Managing Medicaid in tough times: states are struggling with soaring Medicaid costs. Some are using short-term solutions, others have launched bold reforms.

• Author: Tomsic, Trinity D.

Arizona voters want the working poor to have health care coverage. They said so when they passed Proposition 204 in November 2000 making more people eligible for Medicaid and prescription drugs.

But today--less than two years later--Arizona's severe budget crisis is putting the entire Medicaid program at risk.

Lawmakers are looking at several different proposals "including reducing services, decreasing the eligibility limit and capping enrollment," says Representative John Loredo. But he fears that cutting Medicaid in a tough economy "will have an adverse effect on the entire health care system."

Legislators around the nation are finding themselves in the same predicament. Many took advantage of strong state finances to expand Medicaid programs. But deteriorating fiscal conditions coupled with rising Medicaid costs are making it almost impossible for states to pay for those programs.

That's the irony of Medicaid; The program has a difficult time doing its job when its services are most needed. A sour economy increases demand for coverage and spending, at the same time revenues are eroding and putting heavy pressure on state budgets.

What can legislators do? How can they sustain and even expand health care coverage for the most vulnerable Americans when the well runs dry? Some states are rising to the challenge and implementing bold reforms. Others are relying on short-term solutions to weather the drought.

BETTER MEDICAID

States have made huge strides in providing health care coverage in recent years. "Medicaid has evolved from a safety net program to one that covers families when employer coverage is not available," says Representative Garnet Coleman, vice chair of the Texas House Committee on Public Health.

The 1997 State Children's Health Insurance Program, which in 21 states is simply an expansion of Medicaid, set in motion an unprecedented wave of activity to expand health coverage to uninsured, low-income children. More than a third of states have gone further, extending coverage to poor working parents with incomes greater than the federal poverty level. A few states even extended Medicaid to adults without children.

Many lawmakers adopted new federal Medicaid options to cover people with disabilities who work, but can't get health insurance, and uninsured women who need treatment for breast or cervical cancer.

State policymakers didn't stop there. They used federal waivers to expand benefits, such as community-based care and services to people with HIV. Lawmakers also simplified the application process for Medicaid and increased outreach efforts, again with the goal of expanding coverage.

FINDING THE RIGHT BALANCE

But the economic downturn has shifted the focus from expanding Medicaid to maintaining current levels. Lawmakers face the immediate problem of making sure the most vulnerable people aren't hurt by problems in the economy.

Unlike the federal government, nearly all states have balanced budget requirements. Lawmakers must raise taxes, reduce spending or tap reserve funds when revenues don't cover expenditures. Forty-three states had budget shortfalls in early April. The outlook for FY 2003 remains much the same, with at least 37 states facing potential budget gaps.

State policymakers are under tremendous pressure to limit Medicaid spending, Because the program makes up such a large and increasing share of state budgets--an average of 13 percent of state general Funds--lawmakers have no choice but to examine Medicaid as they address shortfalls. The budget problem is particularly dire in those states that underestimated the cost of Medicaid, even though they approved considerable increases. Twenty-seven states and the District of Columbia reported to NCSL in April that Medicaid was over budget in the course of FY 2002. Another five expressed concern that it could exceed budgeted levels in the coming months.

When states reduce Medicaid funding, however, they lose federal money as well. State expenditures for medical benefits are matched by federal payments. The size of the match is determined by the state's per capita personal income. In states with low per capita income and thus with higher federal matching rates, the consequences are the most significant. For example, if Mississippi were to cut $1, it would lose more than $3 in federal funds.

With the federal match and the potential increase in uncompensated health care costs, cutting Medicaid budgets is the "most counterproductive thing one could do in difficult economic times," says Sara Rosenbaum, professor of health law and policy at the George Washington University School of Public Health and Health Services. Medicaid not only provides health care to more than 40 million of the nation's most vulnerable people, but it also pumps money into the health services industry. "Medicaid is one of the pillars that holds up the American health care system," Rosenbaum says.

WEATHERING THE DROUGHT

Legislators in Idaho demonstrated their commitment to Medicaid when they implemented a reform package that holds down spiraling costs without reducing the number of recipients.

Idaho's reform package tackles rising drug costs by insisting patients use up most of their prescriptions before they can be refilled and requiring special authorization before a patient can have more than four prescriptions at once. It also increases the number of people in managed care, reviews hospital stays after three days, reduces...