Stateline Story

States Pinched in President Bush's Budget Plan for 2006

States can faintly sigh in relief that President Bush's budget proposal spares Medicaid from drastic cuts or caps on federal spending. But the plan still aims to squeeze $45 billion in Medicaid savings over 10 years through changes that include clamping down on who qualifies for government-funded nursing homes.

Even if enacted by Congress, the president's proposed changes won't free states of their worries over runaway Medicaid costs for the poor, disabled and uninsured.

Besides trimming Medicaid, the administration's $2.5 trillion budget proposal would shrink other key programs important to states. On the chopping block are programs to help train workers for new jobs, revitalize inner-city communities and improve water quality. The Bush plan would consolidate several similar programs, giving states more freedom to spend the money as they see fit but, in most cases, providing less money.

The budget proposal lays out the president's spending priorities for fiscal 2006, which begins Oct. 1. Under Bush's plan, most federal agencies and programs would be scaled back except for defense and homeland security. (See related Stateline.org story: Budget would revise antiterrorism funding) The Republican-controlled Congress will have final say on how the federal government spends taxpayers' money and how policy-makers will plug this fiscal year's estimated $427 billion deficit brought on by U.S. spending for wars in Iraq and Afghanistan and tax cuts.

In his budget, the president pledged to work with Congress to reform Medicaid, the state-federal health care program for 52 million poor and disabled Americans that is the main squeeze on state budgets.

The nations' governors want to be at the table, as well. "The Medicaid program needs to be rethought and reformed. It needs to redefine the federal-state role in a way that makes states' financial commitment sustainable over the long-run," the National Governors Association said in a statement. Virginia Gov. Mark Warner (D), who is NGA chairman, said that he's concerned the proposed reductions in Medicaid would shift costs to states.

Collectively, states and the federal government spend more than $300 billion on Medicaid, and states now spend more money on the program than on K-12 education. Spending on Medicaid continues to rise at a double-digit clip.

The White House wants to reap savings in Medicaid using three main tactics: reducing the money spent on prescription drugs, cracking down on accounting loopholes that some states use to draw down additional funding from the federal government and stopping senior citizens from transferring their assets to qualify for government-funded nursing home care through Medicaid.

Some parts of the budget proposal likely will resound well with states, health care analysts said. The administration wants to give states greater flexibility to expand health insurance coverage to vulnerable populations and seeks to eliminate some administrative hurdles that prevent states from veering from mandated coverage guidelines without federal approval.

The administration also is proposing grants to encourage states to expand access to community-based care for the disabled and elderly rather than nursing home and institutional care.

The budget states it wants to "build on the success" of the State Children's Health Insurance Program, which was created in 1997 to expand coverage to poor children whose parents earn too much money to qualify for Medicaid. The administration is calling to re-authorize the S-CHIP program early, in fiscal 2006 rather than 2007, and to reduce the time frame that states have to spend their S-CHIP money from three years to two years, so states can target funds in a more timely way.

Making good on a campaign promise, Bush also wishes to spend $1 billion over two years on state grants as part of a national outreach campaign to enroll as many children in Medicaid and S-CHIP as possible.

However, the budget proposal leaves many questions about Medicaid's future unanswered.

"Clearly this is a major proposal, and it has far-reaching implications. But much of the detail is not apparent," said Joy Johnson Wilson, federal affairs counsel at the National Conference of State Legislatures. Wilson also said she is concerned that the budget calls for turning the federal allocations for administrative processes in Medicaid into a block grant.

Diane Rowland, executive director of the nonpartisan Kaiser Commission on Medicaid and the Uninsured, said the Bush administration has "opened the door to a lot of potential changes in the way that Medicaid operates, and its interaction with the (state Children's Health Insurance Program), and the way it organizes and delivers long-term care services, but it's not clear what's really envisioned once the states step through the door."

Medicaid is not the only program important to states that would get squeezed under the Bush plan.

States have long complained that Washington passes the buck when it OKs sweeping new programs but not enough funds for states to actually launch and run the initiatives. For example, states last year contended they were shortchanged by at least $10 billion in federal funds promised to carry out the federal No Child Left Behind (NCLB) education law and another $9 billion for special education. The president's latest budget plan won't allay those critics.

The Center on Budget and Policy Priorities (CBPP), a Washington, D.C., group that focuses on policies affecting the poor, estimates that grants to state and local governments for all programs other than Medicaid would decline by $10.7 billion or 4.5 percent under Bush's proposal.

Here's how the administration would fund other programs important to states:  

  • Community development - The administration wants to fold a myriad of economic development programs that are scattered across the federal government into one at the Commerce Department, but with less funding. The programs now garner more than $5 billion. The president is asking for $3.7 billion.
  • Crime prevention A program to help states and local agencies hire police officers, known as Community-Oriented Policing Services, or COPS, would be eliminated.
  • Education Bush's education budget proposal would cut overall funding by 1 percent and eliminate 48 programs, but would boost Pell Grants serving low-income college students and provide small increases for special education and NCLB. This includes a $1.5 billion initiative to extend NCLB accountability and testing requirements to high schools. Hardest-hit would be vocational education and programs targeting low-income and inner-city youths, such as Upward Bound, Talent Search and GEAR UP.
  • Welfare - The president' plan would cut the number of people receiving food stamps by changing eligibility requirements and freeze the funding for child-care subsidies.
  • Environment Low-interest loans to states to improve water quality, treat wastewater and reduce pollution would drop to $730 million from $1 billion.
  • Health care - The administration is proposing $4 billion to states for purchasing pools to help low-income people purchase health insurance with a proposed health insurance tax credit, but the plan requires legislative approval. In addition, the White House wants Congress to pass a bill allowing small businesses and private nonprofits to buy health insurance across state lines. Similar proposals previously have raised concerns for state insurance regulators.
  • Job training Four existing job training programs would be melded into one, giving states more flexibility in how they spend the money, but overall less money, from the current $4.1 billion to $3.9 billion.
  • Transportation State grants for highway safety would receive the same amount of funding as current levels. Bush's plan would increase federal spending on road construction, but falls $10 billion short of the levels that state highway groups had hoped. A revamped highway and transit bill stalled last year when the administration and Congress couldn't agree on how much to spend.