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Omens of Economic Ill: Medicaid Spending, Enrollment Turn Upward

By John Reichard, CQ HealthBeat Editor

September 29, 2008 -- True to its "countercyclical" nature, Medicaid is starting to see increases in enrollment and spending growth as the economy worsens, portending state budget shortfalls that may lead to a new round of cuts in payments to doctors and hospitals. And in a year that was supposed to see renewed efforts by policy makers to cover the uninsured, 2009 may see little effort at the state level toward that goal, Medicaid officials said Monday in response to new survey findings.

Medicaid enrollment grew 2.1 percent in fiscal 2008 and is likely to grow another 3.5 percent in fiscal 2009, said the 50-state survey released by the Kaiser Family Foundation. Meanwhile, Medicaid spending grew 5.3 percent in fiscal 2008 and is likely to grow 5.8 percent in fiscal 2009, the survey found.

Medicaid's classic pattern is that when the economy sours and unemployment rises, people lose job-based coverage and turn to the federal–state program for health benefits or become uninsured. But the added Medicaid spending that occurs add to the fiscal woes of states, another element of the pattern that now seems to be asserting itself. Two-thirds of state Medicaid directors told the survey that there's a 50–50 chance they'll see a shortfall in their Medicaid budgets in the current fiscal year. Those shortfalls could force midyear changes in state Medicaid budgets to control costs.

Since states are reluctant to cut Medicaid eligibility to save money, they are more likely to cut Medicaid by going after provider payments, said Vernon Smith, a principal with Health Management Associates, a consulting firm that joined with Kaiser in conducting the survey.

Each one percent increase in unemployment translates to an increase of one million in enrollment in Medicaid and State Children's Health Insurance Programs, according to an analysis released with the survey. And for each percentage point increase in unemployment, combined state and federal spending on the Medicaid program rises by $3.4 billion, the analysis said. In addition, the uninsured population grows by 1.1 million since many unemployed people who have lost job-based health benefits do not qualify for Medicaid.

The House and Senate voted last week to temporarily boost federal matching payments for Medicaid but the White House issued a threat to veto economic stimulus legislation of which the payments were a part. The chances that Congress will act to boost Medicaid to forestall benefit and payment cuts resulting from the economic downturn now seem all but dead for the year.

"I don't hold out a lot of hope that that's going to happen before January," said David Parrella, director of the Connecticut Medicaid program. "I think the $700 billion bailout has sucked all the air out of Congress," added Doug Porter, who heads the Washington state Medicaid program. Parrella and Porter took part in a Kaiser-sponsored press briefing Monday on the survey results.

Kaiser researchers said the findings probably understate the eventual impact on Medicaid of the economic downturn. "I think we have a somewhat rosier picture [in the survey] than the reality we've heard from the directors on the ground," said Diane Rowland, executive director of the Kaiser Commission on Medicaid and the Uninsured.

The yearly Medicaid spending growth rate was 6.4 percent in 2005, then dropped to 1.3 percent in 2006 as the federal Medicare program assumed prescription drug costs for Medicaid enrollees who were also enrolled in the Medicare program. In 2006, the growth rate was 2 percent, and now has accelerated to 5.3 percent in fiscal 2008 and to the projected 5.8 percent in fiscal 2009.

Smith said in the press briefing that the Medicaid annual spending growth rate has averaged 7 percent over the past 15 years. But as the effects of a downturn deepen, Medicaid spending growth accelerates, Smith noted. He said that for example in 2002, Medicaid spending grew 12.7 percent.

"During the last economic downturn from 2001 to 2004, most of the major Medicaid restrictions came later in the downturn cycle, not at the very beginning," the survey analysis noted.

Much of the survey, which was conducted in July and August, reflected the better economic times at the start of the fiscal 2008 period when states enacted changes based on stronger balance sheets. "This enabled them to implement an array of positive changes for Medicaid including provider payment rate increases, eligibility expansions and simplifications, targeted benefit improvements or restorations of cuts, community-based long-term care expansions as well as continued strategies to improve quality of care," the analysis said.

The authors of the survey said it showed signs of increasing strain between federal and state officials stemming from new or proposed regulations, audits, and policy statements aimed at cracking down on Medicaid spending. Provisions from a 2005 budget savings law (PL 109-171) requiring documentation of citizenship caused application backlogs and a drop in enrollment for a time, survey respondents said. "Overwhelmingly, Medicaid directors indicated the new requirements were cumbersome, burdensome, and that they pose new barriers for those applying for benefits," the analysis said.

Porter said the relationship between the feds and state officials "has never been worse." Porter said he has 14 amendments pending before federal officials to change the Washington state Medicaid program. Federal officials mistrust state officials and have dropped required rule-making in favor of "letters of guidance" to trim Medicaid spending, he said. Porter said the only area of good cooperation right now is in state-federal efforts to reduce fraud in Medicaid.

Separately Monday, a new report from America's Health Insurance Plans found that state Medicaid programs will spend $1.6 trillion on long-term care expenses over the next 20 years. When federal matching federal funds are included, total government expenditures for long-term care will exceed $3.7 trillion, the study found.

If current policies and trends continue, between 2008 and 2027 annual Medicaid long-term care expenditures are projected to grow by 124 percent from $51.5 billion to $115.6 billion. In 2008, 15 states are expected to spend $1 billion on Medicaid long-term care services. By 2027, 25 states will be spending $1 billion or more, according to the report.

In a statement, Karen Ignagni, president and CEO of the health insurance lobbying group, said the report "shines a spotlight on the need to better prepare for long-term care expenses and to explore ways to provide consumers with greater access to home and community based care options." The average annual stay in a nursing home is $75,000 and many Americans underestimate that cost and erroneously believe they have long-term care coverage, Ignagni said. Medicare does not cover extended long-term care.

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