Medicaid Increasingly Heavy State Budget Burden

By: - January 3, 2005 12:00 am

Medicaid and the State Children’s Health Insurance Programs (S-CHIP) — both jointly financed by states and the federal government — are credited with cushioning the fall during the recent economic downturn when thousands lost their jobs or employer-sponsored health benefits. Health experts worry that the programs can’t keep picking up the slack.

Indeed, Tennessee threatened to pull the plug on TennCare, its costly 10-year-old attempt to fold working families with modest incomes and no insurance into an expansion of traditional Medicaid.

Medicaid “is the health safety net, and when people start falling, there is nowhere to fall except crashing to the ground if Medicaid isn’t there,” said Diane Rowland, executive director of the Kaiser Commission on Medicaid and the Uninsured, a nonpartisan health research group.

An October 2004 survey by the Kaiser Commission found none of the 50 state Medicaid directors expects the relentless strain on state health budgets to ease soon. “As we look into the future, the states face tremendous challenges in financing and administering (Medicaid),” said Vernon Smith, a former Medicaid director in Michigan who conducted the survey.

State Medicaid spending is expected to jump almost 12 percent in fiscal 2005, dwarfing the 4.8 percent increase during fiscal 2004 when states staved off deep program cuts thanks to a one-time $10 billion bailout from President Bush’s 2003 tax-cut package. That windfall ended last June, and despite a recent upward tick in state revenues, states are left carrying a heavy load.

One of the most drastic rollbacks loomed in Tennessee, where Gov. Phil Bredesen (D) threatened in November to begin dismantling the state’s ambitious but perennially over-budget TennCare program. TennCare was launched in 1994 as a landmark experiment to expand Medicaid to working families who could not afford private insurance. The idea was that by aggressively managing their care, TennCare could cover far more people for the same dollars that were spent on Medicaid.

But it didn’t work out that way. The program encountered large overruns from the start and grew to consume a third of the state’s budget. Bredesen’s move, which he called a last resort, would leave about 430,000 of the state’s 1.3 million TennCare beneficiaries without coverage.

Another dramatic cutback was in Mississippi, where Gov. Haley Barbour (R) signed off on a plan to help plug the state’s $709 million budget deficit by eliminating coverage for 65,000 elderly and disabled residents. However, in October the federal government granted Mississippi a waiver to cover all of those beneficiaries and stave off benefit reductions temporarily.


  • Colorado lawmakers voted to remove legal immigrants from full Medicaid coverage, affecting 3,500 people.
  • Georgia tightened the income eligibility limit for 7,500 pregnant women and their infants. The income cutoff was lowered from 235 percent of the poverty line to 200 percent. The Peach State also halted coverage for 1,700 medically needy nursing home patients.
  • Oregon closed enrollment in its Health Plan Standard program, which covers adults who do not qualify for traditional Medicaid but have incomes at or below the federal poverty level. The state expected rolls to drop by half, from 54,000 patients to between 25,000 and 30,000.
  • Michigan Gov. Jennifer Granholm (D) skirted payment cuts to health care providers that serve Medicaid patients by raising cigarette taxes to $2 a pack and netting about $310 million over 12 months.

James Fossett, a senior fellow at the Nelson A. Rockefeller Institute of Government in Albany, N.Y., said Medicaid has become “a 900-pound gorilla” on states’ backs. Still, he said, states are in some ways better prepared now to deal with Medicaid than in years past.

The Kaiser Commission forecast that state legislatures were less likely to do away with Medicaid benefits and more likely to expand or restore previous cutbacks in fiscal 2005. For example, in fiscal 2004, 19 states cut benefits such as dental or vision care for adults, but in fiscal 2005, only nine states planned to reduce those benefits. A few states, including Illinois, Maine, Missouri and New York, were even planning modest Medicaid expansions. To get federal matching funds, all states must provide essential benefits, including hospital care, for their Medicaid patients, but they have flexibility to decide what benefits to offer beyond the core package.

Financial woes also are afflicting the popular State Children’s Health Insurance Program (S-CHIP), created in 1997 to benefit kids whose parents earn too much to qualify for Medicaid but cannot afford private insurance. Almost 6 million children and teens were enrolled in S-CHIP in fiscal 2003.

Seven states — Alabama, Colorado, Florida, Idaho, Maryland, Montana and Utah — froze S-CHIP enrollment between April 2003 and July 2004, according to a study by the Kaiser Commission and the Center on Budget and Policy Priorities. Four of those states later lifted their freezes, but poor children in Florida, Idaho and Utah were allowed to sign up only during limited open-enrollment periods.

Donna Cohen Ross, the study’s lead author, said 23 states made it harder for low-income children and families to obtain and retain coverage. The most common action, taken by 16 states, was to increase or impose new premiums on families whose incomes hover near the poverty line.

While states struggle to enroll and cover more kids in government health care, a more costly burden is long-term care.

People more than 65 years old make up just 25 percent of Medicaid beneficiaries, but the elderly account for 70 percent of the program’s costs. A huge chunk of that is nursing home care, which consumes 17 percent of Medicaid dollars and typically costs $50,000 a patient per year. Medicaid pays almost half of nursing home costs in the country.

States have used various tactics to save money, from scaling back provider payments to nursing homes that serve Medicaid patients to more aggressively pursuing estate recovery of those deceased patients who stayed in nursing homes on the state’s tab. In addition, half the states offer tax incentives or deductions for purchasing long-term-care insurance and many have tried to shift elderly patients out of institutions and into community-based care, which typically is less expensive.

“States have struggled with this for a long time, and they haven’t really found a silver bullet,” said Robert Friedland, director of Georgetown University’s Center on an Aging Society. “States don’t want people in nursing homes because they are expensive. People don’t want to be in nursing homes, but there’s no easy solution.”

States will continue to focus on health care for the elderly in 2005 and beyond, especially as they ready for the new Medicare prescription drug benefit, the centerpiece of the Medicare Modernization Act that Congress passed in 2003.

The law failed to deliver on a key provision that states asked for: having the federal government pick up the drug premium tab for more than 6 million poor senior citizens eligible for both Medicare and Medicaid. States are wary that they’ll end up bearing a hefty portion of those costs.

The first phase of the prescription drug benefit got under way in June 2004 when the federal government rolled out temporary prescription-drug discount cards. The cards are a stop-gap measure to help low-income seniors with drug bills until January 2006, when the more-comprehensive drug benefit begins.

But states struggled to get elderly residents to understand the difference between state and federal drug benefits or sign up for the cards. Connecticut, Maine, Massachusetts, Michigan, New Jersey, New York and Pennsylvania automatically enrolled low-income seniors in a state-endorsed card.

Several states also began considering ways to modify their existing drug assistance programs or to fill in coverage gaps that might be left by the federal program. Sixty-two bills were debated in 24 states in 2004 that related to the Medicare drug benefit, according to Richard Cauchi, an analyst at the National Conference of State Legislatures. Alaska, Arizona, Ohio and West Virginia passed laws to help individuals left out of the federal plan.

Several experts cautioned that the Medicare law may cause even greater administrative and financial quandaries down the road and may prompt states to hold special legislative sessions to make adjustments. “The new Medicare prescription drug benefit will bring enormous changes at the state level,” said Trudi Matthews, associate director of health policy at the Council of State Governments in Lexington, Ky. She likened it to an asteroid on a collision course with Earth. “State leaders know when it is going to hit, but not exactly where nor what the impact will be,” Matthews said.

On top of tension over Medicare, there were several dustups over Medicaid financing between the Bush administration and states in 2004.

Fighting for lower-cost prescription drugs for Medicaid patients, state workers and residents long has been a province of state legislators, and 2004 was no exception. States took tacks ranging from forming multi-state bulk-purchasing pools to regulating pharmacy benefit managers to urging the federal government to lift its ban on importing less expensive medicine from Canada and Europe.

“One reason state are doing these things, even when they’re told they can’t, is to push the federal government to be more responsive to the tremendous needs that we see. So many of our citizens are unable to afford prescription drugs,” said Sharon Treat, a former Maine state senator who heads the National Legislative Association on Prescription Drug Prices.

Making health insurance more affordable for state residents, and particularly small-business owners, also will be on states’ radars in the coming months. States may follow the lead of Colorado, Connecticut, Florida, Louisiana and Maryland, which signed laws in 2004 to make way for Health Savings Accounts. The accounts already sanctioned under federal law provide tax breaks for people younger than 65 who purchase a high-deductible or catastrophic-only health insurance policy. States are considering ways to make the personal accounts, a largely overshadowed part of the Medicare bill, free from state taxes or mesh them with new insurance policies.

In 2005, eyes also will be on Maine as it moves forward with Democratic Gov. John Baldacci’s Dirigo Health Reform Act, which was signed into law in 2003. Dirigo named after the state motto, the Latin word for “I lead” is a voluntary, market-based approach to universal health care that is starting in 2005 with insurance assistance for small-business owners and self-employed individuals. The goal is to provide access to health care for all Maine residents by 2009. Currently, one in eight of its non-elderly lack health insurance.

“Our goal is quality care for everyone at a price we can afford,” Baldacci said. That is a goal universally shared in Washington, D.C., and all 50 state capitals, but one that is becoming increasingly difficult, with health care consuming almost 15 percent of the gross domestic product.

Alan Weil, executive director of the National Academy of State Health Policy in Portland, Maine, said: “The biggest health challenge for states in 2005 will be meeting the needs of the uninsured as employers face continued cost increases and Medicaid puts an increasing strain on state budgets.”

The preceding article was excerpted from’s “State of the States 2005.” For your free copy of our annual 60-page reference book, send your name, mailing address and occupation to [email protected]

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