Medicaid: Improving Responsiveness of Federal Assistance to States during Economic Downturns
Published: 2011-03-31T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In response to the most recent U.S. recession, from December 2007 to June 2009, Congress passed the American Recovery and Reinvestment Act of 2009 (Recovery Act). To help states maintain their Medicaid programs and provide states with general fiscal relief, the Recovery Act temporarily increased the federal share of Medicaid funding for states. The federal funding states receive for Medicaid is determined by a statutory formula--the Federal Medical Assistance Percentage (FMAP). The Recovery Act also required GAO to study options for providing a temporary increased FMAP in response to future recessions. GAO reviewed how past recessions affected states' ability to fund Medicaid, examined the responsiveness of past increased FMAP assistance to state needs, and identified options for adjusting the increased FMAP formula for use during future recessions. To conduct this work, GAO reviewed its previous reports on recessions and the increased FMAP and similar work from other organizations. GAO analyzed federal Medicaid data and enrollment data provided by state Medicaid directors. GAO also analyzed labor market data from the Bureau of Labor Statistics, state revenue data from the Census Bureau, and the Federal Reserve Bank of Philadelphia's Coincident Indexes to assess states' ability to fund Medicaid during economic downturns. GAO identifies options for Congress to consider but does not make recommendations in this report.
section_title: What GAO Found
paragraphs: Past recessions hampered states' ability to fund increased Medicaid enrollment and maintain existing services. Both the 2001 and 2007 recessions resulted in increased Medicaid enrollment and decreased revenues, though states' experiences varied. During the 2007 recession, total state tax revenues declined by 10.2 percent from the fourth quarter of 2007 to the second quarter of 2009, with individual state experiences varying. For example, North Dakota had a revenue increase of 6.9 percent while Arizona had a decline of 23.1 percent. In addition, the effect of increased Medicaid enrollment and decreased revenues persisted after the recessions ended, causing states to further adjust their Medicaid programs. The increased FMAP funds provided by the Recovery Act were more responsive to state Medicaid needs than were funds provided after the 2001 recession. Overall, the Recovery Act funds were timed for state Medicaid funding needs. Assistance began during the recession while nearly all states were experiencing Medicaid enrollment increases as indicated by rising unemployment and revenue decreases as indicated by declining wages and salaries. The FMAP funds were targeted for Medicaid enrollment growth, but did not distinguish among states with varying degrees of reduced revenue in the allocation of assistance. The increased FMAP following the 2001 recession was provided well after the recession ended and was not targeted for state Medicaid needs. Past recessions offer options for improving the responsiveness of temporary FMAP increases to state Medicaid program needs. More responsive assistance can aid states in addressing increased Medicaid enrollment resulting from a national recession, as well as addressing decreases in states' revenues. GAO has revised a prototype formula for temporary FMAP increases it developed in 2006. The revised formula would address the timing and targeting of funds, and further improve the responsiveness of the increased FMAP funding. In particular, these revisions (1) use an automatic trigger to start the assistance program closer to the onset of a national recession, (2) add several quarters of transitional assistance before ending the increased FMAP assistance, and (3) target assistance by calculating the increased funding needed on the basis of the economic conditions of each state. In commenting on a draft of this report, the Department of Health and Human Services (HHS) agreed with the analysis and goals of the report while emphasizing that changes to the FMAP formula must be authorized by statute. HHS also stated that it is critical to align changes in the FMAP formula to individual state circumstances in order to avoid unintended consequences for beneficiaries as well as provide budget planning stability for states. GAO agrees that statutory changes would be necessary to implement any adjustments to the FMAP, but does not make recommendations regarding particular actions in this report.

section_title: Letter
paragraphs: From December 2007 through June 2009, the nation experienced the most  serious economic crisis since the Great Depression. This recession saw  overall economic activity in the United States decrease by 4.1 percent with  a loss of 8.3 million jobs. Although the National Bureau of Economic  Research (NBER) determined that the recession ended in June 2009, the  effects of the economic crisis remained for many states. As of December  2010, 25 states continued to experience unemployment rates above   9 percent, and more than 14.5 million people were considered  unemployed—over one-third of whom had been jobless for 6 months or  longer. As in past recessions, as unemployment increased so did  enrollment in Medicaid, a joint federal-state health care program for  certain low-income individuals. The 2007 recession also resulted in state  tax revenue decreases, limiting states’ capacity to maintain funding for  many programs, including Medicaid.
The amount of federal funds states receive for their Medicaid programs is  determined by the Federal Medical Assistance Percentage (FMAP)  formula. The FMAP is the percentage of expenditures for most Medicaid  services that the federal government pays; the remainder is referred to as  the state share. In response to the 2007 recession, and the recession in  2001, Congress temporarily increased the regular FMAP to provide states  with additional funding for their Medicaid programs. Following the 2001  recession, the Jobs and Growth Tax Relief Reconciliation Act of 2003  provided states $10 billion in assistance through an increased FMAP. In  response to the 2007 recession, to provide states with fiscal relief and  protect state Medicaid programs, Congress provided states with increased  FMAP funding through the American Recovery and Reinvestment Act of  2009 (Recovery Act) which totaled an estimated $89 billion through  December 2010. Subsequently, Congress extended this source of funding  through June 30, 2011, subject to certain modifications, which will result  in states receiving an estimated $16.1 billion in increased FMAP  assistance.
In March 2010, the Patient Protection and Affordable Care Act (PPACA),  as amended, was enacted. PPACA expands Medicaid eligibility to include  most individuals with incomes at or below 133 percent of the federal  poverty level (FPL) beginning in January 2014. As this provision of  PPACA is implemented, states will expand coverage under the Medicaid  program to an estimated 18 million additional people, which could  further affect states’ ability to fund Medicaid during future economic  downturns.
In a 2006 report, we provided options for Congress to consider when  assisting states in their efforts to meet increased Medicaid expenditures  resulting from recessions. We noted that among states, economic  downturns have varied widely in their onset, depth, and duration, and they  did not coincide exactly with national recessions. Likewise, increases in  Medicaid enrollment and expenditures were specific to individual states  because of differences in states’ economic conditions, Medicaid program  designs, and health care costs. To address these differences, we noted that  calculating the increased FMAP using changes in states’ unemployment  rates was a key variable because it reflected the potential for increased  Medicaid enrollment resulting from a state’s economic downturn.
The Recovery Act mandated that we conduct an analysis of past national  economic downturns, including the effects of the increased FMAP during  these periods, and that we provide recommendations, as appropriate, for  further modifications of the increased FMAP formula to make it more  responsive to state Medicaid program needs during such periods in the  future. GAO is issuing two reports to address this mandate. This report,  (1) describes the effect past recessions, in 2001 and 2007, had on the  ability of states to fund their Medicaid programs; (2) examines the  responsiveness of past increased FMAPs to state Medicaid program needs  resulting from the 2001 and 2007 recessions; and (3) identifies options for  adjusting the FMAP to make it more responsive to state Medicaid program  needs during future recessions.
To describe the effects of past recessions on state Medicaid programs, we  reviewed prior GAO reports that examined the effect of past recessions on  Medicaid enrollment and expenditures, as well as the responsiveness of  increased FMAPs to state Medicaid funding needs. We reviewed similar  research by The Kaiser Commission on Medicaid and the Uninsured, the  Urban Institute, and other organizations on the relationship between  recessions, increased unemployment, and increased Medicaid enrollment.  We analyzed Medicaid enrollment data from the Centers for Medicare &  Medicaid Services (CMS)—the agency that oversees states’ Medicaid  programs—and used Medicaid enrollment data that we collected from a  survey of state Medicaid directors or their designated contacts in August  2009 and March 2010. We did not independently verify these data;  however, we reviewed all federal Medicaid data and survey responses for  internal consistency, validity, and reliability. On the basis of these  activities, we determined these data were sufficiently reliable for the  purpose of our report. We also analyzed state-level economic indicators,  including data on unemployment from the Bureau of Labor Statistics  (BLS), and quarterly state tax revenue data from the Bureau of the Census.  To compare the economic conditions across states, we analyzed and  compared the Federal Reserve Bank of Philadelphia’s Coincident Indexes,  which summarize the economic conditions of each of the 50 states. We  obtained additional state-specific data from the National Association of  State Budget Officers (NASBO), the National Conference of State  Legislatures, and the National Governors Association. Staff from the  American Enterprise Institute for Public Policy Research, the Center for  Studying Health System Change, and Federal Funds Information for States  provided additional information on the effect of past recessions on state  economies and Medicaid programs.
To examine the responsiveness of past increased FMAPs to state Medicaid  program needs, we reviewed the relationship between the increased  FMAP and specific state circumstances by analyzing the Federal Reserve  Bank of Philadelphia’s Coincident Indexes, BLS data on changes in  unemployment, and data on wages and salaries from the Bureau of  Economic Analysis (BEA). We assessed the reliability of the data we used  for this review and determined that they were sufficiently reliable for our  purposes. We defined responsiveness in terms of two criteria: timing and  targeting. Timing refers to whether funds were provided when states most  needed them. Targeting refers to whether the distribution of funds  reflected different state needs for funding the cost of new Medicaid  enrollees attributable to the recession and maintaining their existing  Medicaid programs as states’ revenues declined as a result of the  recession.
To identify options for adjusting the FMAP formula during recessions, we  analyzed data from BLS, BEA, and the Census Bureau to assess the  revenue capacities of states to meet Medicaid program needs during  recessions. In addition, we reviewed our previous work on increasing the  FMAP in response to recessions, and investigated alternatives that would  make it more responsive to specific state needs. This report presents a  framework and discussion of key design decisions for a modified  increased FMAP formula. A subsequent GAO report will present additional  detail on a modified formula and simulations of its effects on the  allocation of assistance to states.
We conducted this performance audit from April 2010 to March 2011 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.
subsections: section_title: Background
paragraphs: The causes of national recessions, their depths, and durations vary  considerably. For example, the 2001 recession lasted only 8 months, while  the 2007 recession was 18 months long. The nation also experienced  different declines in economic activity, as measured by gross domestic  product (GDP), due to these recessions. For example, during the 2007  recession GDP decreased 4.1 percent whereas GDP decreased by   0.3 percent during the 2001 recession.
Recent economic research suggests that while economic downturns  within states generally occur around the same time as national recessions,  their timing and duration can vary. States have different industry mixes  and resources, and they may enter a downturn before the national  recession begins or well after the recession has set in. The timing of a  state’s economic downturn is determined by its individual economic  condition and revenue structure, which can also affect a state’s capacity to  fund its Medicaid program. (See fig. 1 for differences in the timing, depth,  and duration of state downturns compared to the national recessions of  2001 and 2007.)
Medicaid enrollment, and the state funding needed to support the  program, increase during and after national recessions, when the number  of people with incomes low enough to qualify for Medicaid coverage rises  as economies weaken. Researchers have estimated that for every   1 percent increase in national unemployment, Medicaid enrollment  increases by 1 million. Moreover, as the economy weakens, states have  reduced revenues with which to fund their share of the Medicaid programs  in place prior to the recession.
Under the regular FMAP, the federal government pays a larger portion of  Medicaid expenditures in states with low per capita income (PCI) relative  to the national average, and a smaller portion for states with higher PCIs.  Use of PCI was, by design, intended to adjust for differences in state  funding ability. PCI also serves as an indicator for the number of people  eligible for Medicaid in a given state. The Department of Health and  Human Services (HHS) calculates and publishes the regular FMAP for  each state for each federal fiscal year based on a statutory formula that  incorporates PCI. The regular FMAP for federal fiscal year 2010 for states  ranged from 50.00 percent to 75.67 percent, and was calculated using the  following formula:  FMAPstate = 1 - ( (PCI state)/( PCI U.S. )
PCI is a poor proxy for the size and cost of serving  states’ poverty populations, which vary considerably. For example, the  elderly and disabled constitute about 25 percent of the Medicaid  population, but constitute approximately 67 percent of all Medicaid  expenditures. As a result, two states with low PCIs may have very different  proportions of elderly persons potentially eligible for Medicaid, and thus  very different amounts of Medicaid spending. In addition, the regular  FMAP for each state is generally published in the Federal Register a year  in advance of the federal fiscal year in which it will apply. For example,  regular FMAPs for fiscal year 2011 (which began October 1, 2010) were  published November 27, 2009, based on a 3-year average of PCI data from  2006 through 2008. This lag time between the publication and  implementation of the regular FMAP provides states with an opportunity  to adjust to changing levels of federal assistance. However, it also means  that the PCI amounts used to calculate FMAPs for a given fiscal year do  not reflect states’ economic conditions for that year.
To help states meet additional Medicaid program needs, and to provide  fiscal relief, Congress established temporary FMAP increases for states in  2003, 2009, and 2010. Increased FMAPs help states maintain their  Medicaid programs during downturns. They may also free up funds states  would otherwise have used for Medicaid and make them available to  address other state budget needs. The FMAP is a readily available  mechanism for providing temporary assistance to states because  assistance can be distributed quickly, with states obtaining funds on a  quarterly basis through Medicaid’s existing payment system. In 2003, the  increased FMAP provided states with $10 billion in assistance. When  combined, the increased FMAP formulas in the Recovery Act and the 2010  extension provided states with an estimated $105.1 billion in assistance.  These formulas also incorporated three components for calculating the  increase: a component that protected states against decreases in FMAP,  an across-the-board component, and a component based on a state’s  increase in unemployment. (See table 1 for more information on these  increased FMAPs for the 2001 and 2007 recessions.)
The enactment of PPACA affects federal and state funding of the Medicaid  program. For example, PPACA establishes an eligibility threshold for state  Medicaid programs by requiring states, beginning on January 1, 2014, to  cover a new eligibility group of nonelderly, nonpregnant individuals at or  below 133 percent of the FPL. Consequently, the number of individuals  who qualify for Medicaid is estimated to increase by 18 million, according  to the CMS actuary. The federal government will pay 100 percent of the  cost of covering newly eligible individuals in fiscal years 2014, 2015, and  2016, with the federal match gradually reduced to 90 percent by 2020.  States will continue to receive the regular FMAP for most individuals who  meet the Medicaid eligibility requirements that each state had in place  prior to the enactment of PPACA.
section_title: Past Recessions in 2001 and 2007 Hampered States’ Ability to Fund Medicaid
paragraphs: Past recessions hampered states’ ability to fund increased Medicaid  enrollment and maintain existing services. Within this broad national  trend, however, there was significant variation among states in terms of  their increases in Medicaid enrollment and revenue losses. Further, these  enrollment increases and revenue declines continued after the national  recessions ended, and states made additional adjustments to their  Medicaid programs.
subsections: section_title: Past Recessions Resulted in Increased Medicaid Enrollment, though States’ Experiences Varied
paragraphs: Medicaid enrollment increased during past recessions, in part due to  increased unemployment, which led more individuals to become eligible  for the program. During the 2001 recession—March 2001 through  November 2001—the national unemployment rate increased from 4.3 to  5.5 percent, and total Medicaid enrollment increased by 5.6 percent, which  added approximately 2 million enrollees to the Medicaid program. During  the 2007 recession, from December 2007 through June 2009, the  unemployment rate grew from 5.0 to 9.5 percent, while Medicaid  enrollment rose by 9.7 percent—adding nearly 4.3 million enrollees to the  program.
Although Medicaid enrollment increased nationally during the 2001 and  2007 recessions, the percentage change varied considerably at the state  level. All new Medicaid enrollment was not attributable to past recessions,  as some states expanded eligibility or received waivers that increased the  size of their programs. In 2001, changes in enrollment ranged from an  increase of 12.4 percent in Mississippi’s Medicaid program to a decline of  5.6 percent in New Jersey. The 2007 recession also showed variation. From  December 2007 through December 2009, Nevada experienced 32 percent  enrollment growth in its Medicaid program, while Tennessee’s Medicaid  program enrollment remained steady. Although the magnitude of the  enrollment increases across states was largely due to the economic  downturn, program expansions and enrollment outreach activities  implemented in some states also contributed to enrollment growth.  Figure 2 shows the changes in Medicaid enrollment among the states and  the District of Columbia during the 2007 recession.
section_title: Past Recessions Resulted in Decreased State Revenue to Maintain Medicaid Services, though States’ Experiences Varied
paragraphs: As economic activity slowed during the 2001 and 2007 recessions, states’  revenues decreased, which hampered states’ ability to fund their existing  Medicaid services and support new enrollment. For example, due to the  2007 recession, total state tax revenues declined by 10.2 percent from the  fourth quarter of 2007 to the fourth quarter of 2009. However, the depth  and duration of states’ economic downturns varied. As shown in figure 3,  44 states and the District of Columbia experienced decreases in tax  revenue during the 2007 recession; for example, Iowa experienced a   1 percent revenue decrease, while revenue declined 23.1 percent in  Arizona. Over this same period, North Dakota’s tax revenue increased by  6.9 percent.
As a result of the revenue decreases and Medicaid enrollment increases  brought on by the 2001 and 2007 recessions, states took steps to contain  Medicaid costs. For example, in response to the 2001 recession, 34 states  took actions to reduce costs that included freezing or reducing provider  payments; capping program enrollment; eliminating coverage for optional  services; and increasing premiums and copayments for prescription drugs.  Revenue decreases due to the 2007 recession prompted 31 states to cut  health care programs by reducing or freezing provider rates or increasing  provider taxes. Other states took steps to control prescription drug costs,  amend enrollment criteria for optional eligibility groups, and limit or  eliminate coverage for optional services, such as mental health or dental  care.
section_title: Increased Medicaid Enrollment and Decreased Revenue Continued after Recessions Ended
paragraphs: After the 2001 and 2007 recessions ended, Medicaid enrollment remained  high or increased in most states, even as revenues continued to decrease  or remain below their prerecession levels. As the economic downturns  persisted, states remained hampered by both effects in their ability to fund  Medicaid and other state programs. According to NASBO, Medicaid is the  largest component of state budgets. Therefore, to balance their budgets,  states implemented a variety of actions to contain costs, such as modifying  eligibility criteria, limiting benefits, and instituting new or higher  copayments.
Following the 2001 recession, which ended in November of that year, the  national unemployment rate remained above prerecession levels, peaking  at 6.3 percent in June 2003—19 months after the recession was declared  over. In the second quarter of 2002, state tax revenue dropped by   3.2 percent, continuing a decline that started during the 2001 recession.  Further, Medicaid enrollment increased by 9.5 percent in 2002, and by  another 5.1 percent in 2003. As a consequence in 2002, states instituted  additional Medicaid enrollment requirements, such as waiting lists,  increased premiums, and changes in optional eligibility categories. In  some cases, a state’s enrollment increase was due to policy changes. For  example, the most significant factor driving Utah’s enrollment growth was  the state’s decision to extend a limited benefit package to parents and  adults without children in fiscal year 2003.
In June 2009—the designated end of the 2007 recession—the national  unemployment rate was 9.5 percent and rising, reaching 10.1 percent in  October 2009. As a result, Medicaid enrollment continued to grow from  48.7 million in June 2009 to 49.7 million in October 2009, and to   50.7 million in February 2010. In most states, tax revenue remained below  prerecession levels after the 2007 recession, resulting in continued  budgeting challenges in 41 states. To balance their budgets, states  implemented various Medicaid program cuts and other adjustments. For  example, 28 states reduced or froze provider payment rates; 22 states  reported implementing or considering restrictions on optional benefits,  such as eliminating dental and vision services; 38 states implemented cost  containment initiatives in the area of prescription drugs; and 18 states  implemented utilization controls on long-term care services. According to  NASBO, 23 states expect budget deficits for fiscal year 2012, and 17 states  anticipate budget gaps for fiscal year 2013, presenting further challenges  to funding Medicaid.
section_title: Recovery Act Funds Were More Responsive to State Medicaid Needs than Previous Assistance
paragraphs: Increased FMAP funds provided by the Recovery Act were better timed  and targeted for state Medicaid needs than were funds provided following  the 2001 national recession. Overall, the Recovery Act funds were timed  for state Medicaid needs because assistance began during the 2007  national recession while nearly all states were experiencing Medicaid  enrollment increases and revenue decreases. The funds were targeted for  state Medicaid enrollment growth based on changes in state  unemployment rates, but assistance was not allocated on the basis of a  state’s ability to generate revenue. As a result, the increased FMAP funding  did not reflect varying degrees of decreased revenue that states had for  maintaining Medicaid services. In contrast, the increased FMAP funds for  the 2001 recession were provided well after the recession ended and not  targeted on the basis of need.
subsections: section_title: Recovery Act Assistance Was Timed to Meet State Medicaid Needs Resulting from Enrollment Increases and Revenue Decreases
paragraphs: The Recovery Act assistance provided to states was timed to meet state  Medicaid needs resulting from Medicaid enrollment increases and revenue  decreases, beginning midway through the 2007 national recession. As  shown in figure 4, the initial period of assistance under the Recovery Act  began approximately three quarters after the December 2007 start of the  recession, and continued for six quarters beyond the June 2009 end of the  recession. Although the timing of state economic downturns varied,  almost all states were in an economic downturn during the period covered  by the increased FMAP, beginning in October 2008, and funds continued to  be available as state economies began to recover.
Although Recovery Act funds were provided during the period of  economic downturn in most states, states experienced their peak Medicaid  needs at different times during the 2007 recession. As shown in figure 5,  the period of peak unemployment occurred after the 2007 recession in  most states; however, no state experienced a peak in unemployment prior  to the receipt of Recovery Act funds. Almost all states experienced  declining wages and salaries during or following the 2007 national  recession, and the period of increased FMAP assistance included the  lowest point of total wages and salaries in most states.
section_title: Recovery Act Funds Were Targeted to Increased Medicaid Enrollment, but Not to State Revenue Decreases
paragraphs: The increased FMAP funds provided by the Recovery Act were targeted  for increases in states’ unemployment, but did not target the varying  degrees of state revenue decreases that occurred during the 2007  recession. Furthermore, some provisions of the Recovery Act—such as the  across-the-board FMAP increase—were not targeted, and states with  higher regular FMAPs received a greater increase in funding.
The increased FMAP funds included a factor for changes in unemployment  as a proxy for targeting changes in Medicaid enrollment. As a result,  changes in state Medicaid shares based on the unemployment component  of the increased FMAP formula were strongly correlated with changes in  state unemployment rates. States with a greater increase in  unemployment received a greater reduction in their share of Medicaid.  Figure 6 reflects the three tiers of state assistance provided by the  Recovery Act based on different levels of unemployment growth.
However, reductions in state Medicaid shares produced by the overall  increased FMAP formula—including the hold-harmless provision, which  prohibited decreases in the regular FMAP, and across-the-board  increases—were only slightly correlated with increased state Medicaid  enrollment as represented by rising unemployment rates. As shown in  figure 7, states with a greater increase in unemployment generally received  a larger reduction in their state Medicaid share, but the relationship was  not as strong as it was for the unemployment component only.
Although Recovery Act funds were targeted for increases in state Medicaid  enrollment, they were not targeted to reflect varying degrees of revenue  decreases among states. Therefore, the Recovery Act did not distinguish  among states with varying degrees of reduced revenue capacity in the  allocation of assistance. For example, during the fourth quarter of  assistance under the Recovery Act, there was no relationship between  reductions in the state share of Medicaid expenditures and decreases in  state revenue as indicated by declines in state wages and salaries.
The largest share of total assistance under the Recovery Act—the across- the-board 6.2 percentage point FMAP increase—was not targeted for  variable state Medicaid needs. As a result, state Medicaid shares were  reduced more in high FMAP states than low FMAP states. For example, a  6.2 percentage point FMAP increase results in a 12.4 percent reduction in  the state share of Medicaid in a state with a low FMAP of 50.00 percent.  However, the same 6.2 percentage point increase produces a 24.8 percent  reduction in the state share of Medicaid in a state with a high FMAP of  75.00. While there was a strong correlation between reductions in state  Medicaid shares and rising unemployment among low FMAP states, there  was no correlation among high FMAP states. As a result, some states  with similar changes in unemployment had widely varying reductions in  their state share of Medicaid. For example, during the fourth quarte assistance under the Recovery Act, West Virginia had a 4.2 percentage  point increase in unemployment and a 35.5 percent decline in state share  of Medicaid, while Virginia had an identical 4.2 percentage point increase   The effect of  in unemployment, but a 23.2 percent decline in state share. the across-the-board increase was particularly evident with respect to  state revenue decreases as represented by declines in wages and salaries.  As a group, during the fourth quarter of assistance under the Recovery  r of  Act, the low FMAP states had a greater reduction in total wages and  salaries than high FMAP states, yet they received a smaller reduction in  their share of Medicaid.
section_title: Assistance Was Provided after the 2001 Recession Ended and Not Targeted Based on Need
paragraphs: The assistance following the 2001 recession was provided approximately  six quarters after the recession ended and not targeted based on state  Medicaid needs. The five-quarter period of increased FMAP assistance  provided following the 2001 recession began well after the three-quarter  recession and after the period of economic downturn when most states  were in recovery. (See fig. 8.) Increased FMAP assistance began in April  2003, eight quarters after the March 2001 start of the national recession,  and six quarters after the November 2001 end of the recession.
Although the increased FMAP following the 2001 recession coincided with  states’ needs due to increased Medicaid enrollment, it was not timed to  assist states in responding to decreased revenues as indicated by lower  total wages and salaries. As shown in figure 9, the period of increased  FMAP assistance included the period of peak unemployment in most  states, but it trailed states’ lowest point of total wages and salaries by at  least six quarters.
The increased FMAP provided following the 2001 recession was not  targeted for variable state needs because it relied on an across-the-board  FMAP increase for states and a hold-harmless provision.
section_title: Past Recessions Offer Insights on Improving the Responsiveness of FMAP Adjustments
paragraphs: States’ experiences with past recessions offer insights for improving the  responsiveness of FMAP adjustments. In particular, mechanisms that   (1) improve the timing for starting assistance, (2) taper off the end of  assistance, and (3) better target for state needs can provide a more  responsive increased FMAP. More responsive assistance can aid states in  addressing increased Medicaid enrollment resulting from a national  recession, as well as addressing reductions in states’ revenues. Our 2006  report provided a prototype formula for an increased FMAP that  addressed increased Medicaid enrollment, but did not address states’  revenue losses. We have revised our 2006 prototype formula in several  ways to further improve its responsiveness. Table 2 summarizes and  compares the design options from our 2006 report with our proposed  revisions and the purpose of the changes.
subsections: section_title: Starting Increased FMAP Assistance Closer to Onset of Recession Could Help States Avoid Program Cuts
paragraphs: Although the Recovery Act assistance timing was an improvement over the  assistance for the 2001 recession, an automatic trigger (a provision that  would start the assistance program without the need for legislation) that  would provide an increased FMAP to states close to the onset of an NBER- designated recession has additional advantages. Providing assistance  earlier than that provided under the Recovery Act could have assured  states of a federal response if the national economy weakened. This would  particularly benefit states that begin an economic downturn before a  national recession. Additionally, from a macroeconomic perspective, it is  likely to be more effective to provide temporary assistance—such as that  offered by an increased FMAP—when the economy is just beginning its  downturn rather than later when the effects of recession are more  widespread and the economy has greater downward momentum. When  states face an uncertain economic outlook, their awareness that the trigger  is there may forestall tax increases or cuts in services because states know  that increased assistance will begin if economic conditions continue to  worsen. (In other words, because states can anticipate assistance, the  assistance does not need to be received or “in the pipeline” in order to  produce the desired effect on state fiscal behavior.)
Our 2006 report suggested a prototype formula for triggering and targeting  an increased FMAP that was based on increases in unemployment.  Although unemployment increases in many states typically lag behind the  onset of a national recession, our prototype formula considered that states  had budget resources and financial management techniques to temporarily  sustain them for a year or two with downturn-driven increases in Medicaid  expenditures. However, the additional objective of responding to state  revenue losses makes a more timely response preferable. Other measures,  such as the decrease in states’ employment-to-population ratio, could  improve the timing and hasten the provision of assistance to states during  a national recession. A trigger based on a change to this ratio could  further mitigate the lag time by including two quarters of retroactive funds,  similar to that provided in the Recovery Act. If targeted assistance was  triggered earlier, the overall amount of increased FMAP assistance would  initially be smaller, as most states show greater funding needs a number of  quarters after the onset of a national recession, when the results of  economic downturns—increases in unemployment and decreases in  revenue—are more widespread.
section_title: Determining When to End Assistance Is Complicated by States’ Continuing Medicaid Funding Needs
paragraphs: Determining when to end increased FMAP assistance to states is  complicated by states’ continuing Medicaid funding needs. In our 2006  report, the increased FMAP prototype stopped assistance abruptly once a  threshold of states no longer showed increases in unemployment. This  approach did not allow states time to transition their Medicaid programs  back to their regular federal matching rates. As we noted earlier,  increased Medicaid enrollment and decreased revenue continued after  both the 2001 and 2007 recessions ended. Adding several quarters of  transitional assistance and gradually reducing the percentage of increased  FMAP provided could help mitigate the effects of a slower recovery.  Phaseout assistance such as this could be targeted to states that have  weaker economies and face larger losses. However, any transitional rule  for terminating assistance will be subject to complex considerations,  including assessing the competing demands for federal resources and  states’ ability to cope with their economic conditions without further  federal aid. As a result, any transitional rule is likely to require several  options for proceeding that are based on several factors, including  economic circumstances and congressional decision making.
section_title: Accounting for Medicaid Enrollment Increases as Well as State Revenue Losses Could Further Improve Targeting
paragraphs: States’ efforts to fund Medicaid during an economic downturn have two  main challenges: (1) financing increased enrollment, and (2) replacing  revenues lost as a result of the recession. In our 2006 report, the prototype  formula accounted for the increases in enrollment, but did not provide for  states’ revenue losses. A more responsive increased FMAP would calculate  the increased funding needed on the basis of the economic conditions of  each state. To consider both increased enrollment and decreased revenue,  quarterly increases in each state’s unemployment and decreases in real  wages and salaries could be calculated and used together as the basis for  targeting funds. Such an approach would target assistance to the states  with the greatest economic declines. States could then receive funding  based on two formula components:    each state’s increase in unemployment, as a proxy for an increase in    each state’s decrease in wages and salaries, as a proxy for the loss of  revenue.
Improving targeting is essential to meet the goals of providing assistance  to states in an efficient and effective manner. Without specific measures of  states’ needs, federal funds could be distributed inequitably and run  counter to the goals of providing assistance during a recession. A formula  with finely graduated adjustments to assistance can be an efficient   mechanism for providing support to states. States that do not yet show  increases in unemployment and decreases in wages and salaries would not  receive assistance until changes in these measures indicated an economic  downturn. For states with rapidly improving economies that show large  decreases in unemployment and increases in wages and salaries, the  quarterly assistance could be phased out to ease the transition for their  Medicaid programs.
section_title: Agency Comments and Our Evaluation
paragraphs: In commenting on a draft of this report, the Department of Health and  Human Services stated that it agreed with the analysis and goals of the  report while emphasizing that any changes to the FMAP formula must be  authorized by statute and implemented by the Assistant Secretary for  Planning and Evaluation in HHS. The department further stated its belief  that it is critical to as closely as possible align changes in the FMAP  formula to individual state circumstances in order to avoid unintended  consequences for beneficiaries as well as provide budget planning stability  for states. We agree that statutory changes would be necessary to  implement any adjustments to the FMAP, but we do not make  recommendations regarding particular actions in this report. The full text  of HHS’s comments can be found in appendix II. HHS also provided  technical comments, which we incorporated as appropriate throughout  this report.
We are sending copies of this report to the Secretary of HHS, the  Administrator of the Centers for Medicare & Medicaid Services, and other  interested parties. In addition, the report will be available at no charge on  the GAO Web site at http://www.gao.gov.
If you or your staffs have questions about this report, please contact  Thomas J. McCool at (202) 512-2642 or mccoolt@gao.gov or Carolyn L.  Yocom at (202) 512-7114 or yocomc@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this report major contributors to this report are listed in  appendix III.
section_title: Appendix I: Children’s Health Insurance and Other Publicly Funded Health Programs
subsections: section_title: Program Descriptions
paragraphs: In 1997, Congress created CHIP, a federal-state health care program  providing coverage for uninsured children in families with incomes that  are too high to qualify for Medicaid. States can design and operate their  CHIP programs as an expansion of their Medicaid program, as a separate  program, or as a combination of the two approaches. CHIP is based on  federally funded allotments for each state that are subject to  reauthorization by Congress. CHIP provides a strong incentive for states to  participate because the federal government pays an “enhanced” federal  matching rate that is derived from a state’s FMAP. Patient  Protection and Affordable Care Act (PPACA) further extended federal  CHIP funding through fiscal year 2015 and provided for an increase in the  enhanced FMAP for CHIP beginning in fiscal year 2016. Since its inception  in 1997, CHIP enrollment has steadily increased from 660,000 in 1998, to   7.7 million in 2010. (See fig. 10 for CHIP enrollment trends.)
CHIP was originally known as the State Children’s Health Insurance Program or SCHIP.  Subsequent legislation renamed the program CHIP. In this report, we use the acronym  CHIP to refer to the program.
The enhanced FMAP for CHIP in 2010 ranged from 65.00 to 82.97.
section_title: Effects of the 2001 and 2007 Recessions on CHIP
paragraphs: In response to the 2001 recession, states made different decisions  regarding their CHIP programs. For example, six states expanded their  CHIP programs, while seven states froze or capped their enrollment in  CHIP. Other states proposed cost-containment strategies for their CHIP  programs, such as reducing payments for health care providers,  eliminating benefits, and increasing the use of copayments and monthly  premiums.
Due to the 2007 recession, 13 states expanded eligibility for their  programs, and 14 states made changes in enrollment and renewal  procedures, such as accepting online applications or eliminating face-to- face interviews for renewal. However, a number of states reported  reducing or freezing reimbursements to providers, or increasing  copayments and monthly premiums.
section_title: Effects of the 2001 and 2007 Recessions on Other Publicly Funded Health Programs
paragraphs: Decreases in tax revenues during the 2001 and 2007 recessions led most  states to cut or reduce coverage for many of their health programs. For  example, 14 states that operated a prescription drug program responded to  the 2001 economic downturn by proposing to reduce dispensing fees,  change reimbursement formulas, and implement a maximum allowable  cost for generic drugs to contain costs. Other states addressed budget  concerns by limiting enrollment in state-funded health programs,  increasing premiums for program participants, and increasing  copayments. In addition, states eliminated or reduced coverage of low- income adults in three state-funded health programs; cut services for  people with chronic diseases who were rejected by private insurance  companies; and discontinued services for disabled individuals.
The 2007 recession also created significant budget gaps for states, which  affected their health care programs. The National Conference of State  Legislatures reported that for fiscal year 2011, health programs were over  budget in 18 states. In November 2010, the Center on Budget and Policy  Priorities reported that 31 states enacted cuts to public health services,  and 29 states cut services to elderly and disabled individuals. Examples  of state health program cuts included dental and vision care programs,  maternal and child health programs, health insurance for legal immigrants,  and prescription drug coverage to help seniors pay for drugs not covered  by Medicare’s prescription drug benefit. In addition, other states  eliminated funding for their state-funded health insurance programs for  certain low-income parents and disabled adults.
section_title: Appendix II: Comments from the Department of Health and Human Services
section_title: Appendix III: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: In addition to the contacts named above, major contributors included  Robert Copeland, Assistant Director; Eric R. Anderson; Robert  Dinkelmeyer; Greg Dybalski; Anne Hopewell; Allison Liebhaber, Drew S.  Long; Victor J. Miller; Elizabeth T. Morrison; and Hemi Tewarson.