States are in good shape to absorb projected increases in Medicaid costs, at least in the short term, according to a report released this month by Moody's Investors Service.
That's good news for providers, which have been socked with reimbursement controls as a result of a spike in Medicaid costs in the early 1990s.
"There shouldn't be too many surprises for hospitals as a result of Medicaid spending. It suggests there isn't going to be dramatic change in coverage or payments," says Donna Folkemer, a program manager who works on healthcare issues at the National Conference of State Legislatures in Denver.
Folkemer says that, compared with a decade ago, states can better predict their Medicaid budgets through heightened monitoring and the use of HMOs, which now enroll more than half of beneficiaries.
Yet the rating agency warns that while Medicaid isn't an immediate threat to states' credit quality, fiscal pressures are looming. Medicaid accounts for 20% of total state spending, second only to elementary and secondary education.
States have built a "sizable financial cushion," according to Moody's, with balances as a percentage of expenditures hitting their highest levels in two decades in 1998 and 1999. According to a survey by the National Association of State Budget Officers (NASBO), state balances totaled $31.9 billion, or 6.4% of expenditures, in fiscal 2000, which ended in all but four states on June 30.
Some state hospital associations are using this window of prosperity to ask for more money. "There are big surpluses, and right now I think hospitals are benefiting," says Bruce Gordon, an analyst in Moody's healthcare group.
Illinois hospitals, for example, won higher outpatient rates and tertiary-care reimbursement in the past two years and will fight to lift a freeze on inpatient rates next year, says Karen Porter, a spokeswoman for the Illinois Hospital and HealthSystems Association. The association claims Medicaid covers only 80% of hospitals' costs, making it a perennial cause. "Can (the state) spend more? We're certainly going to argue that they can," Porter says.
Molly Collins, a senior associate director for policy at the American Hospital Association, says that state legislatures generally have looked to cut taxes rather than increase Medicaid spending. An example of this is Massachusetts, where hospitals are fighting a ballot measure that would reduce state taxes and slash the state budget.
After double-digit increases that devoured state balances, Medicaid growth skidded to just 3.3% in 1996 and 3.9% in 1997, according to the Congressional Budget Office, which attributed the unprecedented slowdown to a strong economy, state-imposed reimbursement controls, managed care and new limits on disproportionate-share payments to hospitals.
But for the past two years the rate of increase has accelerated, and the CBO is predicting average annual increases of 7.4% through 2008. According to NASBO, a variety of program and demographic factors are contributing to renewed growth, especially long-term care and prescription drug costs. States have also expanded eligibility, especially for pregnant women and older adults.
Further, 20 states may have to shoulder more Medicaid costs as a result of a proposed HCFA rule that would close a loophole that allows states to maximize federal matching funds beyond the cost of providing services. HCFA says the practice allowed states to divert nearly $2 billion of federal funds to their own coffers in fiscal 2000 (Oct. 9, p. 8).
In the long term, Moody's says an economic slowdown could rapidly erode states' surpluses, once again presenting a fiscal strain.
A stark reminder of the uncertainty of Medicaid funding is Louisiana, which hasn't fully shared in the nation's economic growth. The state has also been hampered by a constitution that limits its taxing and budgeting options.
Earlier this year, Louisiana providers banded together and persuaded the state to reverse a 7% reduction in Medicaid rates that was imposed in order to balance the state budget. Lynn Nicholas, president of the Louisiana Hospital Association, says there is already anticipation of another budget shortfall in the next fiscal year, which starts July 1, 2001.