State Medicaid Budgets Start To Squeeze

During the last five years, policymakers expanded Medicaid with a flourish. Armed with hearty surpluses and federal funds to boot, many states launched the State Children's Health Insurance Program (SCHIP), pharmacy assistance programs for the elderly and community-based health services for the elderly and disabled.

But budget bliss is fading fast. Numerous states, from Oregon to Tennessee, New Mexico, Kentucky, Indiana and Washington State, are now complaining about Medicaid's skyrocketing price tag.

Last month, Indiana Medicaid officials announced a $71.2 million appropriation shortfall based on incoming claims, said Medicaid director Kathleen Gifford. With a current budget for FY 2001 at $3.45 billion (which includes the shortfall amount), projections show the figure will rise to $4.13 billion by 2003.

"Increasing enrollment of both children and low-income adults, and increasing pharmacy costs are the two major cost drivers," she says.

The Hoosier State's situation--which Gifford says "did not come as a surprise to anybody"--is mirrored across the country, say fiscal experts.

"What we've heard anecdotally from states is that the major [cost-driving] culprits are increases in pharmaceutical costs and SCHIP," says Marcia Howard, program director at Federal Funds Information for States, which tracks and reports on the fiscal impact of federal budget and policy decisions on state budgets and programs.

"There's also been a shift in spending toward the elderly and disabled under Medicaid, and states have [beefed up what they pay doctors because they] are refusing to participate in Medicaid," she says.

Does the spike in spending translate into poor planning by lawmakers, since programs like SCHIP have been years in the making?

No, says Howard. "If states have big surpluses, policymakers can look at a 'frill,' like expanding a particular program. But when pharmaceutical costs jump around 10 percent, you suddenly don't have the underlying revenue growth to support such a program. It's the classic business cycle for states, and officials now are faced with what happened in some states in the early 1990's. Revenue is now growing at a more moderate level, instead of at a booming rate," she explains.

A handful of other states has additional problems:

  • In Ohio, legislators passed a $248 million Medicaid bailout measure in December. State officials estimated a $648 million total shortfall in state and federal funds, says Jon Allen, spokesperson for the Ohio Department of Job and Family Services. "Two things [caused] the shortfall," he says. "The largest part was an increase in care per person, especially in the aged, blind and disabled, and we also saw increased nursing home costs."
  • In addition, the state had rising drug costs and a jump in Medicaid enrollment beyond projections. Allen says the Medicaid budget will be a [big] topic in the upcoming legislative session, and that officials will "look at any programmatic cutbacks at that time."
  • Although policymakers in California won't get a peek at the new budget until Gov. Gray Davis unveils it on January 10, several Medi-Cal expansions are in the works, which translates into a bigger budget, said Farra Bracht, senior fiscal and policy analyst for the California Legislative Analysts' Office. (Last year's Medi-Cal budget, including federal funds, was $23.2 billion.) "We recently put in a proposal to expand the Healthy Families [SCHIP] program to parents of participating children, and there might be a proposal to increase access to insurance for the working poor," she says. As in other states, California has seen general cost increases related to pharmaceutical costs, specifically anti-psychotic medications used to treat mental illness. The state has a $10 billion surplus this year, says Bracht, and "the governor's intent is to use that for one-time expenses."
  • Despite $12.4 million in cuts, Colorado's Medicaid budget will rise by 7 percent this year, to $2.4 billion. "We're typical, like most other states," says Medicaid director Richard Allen. "Pharmaceutical drug costs are up, and that has been consistent over the last few years. Medications used to treat mental illness, or psychotropic drugs, are rising the fastest. [The clients we had are using more services and the number of clients] "is going up," he explains. In addition to the "typical," some small line items like transportation and durable medical equipment (for things like wheelchairs and diapers) have jumped in Colorado. As for general feedback on the budget, Allen says, "the Legislature appreciates that the department is trying to get growth leveled down to seven percent. Some ideas--like employing a broker to handle transportation--are win-win, but rate increases for hospitals or rate changes for pharmaceuticals, which we've planned, will not make some people happy."
  • In a first-ever occurrence, pharmaceutical costs in Massachusetts outgrew acute care in FY 2000, says Richard McGreal, spokesperson for the Division of Medical Assistance. (Rx costs are estimated at $685 million, while inpatient and outpatient acute care weigh in at $614 million.) Enrollment has also played into the overall budget increases, which has witnessed growth from $4.1 billion in FY 99 to a projected $4.827 billion in FY 2001. The Commonwealth added 225,000 MassHealth (Medicaid) members in the last three years, and McGreal says there is "a population of sicker people coming on the rolls" that has increased costs.
  • More requests for funds are on the horizon as well. Following the near-collapse of HMO giant Harvard Pilgrim last year, the state set up a blue ribbon commission known as the Massachusetts Health Care Task Force to analyze how the Commonwealth delivers health care through its clinics, hospitals and doctors' offices. Among the group's findings, released mid-December, was that hospitals need increased Medicaid reimbursements and approximately $100 million more in the current budget cycle to break even. "I don't see it [happening] this time, but I also don't see pressure for such an increase going away," says McGreal. "I can't speak for the governor or the Legislature, but if you read recent [budget] reports, we're still doing well. To maintain quality health care, which is a priority of the governor, there will be increased costs."