State Initiatives

Economic Boom Over, State Health Budgets Besieged

Bob Carlson

"It's not lookin' pretty out there, but I hope we don't cut off our noses to spite our faces," worries Trish Riley, executive director of the National Academy of State Health Policy. Riley is referring to reductions in Medicaid and overall health care spending that make up a big chunk of the cuts proposed by states that face declining revenues and rising expenses. The National Association of State Budget Officers (NASBO) estimated that aggregate state shortfalls for fiscal 2002 could exceed $15 billion.

Several states reported budget shortfalls as early as spring and late summer. The economy continued its decline.

And then came Sept. 11, which made everything worse.

In Indiana, Gov. Frank O'Bannon spoke about his deficit-reduction plan in a special address Nov. 15. During the first four months of this year, Indiana took in $209 million less than the projections on which its two-year budget was based. That budget already was in the hole by $500 million a year when adopted.

Like many other states, Indiana had enjoyed a budget surplus. O'Bannon and the legislature spent most of it on tax cuts, public schools, prisons, roads, university building projects, and the like. But if current trends continue, the onetime surplus will be wiped out by rising Medicaid costs and by lower tax revenues — $3 billion less than what the state projected to collect.

This year, the legislature passed a new two-year budget that relies on gambling revenues, a reserve fund to pay Medicaid claims, the state's Rainy Day Fund, and delayed payments to public schools, universities, and local governments. O'Bannon said the budget was unrealistic and allowed it to become law without his signature.

Without some combination of spending cuts and more taxes, the state could be $400 million short by the middle of 2003. O'Bannon's deficit-reduction plan would cut state-agency spending by 7-percent ($100 million), cancel state-employee raises, freeze the $50 million in the 21st Century Research and Technology Fund, delay construction projects, and freeze hiring. But by far, the biggest savings — $680 million — would come from Medicaid cuts.

Coupled with proposals to increase fees, scuttle tax breaks for businesses and homeowners, raise cigarette and casino gambling taxes, and use some money from the state's emergency and tobacco-settlement funds, these actions would balance Indiana's budget by the end of the biennium, June 2003, O'Bannon says.

Two cows, one sacred

The Hoosier experience is typical of what other states are going through right now, especially when it comes to the huge Medicaid cuts being proposed. According to the National Governors Association (NGA), 20 states are proposing outright spending cuts and reductions in their Medicaid and overall health care budgets.

"Education and Medicaid are where the big spending is, and that's where you're going to get the big cuts," Riley explains. "Increasingly, education is a hot-button topic and many governors have said they're not going to touch it, which means even more attention on Medicaid."

In the NASBO 2000 State Expenditure Report, elementary and secondary education accounts for more than 22 percent of total state spending; Medicaid, 19 percent; and higher education, 11 percent. Nothing else tops 9 percent.

The downside to Medicaid cuts is that for every dollar a state reduces Medicaid spending, $1 to $3 in matching funds from the federal government is lost. (Some states have tried using a loophole in federal law to head this off; see Washington Watch). In Indiana, for example, the feds kick in about 62 cents for every 38 cents the state spends on Medicaid.

NGA Director of Health Legislation Matt Salo notes that rising Medicaid costs were a source of concern even before the economic downturn. The same factors driving medical inflation in the private market — higher drug spending, hospital rates, and physician fees — have contributed to 10 percent or greater annual Medicaid-spending increases in many states, a rate unsustainable even in a booming economy. In addition, many states increased enrollments by raising income eligibility levels to provide coverage to the working poor.

"There's also been a significant backlash, not just in the private market but in Medicaid, against tightly controlled managed care, with fee-for-service treatment and open networks more in favor," Salo adds. "You have happier people, but higher costs."

In the private health insurance market, payers and purchasers are reducing benefits and passing costs on to consumers. With orders to trim hundreds of millions of dollars, state Medicaid directors are now considering doing the same.

"We're going to have to reduce services or reimbursements for services to our Medicaid clients in conjunction with continuing to explore any opportunity for revenue enhancement from the federal level," says Karen Kinder, director of budget and finance in Indiana's Family & Social Services Administration, which administers the state's Medicaid program.

Starting around the edges

Already on the list are a 10-percent reduction in coverage for over-the-counter drugs and the elimination of coverage for dentures. An attempt by Indiana to reduce dispensing fees for Medicaid prescriptions from $4 to $3 was challenged in court by retail pharmacists and was subsequently withdrawn. But Kinder says reductions in Indiana's current Medicaid case- mix reimbursement formula for hospitals and nursing homes, under which the state now pays for empty beds, are being considered.

A report from the Commonwealth Fund, "How the Slowing U.S. Economy Threatens Employer-Based Health Insurance," estimates that under current Medicaid eligibility rules, a 2-point increase in the unemployment rate will add about 3.3 million people to Medicaid, at $5 billion a year. This sets the stage for intense discussions in statehouses as administrations try to keep their states solvent and interest groups try to keep their slices of the Medicaid pie.

Meanwhile, the Sept. 11 attacks and anthrax bioterrorism have states scrambling to beef up their public health infrastructure. In Indianapolis, the volume of testing by the Indiana State Department of Health lab is only now starting to taper off after postal equipment from New Jersey sent to the state for servicing and cleaning in late October turned out to be contaminated with anthrax.

State Health Commissioner Greg Wilson, MD, sees this and other recent events as a wake-up call to strengthen the public health system. "The federal government has an important role in setting standards and providing expert authorities, but actual public health gets implemented at the state and local level," says Wilson. "In Indiana, we need more trained personnel and communications equipment, everything from walkie-talkies to integrated computer systems, so that police, fire, EMS, and health officials can communicate and store data online."

Wilson is quick to point out that while bioterrorism dominates the headlines now, more insidious public health threats such as cancer, heart disease, and smoking are just as deadly.

Riley, too, has been thinking about the aftermath of 9/11. Her take is that it may change the way we think about government, about how we spend tax dollars, and how we help each other.

"One strategy is to send tax dollars back to individuals," she says. "The other is to invest in the common good, in things that help all of us."

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