Time Running Short for Medicaid Help

Late last year, when Congress' willingness to pass an enormous health care bill still was very much in doubt, states had a more modest goal that should have been easier to achieve. They wanted Congress to pass a 6-month extension of the part of the economic stimulus program that is helping to pay for their Medicaid programs.

The Medicaid assistance, set to expire at the end of December, has become a critical component in many state budgets during a time of devastating deficits. So critical, in fact, that two-thirds of the states crafted 2011 budgets assuming that more of it would come through, according to the National Conference of State Legislatures.

For a while, this looked like a safe bet. The House had included the states' extension in its original version of health care reform. But by the time Congress produced a final bill for President Obama to sign in March, the aid to states had disappeared into the legislative ether. Now, with Congress ratcheting up its scrutiny of new spending, it's not at all clear that the Medicaid assistance will ever materialize.

If it doesn't — or if it doesn't pass until much later this year — that would wreak major havoc in many state capitals. The aid, worth a total of $25 billion, amounts to nearly one-quarter of the collective budget deficits states face for the fiscal year that begins on July 1 in most states. To balance their budgets, states would have to raise taxes or cut their budgets by that much. Yet nearly half the states already have finished their legislative sessions for the year and more will wrap up in the next few weeks. According to NCSL, as many as 19 states have no backup plan in place should Congress not come through with the money they've been expecting.

Virginia is one state that did anticipate the possibility of its $417 million share of the aid falling through. Republican Governor Bob McDonnell and Virginia legislators approved a 2011 budget that zeroes out spending on optometrist services for adults, all podiatrist visits and other health services. Virginia will begin implementing those cuts on May 27 — unless Congress passes an extension first. "For us," says acting Medicaid Director Cindi Jones, "it's very significant."

Broad support

Not so long ago, such a contingency plan would have seemed unnecessary. Unlike the more partisan national debate over health care, which had governors from different states arguing with each other, the stimulus extension has always enjoyed broad support. Some 42 governors from both parties signed a letter to Congressional leaders requesting the extension. President Obama included the money in his 2011 budget. And both the House and Senate have approved the extension at one time or another, although not as part of a bill that actually became law.

In most states, the aid represents the difference between a manageable budget deficit and one that requires drastic budget cuts or tax increases. In Minnesota, for example, the extension would cut a 2011 budget deficit of $536 million down to less than $150 million. The state already has weathered $2.5 billion in cuts made last year. Additional reductions, if needed, would be hard to swallow.

"It would compound our financial crisis," says Kristin Dybdal, Minnesota's budget director. "We'd be having to look at really significant reductions, or things that aren't actually on the table."

Both the Minnesota House, which is controlled by Democrats, and Governor Tim Pawlenty, a Republican, have assumed in their budget proposals that the aid will be approved, although Pawlenty was one of the governors who didn't sign the letter formally requesting that Congress extend it. Dybdal says lawmakers may have to come together to forge a contingency plan, but with the Legislature set to adjourn May 17, she says it's "very, very difficult" to see how that could happen.

Few options left

In addition to the extra funding for Medicaid, last year's federal stimulus law came with a few strings attached. For example, states couldn't reduce Medicaid eligibility — typically one of the main thrusts of any move to cut health care spending. The new health care law extended this so-called "maintenance of effort" requirement until 2014. In other words, states are looking at the possibility of having less federal money to spend on Medicaid when the stimulus runs out, but less flexibility than they usually have to cut costs from the program.

The situation is also complicated because many states already have cut Medicaid costs in areas the stimulus and the health care law allows them to, such as dental coverage. "It makes it extremely difficult," says Stacey Mazer of the National Association of State Budget Officers. "If the money is not forthcoming, there are other places you have to cut, or raise revenue."

One option that's left for states is cutting provider reimbursement rates, which many already have reduced in an attempt save money.  But if rates are cut too much, it could push doctors to stop accepting Medicaid patients. As Stateline reported last week, a shortage of primary care doctors already threatens implementation of the health care law. Yet the law envisions using Medicaid as a primary vehicle to reach universal coverage.

The states "have very few good options right now," says Robin Rudowitz, of the Kaiser Family Foundation. "States have described the last round of fiscal relief as a lifeline. Without that relief, and with them still experiencing extraordinary fiscal hardships, it's going to be hard to pull together a budget."