Trend of Medicaid pay increases is expected to end as states struggle

Washington -- Physicians who have seen Medicaid pay increases in recent years soon could be in for a rude awakening.

Twenty-six states and the District of Columbia budgeted for higher Medicaid physician rates for fiscal year 2009, which began on July 1 in many states. This is the fourth year in a row that most states have raised pay across the board or at least for some specialties, according to an annual survey of state Medicaid directors released Sept. 29. Six states adopted increases larger than 5%, said Eileen Ellis, one of the report's co-authors and a principal with Health Management Associates, a research firm.

But a slowing economy and dwindling tax revenues are starting to take their toll, and doctors' fees could be on the chopping block if states can't cover their costs. At least four states already have budgeted pay cuts for fiscal 2009.

New shortfalls could lead to additional cuts before the fiscal year ends. States faced more than $50 billion in total deficits going into fiscal 2009, and not all of the holes have been plugged, according to an analysis released Sept. 26 by the Center on Budget and Policy Priorities.

Adding to the strain, Medicaid spending and enrollment are growing as the economy slows. Enrollment increased by 2.1% in fiscal 2008, reversing course from a 0.5% decline in 2007, according to the Medicaid director survey. Spending climbed 5.3% in 2008, its fastest pace since 2005.

"The combination of the increase in Medicaid spending at the same time that state revenues are contracting creates a real fiscal crunch for states," said Robin Rudowitz, co-author of the survey report and a principal policy analyst for the Kaiser Commission on Medicaid and the Uninsured.

Roughly two-thirds of state Medicaid directors gave at least a 50-50 chance that their Medicaid program will experience budget shortfalls in fiscal 2009, said Vernon Smith, PhD, a report co-author and principal for Health Management Associates. Cutting physician pay is a particularly tempting move for Medicaid programs because it produces immediate savings, he said. States are somewhat less attracted to rolling back coverage expansions or restricting benefits because the savings aren't realized as quickly.

The latest trends in Medicaid enrollment and spending are expected to continue, Smith said. "Not one state in the country projected a drop in enrollment for 2009."

The higher spending in fiscal 2008 was driven in part by pay increases to physicians, hospitals and others. Higher utilization of certain medical services, enrollment gains and coverage expansions in some states also played a major role in driving up spending, Smith said.

Resistance to cuts

Some states already have resorted to physician pay reductions or are strongly considering doing so as they try to balance their Medicaid books.

California lawmakers, facing a $15 billion budget deficit earlier this year, cut physician pay -- among other Medicaid expenditures -- by 10% across the board effective July 1. But a recent court decision has put this on hold for now.

The California Medical Assn. joined with hospitals, pharmacists and other health care professionals earlier this year in filing a lawsuit to block the cuts. The association also coordinated with a separate lawsuit filed by independent pharmacists, said CMA spokesman Ned Wigglesworth.

The U.S. District Court for the Central District of California on Aug. 18 issued an injunction against the cuts in response to the pharmacists' lawsuit. The court found that the cuts jeopardized enrollees' access to care and that the state didn't go through the required process to amend its Medicaid plan.

The state administration plans to appeal the injunction and to impose a 1% cut on physician Medicaid pay on March 1, said Norman Williams, spokesman for the California Dept. of Health Care Services. "Our budget requires that we make these reductions to make a balanced budget."

South Carolina physicians were unable to prevent the reversal of a pay increase they recently received. The state had boosted Medicaid physician pay from about 83% of Medicare rates to about 86%. But state officials rolled back that increase on Oct. 1 by cutting health spending 3% across the board in response to a state budget shortfall. This reduced physician pay by $4.5 million for the rest of fiscal 2009, said Gregory Tarasidis, MD, board chair of the South Carolina Medical Assn.

"Obviously, in the economic times that we're in, we're trying to be understanding," Dr. Tarasidis said, adding that more budget cuts could be on the way.

Officials in Washington state also are under financial pressure.

Doug Porter, director of Washington's Medicaid program, has orders to cut spending by 15% over the next two years. Trying out new benefit designs and possibly cutting certain interpreter services could help close the gap, he said. But a 48% Medicaid pay increase for pediatricians, enacted last year, might have to be rescinded.

"We're in kind of a survival mode here," Porter said.

Friction with the feds

Medicaid directors told Smith that their relationship with the Centers for Medicare & Medicaid Services has deteriorated in recent years due to CMS efforts to limit federal spending increases.

Washington state's Porter, who also has run Medicaid programs in California and Maine, said the federal-state Medicaid relationship can only improve. "I don't think it has ever been worse," he said.

CMS spokeswoman Mary Kahn said the agency works directly with states on developing Medicaid regulations and on crafting the agency's interpretation of the law.

Democrats in Congress have tried to adopt a temporary increase in the federal Medicaid matching rate, which would provide billions in additional support to states. Lawmakers last approved such assistance in 2003.

But Porter said that wouldn't happen before the next president takes office, because of the resources Congress has spent on preventing a national financial crisis. "The $700 billion bailout has sucked all of the air out of the room back in Congress," he said.