STATE FISCAL RELIEF PROVIDES
AN OPPORTUNITY
TO SAFEGUARD MEDICAID BUDGETS
By
Leighton Ku
| PDF of this report |
| If you cannot access the files through the links, right-click on the underlined text, click "Save Link As," download to your directory, and open the document in Adobe Acrobat Reader. |
The recent enactment of the state fiscal relief provisions contained in newly enacted tax-reduction legislation (the Jobs and Growth Tax Relief Reconciliation Act of 2003) will substantially reduce the cost of Medicaid to states in 2003 and 2004 and ease budgetary pressures to cut the program. The new legislation temporarily raises the federal matching rate for Medicaid — the Federal Medical Assistance Percentage or FMAP — and thus directly lowers states’ share of Medicaid expenses by about $10 billion during the period April 1, 2003 through June 30, 2004. In addition, the legislation provides grants worth $5 billion in federal fiscal year (FFY) 2003 and another $5 billion in FFY 2004 that states can use for broader budgetary relief. States can use this opportunity to safeguard Medicaid budgets; they can avert unnecessary and harmful proposed cuts and/or restore some cuts that have already been made.
One of the chief reasons that many states have recently considered reductions in Medicaid is the program’s rapid expenditure growth. The new law immediately and substantially reduces state Medicaid expenditure growth for all states in the state fiscal year that starts July 1 in most states, reducing the need to scale back Medicaid. Because the new legislation lowers the percentage of total Medicaid costs that a state must pay, the cost of Medicaid to states will be at least 5.9 percent — and as much as 12.8 percent — lower than previously estimated under the old federal matching rates for the state fiscal year that begins in July 2003.
Recent federal data show that states have already been successful in slowing Medicaid spending growth. During the period October 2002 to April 2003, Medicaid expenditures were 7.3 percent higher than in the same period of the prior year, a rate of growth that is about half that experienced in the previous year. The combination of slower Medicaid expenditure growth and increased federal aid should greatly ease growth in state Medicaid expenditures in the year ahead. This should make deep Medicaid cutbacks for the coming year much less necessary.
In addition, the new legislation alters the fiscal incentives for states to scale back their Medicaid programs. Because of the higher federal matching rates, a proposed or already planned cutback will save a state 5.9 to 12.8 percent less than the amounts estimated before the matching rates changed. A cut also will lead to a greater loss of federal matching revenue than previously estimated. To take advantage of these new fiscal opportunities, states should consider canceling or scaling back Medicaid budget cuts.
States that cut their Medicaid programs will receive less federal aid, while those that cancel or postpone cuts will gain more aid. Some state policy officials may mistakenly believe that the amounts of federal Medicaid relief are fixed in size. The amount of relief will be a percentage of the amount that a state actually spends on Medicaid. Medicaid cuts will thus reduce the amount of federal Medicaid relief that a state receives.
Many states are still working on their budgets for state fiscal year (SFY) 2004, the year that begins on July 1, 2003 in most states. These states could immediately reassess state budget estimates for Medicaid and examine whether it is still necessary or appropriate to cut their Medicaid programs. Other states have already completed action on SFY 2004 budgets but could reassess their budgets and take legislative or administrative actions to cancel, delay or lessen the severity of cutbacks planned for 2004. It is particularly important that states that plan to institute restrictions in Medicaid eligibility reconsider these plans; such policies are likely to violate one of the requirements of the new law and trigger the loss of most of the federal Medicaid aid that otherwise would be provided to a state under the new legislation.
Summary of the New Federal Legislation
Under the legislation, each state’s federal Medicaid matching rate (or FMAP) is modified during the last two quarters of FFY 2003 (April 1 to September 30, 2003) and the first three quarters of FFY 2004 (October 1, 2003 to June 30, 2004). Medicaid matching rates will be recalculated as follows:
| (a) | Hold Harmless. First, for the period April to September 2003, the state’s federal matching rate will be the higher of the regular FMAP for FFY 2002 or its regular FMAP for FFY 2003. From October 2003 to June 2004, the matching rate will be the higher of the regular FMAP for either FFY 2003 or FFY 2004. |
| (b) | Across the Board 2.95 Percentage Point Increase. Second, during the period April 1, 2003 to June 30, 2004, each state’s revised FMAP will be increased by 2.95 percentage points (above the “hold harmless” rate just described). |
| (c) | Eligibility Maintenance of Effort. If a state restricts Medicaid eligibility below the levels in effect in its state plan as of September 2, 2003, the state will not receive the 2.95 percentage point increase in FMAP. If a state restricts eligibility but subsequently reinstates it, however, the state can begin to collect the higher FMAP in the quarter the reinstatement begins. |
| (d) | Applicability. The FMAP increase applies to the main portion of Medicaid benefits and does not affect the matching rates for Medicaid disproportionate share hospital (DSH) payments, administrative expenses, other Medicaid matching rates above the regular FMAP rate (e.g., the 90 percent rate for family planning services or the 100 percent rate for Indian Health Service-related expenditures) or the State Children’s Health Insurance Program. |
| (e) | Local Contributions. If a state requires local contributions to meet the state share of Medicaid costs, the state may not require that local governments pay a greater percentage of the state share of costs than the local governments paid prior to April 1, 2003. |
There Is Less Need to Cut Medicaid in State Fiscal Year 2004
The main reason many states have been interested in cutting Medicaid in the coming state fiscal year is because state Medicaid expenditures have grown rapidly. It is important to realize, however, that Medicaid costs have grown because they are affected by the same underlying increases in health care costs that also escalate private health insurance premiums, state employee health costs and all other health spending. Indeed, states have generally been able to hold down increases in the per capita costs of Medicaid to rates well below those experienced for private sector health insurance premiums.[1] But since Medicaid is the largest health expenditure in state budgets, rising Medicaid costs are particularly visible in state budgets.
The higher federal matching rates during the April 2003 to June 2004 period mean that states’ Medicaid costs will automatically be significantly lower than previously anticipated. As a result, growth in states’ share of Medicaid costs will be substantially reduced in the coming state fiscal year, and there should be much less need to adopt Medicaid cutbacks that adversely affect low-income families, children, elderly people and people with disabilities.
Table 1 presents the current, regular FMAP rates for each state, as well as the rates that will apply under the new fiscal relief legislation.[2] Also shown in the table is the percentage reduction in state Medicaid costs that will result from the increase in Medicaid matching rates. For example, if a state’s federal matching rate was originally 50 percent and now will be elevated to 52.95 percent, the state share of Medicaid costs will fall from 50 percent to 47.05 percent. This is equal to a 5.9 percent reduction in the state’s Medicaid expenditures.[3] As seen in the table, all states will have reductions in the state-level Medicaid expenditures ranging from 5.9 percent to 12.8 percent; the majority have reductions greater than 5.9 percent.
- Consider, for example, a hypothetical state that projected Medicaid expenditures would grow 10 percent in state fiscal year 2004 and planned to adopt a 6 percent cutback in Medicaid benefits to limit expenditure growth to just 4 percent. If the data in Table 1 showed that this state’s Medicaid expenditures would fall by 7 percent in SFY 2004 solely because of the higher federal matching rate, then the state would have already met — actually exceeded — its budget target and there would be no need to adopt any additional cuts.
Furthermore, state worries about double-digit growth in Medicaid expenditures already appear to be easing. Data from the U.S. Treasury Department show that Medicaid spending growth already has slowed considerably. From October 2002 to April 2003, Medicaid draw downs were 7.3 percent higher than in the same period last year. This is about half the 15.8 percent growth rate measured in the same time period the year before.[4] The combination of already slower Medicaid spending growth and the enhanced federal matching rates means that most states will experience only modest growth in Medicaid expenditures in the coming fiscal year, even without adopting budget reductions.