FEDERAL MEDICAID ASSISTANCE TO STATES: IMPACT ON PRENATAL CARE

1. INTRODUCTION Between 1985 and 2003, total public and private health-care costs in the United States rose from 10.1% to 15.3% of gross domestic product (GDP). This translates to a staggering change from $611 billion to $1,579 billion in real terms (year 2000 dollars). Since the public share of health expenditures is 46%, health care in general (and Medicaid in particular) are straining budgets both at the federal and at the state levels (Assistant Secretary for Planning for Evaluation Office of Health Policy, 2005). These pressures were not foreseen when Medicaid was originally designed. Created in 1965 by Congress through a major amendment to the Social Security Act, Medicaid was conceived as a basic health insurance program for people with low incomes. Through successive amendments that extended both breadth and depth of coverage, Medicaid has ballooned into a major expenditure category for both states and the federal government. (1) In 2005, Medicaid covered 59 million people and the cost of $323 billion was shared by the states and the federal government (National Association of State Budget Officers, 2006). Even though the states received reimbursement of $182 billion from the federal government that year, they still spent an average of 22% of their budgets on nonreimbursed Medicaid expenditures (National Association of State Budget Officers, 2006). Notwithstanding the recent slowing in Medicaid expenditures (which appears to have been achieved by states taking actions such as cutting payment rates to providers, restricting eligibility, reducing benefits, and increasing copayments), the growth in Medicaid spending is forecasted to outstrip the growth rates of GDP and the general level of prices (Congressional Budget Office, 2006). (2) Figure 1 traces the growth of real Medicaid expenditures (combined federal and state costs). Within broad federal guidelines and mandates, states have considerable flexibility in crafting their individual programs via varying eligibility requirements, optional services covered, and modes of payments to providers. In an effort to create more equity among beneficiaries and taxpayers in different states, the federal government created the federal medical assistance percentage (FMAP) system whereby states are reimbursed a certain percentage (called the FMAP) of Medicaid costs incurred. This rate is state specific and determined annually based on the ratio of a 3-yr average of the state's per capita income to the national per capita income. (3) Mandated to range between 50% and 83%, the average FMAP in fiscal year 2000 was 57%, with Mississippi getting the highest percentage of 76.8 that translates to an aid of 76.8 cents from the federal government for every dollar spent. (4) Despite this aid, the continuing strain on state budgets has spawned various policy proposals to modify or change the existing FMAP system that determines the federal-state Medicaid cost sharing. A primary goal of these reforms has been to increase the efficiency of expenditures and/or reduce their magnitude (Moon and Liska, 1995). These plans have included options such as increasing the FMAP (to reduce interstate inequality) to replacing the FMAP with a block grant system (to increase efficiency). The latter has been supported by the current and several past administrations (Holahan and Weil, 2003).(5) Cutting back on eligibility and benefits at the state level, as well as proposed policy options to tinker with the existing reimbursement system, have sparked controversy, triggering fears of increasing inequities in the health-care system. The long-term consequences of such state actions can be ambiguous. State policies that cap benefits and shift the prescription drug-spending burden further on patients have been shown in the clinical literature to have an unintended consequence of increasing the rate of emergency hospital visits and nonelective hospitalizations (Hsu et al. …