News: CJ Exclusives

NC Has Self-Inflicted Fiscal Wound

State’s Medicaid program is among the costliest and fastest-growing in the region

After the comparatively good times, both economically and security-wise, of the 1990s, the new millenium brought North Carolina to crisis points in several areas, especially with the state budget, employment, education, and medical malpractice.

But in North Carolina and everywhere else in the country, few public-policy challenges seem as daunting as the crisis facing both federal officials and the states: the crisis of Medicaid. Costs for the program that provides health care coverage for the poor, aged, and infirm have spun out of control and promises only to escalate in the future.

Attempts at cost containment so far have mostly failed, and during the times of prosperity in the 1990s, benefits and eligibility grew at unsustainable rates. The Medicaid problem appears to be largely one of lawmakers’ own making, because when state budgets were flush with cash, they chose to expand Medicaid — even though declining poverty rates would otherwise have cut thee caseload. Politicians failed to recognize lessons of the past, which should have told them that Medicaid enrollment inflates when the economy goes sour.

North Carolina appears to be among the greatest practitioners of this policy. According to federal data, real Medicaid spending per resident grew by 15 percent in the 1990s — the fifth-fastest growth rate in the United States. North Carolina ranks second in the South, behind Tennessee, in Medicaid spending per capita.

Problems with the FMAP

The Medicaid program began in 1965 as Congress and then-President Lyndon Johnson sought to expand federal assistance to states offering medical services to the poor and disabled.

Federal law established broad guidelines under which states could administer their Medicaid programs. Each state has the latitude to determine “the type, amount, duration, and scope of services” after satisfying some federal benefit mandates. A state can set its payment rates to health service providers and establish its own eligibility standards within federal bounds. Therefore, qualifications for Medicaid participation vary from state to state.

This relative freedom fostered an environment where states could offer large amounts of health benefits at a comparatively low cost to state governments. The federal government shells out between 50 percent to 71 percent for the costs of the program, while states pick up the remaining percentage. A few states, including North Carolina, pass on some of their costs to local governments.

This Federal Medical Assistance Percentage is determined through a formula calculated every year that measures an individual state’s average per-capita income with the national average. Part of the problem, according to the American Congress of Community Supports and Employment Services, an advocacy organization for people with disabilities, is that “the formula used to calculate the FMAP was changed several years ago, during a time when many states enjoyed strong economies.

“Unfortunately, throughout the past two years states have faced sharply deteriorating fiscal conditions,” ACCSES President Steve Perdue wrote to congressional leaders.

“As a result, the funding necessary to sustain current Medicaid services is expected to far exceed budgeted allotments, exerting tremendous pressure on Medicaid programs. In short, the FMAP calculated for many states is not sufficient to cover provided services.”

For fiscal year 2004, the federal government approved a temporary 2.95 percent increase in the FMAP to help relieve the financially struggling states. The federal government will pay more than 74 percent of Medicaid costs for 10 of the states; 15 states will receive 64 percent to 74 percent in expenditure relief. In exchange for the higher temporary FMAP, states had to maintain their previously set eligibility levels.

According to a mid-fiscal 2004 survey of state Medicaid directors by the Kaiser Commission on Medicaid and the Uninsured, states were able to avoid drastic cuts in 2004, and at least one state reported that it was able to use the extra FMAP money “to do expansions that we might not have been able to afford otherwise.”

But that strategy could prove to be shortsighted, as difficult decisions are expected to return in 2005.

“I dread ’05, ’06, and ’07,” an unidentified state Medicaid director wrote to the Kaiser Commission. “The only reason we are getting along right now is the enhanced FMAP.”

“[The FMAP increase] really masked the underlying problem,” wrote another Medicaid director. “It delayed the need to address the fundamental cost problem for the Medicaid program.”

FMAP relief an unintended curse?

According to the Kaiser Commission, total Medicaid spending grew at an average rate of 11.9 percent from 2000 to 2002, but is expected to slow to 8.2 percent in 2004. The growth rate for the states’ share slowed more significantly, to 3.3 percent, reflecting the impact of the FMAP relief.

Enrollment growth also slowed a bit as the economy has improved. The numbers for new participation is expected to increase by 5.5 percent for 2004, down from 8.8 percent growth in 2003 and 8.5 percent in 2002.

But 2004 may turn out to be a year of “problem-fixing delayed equals problem-fixing denied.” Although many states have implemented some cost containment over the last three years for Medicaid, none changed eligibility requirements that would have prevented them from receiving the temporary FMAP relief. As a result, according to the Kaiser Commission mid-year survey, when the federal aid expires in June “the percentage increases in the state share of Medicaid in 2005 likely will be the highest experienced in many years.”

The commission noted that “recent modest growth in state revenues has not been strong enough to fill the hole that was created in state budgets when state tax revenues fell more than 6 percent in real terms in 2002.” According to Kaiser, “this low level of revenue growth also is not sufficient to maintain Medicaid funding, even at the lower Medicaid growth rates that states are now experiencing.”

FMAP relief and cost-containment efforts may have limited growth in the state share, but fiscal 2005 will likely bring another explosion in state expenditures. For example, if one of the 12 states with a 50 percent FMAP experiences a routine 8 percent growth in total Medicaid spending, the Kaiser Commission estimates the state would see its costs for Medicaid increase by at least 14.8 percent in 2005.

One of the 10 states with an FMAP greater than 70 percent would likely see its Medicaid costs rise by more than 20 percent.

“When revenue growth is 5 percent in a good economy,” one Medicaid director said, “and health care is increasing in the teens, it just doesn’t work for us.”

North Carolina’s FMAP is 65.8 percent for fiscal 2004, but it will revert to 63.6 percent for 2005.

Nationwide and N.C. spending

In terms of dollars, Medicaid expenditures at both the state and federal levels have increased dramatically. The economic boom of the 1990s gave a large financial boost to the program.

According to a report by the National Association of State Budget Officers, state Medicaid spending from 1985 to 1990 rose from $18 billion to $32 billion. From 1990 to 1995, it soared to $67 billion. By 2003, spending for all states was projected to reach $122 billion.

North Carolina’s total Medicaid expenditures followed a similar trajectory. In 1985 the state spent $665 million for Medicaid, and the amount grew to $1.42 billion by 1990.

In 1995 Medicaid cost $3.55 billion in the state, and in 2002 the program cost almost $6.6 billion.

The crushing effect Medicaid has upon states is exacerbated in a down economy, because more people enroll in the program. Medicaid growth spiked in years when the country was in recession. In North Carolina, program expenditures grew by 36 percent in 1991 and by 28 percent the next year. Medicaid spending grew by 22 percent in 2001, another recession year.

The solvency of the program depends on how much lawmakers can maintain self- control during times of plenty. Studies have found that has been a problem.

In “What Goes Up May Not Go Down: State Medicaid Decisions in Times of Plenty,” a study by the conservative American Enterprise Institute in Washington, D.C., author Michael Greve found “an enormous divergence in Medicaid spending trends among the individual states.”

Greve’s report debunked many state lawmakers who said escalating Medicaid costs were the consequence of an inadequately funded federal mandate, greater health care costs, and rising poverty levels.

“Two-thirds of Medicaid spending is now devoted to constituencies and services that the states may, but need not, cover as a condition of receiving federal Medicaid reimbursements,” he wrote. “Similarly, Medicaid expenditures rose throughout the 1990s, an economic boom period when poverty rates fell substantially.

“Thus, neither mandates nor poverty seems likely to explain the Medicaid cost explosion.”

The AEI study analyzed state Medicaid decisions and spending between 1994 and 2000, which Greve said “covers all but the first and last fiscal years of an unprecedented boom in state finances.”

Greve found that state revenues grew by 24.4 percent during the study period, while the poverty population shrank by 18.4 percent. Still, Medicaid expenditures grew by 30.8 percent during that time. Greve noted that the federal government imposed no significant new Medicaid mandates during the seven-year period.

He also dismissed claims that rising health care costs contributed greatly to the Medicaid cost increase.

National health care spending grew at a much slower rate, Greve said, and there were also disparities in Medicaid spending among the states.

“Falling poverty was accompanied by escalating Medicaid expenditures,” Greve wrote. “That escalation is largely attributable to state policy choices under loosening budget constraints.”

In North Carolina, expansion of benefits and eligibility far above the poverty level provided some workers an incentive to drop medical insurance through their employers, and to pick up Medicaid or its sister plan, the Child Health Insurance Program. The trend effectively swelled the burden on taxpayers as they left private insurance companies.

Medicaid enrollment in the state ballooned from 769,000 to 1.02 million from 1997 to 2002, a jump of more than 32 percent.

Efforts at restraining benefits and eligibility have appeared to be futile. National organizations are calling for an overhaul.

“State leaders can do for health care what (former Wisconsin) Gov. Tommy Thompson did for welfare,” said Duane Parde, executive director of the American Legislative Exchange Council. “It’s only a question of which governor has the uncommon courage to lead us through this perilous political valley called Medicaid reform.”

Chesser is an associate editor at Carolina Journal.