By Melissa Attias, CQ Staff
October 15, 2012 -- All but one of the 50 states had joined Medicaid by 1972, seven years after the federal-state health insurance program for America's poor was created. Wary both of having to follow federal requirements and of the potential stress on its own budget, Arizona held out for 10 more years until the lure of federal health care dollars persuaded state officials to implement a program.
The concerns about Medicaid expressed by Arizona decades ago have persisted not only for that state but also for others across the country, and they have been exacerbated by the recession and the economy's tepid recovery. Medicaid enrollment climbed by almost 4 million people from December 2008 to December 2009, the largest one-year jump since the late 1960s, according to the Kaiser Commission on Medicaid and the Uninsured. Medicaid covered more than 67 million individuals, about one in five Americans, for at least one month in fiscal 2010, according to the program's 2011 actuarial report.
As the loss of jobs and health insurance pushed people onto the rolls, the federal government gave states roughly $90 billion in additional Medicaid money through the 2009 stimulus law and later provided $16 billion more to extend the aid for six months. But that money is long gone, leaving states to manage a significant increase in their costs. Importantly, states have had to maintain their eligibility standards for the program under provisions in the stimulus and the 2010 health care law.
"I don't know any state that sort of eagerly goes and takes health insurance away from people. But you cannot understate how much fiscal pressure states have been under in the last few years," says Alan Weil, executive director of the National Academy for State Health Policy. "They've been forced to make decisions they don't want to make."
The current strain on state budgets is evident and likely to persist, but that's only part of the story about this central pillar of the nation's safety net. States also face uncertainties about the direction the program will take down the road. The Supreme Court ruled in June that the Medicaid expansion in the 2010 health care overhaul is essentially optional, so each state now is weighing whether to participate. For those that decide to move forward, there's still a concern that the federal government might not sustain the financial commitment included in the law. And there's also a question of whether to turn the program into a block grant, as proposed by Wisconsin Republican Paul D. Ryan, the House Budget Committee chairman and his party's vice presidential nominee.
To Expand, or Not
Under Medicaid, the federal government matches state spending on the program based on a formula. The federal share is at least 50 percent in every state, according to the Kaiser commission, and was stretched as high as 74 percent in the poorest state in fiscal 2012.
As construed by the Supreme Court, the health care law gives states the option of extending their Medicaid programs to include individuals under age 65 with annual incomes up to 133 percent of the poverty level, with an enlarged matching rate. The federal government would cover 100 percent of the costs of those newly eligible from 2014 through 2016, with its share gradually decreasing to 90 percent in 2020 and thereafter.
Although some Republican governors have said their states won't participate in the expansion, many others are weighing whether the benefits of expansion outweigh the costs.
"I liken it to, you walk into a shoe store and there's a $200 pair of shoes marked down to 20 bucks," Weil says. "One way to look at it is, 'Wow, I can get a $200 pair of shoes for 20 bucks.' But if you look in your wallet and you only have 10, then it doesn't feel like much of a deal. And I think both of those are happening."
Among the things for states to consider is the relative health of those who would become eligible for the program. Beyond that is the potential of added costs for those who were already eligible for Medicaid and therefore would not be covered by the enhanced federal match but turn up on the program's rolls for a variety of reasons. Cutting the other way is the potential for savings from state health programs that might no longer be necessary as a consequence of the expansion or because of coverage provided through state insurance exchanges.
States also have to consider other provisions of the overhaul that will take effect even if they decide not to expand their programs, says Matt Salo, executive director of the National Association of Medicaid Directors. One example is that the law cuts payments to so-called disproportionate-share hospitals, which have large numbers of low-income patients. Those cuts begin in fiscal 2014.
"You're going to have state hospital associations who are looking at their future and saying, 'Well, we're getting hit. And if we get hit and we don't get the benefit of the Medicaid expansion, we're in real trouble,'" Salo says.
States also are grappling with the politics of any decision linked to the highly politicized health care law, as well as ideological issues about the proper role of government.
"State taxpayers and federal taxpayers, they're the same people at the end of the day," Salo says. "And there's a very strong concern in a lot of parts of this country that taxpayers in general are spending too much money."
The Federal Commitment
With no deadline for states to decide whether to expand their programs, it's likely to be some time before Medicaid's future becomes clear. For instance, some states are interested in phasing in the expansion and want to know whether that will be possible, says Joy Johnson Wilson, health policy director and senior federal affairs counsel at the National Conference of State Legislatures.
For those states that end up participating, there are concerns about whether the federal government will meet its financial obligation. "There's a pretty strong feeling out there that that current commitment to 100 percent phasing down to 90 is going to be hard to maintain," Salo says.
"No Congress can bind future Congresses," Weil says. "So you can read the law and see what the federal share is, but in the future that could change." States could withdraw from the expanded program, he says, "but states are also aware that it's hard to pull back something that you've done."
A proposal included in President Obama's 2011 deficit reduction plan already has produced some unease that the federal contribution to Medicaid might be targeted to be scaled back. Known as a "blended rate," the approach would replace the formulas for calculating federal payments for Medicaid and the Children's Health Insurance Program with a single matching rate for each state beginning in 2017.
"That's an immediate concern given that we're approaching serious deficit reduction talks next year," Wilson says. "We don't know how much traction it has, but that's problematic and yet another way of reducing the federal contribution to the program."
Obama also proposed phasing down how much states can tax providers to help raise state matching funds that can be used to increase federal matching payments. Reducing or eliminating those taxes might yield a "pretty big chunk" of federal savings, Salo says, but might also have a "pretty disastrous impact on a number of states."
Republicans proposed a similar limitation as a way to offset the cost increase of extending a reduction in student loan interest rates this past summer, and both the provider tax limitation and the blended rate ideas were included in the president's fiscal 2013 budget proposal.
Block Grant in the Future
Republicans have been campaigning for repeal of the health care law and pushing the concept of Medicaid block grants as a way to constrain the program's rising costs. Exactly how block grants work would depend on the details of the legislation. But, generally speaking, Congress would set a spending level and allocate that money among the states, Weil says. Lawmakers also might set standards for what states have to do to get the money.
The idea is that a block grant approach would provide states flexibility to make broad changes in their programs more readily. Proponents say states would run more efficient programs compared with the current structure, where the more money states spend the more they get from Washington.
"The states would theoretically no longer have an incentive to spend and spend and spend because at some point the federal dollars just run out," Salo says.
Some observers have doubts that the federal government would give states much flexibility. Block grant opponents worry that states would end up having to pick up the difference if the federal payment rates are set low, and they remain concerned about the potential for costs shifting back to patients.
"I think what complicates the conversation for states is that the Medicaid block grant in Washington is a deficit reduction strategy, not a health reform strategy," Wilson says. "If the idea is to save the federal government money, it's either going to cost states more or something has to not happen—as opposed to a strategy to improve the product and the services for the beneficiaries, not saying that they're mutually exclusive."
The conversation is also one that's infused with politics. President Bill Clinton vetoed legislation that included language to convert Medicaid into a block grant, and, more recently, Ryan included the idea in his fiscal 2013 budget proposal. The 2012 Republican Party platform supports block-granting the program, while Democrats officially are opposed to it.
As with other potential changes to Medicaid, the future of the block grant concept is linked to whichever party controls Washington. Although states are concerned that Congress might make things worse no matter which course it takes, "the primary concern right now is the program today," Salo says. "The program today is unsustainable and not delivering the best care possible."