Stateline Story

State Budget Cutters Avoid Deep Medicaid Reductions

  • August 10, 2004
  • By Pamela Prah

Many states balanced their fiscal 2004 books by cutting spending on higher education rather than Medicaid, the popular medical assistance program for the poor and disabled that states fund and operate with the federal government, a new report shows.

Medicaid, which pays for nearly half of all nursing home care, is the fastest-growing component of state budgets.

Many states also did not use money from a $10 billion federal bailout package to restore Medicaid cuts, one of the main reasons Congress forked over the extra money, but instead used the cash to bolster other programs, according to the report.

The study was conducted by the Rockefeller Institute of Government, the public policy research arm of the State University of New York. The report was funded in part by the Robert Wood Johnson Foundation of Princeton, N.J., a philanthropy devoted exclusively to U.S. health care.

"State budget woes have kept Medicaid from expanding, but they haven't resulted in any large-scale cuts," Richard P. Nathan, director of the institute, said in a statement accompanying the 22-page report, "Medicaid and State Budgets in FY 2004: Why Medicaid is So Hard to Cut."

Medicaid funding remained intact because the program is politically popular, brings in federal money and helps local economies, Rockefeller researchers said. Uncle Sam "matches" the amount a state spends on Medicaid. So each $1 a state cuts from Medicaid could mean a dip of as much as $4 in total Medicaid spending.

On top of that, thousands of hospitals, nursing homes and other long-term-care facilities count on Medicaid for funding and, as a result, jobs. "[L]arge numbers of state legislators have influential constituents with an economic interest in Medicaid," the report said.

Rockefeller researchers looked at 10 states to come up with their conclusions: Arizona, Colorado, Kansas, Michigan, New Jersey, Ohio, Oregon, Texas, West Virginia and Wisconsin. These states have different economies, but all suffered declining revenues and increased Medicaid and education costs.

Politics, rather than the severity of budget problems, determined whether states cut Medicaid, the researchers said. In Arizona, Kansas and West Virginia, Democratic Govs. Janet Napolitano, Kathleen Sebelius and Bob Wise made explicit decisions to keep Medicaid off the chopping block. In Arizona, Napolitano vetoed proposed Medicaid cuts, while in Ohio the Legislature rejected a number of Medicaid cuts proposed by Gov. Bob Taft (R).

On average, the Rockefeller study found that Medicaid cuts accounted for less than 7 percent of the strategies that states used to balance their budgets. Strategies included a mix of cutting programs, raising taxes, borrowing and tapping rainy day funds.

Medicaid may have been spared deep budget cuts, but higher education wasn't as lucky. On average, spending on higher education was cut 4.5 percent in the 10 states examined, and tuition and fees went up almost 14 percent. Over the past two years, Colorado, for example, cut higher education by 20 percent.

Predicting Medicaid's future is tricky, the report said. The good news for states is that Medicaid enrollment is not expected to grow as much and that programs to control costs, especially prescription drug costs, appear to be working.

State revenues also are recovering. For the third straight quarter, state tax revenue grew 6.7 percent when adjusted for inflation, Rockefeller announced Aug. 9 in a separate preliminary report looking at tax revenue for the April June 2004 quarter.

But despite Medicaid's size and importance, the study said that the reporting systems that track the program are not developed and that few are analyzing what is happening. "Medicaid may have dodged the bullet this time, but without more systematic attention to its spending and direction, things may be much different the next time there's a major budget squeeze," Nathan said.