# Presentation: 247510

## The Economic and Fiscal Climate: The Impact on State Budgets, Medicaid and Long Term Care

- Presentation and discussion with
- User Liaison Program on
- State Long Term Care Programs
- Indianapolis, Indiana
- May 6, 2002
- Vernon K. Smith, Ph.D.
*Health Management Associates*

**Notes:**
The Economic and Fiscal Climate:  The Impact on State Budgets, Medicaid and Long Term Care, a presentation by Vernon K. Smith of Health Management Associates. Presented at the AHRQ-NGA meeting, State Long Term Care Systems: Reducing Cost, Quality and Access, held in Indianapolis, IN, May 6-8, 2002.

## Medicaid: Critically Important

**Provides health coverage for over  44 million Americans (vs. 40 million on Medicare) in 2002**
**Pays for 35 percent of all U.S. births**
**Health coverage for 1 in 5 children **
**Pays for half of all nursing home care**
**Covers 6 million low-income elderly and disabled persons on Medicare**
**Largest source of Federal grants to states**

- SOURCE: Kaiser Commission on Medicaid and the Uninsured

**Notes:**
I understand the value of the Medicaid program – the most important health care program in America today. It makes an incredible difference in the lives of 44 million people.  It is not the junior program to Medicare. Medicaid serves 10% more people than Medicare.  In terms of dollars, Medicare is a $250 billion program. Medicaid a State/Federal and, in some places, local program that also spend $250 billion. 

## Incomes of Four in Nine Elderly Were Below 200% of Poverty, 2000

**Total = 33 million**

**Less than 100% of Poverty  14%**

**100-149% of Poverty 16% **

**150-199% of Poverty 14% **

**200% of Poverty or more 56% **

- Source: Urban Institute estimates based on the March 2001 Current Population Survey. Kaiser Commission on Medicaid and the Uninsured, 2002.

**Low-Income**

**(< 200% of poverty) 44%**

**Notes:**
Medicaid is a program of niches. It serves persons beyond poverty line but looking at the senior population, 44% are at or below 2 times poverty line (200%).

## Medicaid Spending on Services for the Elderly, 1998

**Total Spending on the Elderly = $46 billion**

- Note: Does not include DSH payments. Lab and X-ray services included in site of receipt of service.
- SOURCE: Urban Institute estimates, 2000, based on HCFA-2082 and HCFA-64 reports. KCMI, 2002.

**Inpatient 5%**

**Physician/ Outpatient 3%**

**Drugs 7%**

**Other Acute 3%**

**Payments to MCOs 3%**

**Nursing Facilities**
**61%**

**ICF/MR 1%**

**Mental Health 2%**

**Home Health 5%**

**Personal Care 4%**

**Payments to Medicare 6%**

**Notes:**
Institutions comprise 62 percent of all spending and all of long term care facilities is about 75 percent of Medicaid spending.

## Medicaid’s Role in Long-Term Care

**Total = 1.5 million residents**

**Total = $ 87.8 billion**

- Source: HCFA, National Health Accounts, 2000.  Nursing home care includes intermediate care facilities for the mentally retarded (ICFs/MR).  Georgetown University Institute for Health Care Research and Policy. Slide by KCMI, 2002.

**Nursing Home Residents**

**Nursing Home Expenditures**

**Notes:**
Medicaid finances care for 70 percent of people in nursing homes but it is only 46 percent of all nursing home revenues because the rates are lower than other payers. 

## Medicaid as a Share of Total Federal Grants to States 1987 and 2000

- SOURCE: National Association of State Budget Officers, 1999 State Expenditure Report, June 2000.

**Federal Medicaid 26%**

**Federal Medicaid 43%**

**Education 18%**

**All other 28%**

**Transportation 14%**

**Transportation **
**9%**

**All other 32%**

**Education 16%**

**Cash Assistance 10%**

**Public Assistance 4%**

**Total = $245 billion**
**2000**

**Total = $108 billion**
**1987**

**Notes:**
Medicaid is the largest source of Federal grants to states. 

## Average Annual Growth Rates of Total Medicaid Expenditures 1990-2001

- SOURCE: For 1990-1999: Urban Institute estimates prepared for the Kaiser Commission on Medicaid and the Uninsured, 2000.
-  For 1999-2001: Health Management Associates survey for Kaiser Commission on Medicaid and the Uninsured, 2001.

**Average Annual Growth**

**Notes:**
In the early 1990s, growth was 27 percent a year. By middle of decade, growth was historically low, also unsustainable. At the end of the decade, growth increased to near double digit rates. This trend, along with a lot of attention being paid to state budgets, led us to look a little bit more closely at Medicaid spending at the state level.  

## Average Increases in Medicaid Spending vs. Total State Spending FY2000-2002

- SOURCE:  Health Management Associates for the Kaiser Commission on Medicaid and the Uninsured, June 2001.

**Number of States Reporting:**

**32**

**34**

**29**

**Notes:**
Medicaid grew 2 percent faster than other parts of State budgets in 2000 and 4 percent more in 2002. The primary causes for Medicaid growth are prescription drugs and provider rates. With the economic downtown, enrollment is also growing again as well as spending for long term care.  

## Top Reasons Reported by State Medicaid Officials for Medicaid Expenditure Growth in FY 2001

**Number of States reporting as top two or three reasons:**

- SOURCE:  Health Management Associates for the Kaiser Commission on Medicaid and the Uninsured, June 2001.

**Notes:**
Our State survey found that almost all States listed prescription drugs among the top three reasons for increasing costs, followed by provider rates, 31 States, enrollment, 27 States and long term care, 24 States. 

## Average Annual Rate of Growth in Selected Medicaid Expenditures, 1998-2000

- Note:  All growth rates shown represent changes in total fee-for-service expenditures for the types of services listed (except for ‘managed care,’ which includes a wide range of medical services).
- Source:  CMS, CMSO, Financial Management Reports (HCFA-64 data). KCMI, 2002.

**Notes:**
Prescription drugs really stands out with a doubling of expenditures every four years.

## Converging Trends Impacting Medicaid Now

**1. Health care cost inflation**
**2. Health care market place changing**
**3. Medicaid enrollment up **
**4. State revenue trends force budget cuts**

**Notes:**
A number of factors are having an impact on Medicaid spending. Anyone of them on their own would be significant. They include a revival of health care cost inflation, changes in the marketplace, rising enrollment, and declining State revenues.

## Annual Increase In Health Insurance Premiums, 1992-2001

- SOURCE: Kaiser/HRET survey of employer-based health plans for 1998-2000 and KPMG survey for 1992-1998, as cited in: Hogan, Ginsburg and Gabel, “Tracking Health Care Costs: Inflation is Back,” *Health Affairs*, Nov/Dec 2000. 2001 by Hewitt Associates.

**Notes:**
Private sector health care premiums follow the Medicaid growth pattern. The growth rates were high in the early 90’s, slowed in the low late 90’s and increased greater than overall inflation in 2000.

## Managed Care is less able to control costs for states... 

- Consumer backlash
- Providers now less willing to bear risk or participate in Medicare or Medicaid
- MCOs less able to restrict access
- Managed care savings already realized
- Costs driven by technology and prescription drugs

**Notes:**
There are lessons here as people apply the principles of managed care in the long term care arena. We have provider and consumer push-back.  The marketplace does not allow savings because so much is driven by drugs and technology. Direct to consumer advertising is a huge factor in drug costs.  There are about 9,900 drugs. Half the increase in cost comes from sales of the 50 most heavily advertised drugs.  

## “Direct-to-Consumer” ads linked to higher Rx costs?

- The 50 most heavily advertised Rx accounted for 48% of the increase in total retail Rx sales (1999-2000).
- The 9,850 other Rx accounted for 52% of the increase in Rx sales.
- Sales rose 32% for the 50 most heavily advertised drugs; all others up 13.6%.

**Source: *****Prescription Drugs and Mass Media Advertising, 2000*****, NIHCM, November 2001, citing: American Institutes for Research analysis of Competitive Media Reporting data cited in June 2001 Med Ad News and Scott-Levin Year 2000 Prescription Audit Data.**

**Notes:**
There is also an increase in the number of prescriptions per person. Most of the new prescriptions shift the consumer to higher priced drugs and about 20 percent is due to inflation.

## Total Medicaid Enrollment in 50 States and the District of Columbia

- Monthly Enrollment in Millions

- Source: Compiled by Health Management Associates from State Medicaid enrollment reports for the Kaiser Commission on Medicaid and the Uninsured, 2001.

**Notes:**
Nationally, the decline in Medicaid enrollment bottomed out in 1998, and has been rising steadily since then through end of 2001 and continued unabated.

## Source: USDHHS: Administration for Children and Families

**Source: USDHHS: Administration for Children and Families**

**Notes:**
This slide shows a 40 year view of the welfare cash assistance/TANF program.  TANF saw big growth until 1970, then stability until the 1990’s when it saw an increase to 14.4 million people in 1994. Then it dropped to 5.8 million last year.  We have seen a big effect on Medicaid with people losing TANF benefits even though they may still have been eligible for Medicaid. 

## Total U.S. SCHIP Enrollment

**0.9 Million**

**1.8 Million**

**2.7 Million**

- Source: Vernon Smith, David Rousseau and Jocelyn Guyer, *CHIP Program Enrollment December 2000,* The Kaiser Commission on Medicaid and the Uninsured, October 2001. Publication #4005.

**December**

**December**

**December**

**Notes:**
CHIP is also a driver for enrollment, with three million kids in CHIP and Medicaid expansion programs. CHIP outreach has contributed to Medicaid enrollment since many of those applying for CHIP are actually eligible for Medicaid. For every child enrolled in CHIP, there are 3,4 or 5 who are eligible for and enroll in Medicaid.

## Source: Health Management Associates from State enrollment reports, for the Kaiser Commission on Medicaid and the Uninsured, 2001. 

**Source: Health Management Associates from State enrollment reports, for the Kaiser Commission on Medicaid and the Uninsured, 2001.**** **

**Notes:**
Even when caseloads grew slowly, persons with disabilities and elders were increasing. This seems likely to continue in the future. 

## Medicaid Prescription Drug Spending, 1998

**Total = $14.5 billion***

- * 8.2% of total Medicaid spending on services. Includes both fee-for-service
- expenditures and estimated drug spending by managed care organizations
- SOURCE: Urban Institute Estimates, 2000.

_**Expenditures by Eligibility Group**_

**Notes:**
The cost per individual is six times more expensive for elderly and disabled beneficiaries than for children and families. Eighty percent of people using prescriptions drugs are elderly and disabled. Future forecasts project the largest increases for drugs will be incurred by elderly and disabled beneficiaries. This is important as States think about strategies to control drug spending. 

## Medicaid Expenditures Per Enrollee, 2001

**$1,447**

**$2,283**

**$11,238**

**$12,322**

- SOURCE: CBO January 2002 Baseline.

## Medicaid Payments vs. Recipients U.S. in 2001

- Recipients: Most are children and families
- Disabled 			17%
- Elderly			10%
- Children and Families	73%
- Payments: Most are for disabled and elderly:
- Disabled 			43%
- Elderly			28%
- Children and Families	29%

- Source: Calculated by Health Management Associates from CBO January 2002 Baseline. Percentages exclude payments not for specific services, e.g., disproportionate share payments to hospitals.

**Notes:**
Here we see a familiar relationship – recipients vs. payments. Although most beneficiaries are kids and adults, they account for significantly less spending per capita than elders and people with disabilities. States can’t balance their budgets on back of kids, so must do so on groups that use more services.

## Projected Total Medicaid Spending Per Enrollee, 2001-2005

- Note: Includes federal and state spending on benefits.
- SOURCE:  Health Management Associates calculation based on CBO baseline, April 2001 Update.

**25**

**Notes:**
CMS forecasts between 2002 and 2007, 8.6 percent growth. This is significantly higher than forecasted revenue growth. 

## FY2002 State Fiscal Stress

- General Tax Revenues down 3.8%
- Rainy day and reserve funds are being drained
- Net borrowing by state and local governments is at record levels
- Spending pressure is increasing, led by Medicaid

**Source: Mark M. Zandi, *****The Outlook for State Tax Revenues*****, **
**Economy.com. February 2002**

**Notes:**
States have experienced significant fiscal stress in 2002. Tax revenues are down 3.8%, rainy day reserve funds are being used, net borrowing is at historic highs, and spending pressure is led by Medicaid.

## “They are not crying wolf.”

- Gail R. Wilensky, former HCFA Administrator, on national Public Radio, commenting on the crisis facing states due to the economic slowdown, decreasing state revenues and increasing Medicaid costs.

**Source: National Public Radio interview in NPR series titled: “States Fear **
**Medicaid Meltdown,” Interview by Julie Rovner on April 10, 2002.**

**Notes:**
A former CMS administrator, Gail Wilensky, said recently that the States are not crying wolf.  States have real need.  For a while comments on National Public Radio reflected thoughts such as “States brought it on themselves, by expanding coverage and growing.”  But attitudes are changing as people begin to see this is a real problem.

## Average State Year-End Balances as a Percentage of Expenditures, FY 1995 -2002

- SOURCE:  NASBO, December 2001.  Fiscal year 2001 is preliminary actual; fiscal year 2002 is based on appropriations, prior to mid-year adjustments.

**Notes:**
This chart shows the surpluses States have had at the end of the past eight fiscal years.  Balances peaked in 2000, have declined since then, and are now at lowest level since 1995.
But balances are still healthy, and probably within the range that a financial analyst would accept as healthy for an individual State.

## Total Medicaid Expenditures as % of Total State Expenditures1987-2004

**Percent**

**10%**

**14%**

**20%**

**20%**

**23%**
**Est.**

**Source: For 1987-2001, from NASBO, *****State Expenditure Reports*****. Various years.**
** ****For 2002-2004, projections by Health Management Associates, February 2002.**** **

**Notes:**
In 1985, Medicaid was 8 percent of State budgets. It has grown to over 20 percent. Because of reorganization and growing revenues, it was steady at about 20 percent during the late 1990s. Now it has grown higher and in some States, Medicaid is 25 percent of the State’s budget. 

## State and Medicaid Budgets are now under Stress

- Revenue forecasts are down, Medicaid spending up, forcing States  to cut budgets
- By October 2001, 2/3 of States had initiated budget reduction actions
- Medicaid  programs are being asked to propose reductions of up to 10% - 15%
- Options previously off the table are now being considered

**Source: Survey of State Medicaid and Budget Officials by Health Management Associates for Kaiser Commission on Medicaid and the Uninsured, October 2001.**** **

**Notes:**
Many cuts have been proposed and pharmacy is a big target. Directors are asked to cut spending 15-20 percent. States are finding ways to use prior authorization or discounting the price to control the 18-20% annual growth in drugs.

## The Medicaid Budget Dilemma

- Medicaid need goes up just when the state’s ability to pay for it goes down
- States must cut total Medicaid spending  $2 - $4 to save one state general fund dollar
- Every Medicaid cut affects local health care providers and individuals who need health care services
- Medicaid spending cuts are usually needed immediately, but it takes time to achieve savings
- Choices are limited by federal rules

**Notes:**
The need for Medicaid goes up when budgets least able to support the program – as it is a dually funded program, federal matching funds also cut, depending of state matching grants, so State cuts are larger in order to achieve the same budget savings - $2 - $4 in spending to save a dollar in State revenues. 

## Budget Cuts are the Rule in FY2002 

- Medicaid options previously off the table are now being considered, including cuts and restrictions in eligibility, benefits, payments
- Key areas for cost containment are pharmacy, hospital, long term care, managed care
- Even with cuts, most states will likely need supplemental funding for Medicaid

**Notes:**
Policy makers are considering just about all limitations or reductions, even those that may have been rejected in early rounds of review. The primary areas of focus are pharmacy, hospital, long term care and managed care programs. 

## Medicaid Cost Reduction Actions FY2002

- Restrictions in pharmacy costs and use
- Prior authorization, preferred Rx lists
- Discounts from AWP: –13% to –15% for brands
- PBMs, pharmacist fees, purchasing coalitions
- Limits on provider payment increases
- Care coordination, disease management, managed care

- SOURCE:  Health Management Associates Survey of States for Kaiser Commission on Medicaid and the Uninsured, June 2001.

**Notes:**
In FY 2002, states cut back pharmacy costs by requiring prior authorization and using preferred drug lists, adjusting payment to a percentage of the average wholesale cost, using benefits managers and joining purchasing coalitions. 

## Long Term Care Medicaid Cutbacks FY2002

- Payment freezes, delays in scheduled payment increases
- Curtailing Home and community-Based Care
- Medically Needy eligibility limits
- Looking at ways to “organize” the system

**Notes:**
In long term care, provider payment rates have been frozen. Proposals to eliminate medically needy eligibility have been made in at least three States that will affect the long term care arena. States have proposed applying the principles of managed care in the long term care arena to reorganize the system and save money  through case management, care coordination or some other approach 

## More Medicaid Cutbacks FY2002

- Benefit reductions or limits, copays
- Delaying Cervical and Breast Cancer coverage
- Reducing eligibility for expansion groups, medically needy
- Curtailing SCHIP outreach
- Expanding managed care, bid services
- New edits, audits, prior authorizations, maximize Rx rebates, other insurance Supplemental appropriations, Upper Payment Limit (UPL) arrangements

**Notes:**
We need to know the organizational and structural principles to find a way to apply principles of care coordination to the long term care delivery system. 

## Number of States with Supplemental Medicaid Budget Funding FY2000-2002

- SOURCE:  Health Management Associates for the Kaiser Commission on Medicaid and the Uninsured, June 2001.

**Mid-Year **
**Overall**
**Budget **
**Shortfall**

**+**

**+**

**Notes:**
Many States will need supplemental appropriations to cover budget shortfalls driven by Medicaid. Last year thirty seven states had supplemental appropriations to Medicaid and this year, there will be at least that many. In January, over 40 States had a budget shortfall with Medicaid leading the way. Dramatic Medicaid spending reductions have been proposed, but drawing down balances will not be among the options available in 2003.

## Medicaid is a Federal – State Partnership, but...

- All the important decisions about Medicaid are made by  states
- State decisions about eligibility, coverage and payments reflect the values, priorities, economics and health care traditions in each state...a virtue of the current structure
- State fiscal capacity is too limited  to finance Medicaid expenditure growth...an Achilles’ heel

**Notes:**
Medicaid is a Federal/State partnership but States make all the important decisions. States can structure the program to reflect the values, priorities and health care system, the realities in your State.  But it is also the Achilles heel of the program when it comes to funding. Medicaid needs stable funding and it is a problem in times of budget downturns. 

## The Outlook: Increasing Medicaid Budget Stress

- Medicaid cost pressure will be driven by enrollment growth, more elderly and disabled, double-digit cost growth in the medical market place
- Even with rebounding economy, increases in state revenues will be dwarfed by Medicaid expenditure growth
- States’ ability to finance Medicaid in the long run is in question, under the current federal rules and federal financing formula

**Notes:**
The outlook is troubling – increasing costs, demographics of increasing numbers of elderly and disabled beneficiaries, and increased spending. Even with a rebounding economy, increases in State revenues will be dwarfed by Medicaid increases. The States’ ability to finance Medicaid in the long run is called into question at this time.