Medicaid formula flawed; produces funding inequities

Some states get twice as much federal money to spend on each Medicaid patient as others, GAO reports.

By Joel B. Finkelstein, amednews staff. Sept. 8, 2003.

Washington -- The Medicaid formula shortchanges states with large numbers of poor people and fails to take into account the variations in the cost of providing medical services, according to a new government report. But change is unlikely because improvements for some states would hurt others, and governors have set their sights on another Medicaid priority.

The Medicaid formula, based on state per-capita income, is used to decide how much the federal government kicks in for the program.

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States receive federal matching funds of between 50% and 75% of their program costs. Congress recently gave states a 2.95% temporary boost in their matching funds.

The formula was meant to fairly distribute Medicaid funds based on state need. However, it fails to account for a number of complexities, according to a General Accounting Office report.

"Per capita income is an inadequate measure of states' funding ability because it is an incomplete measure of states' resources, it is a poor proxy for the size of a state's population in poverty, and it does not take into account differences in the cost of providing health care services to people in poverty," the report states.

Another reason for the inequity is the requirement that the federal government match no less than 50% of a state's Medicaid costs (exceptions are Alaska and the District of Columbia, which can get no less than 57.38% and 70%, respectively). This helps states that already have above-average resources to fund health care, the report says.

States receive federal matching funds of between 50% and 75% of their Medicaid costs.

The result is that some states have twice as much money to spend per Medicaid patient as other states.

For example, although they devote very similar proportions of their tax revenue to Medicaid funding, California can spend an average of $3,731 per enrollee, while Wisconsin has $7,532 to spend per enrollee. Similarly, Florida has $3,160 to spend per person, compared with Iowa's $6,729 per person.

"The [Federal Medical Assistance Percentage] formula is in need of substantial reform," said Sen. Dianne Feinstein (D, Calif.), who requested the report. "It is clear that as a result of this funding gap, California, which has 6.5 million people who depend on Medicaid, is shortchanged by hundreds of millions of dollars."

The report showed that the formula does partially accomplish its goal of moving states closer together in their ability to fund Medicaid. It reduces the average difference in states' funding ability by 20%. But at the same time, the current matching rates move several states further away from the national average.

Feinstein has said she plans to work with other senators to draft legislation to rectify the inequities.

Leighton Ku, senior fellow at the Center for Budget and Policy Priorities, said support for such a measure is unlikely.

6.5 million people in California are on Medicaid.

"The problem ... is that formulas inherently favor one state over another," he said. "If you help New York or if you help California, and you're truly trying to be budget neutral, then lots of other states need to lose."

Although the report does not explicitly offer an alternative to the formula, one is implied in the way the GAO chose to compare the current method against states' funding ability, said Ku.

Rather than using per capita income, the GAO based its calculations on state resources that are subject to taxation divided by the number of people in poverty and the cost of health care services.

Differing priorities

State officials appear unlikely to lobby for a change. At the recent National Governors Assn. meeting, the 50 state governors identified another funding priority for Medicaid.

They asked congressional lawmakers negotiating final Medicare reform legislation to include language from the House version of the bill that would require the federal government to take on some of the drug costs of beneficiaries who qualify for both Medicare and Medicaid.

The Senate bill would maintain the status quo, in which states cover these patients' pharmacy costs.

The governors argue that many seniors are in Medicaid because they have become sick and spent their savings on drugs or other services not covered by Medicare.

"It's un-American to disenfranchise a group of Americans and treat them differently simply because their illnesses have caused them to become poor," said Kentucky Gov. Paul Patton, chair of the National Governors Assn.

With the rising cost and use of prescription drugs, especially for patients with chronic diseases, states have focused on this population as they seek federal help in handling Medicaid programs that are swallowing increasingly large chunks of their budgets. NGA estimates the states spend about $7 billion a year on drugs for these patients.

ADDITIONAL INFORMATION:

Same commitment, fewer dollars

The Medicaid formula determining states' federal matching funds produces inequities, says a General Accounting Office report. In some cases, two states devote a similar portion of resources to the program, yet one ultimately has fewer dollars to spend on Medicaid patients.

Percentage of national average:

State
resources Spending

California 96% 74%

Wisconsin 94% 153%

Florida 77% 78%

Iowa 77% 166%

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General Accounting Office report, "Medicaid Formula: Differences in Funding Ability Among States Often Are Widened," July 10, in pdf (www.gao.gov/new.items/d03620.pdf)