Soaring Health Care Costs Squeeze States

The nation's governors warn in a new report that the recent signs of a national recovery won't make it any easier for states to balance their budgets this year and that rising health care costs are a major culprit.

The reason states' health care costs will balloon in fiscal 2005 is that the federal government isn't expected to repeat last year's $20 billion bailout to help states cover Medicaid, the health care program shared by states and the federal government.

Governors expect the states' share of Medicaid to increase 12 percent, compared to a 4.6 percent growth rate for fiscal 2004, according to the May 3 report from the National Governors Association and the National Association of State Budget Officers. The 47-page survey includes state-by-state lists of how much states spent on Medicaid in fiscal 2003 and how much Medicaid is expected to grow for fiscal 2004 and 2005.

Medicaid is "still the driver" behind many states' budget woes, NASBO Executive Director Scott Pattison said at a joint NGA-NASBO press conference. He said he has visited 10 statehouses since January and the common theme from budget directors is: "Medicaid is eating us alive."

On top of rising health care costs, states' "obsolete tax systems" make it harder for states to generate enough revenue, said NGA Executive Director Ray C. Sheppach. Most states' tax systems were created for a manufacturing-based economy, not today's high-tech, global economy that churns out services, not products, he said. States generally tax few services.

The latest survey follows several reports warning that tough budget times still lie ahead for states, including data last week from the National Conference of State Legislatures. NCSL reported 33 states expect to have budget gaps for fiscal 2005, which starts July 1 for all but four states.

The latest Fiscal Survey of States includes state-by-state tax collections for fiscal 2004 and proposed tax changes for fiscal 2005. Governors in 26 states, for example, have pitched tax and fee increases totaling $5.4 billion for fiscal 2005.

Eighteen states struggled to patch holes they found in their budgets for this year while preparing budget plans for fiscal 2005. The 18 states made emergency cuts totaling $4.8 billion after fiscal 2004 budgets already had passed. "That shows things are still pretty bad," NASBO's Pattison said. The number of states making mid-year cuts is fewer and the dollar amount less than last year when nearly 40 states were forced to cut budgets $11.8 billion after budgets already had passed. Only one state had to go back and made emergency cuts in fiscal 2000, when states were flush with money, he said.

Governors expect fiscal 2005 expenditures to rise 2.8 percent, well below the 26-year average of 6.2 percent.