Good and Bad News for States in Bush’s Health Care Budget

From a state perspective, there is good news and bad news in the president’s health care budget. First, the bad news: By restricting states’ ability to count funds from local governments and how they tax health care providers, the budget’s recommended Medicaid changes will seriously limit how states finance this program.

While these provisions would save the federal government $40 billion over 10 years, states will be forced to replace these revenues with other general revenues. Unfortunately, the federal government’s savings are the states’ loss because they would either have to raise taxes or cut critical state programs, such as education or homeland security. Alternatively, they could reduce eligibility and benefits for the optional Medicaid populations. Most likely, states will be forced to adopt some combination of these options, which will be quite detrimental to citizens, health care providers and our most vulnerable populations.

Now, the good news. It can be found in two little-noticed initiatives tucked away in other parts of the health care budget. Though obscure, both initiatives – the Health Insurance Tax Credits (HITC) and State Purchasing Pools – could prove to be very valuable to individuals without health care, not to mention to states’ ability to sustain the Medicaid program.

In its budget, the administration proposes a tax credit to help low-income individuals purchase health insurance. According to the proposal, those individuals under the age of 65 not currently enrolled in a public- or employer-sponsored health plan would be eligible for these health insurance tax credits. The credits would be refundable for a maximum of $1,000 for an individual and $3,000 for a family of four. With a price tag of $74 billion over 10 years, the credits would phase out at $30,000 for an individual and $60,000 for a family of four. To ease the administration of these tax credits, the U.S. Department of the Treasury would be able to make payments directly to the provider chosen by the low-income individual.

Meanwhile, the administration is also proposing $4 billion in grants to states over 10 years to establish purchasing pools to help low-income individuals purchase health care coverage.

A significant portion of the 40 percent Medicaid caseload growth over the last five years is due to the reduction in employer-provided health care, particularly to individuals below 200 percent of poverty. Given that the U.S. economy is restructuring by becoming more service- and small business-oriented and that its traditional manufacturing industries are facing more international competition, employer-sponsored health care will continue to decline. These two provisions in President Bush’s budget not only would help take pressure off Medicaid, they also could help to stabilize the increasingly burdened individual and small group health care markets.

To improve the effectiveness of these two provisions, it would be important for states to have the ability to offer some of their optional Medicaid populations a more basic benefit package similar to the one provided in the State Children’s Health Insurance Program (SCHIP). It is also important that low-income individuals who are eligible for Medicaid can choose the tax credit or Medicaid.

In the past, states have experimented with purchasing pools, but with the exception of one in California and another in Washington state, these experiments failed because they were too focused on small businesses and were never large enough to gain leverage in the marketplace. By being able to include some of the optional Medicaid population with the SCHIP benefit package with individuals who chose the tax credit in the purchasing pool and then offering the same benefit package to small business, it should allow states to develop large enough pools to give them leverage sufficient to attain good health-care prices in the marketplace. Although there are risk-adjustment issues, this could help stabilize the individual and small group health care market.

There is clearly bad news in the president’s budget for Medicaid financing, but there is clearly good news in other components of the health care budget for states. Time will only tell how Congress reacts to all of the recommendations. States could ultimately be winners or losers.

Raymond C. Scheppach, Ph.D., is the executive director of the National Governors Association. The views expressed here are those of the author and do not necessarily represent those of the National Governors Association.