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The Republican euphoria that followed Last November’s mid-term elections has all but disappeared, as lawmakers in state capitals throughout the nation now face the stark realities of balancing budgets decimated by the recession.
“We fell off a cliff in 2008,” said John Thomasian, director of the Center for Best Practices at the National Governors Association. “In terms of revenues, states have not come back to pre-recession levels. We are in a situation now where in late 2012 or 2013, states will only get back to 2008 (revenue levels).”
With revenues down, states aren’t merely looking at holding the line on spending – they will need to make significant cuts to balance budgets. This fiscal reality puts Medicaid spending, the second largest line item on state budgets behind education, directly in the cross-hairs.
Industry experts say the structure of the program doesn’t leave much wiggle room for states to find budget savings. Further, the pain may be amplified on July 1, when federal stimulus money from the American Recovery and Reinvestment Act dries up.
Since October 2008, states have received at least 6 percent in additional federal Medicaid matching funds to help cover the more than 6 million people that have been added to Medicaid since the recession began.
“States have described the funds as vital to their state budget and to their Medicaid programs in terms of helping them to maintain coverage and close Medicaid shortfalls,” said Robin Rudowitz, a Medicaid analyst and associate director with the Kaiser Family Foundation. “With ARRA funds phasing out, that puts additional pressure on governors coming up with their budgets for fiscal 2012, since they have to account for the expiration of those enhanced matching funds.”
Desperate for savings
States will likely find it difficult to identify areas in their Medicaid program that offer the potential for significant near-term savings.
“I think what you are seeing now is states feeling the intense pressure of knowing they have already done all the easy stuff to save money,” said Carolyn Ingram, senior vice president at the Center for Health Care Strategies and former New Mexico state Medicaid director. “We took on fraud and abuse, we redesigned our benefit package, and we have coordinated care better for dual eligibles.”
Ingram suggests that states begin to consider payment reform, bundled payments, medical homes and even working with other states to manage these initiatives more effectively.
“There is a lot of politics when it comes to working with how you pay providers,” she said. “But it can be done if states work collaboratively to pay for outcomes and how you treat the patient.”
Greg Crist, vice president of public affairs with the American Health Care Association, sees an opportunity for savings in better coordination of care.
“When you talk about coordinated care, we like to think that we have been pioneers in that area years ago,” he said. “You are talking about hospitals working with post acute facilities, rehab facilities and even our skilled nursing facilities working to reduce re-hospitalizations, which are very expensive. Where we can we want to encourage that.”
Other areas for potential savings involve tweaking Medicaid benefits packages or adjusting buying methods for things like durable medical equipment. But Ingram said belt tightening in these areas isn’t going to reap significant savings.
Unfortunately for states, the most significant savings in their Medicaid expenditures will likely come from something over which they have little control: Declining enrollment as a result of a recovering economy.
“Medicaid enrollment is still very dependent on the economic situation,” said Rudowitz. “States do believe they may have hit the absolute bottom of the impact of the recession. As the economy continues to improve and unemployment rates continue to decline, that will put less pressure on upward enrollment growth.”
But beyond the organic ebb and flow of enrollment, there is very little that states can do to adjust the number of people eligible for Medicaid without the risk of forfeiting federal matching funds, which comprise 57 percent of Medicaid dollars nationally. Under last year’s health reform law, states must comply with a “maintenance of effort” provision to keep eligibility requirements intact from year to year.
Working the waiver
In Arizona, which Thomasian said is faced with one of the country’s biggest budget crises, state officials are looking for a way to get around the maintenance of effort requirement. In December 2010 the state legislature approved plans to apply to the Department of Health and Human Services for a Medicaid waiver to allow the state to drop 280,000 people from its Medicaid enrollment.
While it’s unlikely the administration would grant such a waiver, it could be the first step to opening lines of communication between HHS officials and state governors caught in the budget crunch.
“What you are seeing is states that have tried everything and they don’t have an idea about what else to try,” said Ingram “So what I think you will see is more requests for those type of waivers under maintenance of effort and I think what it helps do is open the conversation with CMS.”
It’s a conversation the nation’s governors are hoping to have soon. In January, 33 governors sent a letter to Congress asking for the elimination of a provision of the Affordable Care Act that reduces Medicaid matching funds if states decrease enrollment.
“The federal requirements force governors to cut other critical state programs, such as education, in order to fund a ‘one-size-fits-all’ approach to Medicaid,” the governors said.
“Governors are very concerned about their maintenance of effort,” said Thomasian. “So I see them looking to HHS to allow them flexibility to run their programs in ways that are best for their states.”
According to Rudowitz, it’s a door that is now open.
“It is up to the administration to determine how (states) would receive those waivers,” she said. “But based on our conversations with CMS they will actively work with states to help them control their costs.”