States call President George W. Bush’s Medicaid plan the carrot-and-stick approach to state-federal relations. They could take the carrot, but they dread a swift whack from the stick.
The White House envisions tidy administration of health care for the poor. If states get their programs in order, the administration contends, then there’s no whack to fear.
One thing is clear: If Bush has his way, states would have the burden of keeping booming Medicaid costs under control. If they can’t do that, covering the extra costs would be their burden, too.
States do have other concerns about the president’s proposed federal budget for fiscal year 2004, which begins in October. They complain, for instance, that it wouldn’t sufficiently fund federal mandates for education, for special education in particular, and that it lacks adequate support for state and local homeland security efforts. But Bush’s dramatic Medicaid proposal clearly is of greatest concern to Illinois and other states.
Bush would transform what amounts to open-ended entitlements into capped allotments. The federal government no longer would reimburse states for a percentage of their Medicaid spending — an arrangement that’s limited only by what states can afford to spend up front. Instead, the feds would give states a set sum of money each year, and states would cover any additional program spending.
States are cool to this fiscal risk. But most are in a budgetary bind, and the White House is dangling an opportunity to wriggle free in the short term.
Illinois and other states are struggling with budget deficits not seen since World War II. In this state, Gov. Rod Blagojevich estimates the budget gap for this fiscal year and the one that begins in July at $4.8 billion. The recent recession and economic fallout following the September 11 terrorist attacks fueled this red ink. But so has Medicaid, one of the greatest pressures on state spending.
The program in Illinois, which serves 1.6 million poor people, cost $4.7 billion in state dollars in the fiscal year that ended last June, according to the Department of Public Aid, which administers the program. That figure does not include administrative costs. Andrew Kane, the department’s deputy administrator for medical programs, says spending has grown by about 8 percent each year over the last decade.
Increased spending is driven largely by the growing cost of prescription drugs, innovative drugs in particular. This state also has expanded its program in recent years to cover such groups as pregnant women and children. Another program increased eligibility for poor people who are 65 years of age or older, blind or disabled.
This is where the carrot comes in. The president’s plan would give $3.25 billion to states that opt into the program — on top of their annual allotments. States could choose to continue operating under the current system, and the feds would simply continue reimbursing them for its share of Medicaid costs. But states that opt out would not share the extra aid.
The White House evidently is betting that the prospect of soothing Medicaid spending strains will coax states on board. Over the first seven years of this 10-year plan, that pot would total $12.7 billion.
Now for the stick. Over the 10 years, the plan would be “budget neutral.” So while federal funding to states that opt in would be $12.7 billion over allotments in the first seven years, funding in the last three years would be $12.7 billion under those allotments. The reduction would neutralize the federal government’s additional expense from the first seven years.
The Bush Administration’s Dennis Smith says the key to making this equation work is more efficient programming on the part of the states. He says such states as Florida, Michigan, New Jersey and Washington have saved money by emphasizing “home-based” and “recipient-oriented” care. These programs discourage recipients from living in institutions, and encourage them to design their own programs within personalized budgets.
Smith, director of the Center for Medicaid and State Operations at the U.S. Department of Health and Human Services, says if other states follow these models, they, too, will save money and be better positioned to absorb the $12.7 billion hit in the final three years. “What we’re saying to the states is if you adopt these new ways of delivering services today, you will be saving dollars in the long term,” he says. “So, when you get to years eight, nine and 10 you won’t feel the lower growth rate in federal spending.”
He also says states should keep the loss during fiscal years 2011, 2012 and 2013 in perspective. During those years under the current funding scheme, he says, the federal government’s outlays for Medicaid are projected to be $313.2 billion, $338.5 billion and $365.4 billion, respectively. “There’s a trillion dollars in those last three years,” he says. “So $12.7 billion out of a trillion is not much money.” The Bush proposal would reduce those figures slightly to an estimated $313 billion, $334.1 billion and $357 billion, respectively.
State officials in Illinois and elsewhere are loath to predict to what extent Medicaid spending will grow over the next decade. Some presume, however, that prescription drug costs will continue to stretch their bottom lines. Another factor on the horizon: the Baby Boom generation could, around 2010, severely heighten demand for services.
“One thing is for sure, [states] are a loser in the end,” says Michael Bird, chief Capitol Hill lobbyist for the National Conference of State Legislatures. “What this looks like is a loan up front and payback in the end.”
Blagojevich does not support the president’s Medicaid plan. But he won’t speculate on whether Illinois would opt out. Blagojevich’s budget proposal for the next fiscal year, which he is scheduled to deliver on the 9th of this month, is expected to assume the Medicaid spending scheme will remain the same.
In the meantime, his administration is examining ways to curb Medicaid costs. It is investigating how to use the state’s prescription drug “purchasing power” to negotiate a better deal with drug companies in an effort to save the state money.
At the same time, the state’s largest health insurance lobbying group, the Illinois Association of Health Plans, is pushing the administration to consider privatizing almost half of its Medicaid program. The group argues the state could save $1 billion over five years. Blagojevich Budget Director John Filan says he can’t judge whether the administration would consider such a move because there’s no specific proposal.
The governor also has called on Congress to improve the state’s current reimbursement rate from 50 cents on the dollar to 55 cents. The rate is calculated under a formula based on per capita income relative to the national average per capita income. The state public aid department estimates the change would mean an extra $440 million in federal funds for Illinois each year.
Though the 50 percent rate is the minimum states may be reimbursed, other states oppose Illinois’ effort unless they too can get more money. “I think it is wishful thinking to believe that Illinois can increase its percentage of reimbursement from the federal government,” says U.S. Sen. Dick Durbin, a Springfield Democrat. “That is not likely to happen.”
No surprise, the White House’s long-term approach does not sit well with the states. Filan says it’s irresponsible to construct a spending plan contingent on the fiscal climate 10 years down the road. “For anybody to say with any kind of confidence that they can look out eight to 10 years and say this is what the world will look like is spending much too much time in Washington and no time in reality,” he says. “I really take offense at the lack of sensitivity and understanding of that kind of statement from anybody.”
The debate is so heated, in fact, that even the terms used to describe the federal government’s commitment to Medicaid under the Bush plan are controversial. State officials say the federal commitment would amount to “block grants,” but Bush administration officials object to that term because, they say, it’s associated with reduced commitment on the part of the federal government. The feds prefer the term “lump-sum allotments” because, they say, the proposal actually would increase federal funds to the states.
The Bush plan would consolidate two federal funding streams, Medicaid and the State Children’s Health Insurance Program, the program for children whose families have incomes too high to qualify for Medicaid but too low to afford private insurance. The federal government would give each state two blocks of money, one for acute care and onefor long-term care. States could transfer 10 percent of funding between each of the grants.
A state’s allotment would be increased each year under an inflationary rate that has not been determined. The first allotment, in fiscal year 2004, would be based on the state’s expenditures in fiscal year 2002 and adjusted for two years of inflation, according to the Center for Medicaid and State Operations.
The center’s Smith says the Bush Administration understands states are facing tough fiscal times, and it’s trying to help with an infusion of federal dollars above what they would get under current law. He says the idea is to preserve and protect eligibility gains in state programs that could be in jeopardy because of the budget crises.
“We recognize that the states are having difficulty putting up their share of the funds,” he says. “So this proposal is a way of stabilizing the state budgets while still giving them access to a growing federal fund.”
This yet-to-be-determined inflationary rate is key to the debate and could determine whether states ultimately sign on to the president’s plan. Kane, of the state public aid department, says, “If they come through and say we’ll grow that piece at 20 percent a year, we’ll say, ‘We’ll take it.’” He acknowledges, though, that such a high rate is unlikely.
States also would have to increase their commitment to Medicaid under the plan. But the rate at which state spending on Medicaid must rise has not been determined. The Bush Administration says this rate would be lower than the one for federal allotments.
The White House is marketing its proposal as an opportunity for states to increase flexibility, design innovative programs and coordinate service delivery with the private sector. But Illinois officials wonder how much flexibility is available in a program devoted to low-income people.
“Can we discontinue some programs?
I don’t know how you can do that when you’re trying to provide health care to the poorest of the poor,” says state Rep. Gary Hannig, a Litchfield Democrat and chief budget negotiator for the House Demo-crats. “It seems like those are the people that don’t have health care and those are the ones that the state needs to try and address.”
Should this state opt in, and find itself unable to expand Medicaid coverage in the face of restricted funds, Kane says it would be difficult to quantify how service would be affected. “It would be along the lines of you wouldn’t see the expansions anymore. It’s not like we would suddenly rip the rug out from underneath anybody. It would be more a question of limited options and the state having to cover any growth,” he says.
State politics also would determine how Medicaid dollars would be distributed. And that’s a concern for Patrick Lenihan. Chicago, where he is deputy commissioner for policy and planning at the city Department of Public Health, is home to roughly half the state’s Medicaid caseload. What’s more, several city hospitals that serve a disproportionate share of the state’s poor depend on a higher rate of funding, which is mandated by federal law. Lenihan fears this mandate would not exist under Bush’s plan and predicts there would be political pressure to direct the money elsewhere. “What you end up with is, in essence, a political fight between the advocates for various constituency groups or various beneficiaries,” he says. “It pits the elderly against the low-income pregnant women and children.”
For now, states are waiting for the next move in Washington, D.C. Specifically, they’re on hold for the all-important rate at which federal allotments would increase. Until then, Kane says, “We’re not tempted.”
The White House tax plan would cost the states
President George W. Bush promises to stimulate the national economy by eliminating the federal tax on most dividends, but states fear adverse consequences. Should Congress adopt the centerpiece of the president’s tax cut package, states foresee lost income tax revenue and higher costs in issuing bonds.
Illinois and other states ask individual income taxpayers to include dividends in their total income for purposes of figuring state income tax. And taxpayers rely on the federal government to issue a 1099 form accounting for those dividends. If the feds cease recording dividends and sending forms, state officials say some taxpayers will claim less income.
That means less income for the states to tax.
“I think the average taxpayer that does his own taxes, if he doesn’t get a 1099, he’s not going to remember that and not report it,” says Edward Boss Jr., chief economist at the Illinois Economic and Fiscal Commission, the General Assembly’s accounting arm. “And I don’t know how the state would find out he didn’t.”
Boss estimates the potential annual loss for Illinois at $200 million.
It’s not clear how states could rectify the loss. But state officials examining the tax cut proposal suggest legislatures would need to enact a complex formula to require state taxpayers to report tax-exempt dividends.
Eliminating the tax on dividends also could make state and municipal bonds less attractive to investors. Interest earned on these bonds is not taxed, and that helps lure investors. But if interest earned on stocks also isn’t taxed, then there’s less incentive to buy government bonds.
“Clearly the proposal would result in a shift to corporate equity and away from tax-exempt municipal securities,” says Frank Shafroth, director of state and federal relations at the National Governors Association.
States and municipalities would need to pay higher interest rates on their bonds to make them more attractive. That costs additional money.
Government bonds could still retain some edge over stocks because they’re widely regarded as a stable investment. “The advantage that tax-exempt bonds still have, at least those issued by state governments, is they’re far more secure than equity investments,” says Illinois Budget Director John Filan. “But [eliminating the dividend tax] definitely takes away one of the significant reasons that people look to tax exempt.”
Illinois Issues, April 2003
