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New Year, but Same Old Budget Challenges

“Austerity” was 2010’s word of the year, according to the Merriam-Webster Dictionary.

Are two-time winners allowed?

Legislators returned to state capitols this month amid the worst three-year budget crisis since the 1930s. Tax revenues fell by nearly one-third in 2009 because of the recession, and almost every legislature struggled to close shortfalls when adopting budgets for the current fiscal year, according to the Center on Budget and Policy Priorities. As a result, 2011 is shaping up to be a year of program cuts, fiscal challenges and, yes, more austerity.

It “will actually be the most difficult budget year for states ever,” said Nicholas Johnson, director of CBPP’s state fiscal project.

Health Care Cuts Likely on the Way

Pick any cash-strapped state, and Medicaid is likely at the center of both its budget mess and its attempt to plug the gap.

About one-in-six U.S. residents now are covered by the public program, with enrollment soaring during the recession. Medicaid also tends to be states’ most costly budget item, although federal funds on average account for 57% of states’ expenses. Meanwhile, an emergency federal cash infusion of $103 billion — slated to expire in June — helped states prop up their Medicaid and CHIP programs during the downturn, according to an annual Kaiser Family Foundation survey.

The enrollment growth means that Medicaid increasingly serves “a whole array of needs, and yet state budgets no longer seem able to support it,” according to Andrew Allison, chief of Kansas’ Medicaid program and also head of the National Association of Medicaid Directors.

For example, Texas is facing a $15 billion shortfall across the next two years —  but newly elected legislators campaigned on promises not to raise taxes. As a result, The Texas Tribune warns that the state should expect “devastating cuts” to its Medicaid program, possibly by paring back eligibility, and lawmakers may significantly reduce reimbursement rates for participating providers.

In California, Gov. Jerry Brown (D) has proposed “painful” cuts that would trim $1.7 billion from the Golden State’s Medi-Cal program largely by limiting services. Governors in Idaho, New Jersey, New York and other states have floated commensurately sweeping cuts to their programs, too. 

Reform Law Adds Further Wrinkle

State officials also are facing down estimates that the required Medicaid expansion under the federal health reform law will add billions in mandated spending, according to Lanhee Chen of the Heritage Foundation. For example, Chen notes that the California Legislative Analyst’s Office concluded that the Medicaid expansion will likely add annual costs to the state budget in “the low billions of dollars.”

Seeking flexibility, 33 governors last week asked the White House for permission to eliminate a federal health reform law provision saying states that reduce Medicaid enrollment will lose federal matching funds. As one tactic to avoid losing the funds and still pare back spending, some states have begun cutting optional Medicaid benefits, such as vision, dental and prescription services. A handful of states have considered ending participation in the program all together.

Officials Weigh Possible Approaches to Medicaid Conundrum

Given these pressures, some states have seized on potential transformation points for Medicaid: changing financing, redesigning care delivery or rethinking the program’s purpose.

Rhode Island: Block Grants

The Ocean State received approval from the George W. Bush administration to use federal Medicaid block grants, and the program saved the state $150 million in its first 18 months, Galen Institute President Grace-Marie Turner tells Inside Health Policy.

Under current structure, the federal government’s contribution to state programs rises or falls based on the state’s Medicaid spending. Block grants instead apportion a fixed chunk of federal funds to the state, which could allow for more experimentation but also significant cuts to enrollment.

The financing model is especially relevant because of the federal health reform law’s restriction on states’ ability to modify Medicaid eligibility requirements. According to Turner, states can use block grants to gain additional flexibility and free themselves from “federal micromanagement.” Some observers say that the model could weaken the health reform law by shifting costs and risk to low-income beneficiaries and the poor.

North Carolina: Managed Care

North Carolina’s medical home program –built from “the ground up” in 1998 with “significant” physician input — reduced the state’s Medicaid spending by roughly $147 million in 2007 and may serve as a replicable model for states seeking to curb program spending in the face of increasing enrollment.

In medical home programs, physicians and networks are paid on a per-member, per-month basis for care coordination. According to the president of North Carolina’s program, known as Community Care, each medical home network essentially is its own integrated health system, with a medical management committee of local physicians who decide best practices, a medical director and a clinical pharmacist. The care networks have helped patients facing chronic illness treatments.

Despite potential roadblocks — such as specialists’ reluctance to see medical home patients, given poor reimbursement rates and added coordination — states like Illinois, Oklahoma and Vermont have created similar medical home programs in recent years.

Arizona and Oregon: Rationing Services

Confronting a multibillion dollar budget shortfall, Arizona has eliminated Medicaid coverage for basic health services, like physicals and podiatry, in addition to instituting very specific cuts to transplant coverage. Notably, Arizona will not cover organ transplants for Medicaid beneficiaries with hepatitis C, as well as lung transplants and certain heart, bone-marrow and pancreas transplants for all beneficiaries. Altogether, about 100 transplant patients have been affected by the change, and two have since died.

Meanwhile, Oregon’s Medicaid program annually “draws a line” on which services make the cut for coverage, notes Forbes‘ Merrill Matthews. This year, the program does not cover medications for conditions like pink eye and certain skin rashes.

While states’ decisions to pare back services has sparked outcry, some stakeholders say that officials are right to go beyond an annual debate over cuts — and want to see other states follow in Arizona’s and Oregon’s footsteps.

“We want as many people as possible to have access to some care, rather than let some have terrific access and other people have none,” according to Tim Bartholow, a senior vice president of the Wisconsin Medical Society, which last week offered recommendations for how Wisconsin could close a $1.2 billion Medicaid deficit by rationing services.

We’ll be watching as state leaders make tough decisions on Medicaid in coming months. Here’s a look at other health reform stories making news across the nation.

Challenging the Overhaul

  • The delay of a vote on a bill (HR 2) that would repeal the federal health reform law could temporarily alleviate the highly charged tone of the debate, but likely will not change the substance of the bill or the likelihood of it passing in the House, lawmakers say. Democratic and GOP lawmakers and aides have acknowledged that the vote on the repeal bill is inevitable and the rhetorical truce likely will not last long (Pecquet, “Healthwatch,” The Hill, 1/10).
  • On Monday, Republicans lawmakers rejected a Democratic House member’s proposal to rename the GOP health reform repeal bill. In a Huffington Post opinion piece published on Monday, Rep. Chellie Pingree (D-Maine) urged the GOP to change the name of the bill — titled “Repeal the Job-Killing Health Care Law Act” — as a symbolic gesture to signal a more civil tone in the repeal debate. Pingree questioned the use of the word “killing,” noting that Republican lawmakers “have a responsibility to help turn down the temperature on the nation’s debate and help restore an element of civility to the discussion” (Ethridge, CQ Today, 1/10).
  • After the shooting in Arizona, advocacy groups supporting the health reform law have halted dozens of scheduled events aimed at criticizing congressional efforts to repeal the law. Health Care for America Now postponed about 55 such events. In addition, Organizing for America — the community grassroots arm of President Obama‘s 2008 presidential campaign — halted 71 press conferences that had been scheduled this week outside numerous Republican lawmakers’ district offices (Pecquet, “Healthwatch,” The Hill, 1/10).
  • Meanwhile, a recent decision by the U.S. Supreme Court could foreshadow its stance on lawsuits against the federal health reform law should such cases reach the court. On Monday, the court refused to consider whether Congress exceeded its authority under the commerce clause of the U.S. Constitution when it made it a federal offense for a convicted felon to own a bullet-proof vest. Lawmakers and federal officials have argued that the commerce clause provides the federal government with the authority to enforce the mandate (Richey, Christian Science Monitor, 1/10).
  • On Friday, the Congressional Budget Office released additional details on projections for GOP legislation that would repeal the federal health reform law, estimating the repeal bill would reduce revenue by $770 billion through 2021 and cut spending by $540 billion during that period. The latest figures maintain CBO’s previous estimate that the repeal bill would increase the federal deficit by $230 billion over 10 years (Kasperowicz, “Floor Action Blog,” The Hill, 1/7).
  • A fund for public health efforts called for in the federal health reform law likely will be the target of Republican efforts to cull spending this year. The Prevention and Public Health Fund was conceived to create a stable budget source for national public health programs, but critics have called it a “waste of taxpayer money” and a “slush fund” (Reichard, CQ HealthBeat, 1/6).

Rolling Out the Reform Law

  • A group of senators in a recent letter to FDA Commissioner Margaret Hamburg clarified a provision in the federal health reform law related to follow-on biologics. The provision gives companies that create biologic products 12 years of data exclusivity before a generic drugmaker can access the formula to make biosimilar versions. The four senators — incoming Senate Finance Committee ranking Republican Orrin Hatch (R-Utah); Senate Health, Education, Labor and Pensions Committee ranking member Mike Enzi (R-Wyo.); and Sens. Kay Hagan (D-N.C.) and John Kerry (D-Mass.) — noted that the provision does not prohibit other companies from manufacturing a similar product during that period (Adams, CQ HealthBeat, 1/10).
  • In an interview with the New England Journal of Medicine, HHS Secretary Kathleen Sebelius discussed the department’s priorities in implementing the federal health reform law. Sebelius said HHS is striving to promote affordable health insurance coverage, change the Medicare physician payment formula, address the shortage of primary care providers and boost preventive measures (Iglehart, New England Journal of Medicine, 1/5).

Eye on the Industry

  • Small business owners say that tax benefits offered through the federal health reform law will make them more likely to provide health insurance to their employees, according to a poll by Small Business Majority, a not-for-profit small business advocacy organization. According to the poll, one-third of employers that currently do not offer insurance said they would be more likely to offer it because of the tax credits (Mannes, San Diego Union-Tribune, 1/6).
  • Insurance brokers’ commissions will be cut by as much as 50%, likely due to the medical loss ratio provision in the federal health reform law. New insurance commission schedules obtained by Politico show that brokers who had earned between 15% and 20% commissions on plans they sold to individuals and small businesses now can expect to make between 4% and 10%. The change is largely due to new medical-loss ratio rules, which mandate that insurance companies spend at least 80% of premiums on medical expenses. Brokers’ fees are considered administrative, not medical, costs (Nocera, Politico, 1/6).

In the States

  • On Friday, Wyoming Gov. Matt Mead (R) announced that his state will seek to join the multistate lawsuit challenging the constitutionality of the federal health reform law. Former Gov. Dave Freudenthal (D) refused to participate in the lawsuit and said Wyoming is bound by whatever the federal courts would decide so there is no reason to pay the legal costs associated with such a challenge (AP/KULR, 1/9).
  • Meanwhile, Georgia Attorney General Sam Olens (R) recently said he would sign a legal motion joining the multistate challenge after taking office on Monday. Outgoing Attorney General Thurbert Baker (D) refused to join the lawsuit because he said the state lacked a viable legal claim. Although Georgia technically joined the suit when former Gov. Sonny Perdue (R) bypassed Baker by appointing a special attorney to join the challenge, Olens said he is putting more resources from his office behind the lawsuit as a symbolic move (Bluestein, AP/Macon Telegraph, 1/10).
  • Oklahoma Attorney General Scott Pruitt (R) recently announced that the state will file a lawsuit challenging the constitutionality of the federal health reform law (CNN, 1/7). Pruitt said two lawyers from his office will file the suit in federal district court. According to a ballot provision to the state’s constitution passed on Nov. 2, 2010, Oklahoma residents cannot be forced to participate in a health care system. Pruitt says this gives the state the ability to challenge the federal legislation mandating the purchase of health insurance (Hoberock, Tulsa World, 1/7).
  • Meanwhile, Ohio Attorney General Mike DeWine (R) said he will authorize a request to the U.S. District Court for the Northern District of Ohio to enter the state into the multistate lawsuit challenging the health reform law. Previous AG Richard Cordray (D) opposed challenging the overhaul (Hershey, Dayton Daily News, 1/9).


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