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Stop the Leak of Red Ink (1 comment)

Posted: Friday, June 4th, 2010

By Dennis G. Smith

Fresh evidence from the Congressional Budget Office (CBO), the Rockefeller Institute, and the National Association of State Budget Officers (NASBO) reveals that the red ink of state and federal budgets continues to spread and structural flaws in government programs will need to be corrected before the national economy returns to good health.

CBO Director Douglas Elmendorf concluded his May 26 presentation to the Institute of Medicine with a stark warning: “[p]utting the federal budget on a sustainable path would almost certainly require a significant reduction in the growth of federal health spending relative to current law (including this year’s health legislation).” Dr. Elmendorf is telling whoever will listen that the federal budget is not sustainable and the new health care law will not deliver on the promises made to reduce the federal deficit. He also states, “[i]t is not clear what specific policies the federal government can adopt to generate fundamental changes in the health system. That is, it is not clear what specific policies would translate the potential for significant cost savings into reality (emphasis in original).” In other words, we don’t really know what will work.

Dr. Elmendorf’s remarks are quite similar to those of Rick Foster, the Chief Actuary of the Centers of Medicare and Medicaid Services (CMS) in warning that Medicare price controls the new law relies upon are unrealistic and “increase the risk that people would not get some health care they need or would like to receive.” As the public now learns what the experts at CBO and CMS were telling Congress and the Obama Administration in private before the new law was passed, it sounds increasingly that Congress and the Administration simply ignored the counsel of their own professionals.

Moreover, if we already know the price control strategy will not work, should we not try something else? By expanding Medicaid eligibility, reducing individual cost-sharing, and creating new subsidies, the new demand will fuel higher costs. In basic economics, this calls for an increase on the supply side to create competition. This should create opportunities for new relationships among providers to increase alternatives to institution-based care. Exchanges can potentially increase competition by giving individuals access to a wide variety of health plans, including basic health plans and consumer directed plans. Unfortunately, the federal version appears to stifle competition by excluding any plans that do not meet a new definition of a qualified health plan. Under the new federal definition, a health plan that offered only the current Medicare benefit package with the cost sharing required under law by Medicare would not meet the requirements of a qualified health plan.

At the state level, the Rockefeller Institute reports that revenue collections declined in 34 of 49 states that have reported data for the January-March 2010 quarter. Revenues fell compared to the previous year in every state in the Great Lakes, Plains, Southwest, and Rocky Mountain regions except for North Dakota and Colorado. A few states on the East and West coasts have reported higher revenues, but in almost every state in between, the red ink continues to flow.

The states face even more red ink when enhanced federal funding for Medicaid provided through the American Reinvestment and Recovery Act expires on December 31, 2010. To maintain the same total level of Medicaid spending, states will have to replace about $40 billion in lost federal funds. The federal matching formula works against states when spending must be reduced. If a state cuts $1 from its general fund, it then forfeits at least $1 in federal funds, doubling the total cut in the program. The impact is even greater on a state with higher federal match. States are preparing for this eventuality through some predictable and well known means. According to a newly released report from NASBO, 28 states will reduce Medicaid provider payments in 2011; 20 will freeze provider payments; 11 will eliminate some benefits; 14 will limit some benefits; 12 will put limits on prescription drugs; and 9 will expand managed care. NASBO reports that 13 states propose to hold on to federal funds by imposing taxes on providers.

But Medicaid provider taxes and price controls provide only temporary patches. They will not fix the structural flaws inherent in the current design of Medicaid. Moreover, the growth of Medicaid has spread to affect other state programs as well. States have developed such a dependency upon federal funding, Medicaid casts a disproportionately large shadow over the entire state budget. Another presentation by the Rockefeller Institute shows health care spending, (principally Medicaid) has been crowding out non-health social services for the poor over the past two decades. In early 1987, state and local social welfare spending was distributed among cash assistance (21 percent of spending), medical assistance (44 percent) and social services (36 percent). In the last quarter of 2007, medical assistance accounted for 81 percent of welfare spending, leaving just 5 percent on cash assistance and 15 percent for social services. Clearly welfare reform in 1997 had a significant impact on enrollment in cash assistance programs, but that does not explain how social services dropped from 36 percent to 15 percent.

In reality, the federal matching design of Medicaid encouraged states to push as many services as possible into Medicaid in order to claim federal funds. But in doing so, Medicaid is masking underlying problems that should be addressed. By “medicalizing” services that previously were considered to be social services, states and local governments got the benefit of federal funds, but they have subsequently lost control of the management of these programs. Authority and responsibility has shifted from cities, counties, and states to federal Medicaid officials and to federal judges (whose impact is seldom examined).

As Congress has thus far failed to extend the enhanced funding that is due to expire, it should consider alternatives that give back greater control to states, permit states to implement their own payment reforms, and reduce the federal requirements on states to fund the Medicare program (yes, Medicare; states are required to pay for Medicare Part B premiums, states are required to fund the Medicare Part D drug benefit, etc.). If the federal government does not know how to fix the current health care system, as Dr. Elmendorf acknowledges, it should allow the states to try. By next January, there will be at least 23 new governors who will be charged with running the largest health plan in their state, Medicaid. If they are to have a chance to succeed at stopping the flow of red ink for themselves and for the nation, they need more tools than what the federal government currently allows.