and that means more cuts to physician rates, said Barbara Lyons, the Kaiser Commission's deputy director.

Budget battle brewing

Election-year promises by some politicians to balance the budget over the next five years also might come to bear on the program, according to a Democratic staff member of the House Energy and Commerce Committee who spoke at a recent managed care conference.

"It is going to be a very nasty budget battle at the beginning of next year, and I don't think any programs are safe," she said.

The federal government doesn't have much money to help states out. A budget-conscious Congress could even look for ways to squeeze money out of the program, which has outgrown Medicare in terms of total spending, experts said.

"One thing I hope Congress doesn't do is look at Medicaid just in the sense of: 'Wow, look at how expensive that is, look how much money that is, we need to get some money out of the program,' and go out trying to cut little bits here and there," Matt Salo, director of health policy for the National Governors Assn., said at the managed care conference.

Congress could take an incremental approach to Medicaid reform next year, likely by attaching a change in the financing mechanism to other health care legislation, such as reauthorization of the State Children's Health Insurance Program or efforts to fine-tune last year's Medicare reform law, experts said.

The Dept. of Health and Human Services has placed an increased emphasis on Medicaid waste, fraud and abuse measures, especially targeting transfers of funds between state, county and city governments that some states have used to maximize their federal match. The initiative has imposed additional pressure on states' attempts to finance the program within tight budget constraints, Salo said.

While such efforts have shown an attractive return on investment, the savings they produce are small in comparison with overall spending in the program, experts said.

Meanwhile, the states' economic outlook is improving, but it will be several years before they can dig themselves out of the deep budget hole in which they currently find themselves, Salo said.

He compared the states' financial situation to a married couple who have been out of work for an extended period. After months of depleting their reserves, borrowing from family and friends, and getting into debt, one of them lands a new job.

"They're starting to move up again, but it is from a much, much more depressed baseline," he said.

Drug savings in doubt

States also face other financial uncertainties.

The Medicare prescription drug benefit will take over most of the prescription drug costs of people eligible for both Medicaid and Medicare. Medicaid had been footing this bill. But states will have to pay the federal government back 75% of what it is estimated they would have spent on those patients. It's unclear whether the states will realize any savings from no longer having to pay for those patients' medications.

"Unfortunately, the way it is structured, although Medicare may offer it and provide the benefit, the states will essentially keep paying for it in perpetuity," Salo said.

Without reforms, Medicaid also will continue to be the biggest payer of long-term care, which adds significantly to program spending growth, he said.

If something is not done to relieve states of some of that cost, Medicaid will collapse, he said.