In 2001, Medicaid expenditures reached $216 billion, nearly outpacing Medicare, a $236 billion program last year. As Medicaid has grown, so have its troubles.
Strapped by rising budget deficits, state policymakers likely will be forced next year to scale back Medicaid benefits as economic realities pressure them to control spending. Short of an unlikely cash infusion from Washington, budget directors will have to find new ways to cut costs or face the prospect of limiting enrollment.
"The outlook is pretty grim," said Joan Henneberry, director of health policy studies for the National Governors Association in Washington. "States are talking about rolling back eligibility, reducing benefits, reducing provider reimbursement and increasing copayments and cost sharing."
In the federal fiscal year 2002, Medicaid spending grew at a rate of 13.2%, its fastest rate since 1992, according to the National Association of State Budget Officers. Medicaid accounts for more than 20% of total state budget expenditures, second only to elementary education. Some 41 states have said they don't have enough money to continue providing Medicaid benefits at current levels.
Medicaid spending has grown in recent years because of a combination of rising drug costs and benefits that were added during the 1990s, when state coffers were in better shape than they are now.
An anticipated $40 billion total budget shortfall across 40 states in fiscal 2003 will force lawmakers and regulators to continue examining their most expensive programs, and Medicaid tops the list.
In a press conference last week in Washington, members of the Democratic Governors' Association said states need more cooperation from the federal government to better manage the federal-state health program for the poor.
"Give us flexibility," Washington Gov. Gary Locke, a Democrat, said of states' ability to try creative new approaches for education and healthcare. "The states are the ones who have to run these programs. We are the innovators."
Congress may move next year to enhance that flexibility-and HHS, under the Bush administration, has shown a willingness to grant states Medicaid waivers. If the federal government moved in a struggling economy to in- crease its contribution to Medicaid, however, states would be likely to pay a price for any new federal assistance.
"There is some willingness on the part of Congress to provide more resources to states if in return we get some reform," a congressional Republican source said. "The structural nature of the Medicaid program is presenting challenges to states and to the federal government (and) states haven't had the flexibility to rein in cost drivers."
Reform would consist of such steps as dramatically reducing prescription drug spending and scrutinizing beneficiary populations to make sure those most in need are the ones drawing benefits. Medicaid also could be broken into three parts: one for low-income families, a second for chronic illness and long-term care, and a third for the uninsured, according to the National Academy for State Health Policy.
Until such a drastic approach is seriously considered, states are trying their own medicine to cure Medicaid's ills.
Although legal challenges are pending in Maine and elsewhere, 38 states have implemented or plan to implement prior-authorization requirements to limit prescription drug spending, which accounts for a great share of the spending under Medicaid. Some have already demonstrated significant results. In Vermont, the Medicaid program saved $2.4 million in six months by switching beneficiaries on acid-reduction medication from the most expensive brands to cheaper but equally effective alternatives.
"There is promising evidence from states that have done this," Henneberry said.
States will be forced to make tough choices next year, and many will tighten eligibility requirements to reduce spending. "Unfortunately, I think people will lose benefits," Henneberry said.
The most vulnerable population, Henneberry and others said, is the poor parents of children who qualify for State Children's Health Insurance Program funds. Many states that began covering such adults when times were good could find it impossible to continue doing so when budgets are strained.
"Ultimately, we hope states don't have to cut the number of enrollees," a Republican source in Congress said. However, he added, "we have to be willing to tackle some of these hard problems and not just throw money at them. ... The (Medicaid) program is not going to be alive in a decade if we don't take some of these steps now."
House and Senate committees will hold hearings starting early next year to determine how best to address the Medicaid situation, congressional sources said.
The Bush administration, meanwhile, is throwing its support behind community health centers that are less expensive than Medicaid expansions but may help low-income populations access healthcare services more easily.
"It is a high priority for the National Governors' Association to work with Congress to bring fiscal relief to the states, especially in the Medicaid program," Henneberry said. "What form that will take is very much up for grabs, but the governors and the NGA are going to work hard to find some way to relieve some of the pressure."