Medicaid bears brunt of states' budget crunch

Low-income Americans, beware.

Facing budget deficits, two of the nation's most populous states, California and New York, are proposing changes in Medicaid that could affect the eligibility of hundreds of thousands of people or decrease funding for hospitals, doctors, dentists, and pharmacists.

Last month, California cut reimbursements to providers by 10 percent. With the legislature deadlocked over the budget, some healthcare facilities are now close to bankruptcy since no money is flowing to providers.

Other states are tacking on fees or cutting funds for charity care in hospitals. And, as more states face falling tax revenues, there could be more cuts by this fall.

"Medicaid is very much in jeopardy," says Iris Lav, deputy director at the Center on Budget and Policy Priorities in Washington.

The last time states were forced to cut Medicaid programs was after the 2001-02 recession when unemployment was high and tax revenues weak. At the same time, enrollment in Medicaid soared – rising 11 percent between 2000 and 2002 and another 7 percent in 2003. In 2006, the latest numbers available, spending on Medicaid hit $304 billion, up 48 percent from 2000.

One in 5 Americans is covered by Medicaid.

"This is a recurring problem states have during every recession," says Stephen Zuckerman, a healthcare economist at the Urban Institute in Washington. "Last time, Congress allocated more money."

This time, however, it might be more difficult to get federal aid, says Dan Hawkins, policy director for the National Association of Community Health Centers in Washington.

"There is good support for fiscal relief by several key members of Congress such as Rep. John Dingell (D) of Michigan," says Mr. Hawkins, who has watched the healthcare debate for 35 years. "But it all depends on whether Congress does a second fiscal stimulus package, and that is looking increasingly doubtful with President Bush saying he would veto any more fiscal stimulus."

When state lawmakers look at their budgets, the two largest expenditures are education and Medicaid. On average, states pay 43 percent of Medicaid costs, the rest picked up by Washington. However, solons are often loath to cut education funding, especially during the school year.

Instead, they start to look at healthcare.

"There is more flexibility in Medicaid than education," says Ann Kohler, director of the National Association of State Medicaid Directors in Washington. D.C. "You can define who to cover and how to set rates."

California's case

That's what is happening in California. In February, the state facing a growing budget deficit, announced a 10 percent cut in payments to providers, such as hospitals, doctors, and dentists. The cuts went into effect on July 1.

"Many doctors were forced to stop seeing new medical patients or in some cases existing ones," says Ned Wigglesworth, a spokesman for California Medical Association in Sacramento. "The reimbursement rate for a regular 15 minute visit was $24, which is below the cost of providing care," he says. "Now, it's gone to $21.60."

Even with the reduction in rates, California still needed to find ways to bridge the chasm in its budget. So, in May, the state announced another series of changes, including a proposal to restrict eligibility from 107 percent of the federal poverty level to 61 percent.

Ms. Lav says there are estimates this could reduce the number of Medi-Cal (the state name for Medicaid) recipients by 400,000. "That means an adult making $14,500 a year, the equivalent of the minimum wage, would not be getting healthcare," says Mr. Wigglesworth.

The second round of potential changes have not gone into effect yet because the legislature has been deadlocked for the last 45 days over the budget. During that time the state has not made payments to providers.

"Some of the rural hospitals are on the edge of bankruptcy," says Jan Emerson, a spokeswoman for the California Hospital Association in Sacramento. "I had one rural hospital with 40 beds – 39 of them for long-term patients – tell me they can go two more weeks before they have to shut their doors."

Hospitals in peril

In New York's situation, Gov. David Paterson, facing a growing budget deficit, has proposed freezing Medicaid reimbursement rates for hospitals for the rest of 2008 and for 2009. Normally, the state factors in inflation.

In addition, Mr. Paterson wants to cut reimbursement rates by an additional 7.2 percent for the next two years and impose a new tax on hospital revenues. In New York City alone, this could result in a loss of $663 million in revenues, estimates the Greater New York Hospital Association.

"Some would have to cut back services, others would be forced to close their doors," warns Brian Conway, spokesman for the organization.

For Paterson, it could be difficult to convince legislators to make the cutbacks, which are also opposed by local 1199 of the Service Employees International Union, a powerful lobby in Albany.

"In the past, it is my understanding the unions have been quite successful at blunting cutbacks," says Mr. Hawkins. "This is a case where the traditional foes, the institutions and the workers are together on the same side and it multiplies the influence."

The state of Maine recently added a $25 enrollment fee for adults for its Medicaid program. While the fee may seem small, Lav says it could strain low-income Down Easters faced with higher fuel costs and grocery bills. "It's amazing how hard it can be to come up with $25 when everything is going up in price," she says.

Other states, such as California and Arizona, are asking recipients to reenroll for benefits more frequently. New Jersey, also facing a huge budget deficit, has cut funds for charity care hospitals. And Florida has frozen reimbursements to nursing homes.

Some states with significant funding shortfalls are either waiting until after the election or studying how to bridge the gap. That includes Virginia and Mississippi.

In fact, some healthcare observers believe most states will wait until after the election to face up to their shortfalls. "Most states will pretend their budgets are in balance until November," says Lav. "It's hard to admit your budget is out of balance six weeks after you passed it."