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Medicaid funding teetering on 'fiscal cliff'

April 1, 2010
by Bob Gatty
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At a glance…

State Medicaid program and reimbursement levels are in jeopardy of significant reductions as the continued economic downturn fuels burgeoning fiscal disarray nationwide.

A critical fiscal crisis is building across the nation as the impact of the continuing economic downturn threatens to force major reductions in states' Medicaid program and reimbursement levels. This gathering storm will likely affect virtually every long-term care facility in the nation that relies on the poverty program for support.

While the recession has wracked virtually every state budget with no letup in sight, the federal government provided substantial relief in the American Recovery and Reinvestment Act (ARRA) last year, providing some $87 billion to states to support Medicaid during the eight quarters that will end December 31, 2010. Early in March, a new $150 billion jobs bill that includes an extension of that funding was under consideration in the Senate.

At the same time, if Congress and President Obama succeed in enacting major healthcare reform, it is likely to result in millions of poverty-stricken Americans being eligible for the program, further challenging the states financially unless it is fully funded by the feds. Meanwhile, cuts on nursing home funding imposed in 2009 totaling $12 billion have already “contributed significantly to the fragility of our sector,” according to Bruce Yarwood, president and CEO of the American Health Care Association (AHCA).

Excessive spending

According to a new report from the Kaiser Commission on Medicaid and the Uninsured, 44 states and the District of Columbia report that enrollment in Medicaid and program spending are exceeding projected levels and at least 29 of those states predict mid-fiscal year 2010 program cutbacks to balance their budgets. The recession, with increased unemployment resulting in lower state tax revenue, has left 41 states with budget shortfalls of some $35 billion, the Kaiser Commission said, a gap estimated to reach at least $102 billion in 2011 and as much as $180 billion.

The Kaiser Commission pointed out that “the same forces that have caused state revenues to slow also caused increases in Medicaid enrollment and spending.” Across the states where mid-fiscal year cuts are anticipated, the most likely cuts, the Commission said, will be further reductions in provider rates (listed by 21 states) and reductions or restrictions of program benefits (eight states).

In addition, states said likely budget-cutting approaches would include cuts in various specially funded programs such as a disproportionate share of hospital and graduate medical education funding, changes to pharmacy programs, increased program integrity, utilization review, and third-party liability work.

In Medicaid, the downward pressure can be expected to be felt most significantly by providers, since a condition of the ARRA requires states to maintain coverage levels in order to be eligible for the funds. However, unless Congress extends ARRA, that requirement will end as well.

“Medicaid directors expect that the end of the ARRA funding will have a dramatic impact on states and, in particular, on Medicaid,” the Kaiser Commission study said. “Across the country Medicaid directors described the upcoming abrupt end of these matching funds as a fiscal cliff that would have significant detrimental consequences on overall state budgets and their programs.”

Looking ahead, the Commission study said, “Severe fiscal challenges are expected to persist.” With no sign of recovery in state revenue that could replace the large drop in federal funding associated with the end of ARRA funding, many governors' proposed budgets for fiscal year 2011 include drastic Medicaid cuts, the report revealed.

“Medicaid directors see the prospect for widespread program cutbacks in 2011, including eligibility cuts that would affect millions of Medicaid beneficiaries as well as hospitals, doctors, and other providers who depend on Medicaid to pay for healthcare they provide to Medicaid enrollees,” the Commission study said.

Fiscal impacts

In addition, the Commission study noted that state Medicaid directors expressed concern about the fiscal impacts of national health reform on their states, in a time of extreme fiscal constraint and already insufficient revenue. They also were concerned, Kaiser said, about state administrative capacity and the availability of qualified people to do the required work at a time when many states have experienced staff cutbacks, furlough days, and across-the-board program cuts.

“Leading Medicaid directors believe the highest priority for federal action should be to avoid an abrupt and major reduction in federal funding to their program by extending the ARRA temporary FMAP (federal matching funds) enhancement for a significant time, followed by a phase-down period,” the Commission study reported. “Directors point out that states simply are not in a position at this time to replace the ARRA funds with state funding and without additional federal help states will be forced to look at significant program cuts to balance their budgets.”

AHCA concurs with that assessment and has called on Congress to extend the ARRA funding for state Medicaid programs.

The combination of last year's $12 billion in Medicare cuts and the loss of ARRA funding “have significantly reduced the resources available for the provision of skilled nursing care at a time when patients have more medically complex needs than ever before,” Yarwood said. “Seniors in many states have already endured or will soon face substantial Medicaid funding cuts as a result of state legislative actions.”

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