State Spending on Medicaid Increases

Already faced with budget deficits, declining tax revenues, and struggling economic conditions, states now have another challenge: increasing Medicaid costs. In fiscal years 2009 and 2010, state spending on Medicaid decreased thanks to federal government assistance. However, for fiscal year 2011, state spending on the insurance program grew 28.7%, according to the 11th annual survey from the Henry J. Kaiser Family Foundation’s Commission on Medicaid and the Uninsured. The main reason? Funds available to states through the American Recovery and Reinvestment Act (ARRA) of 2009 expired on June 30, 2011, leaving states responsible to spend more money on Medicaid. It was not ideal timing. High unemployment for the past few years has led to more people on Medicaid. When regulations from the Patient Protection and Affordable Care Act take place in 2014, there will be millions of additional Medicaid enrollees, adding to the difficult situation. “This is a huge challenge for states, particularly with demands on their already limited resources,” said Vernon K. Smith, PhD, managing principal with Health Management Associates, a healthcare research and consulting firm. Dr. Smith, one of the study’s authors, spoke during a conference call coinciding with the report’s release on October 27, 2011. The Kaiser Foundation conducted the study in July and August and received responses from all 50 states and the District of Columbia. The report’s authors said Medicaid plays a vital role in healthcare. Of the 59.5 million Medicaid enrollees, approximately 50% are children, 25% are adults, 15% are disabled, and 10% are elderly. In the United States, $1 of every $6 spent on healthcare is related to Medicaid. Dr. Smith said that between fiscal years 2009 and 2011, the ARRA provided $103 billion in Medicaid funding to states. He said that due to the extra money, states in fiscal years 2009 and 2010 had a decline in Medicaid spending for the first time since the program began in 1965. “This was one of the most significant things that happened to Medicaid in its history,” Dr. Smith said. “Even with [the funds], there were budget shortfalls of historic sizes in states.” Tracy Gordon, PhD, a fellow in the economic studies program at the Brookings Institution, provided context on the dire situations states have faced recently. She said income tax revenue in the second quarter of 2009 fell to its lowest since at least 1995. Although state revenues grew for the sixth consecutive quarter in the second quarter of 2011 (the most recent data available), revenue is still 6% lower than when the recession began in 2008, according to Dr. Gordon. Dr. Gordon added that states are required to spend a certain amount of money each year on items such as pensions and bond payments, but the revenues they generate are unpredictable, which contributes to uncertainty and potential budget shortfalls. For fiscal year 2012, states have an estimated $103-billion budget shortfall, the difference between expected revenues and the amount needed to fund the spending requirements. The budget shortfalls were $110 billion in fiscal year 2009, $191 billion in fiscal year 2010, and $130 billion in fiscal year 2011. “Budget gaps opened in nearly every state,” Dr. Gordon said. “It’s not clear if these will be sustained improvements [in revenue]. It’s also not clear if the revenues coming in are bigger than the projections. That’s a concern going forward.” States are taking several steps to deal with the issue. Provider payments were reduced in 39 states in 2011, and 46 states are planning to cut rates this year, according to the survey. Many states are also restricting Medicaid benefits in areas such as dental, therapies, medical supplies, durable medical equipment, and personal care service. Dr. Smith said if Medicaid rates continue to decrease, more physicians may refuse to treat patients. “Access has been an issue since the beginning of the program,” Dr. Smith said. “There’s some concern [dwindling rates] will lead to lower access. It’s something that needs to be taken into account. [Provider cutbacks] are only undertaken because of the fiscal difficulties states face.” Enrollees are burdened with more of the costs, too. Whereas only 1 state increased copayments for Medicaid beneficiaries in 2010, 5 states did so in 2011 and 14 plan on increasing copayments this year, primarily in pharmacy and emergency department visits. Managed care is becoming increasingly prevalent, as well. In October 2010, two thirds of the 54 million Medicaid beneficiaries were enrolled in a managed care program. The number is expected to grow, as the survey found that 17 states expanded their managed care programs in fiscal year 2011 and 24 states expected to expand Medicaid managed care in fiscal year 2012. Valerie Harr, director of New Jersey’s division of medical assistance and health services, said Medicaid enrollment in the state increased 22% and Medicaid spending increased 18% between July 2008 and June 2011. As of October 2011, 95% of New Jersey residents were enrolled in managed care, and the state is looking to expand the program. In September, New Jersey’s Department of Human Services submitted a 150-page application to the Centers for Medicare & Medicaid Services to reform Medicaid in the state. Ms. Harr said plans include implementing safety net accountable care organizations and health homes for mentally ill residents. “States look at [managed care] as a way to hold health plans accountable for access to care and quality,” Dr. Smith said. “By and large, I think managed care provides accountability and a platform for quality.”