Kaiser Family Foundation released a report last week, detailing results from a 50-state survey of Medicaid budgets. Kaiser’s results tell a classic story known as The Life and Times of a Countercyclical Program. Those of us who work in Medicaid policy have heard it many times. (Frankly, we’re getting a little sick of it, which is why we’ve created some new tools to help rewrite the story – but more on that later.) The story goes like this:

Chapter 1: States struggle to fill historic deficits brought on by a recession. Declining revenues left states with an aggregate budget shortfall of $149 billion in the 2012 Fiscal Year (FY) alone. After already closing a staggering $430 billion in shortfalls in 2009-2011, state policymakers have few easy choices left for balancing their budgets.

Chapter 2: The recession drives Medicaid enrollment and spending growth. As unemployment grows, more and more families lose their jobs and have to turn to Medicaid for health care coverage. At the height of the recession, Medicaid enrollment grew by about 8 percent annually. Although it’s dropped down to a 4 percent growth rate in FY2012, that is no consolation to states who are still desperately trying to fill budget gaps.

The American Recovery and Relief Act of 2009 (ARRA) offered temporary enhanced federal Medicaid funding to states, relieving some of the fiscal pressure created by this enrollment growth. The infusion of federal funds was a lifeline to strained state budgets. For example, while overall (federal plus state) Medicaid spending grew by more than seven percent in FY2009, state Medicaid spending actually dropped for the first time in the history of the program.

Unfortunately, that enhanced funding has now expired, while the economic slump has not. That leaves states in the very difficult position this year of having to fill in the gap left from the lost federal funds. Kaiser’s report found that states project an increase in state Medicaid spending of nearly 30 percent in FY2012 (even though overall Medicaid spending is projected to increase by only 2.2 percent).

Chapter 3: States control Medicaid spending by shifting costs onto vulnerable families and restricting care. Kaiser’s report shows an overwhelming majority of states – 46 in FY2012 – contain Medicaid costs by freezing or lowering provider payment rates. Since Medicaid already reimburses well below private rates, further cuts can worsen provider shortages in Medicaid and have a devastating effect on access to care for beneficiaries.

Another common approach is to restrict or eliminate coverage of services. Eighteen states eliminated benefits such as dental care and medical supplies, or restricted key services like physician visits, mental health care and inpatient hospital stays in FY2012. This strategy not only deprives impoverished and very sick patients of needed health services, it may also lead to higher use of expensive emergency services as chronic illnesses can worsen without access to these benefits.

This Story Needs a New Ending Kaiser’s results also hint at a more hopeful, emerging story: states are starting to look beyond those traditional harmful cost-containment strategies. For example, 33 states expanded Long Term Care services in FY2012, frequently by encouraging the types of Home and Community Based Services that enable seniors and people with disabilities to stay at home in their communities – a cost-effective alternative to expensive institutions.

Kaiser’s survey also shows overwhelming interest in developing systems of integrated, coordinated care for the those served by both Medicaid and Medicare (the “dually-eligible”). It’s critical to ensure that these reforms improve quality of care rather than just cutting back on services, but since the dually-eligibles’ care is fractured and plagued by expensive preventable hospital readmissions and duplicated tests, investing in improved care-coordination for this population can drive up their quality of life and drive down costs.

While this is an encouraging start, there is far more states can do to lower Medicaid costs without harming – and often by improving – care. Recently, Community Catalyst released a Medicaid Report Card designed to help states do just that. It features three budget-saving policies that remarkably few states have yet enacted:

  • • Improving Payment Incentives: states could save hundreds of millions of dollars by providing a stronger incentive for hospitals to reduce their rates of potentially preventable complications (such as infections) and readmissions.
  • • Setting Fair Prices for Prescription Drugs: too many states reimburse pharmacies for the costs of prescription drugs using a pricing benchmark created – and inflated – by the drug manufacturer industry.
  • • Expanding the Use of Nurse Practitioners: states could save millions and improve access to primary care by expanding scope of practice laws to allow nurse practitioners to practice to the fullest extent of their training.
Instead of cutting dental benefits for low-income parents or slashing already low Medicaid provider rates, states should pass these – and other – policies that improve care while lowering costs. Let’s give Kaiser something new to write about in next year’s Medicaid budget survey.

— Katherine Howitt, Senior Policy Analyst