Medicaid: A Year of Excruciating Decisions

In health care history, 2012 will be remembered for the U.S. Supreme Court's upcoming decision on the Obama administration's health overhaul. But in the states, 2012 will likely be remembered less as an historic turning point than as a gradual continuation of their longstanding struggles to get Medicaid costs under control.

That's not to say the states aren't watching the Supreme Court closely. The case set to be heard in March and decided in June was brought by 26 states who argued the federal law's “individual mandate,” as well as a massive expansion of Medicaid in 2014, were unconstitutional. While the outcome could have long-term consequences for states, it likely won't change their most pressing short-term budget considerations.

And those considerations are huge. Continuing sluggishness in the economy means that Medicaid rolls are still rising. But with the federal stimulus program over, support from Washington is no longer going up along with enrollments. The result is that Medicaid spending is ballooning, despite deep cuts states have made over the past three years to make the federal-state health insurance program for the poor less and less generous.

Two years ago, Medicaid eclipsed K-12 education as the most expensive item in state budgets. Since then, it has only kept growing. Medicaid now comprises 24 percent of state budgets, when federal funds are counted. That's up from 22 percent last year, according to the National Association of State Budget Officers. The upward spiral seems to be continuing. Even as states get ready to write their budgets for fiscal year 2013, which starts in July in most states, half of them expect to be wrestling with Medicaid shortfalls in their 2012 budgets, according to a survey by the Kaiser Family Foundation. 

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Making the job for fiscal 2013 even more difficult for states are new federal restrictions and an increasing number of court rulings that limit states' options for trimming their programs. Recent cuts have run so deep that they are pushing the limits of what health care providers and patient advocates will tolerate without seeking court review. That's especially true in Western states, where the 9th U.S. Circuit Court of Appeals has been halting Medicaid cuts and ordering states to spend a year or more to study the issue and hold public hearings.

Other restrictions on states come from the Affordable Care Act, which prevents states from doing anything that would lower enrollment. In addition, a new federal rule proposed late last year would require states to produce data showing that cuts to hospital and doctor fees won't make it harder for Medicaid patients to get the care they need.

One state's woes

This wall of restrictions is all too familiar in Washington State, where lawmakers are grappling with painful cuts aimed at closing a $2 billion budget gap. In a special budget session last November, Democratic Governor Christine Gregoire proposed a list of controversial Medicaid cuts, including terminating what is known as a “lifeline” medical program for some 22,000 disabled adults. She also proposed limiting the use of brand-name prescription drugs; eliminating coverage for over-the-counter drugs and adult dental services; slashing payments to small hospitals that treat a large percentage of uninsured patients; and defunding language interpreters who serve 70,000 non-English speaking beneficiaries.

Perhaps most painful is her proposal to terminate a 25-year-old state-funded “basic health plan” for 35,000 low-income adults who are not poor enough to qualify for Medicaid. Ironically, the Affordable Care Act encourages other states to develop plans like the one Gregoire would end. In fact, the federal government said it would pay for half of Washington State's ongoing costs for the model program. But Gregoire is asking lawmakers to terminate the program altogether because she says the state cannot afford to pay even half of the costs.

None of Gregoire's proposed Medicaid cuts were approved in the special session. So lawmakers, who convened their regular 2012 session this week, are taking a fresh look at the proposals.

What won't be on the legislative agenda is what Washington State isn't allowed to do. A union-led ballot measure last year forced the state to reinstate a $32 million training program for home health care workers that the legislature had eliminated. And a three-visit limit on non-emergency use of emergency rooms, designed to save $70 million, was lifted after a superior court judge issued an injunction order. The governor's proposal to limit Medicaid coverage of certain prescription drugs may also be taken off the agenda, if federal objections cannot be satisfied.

No more federal help

Issues before the Supreme Court

Starting March 26, the U.S. Supreme Court will devote five-and-a-half hours to hearing oral arguments in a case against the Affordable Care Act brought by 26 states and the National Federation of Independent Businesses. A decision is expected in late June. A range of outcomes are possible, each with a different potential impact on states. The entire law could be overturned or upheld — or something in between. It's also possible that the Justices could decide to put the case off for a few more years. 

Here are the four key issues before the court. 

‘Anti-injunction Act' 
Under the Affordable Care Act, anyone who does not sign up for a health insurance policy would be penalized under the federal tax code. As a result, some argue the 1867 “Anti-Injunction Act” applies. According to the law, the courts are barred from striking down any tax law until someone has actually had to pay the tax. If the high court agrees that the law applies in this case, a final decision on the substance of the case would likely be postponed until 2015. 

The ‘individual mandate'
At the heart of the health law is a requirement that nearly everyone have health insurance. Opponents say Congress exceeded its power under the Constitution by requiring people to purchase something they don't want to buy. The Obama administration argues that anyone who decides not to purchase insurance puts everyone else at risk of having to pay for their care.

Severability
If the court overturns the individual mandate, the next question is whether other parts of the Affordable Care Act can remain standing — in other words, whether the mandate is “severable” from the rest of the law. Opponents of the law argue that a ruling against the individual mandate would make key parts of the rest of the law unenforceable. For example, they argue that insurance companies could not be required to cover sick people if healthy people are not required to pay into the risk pool. But the Obama administration counters that the rest of the law stands on its own with or without the individual mandate. 

Medicaid expansion
Some states have argued that the federal law's required expansion of Medicaid to some 17 million more people violates the balance of authority and fiscal responsibility between states and the federal government outlined in the Constitution. The Obama administration says the requirement is well within the federal government's power. Since the severability question only applies to the mandate, the judges could decide to uphold or reject the Medicaid expansion, regardless of what they decide on the mandate. 

—Christine Vestal 

The fundamental problem all states face is that while Medicaid rolls continue to grow, federal support for the jointly-funded program is not keeping pace — and neither is state revenue. More than $100 billion in extra federal support under the 2009 stimulus program ran out last July. As a result, state Medicaid spending jumped 29 percent between budget years 2011 and 2012 to make up for the loss of federal funds.

This year, even with program reductions, most states will find it difficult to come in under that higher spending level. Meanwhile, additional federal help is not an option. Although Congress exempted Medicaid from across-the-board cuts in its federal deficit-reduction deal last year, no one expects Washington to ship additional federal dollars to the states for Medicaid. That means the extra burden is all on states' shoulders, according to Alan Weil, director of the National Academy of State Health Policy. “State revenues are growing,” Weil says, “but Medicaid is going to eat that up and more in many states.”

In addition, states are barred from doing anything that would lower Medicaid enrollment below the income levels called for in the national health law's 2014 Medicaid expansion. That includes raising premiums and co-pays to levels the federal government considers unaffordable for low-income patients. 

That leaves states with relatively few options when it comes to controlling Medicaid costs. They can reduce provider fees and eliminate optional benefits. States can also expand Medicaid managed care programs and experiment with broad changes in the way health care is delivered. These labor-intensive system-wide changes have twin goals of improving care and reducing costs through better coordination. But in most cases, any savings they generate are not expected to make a serious dent in state budgets in the short term. 

Making matters worse, federal regulatory processes continue to drag on, says Dan Crippen, executive director of the National Governors Association. States are not allowed to experiment with their Medicaid programs without receiving waivers from the federal government, but the feds have been slow to issue decisions. “As we approach the beginning of legislative sessions in many states,” Crippen says, “governors are faced with making tough decisions without adequate information about programs and their funding.”

Oregon is a case in point. Democratic Governor John Kitzhaber has had what he calls promising talks with the U.S. Department of Health and Human Services about a groundbreaking new health program the state is banking on to cut Medicaid spending this year.

By setting up so-called “coordinated care organizations” as the front door for patients, the state aims to abandon the impersonal and fragmented way most people receive health services today. In addition to improving health, the new system is expected to cut costs. But Kitzhaber worries that if federal approval doesn't come early this year, those savings may not materialize.

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Provider fees

The 1965 federal Medicaid law only requires states to cover certain health care services. Those services include pregnancy and child birth-related services, pediatric care, hospitalization (except for mental illness), regular check-ups and long-term care for the elderly and disabled. Over the years, many states added optional services such as dental and vision, mental health, and a variety of others such as HIV therapies, hospice care, podiatry and occupational and speech therapy.

Since the Great Recession triggered a state fiscal crisis in 2009, many states have cut those optional benefits. Tennessee ended coverage of adult acne medicine. North Carolina stopped covering eye exams and glasses for adults. Massachusetts no longer covers dentures.

As a result, many states now have few places left to turn for savings but to cut the fees they pay doctors, hospitals and other health care providers in the coming budget year. At least 33 states cut provider fees in their 2012 budgets, according to a report by the National Association of Budget Officers; even more are expected to do so this year. 

But states can cut hospital and doctor fees only so much without ending up in court — a trend that has accelerated in recent years as health care providers claim that state budget cuts are making it impossible to keep their doors open. Patients, too, say there aren't enough doctors willing to take Medicaid to provide the care they need. 

While the federal Medicaid statute requires states to set reimbursement rates “sufficient to enlist enough providers” so that health care for the poor is comparable to the care given to people with private health insurance, the law provides no standards for fee-setting. The federal government has so far left the calculation up to states.

A proposed federal rule published last April, however, would for the first time require states to show that lower rates will not make it harder for Medicaid patients to get doctor's appointments. According to Matt Salo, executive director of the National Association of Medicaid Directors, the new rule calls for extensive studies before a state can reduce provider fees — studies he says most Medicaid agencies lack the resources to carry out.

The issue will also come before the U.S. Supreme Court, in a case that has been overshadowed by the challenge to Obama's health care overhaul but may be just as important from the states' perspective. In a decision also expected this June, the high court will determine whether individuals can sue states for failure to comply with the federal Medicaid law if they cut provider fees too deeply.

In recent years, successful lawsuits against state Medicaid programs have been most prevalent in states in the U.S. Court of Appeals for the Ninth Circuit: Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington. But in the 45 years since the Medicaid law was enacted, legal experts say that nearly every state has had at least one Medicaid budget cut stopped because of successful lawsuits by patients, health care providers and other advocates. 

Tough decisions 

As legislative sessions get started this year, a large number of states will have to address holes in their 2012 Medicaid budgets before taking on 2013 budgets.

California Governor Jerry Brown, a Democrat, tried to save $145 million last year by eliminating an adult day care program that was generally agreed to have kept many seniors and people with disabilities out of costly nursing homes. In November, a successful lawsuit by advocates for the disabled forced the state to put back $85 million for a scaled-down program. Those savings will have to be found elsewhere.

North Carolina Governor Bev Perdue, a Democrat, is battling Republican lawmakers over a nearly $150 million projected shortfall in the state's Medicaid budget. Agency officials say that unless lawmakers come up with the needed funds, they will have to cut optional services such as hospice and mental health care, and possibly reduce fees to Medicaid doctors by as much as 20 percent.

In Maine, Republican Governor Paul LePage is proposing controversial cuts because the state already is spending $220 million more than its two-year budget calls for. His solution: elimination of a program that serves 65,000 childless adults, including 19- and 20-year olds. He also wants to make it harder for parents to qualify for Medicaid and do away with adult dental coverage and other optional benefits.

But the governor is having a hard time selling his ideas even to fellow Republicans. If the GOP-controlled legislature approves the cuts, the governor's next battle will be with the federal government. Only a few states have been allowed to scale back the number of Medicaid beneficiaries, even when their programs are more expansive than the Medicaid law requires.

If the Affordable Care Act survives its high court test in June, the federal government plans to pay the full cost of Medicaid coverage for most of the low-income adults whom states are cutting from the rolls — but not until 2014. In the meantime, governors will have to make unpopular decisions that many of them will find extremely painful.

“Washington is a state with a political leadership whose instincts are exactly the opposite of what we've been forced to do,” says Gregoire's policy adviser, Jonathan Seib, noting that the governor supports Obama's health overhaul. “The goal is not to dismantle and contract, but to expand health care.” 

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