Medicaid reform may be too late for some states

Washington -- Congressional lawmakers want to get Medicaid reform done by the end of the year, but for some states, that might not be soon enough.

Huge growth in the program over the past five years is driving both the federal and state governments to focus on the issue.

Governors are facing difficult decisions about how to deal with growing Medicaid deficits that are eating away at their budgets and crowding out other programs. But states already have trimmed much of the fat, as well as some of the meat. Before long, they could find themselves cutting into bone, experts said.

"It's burning a hole in states' budgets," said Matt Salo, director of health policy for the National Governors Assn.

The program currently serves some of the most vulnerable Americans, but that could change quickly if states start eliminating optional services and populations, which are not required by the federal statute but currently constitute 65% of Medicaid costs, said Kathleen Gifford, a principal at Health Management Associates, a national health care research and consulting firm.

In the past, states have focused on saving by freezing or reducing reimbursement rates to physicians and others, making small changes to eligibility, and restricting or limiting access to expensive drugs and services. While all those options are still on the table, several states already have begun considering even larger cuts that could include substantial reductions in Medicaid rolls.

Physicians, hospitals and others invariably bear much of the costs of such cuts, experts said. They must cope with not only continued low Medicaid reimbursement but also an increase in the number of uninsured patients and uncompensated care, experts said.

Governors reach consensus

Those concerns and difficulties were front and center during a recent meeting of the National Governors Assn. in Washington, D.C.

Governors attending the meeting came to two conclusions, NGA's Salo said.

"Medicaid reform is needed this year," he said. "But there is an equally strong consensus that we should not do this in the budget reconciliation process."

Current proposals at the federal level have focused on giving states more flexibility in exchange for greater responsibility for cutting costs.

The federal government is struggling with its own budget problems. President Bush's 2006 budget lays out strategies to reduce federal Medicaid funding growth by at least $45 billion over the next 10 years, although a recent report from the Congressional Budget Office puts the estimated savings from those proposals at closer to $27 billion.

But that approach is less about dealing with an impending crisis in the program than giving the states the freedom to cut optional populations and services, experts said.

NGA's Salo said it's likely the states can find more efficient ways to run their programs, but the federal and state governments still need to expect Medicaid costs to rise.

The program's price tag has grown precipitously in the past five years, mainly due to a 40% jump in enrollment, according to a report by Health Management Associates prepared for the NGA.

Despite that rise, Medicaid's spending growth compares favorably against growth in the private market. Per capita, Medicaid grew 6.9% between 2000 and 2003, while per capita spending grew 9% among individuals with private health insurance during the same period.

Still, states are looking for new ideas on how to alter the program to make it more cost effective. During the recent NGA meeting, congressional lawmakers met with the governors and consented to give them until the end of the fiscal year to come up with proposals on which the states can agree.

Such agreement is likely to come from experimentation by individual states, Salo said. For example, many are now taking a close look at the success of multistate drug purchasing pools.

Troubled states

But that timeline might be too slow for several states facing more immediate fiscal crises.

States have a host of options of where to cut from both optional services and populations.

Optional services include things that are currently considered central but expensive components of Medicaid, such as drug and mental health benefits. Optional populations include millions of low-income children and their parents.

Making these cuts would help states meet their budget goals in the short term but don't address the underlying problem, said Kirsten Sloan, director of health legislative affairs at AARP.

"You don't save anything -- you just push the costs onto people who can't afford it," she said.

Some states already have started making these cuts.

Texas was the leader in making such drastic changes. It knocked nearly 200,000 people off the rolls last year. That state's physicians are now fighting a government plan to move more Medicaid patients into managed care. The proposal would turn over case management duties currently handled by doctors to HMOs.

The plan would offer the state more budget certainty, but it also would mean that the state is spending 11% to 15% in administrative costs that could be available for patient care, said John Holcomb, MD, chair of the Texas Medical Assn.'s ad hoc Committee on Medicaid.

At the end of last year, Tennessee Gov. Phil Bredesen put into motion a retraction of the TennCare program that would drop more than 300,000 enrollees. That has been held up by legal challenges by patient advocacy groups in the state.

Now Mississippi is facing a $268 million deficit that is threatening to shut down the program altogether. And West Virginia is more than $100 million short in state funding just a few months away from its new fiscal year -- a fact that will precipitate some "painful" cuts, according to state officials.