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Medicaid morass: States are cutting funds to make up for major revenue shortfalls

With demand for services up, the cuts could hardly come at a worse time.

By Amy Snow Landa, amednews staff. Jan. 7, 2002.

Marlboro County, home to cotton farms, textile mills and tobacco growers, is one of the poorest areas in South Carolina.

Its three licensed obstetrician-gynecologists include John R. Nobles Jr., MD, who has maintained a women's health clinic in the town of Bennettsville for 17 years.

Growing need

The clinic's revenues have never risen much above its operating costs, says Dr. Nobles. But that goes with the territory when more than one-third of your patients are either on Medicaid or uninsured.

South Carolina pays its physicians among the lowest Medicaid fees in the country, which is especially hard on doctors who treat a high proportion of patients who are enrolled in the program.

But physician fees sank even further last fall, when South Carolina decided to reduce Medicaid reimbursement for physicians, hospitals, pharmacists and nursing homes by $66 million through fiscal year 2002, which ends June 30.

Faced with a sudden plunge in tax revenue that has translated into a budget shortfall of $500 million, state officials decided to cut 4% across the board from all state agencies, including the Dept. of Health and Human Services, which runs the Medicaid program.

Medicaid is the largest and fastest growing element of most state budgets.

As a result, the state's physicians stand to lose at least $8 million in Medicaid fees over an eight-month period, according to preliminary estimates by the South Carolina Medical Assn.

"I just find it incredibly frustrating," says Dr. Nobles. "I don't know how much longer we can keep doing more with less."

Many physicians -- particularly those in poor, rural areas -- can ill afford the reductions, says Ron Fitzwater, the medical society's chief operating officer. "We've got physicians all across this state who are sincerely hurting from these rounds of cuts."

When already low Medicaid fees are reduced even further, it becomes more difficult for physicians to continue accepting Medicaid patients, says Fitzwater. "When your costs continue to go up and up, and reimbursements go down, at the point where the lines cross, you've got to make some serious decisions," he adds.

It's not a point Dr. Nobles wants to reach. When asked if he's ever considered dropping Medicaid patients from his practice, he says he'd "probably come out better [financially]. But there's just such a need here, I don't know how I could stop seeing people."

That need for physicians to accept Medicaid patients is as great as it has ever been, in Marlboro County and across the nation. With the economy in recession and unemployment on the rise, the Medicaid rolls are expected to jump dramatically in the months ahead.

Medicaid spending is expected to grow 9% in 2002, compared with 2.3% for state revenue.

But at the same time, Medicaid is already the largest and fastest growing element of most state budgets. This has made it a prime target of cost-cutting efforts that nearly every state is now undertaking to make up for large budget shortfalls.

The nation's economic slump caused state tax revenues to plunge early last fall, according to the National Conference of State Legislatures. Forty-four states saw their revenue fall below projections by October 2001 -- only a few months into fiscal year 2002. By late October, NCSL reported that "with only a few exceptions, state fiscal conditions have taken a dramatic downturn."

States were not even expected to meet their earlier projections of modest 2.3% revenue growth. Meanwhile, 19 states reported that expenditures had already exceeded budgeted levels.

By November, states faced a total budget shortfall of $15 billion. That figure grew to $40 billion a month later, according to the National Governors Assn. and National Assn. of State Budget Officers.

As of mid-December, the states were predicting that their total shortfall would climb to $50 billion -- nearly 10% of state revenues -- if unemployment continues to rise in 2002.

States' sudden and dramatic revenue shortfalls have put them in a tough position. All states but one, Vermont, have laws or constitutions that require their budgets to be in balance, meaning states must make immediate adjustments when spending exceeds projections or when revenues fall below forecasted levels.

South Carolina, for example, underwent three rounds of budget cuts last fall after state officials reduced their revenue forecasts for the year by $500 million.

Other states are facing even greater gaps between their revenues and expenditures: New York and California have fallen short by at least $3 billion, Minnesota and New Jersey by $2 billion, Ohio by $1.5 billion, and numerous other states are hundreds of millions of dollars in the hole.

More money going out

As revenues fall, states continue to face rapid growth in their Medicaid costs.

Even before this fall, many states were struggling with double-digit cost growth in their Medicaid programs, driven largely by rising prescription drug costs and recent increases in enrollment.

In August 2001, the Congressional Budget Office estimated Medicaid expenditures would grow by 9% in the coming year -- far outpacing the 2.3% state revenue growth that had once been predicted.

That disparity "is unsustainable [even] in a booming economy," says Matt Salo, the NGA's chief health lobbyist. "As I think we all know, the economy right now is far from booming; it is a disaster."

As the economy slides further downward and revenue projections continue to fall, Medicaid spending will only accelerate, since many workers who lose their jobs will become eligible for coverage.

Unemployment is already on the upswing. The jobless rate rose to 5.7% in November, and many forecasters are predicting that it will hit 6.5% by this summer. If it does, the Medicaid rolls will jump by 3.2 million people, according to Urban Institute estimates.

That means that Medicaid enrollment could reach nearly 48 million people within the next six months.

As Medicaid enrollment increases, states and the federal government will have to spend even more on the program. If the jobless rate rises to 6.5% and an additional 3.2 million people gain coverage, the Urban Institute projects, total state Medicaid spending would have to rise by $2.3 billion, or 2.6% above the current forecast.

But just as the economic downturn is pushing Medicaid spending higher, many state policymakers are looking for new ways to clamp down on expenditures.

Some states, like South Carolina, have included, or are considering including, Medicaid cuts as part of across-the-board spending reductions. Others, such as Indiana and Illinois, have specifically targeted their Medicaid programs for reductions of hundreds of millions of dollars.

Double-edged sword

Unfortunately, a recession -- when states are under the most pressure to cut their budgets -- is actually the worst time for them to reduce Medicaid expenditures.

"Cutting Medicaid is the most counterproductive thing one could ever do in a time of difficult financing," says Sara Rosenbaum, professor of health law and policy at George Washington University, Washington, D.C.

It may save state dollars in the short run, but it means that the state also loses federal Medicaid matching dollars that were coming into its economy. Every state dollar that is saved results in a loss of one to three federal dollars in matching payments, depending on each state's federal matching rate.

For example, by cutting its Medicaid program by $66 million by last fall, South Carolina saved $20 million in state dollars but gave up $46 million in federal matching funds that could have helped the state achieve a faster economic recovery.

The health care sector has been one of the most vibrant parts of the national economy in recent years. It accounted for 45% of the net increase in jobs last year and 30% of the real growth in the gross domestic product, according to a recent analysis in BusinessWeek magazine.

"Go into any small town across America, and you will see that the largest employer in most of those towns is the health care system, either the hospital or the community health center," says Diane Rowland, ScD, executive director of the Kaiser Commission on Medicaid and the Uninsured.

"Many of these centers and hospitals are highly dependent on Medicaid revenue," says Dr. Rowland. "In the absence of Medicaid, the patients don't go away, the revenue just goes away, and the jobs go away."

Losing federal Medicaid dollars causes the burden of providing health care services -- through hospital emergency departments or uncompensated care -- to fall even more heavily on state and local governments.

Throughout last fall and into December 2001, the nation's governors told members of Congress and the White House that states were facing a serious fiscal crisis that was only expected to get worse.

"The growing state budget shortfalls in nearly every state will continue to be a major drag on economic recovery," New York Gov. George E. Pataki wrote in a December letter to Congress.

The federal government could do a lot to help alleviate the crisis and stimulate the economy, Pataki wrote, by assuming a greater share of Medicaid costs. He urged lawmakers to approve legislation by the end of 2001 that would provide a temporary increase in federal Medicaid funding of at least $5.5 billion.

But by mid-December, as congressional leaders and the White House continued to wrangle over the contents of an economic stimulus plan, the chances that a Medicaid funding boost would be included did not appear to be high to many observers.

At press time, the question of whether Congress would even agree on an economic stimulus package, much less include more Medicaid funding, was unresolved. It was expected to be the last issue that Congress would address before adjourning just before Christmas.

Relief not likely

But in South Carolina, few were holding their breath for a federal Medicaid package that would cause a reversal of the state's Medicaid reimbursement cuts.

In fact, South Carolina physicians were expecting the reductions made for fiscal year 2002 to continue into fiscal 2003. "These cuts are already included in the [2003] budget that the governor will submit to the Legislature," the medical society's Fitzwater said in December 2001.

State Medicaid officials have said they would try to restore some of the cuts "if they were to magically find new money, but there are not a lot of people holding out great hope for that," he added.

As for Dr. Nobles, he continues treating Medicaid patients but says he is facing some unsettling questions about his practice. "I keep thinking, am I going to be able to stay here? Am I going to be able to continue working here? What is the situation going to be?"

Heading into the new year, the situation that appears to be shaping up is one of even greater need but fewer resources for physicians and others who treat Medicaid patients.

ADDITIONAL INFORMATION:

Growing need

After a slight decline in the late 1990s, Medicaid enrollment is increasing again:

1990: 28.9 million
1991: 32.3 million
1992: 35.8 million
1993: 38.8 million
1994: 40.8 million
1995: 41.7 million
1996: 41.3 million
1997: 40.6 million
1998: 40.4 million
1999: 41.8 million
2000: 42.6 million
2001: 43.9 million