With Medicaid, States Face Painful Cuts and Few Choices

While states closely watched this year's debate over health care reform in Washington, it's another massive federal initiative that has cast an even bigger shadow over 2010's state legislative sessions: the federal economic stimulus law.

Nothing else in this year's legislative sessions, now concluded in 28 states, has had more impact on what states can — and can't — do with their Medicaid programs as they try to rein in health care spending amid tumbling revenue.

On one hand, the economic stimulus provided states with billions of federal dollars to help sustain the health insurance program for the poor through the recession. So for the most part, states were able to avoid making truly draconian cuts to the program.

On the other hand, the law also temporarily barred states from cutting back on who is eligible for Medicaid. That restriction took away one of the most potent tools states have to control their health care costs and balance their budgets. As a familiar recessionary cycle kicked in — more people enrolled in Medicaid at exactly the time state budgets were under the most stress — states had limited options at their disposal.

The result was a flurry of budget cutting in the areas of Medicaid that states still had control over. Many states made cuts in the rates they pay to reimburse doctors for seeing Medicaid patients. Others cut back on the type or amount of benefits their Medicaid programs would cover. In many cases, these cuts came on top of similar cuts made last year. "There have been a lot of across-the-board rate reductions and service cuts," says Ann Kohler, health services director at the American Public Human Services Association. "There's not much left to cut."

Medicaid rolls are growing as fast as they did during the downturn at the beginning of the 2000s. Experts estimate this trend will continue longer than in the previous economic decline. At the same time, increases in spending have not kept pace as lawmakers have sought to hold down program costs.

Color-coded cuts

In Virginia, health officials came up with a color-coded system to help legislators make sense of what service cuts they could use to help balance the budget. Options labeled green were thought to be relatively uncontroversial; yellow called for caution; and red meant the cuts would be very painful, both to providers and patients.

The cuts went into the red. Facing a $4 billion budget deficit, the Legislature passed a budget that eliminated optometrist coverage for adults; did away with coverage for podiatrist visits; reduced funding for indigent care at hospitals; and made the first significant cuts to home- and community-based health care since the 1980s.

As Stateline has reported, some of those cuts could be reversed if Congress passes a proposed $25 billion extension of the stimulus dollars for state Medicaid programs. In fact, two-thirds of states crafted 2011 budgets assuming that the aid would come through, according to the National Conference of State Legislatures. But the extension has run into opposition as Washington applies new scrutiny to any new spending that raises the federal deficit. There seems to be growing momentum on Capitol Hill for the measure, although its passage is far from assured.

Even if the additional federal funds come through, however, it won't be enough to stave off all of the tough choices states are having to make this year. In Kansas, where Medicaid makes up about 20 percent of the state's general fund budget, lawmakers pursued a series of small but not insignificant cuts: Medicaid no longer will cover certain over-the-counter medications such as cough and cold medications or treatments for nose and eye irritations. Medicaid patients will no longer be allowed to receive more than four name-brand drugs in a month. State workers also will feel the pain: The state health agency's budget was cut significantly, which is likely to result in layoffs.

Kansas also increased the amount of money that some patients have to contribute to their own care. For example, the children's health care program, or CHIP, is increasing its monthly premium by $40 each month — something the state has never done before. For a family of four making roughly $2,800 to $3,215 each month, premiums will increase to $60 per month. Those rate hikes are subject to federal approval.

In Arizona, state lawmakers were forced to circle back on Medicaid cuts that ended up being blocked when President Obama signed the health care overhaul in March. The Legislature had voted to eliminate its children's health program and end Medicaid coverage for 300,000 low-income adults. Those plans were undone because the federal health care law extended the stimulus law's stipulation that states could not cut back on Medicaid eligibility rules.

So Arizona lawmakers went back and passed a different set of cuts. The Legislature authorized a reduction in Medicaid provider rates of up to 5 percent — which comes on top of $635 million they cut out of reimbursement rates last year. Medicaid patients also will feel the effects. Arizona is ending coverage for insulin pumps, podiatrist visits and some dental care. "There are only two cuts anymore," says Monica Coury of the Arizona Health Care Cost Containment System. Patient benefits and provider reimbursement rates are absorbing almost all of the cuts, she says. "It's quite difficult."

Lasting impacts

Perhaps the most lasting impact of the current budget climate and the two landmark federal laws is that states aren't playing their once-familiar role as laboratories of health care innovation. Federal waivers for Medicaid administration, which states are required to get before trying to change much of anything, have all but stopped being approved.

Further, it's unclear what role waivers will play under health care reform. But many state health experts have said that because of the investment costs associated with trying almost anything new, particularly in health care, most states are content just to try and maintain the programs they have.

Christie Herrera, director of the health task force for the conservative American Legislative Exchange Council, says Washington's increased influence over state affairs has made pursuing any kind of state-driven health reform difficult. "There's a real offense on the part of state legislators to do anything," Herrera says. "They can't innovate." The council has been pushing a number of initiatives, such as converting Medicaid into a voucher program, an idea that hasn't gained traction in the states.

Others see health care reform as an opportunity for states to change the way they deliver health services. Christine Ferguson, a professor at George Washington University's Department of Health Policy, is one of them. The federal law, she says, gives states an opportunity to apply for various federal grants. It also opens up the possibility of additional federal aid if, for example, a state expands its Medicaid eligibility earlier than the required date of 2014.

Still, the current challenge is trying to fund anything beyond the bare minimum — however states choose to define that. As Peter Hancock of the Kansas Health Policy Authority puts it, "There is no spare money lying around."