The crunch and the cliff: Medicaid funding faces dual perils

With Oklahoma in the midst of what is certain to be a severe and extended fiscal crisis, protecting core public services in every area of state government from deep and painful budget cuts poses a great challenge. However, protecting the budget of Medicaid, the main health insurance program for low-income children, seniors, pregnant women, and persons with disabilities, will present policymakers with special difficulties.

As noted in a recent fact sheet from the Kaiser Commission on Medicaid and the Uninsured, state Medicaid budgets face two distinct dilemmas: “the crunch” and “the cliff”. The crunch refers to the surge in Medicaid enrollment and spending associated with the economic downturn, as those losing jobs and access to employer-based coverage turn to Medicaid for coverage. Nationally, the Kaiser Commission found that total Medicaid spending growth averaged 7.9 percent across all states in FY 2009, the highest rate of growth in six years. As we reported in our last Numbers You Need bulletin, Oklahoma’s SoonerCare (Medicaid) enrollment climbed 8.9 percent between August 2008 and August 2009 and shows no signs of letting up.

With the crunch expected to keep Medicaid expenditures growing, states are simultaneously heading towards “the cliff”, namely the end of enhanced federal Medicaid funding provided as part of the stimulus, or American Recovery and Reinvestment Act (ARRA). The stimulus bill increased the federal government’s share of Medicaid expenditures, known as FMAP,  by a substantial amount.  Oklahoma is receiving an FMAP of 75.83 in FY ’10 instead of its normal rate of 64.43. However, the enhanced FMAP is in effect only temporarily, for nine quarters, beginning in October 2008 and terminating December 31, 2010.  This year’s state initial budget includes over $430 million of enhanced FMAP funds, and a similar, or larger, amount will almost certainly be allocated for FY ’11. However, if and when the ARRA clock strikes midnight, Oklahoma’s federal match rate will revert to below 65 percent – creating a shortfall of several hundred million dollars for FY ’12.  Even if the economy has begun a strong recovery, state  revenues are unlikely to grow sufficiently to fill a hole of that magnitude.

State governments and advocates for the populations served by Medicaid are working hard to get Congress to consider an FMAP phase-down over a period of two to three years to allow state revenues time to recover. The health reform bill passed by the House of Representatives on October 29th would extend temporary enhanced FMAP rates for two quarters, through June 2011. It’s not clear whether this extension will be part of any final legislation that passes both Chambers, or whether Congress will be willing to extend assistance past June 2011.

For now, at least, the option of responding to budget shortfalls by cutting Medicaid eligibility is formally off the table.   ARRA expressly prohibits states from implementing any eligibility standards, methodologies, or procedures that are more restrictive than those in effect on July 1, 2008.  This leaves eliminating or reducing coverage of non-mandatory benefits and provider rate cuts as the only options for addressing budget shortfalls in the short term, as are currently being considered by the Oklahoma Health Care Authority.  Once ARRA ends, however, all bets are off; as the Kaiser Commission notes, “Without the ARRA funds and maintenance of eligibility requirements, states may consider severe eligibility and benefit cuts to meet balanced budget requirements.”

The additional wild card in the Medicaid funding deck is federal health care reform. A sizable number of the uninsured would become newly eligible for Medicaid under both the House and Senate versions of health care reform. In addition, many of those who are currently eligible for Medicaid but not enrolled would be added to the program should coverage become mandated. The federal government would pay the vast majority of the costs for those newly covered by Medicaid, but the states would be obligated for at least some portion.  The Oklahoma Health Care Authority has estimated the annual additional state expense of this coverage at $128 million.  While this has elicited strong expressions of alarm from Republicans in the Legislature and running for Governor, a recent report from the President’s Council of Economic Advisors points out that health care reform would have substantial benefits for state governments. States would be absolved of covering the health care costs of low-income uninsured citizens and legal residents, who currently require a large sum of  state spending on uncompensated care, and would benefit from a reduction of  the “hidden tax” of paying for the uninsured that inflates the health care premium costs of public employees.

Amidst all this uncertainty, the only thing clear is that to make it through the state fiscal crisis without endangering the health care coverage of hundreds of thousands of low-income Oklahomans will require help from Washington and creative and courageous policymaking here in Oklahoma.