New Year, but Same Old Budget Challenges

by Dan Diamond, California Healthline Contributing Editor
New Year, but Same Old Budget Challenges

From coast to coast, governors and state legislators are assuming or returning to office with a common cry: We need to cut Medicaid. Are there new solutions to this old problem?

“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

Rolling Out the Reform Law

Eye on the Industry

In the States

 

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