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States Took Short-Term Actions To Close Gaps In Medicaid Spending, But Legislators Still Face Deficits, Health Affairs Article Says

Review Of Eight States Shows Lawmakers Spurning Broad-Based Taxes,
But Also Reluctant To Enact Large Cuts In Benefits Or Eligibility

BETHESDA, MD — State governments have relied on “short-term solutions” to address the budgetary squeeze posed by increasing Medicaid and SCHIP expenses and lagging tax revenues during the recent economic turmoil, which “pushed their fiscal problems into the future,” according to a new article published today on the Health Affairs Web site.

States were generally reluctant to raise taxes or reduce either benefits or program rolls, and they frequently relied on one-time actions such as depleting rainy-day funds, shifting money from surplus accounts into general funds, changing accounting rules, or delaying payments from one fiscal year into the next, according to a review of actions in eight states related to Medicaid and the State Children’s Health Insurance Programs (SCHIP) in 2003-2005.

Among the strategies was selling bonds backed by the expected revenue stream from the national tobacco settlement. California, meanwhile, got voter approval to sell $15 billion in deficit financing bonds to close budget gaps over the next several years.

“States did not fundamentally reassess the basic structure or rules related to their major budget items, and few questioned their tax structures and policies,” wrote the authors, Teresa Coughlin and Stephen Zuckerman, both principal research associates at the Urban Institute’s Health Policy Center.

“Instead, this review of eight states shows that states relied on a range of short-term solutions that, in some cases, pushed fiscal problems into the future,” the authors wrote. “By taking this approach, however, some states have created structural deficits that will profoundly influence state policy making for many years to come.”

The authors’ research was supported by the Kaiser Commission on Medicaid and the Uninsured and the Urban Institute’s Assessing the New Federalism project, which is funded by a consortium of foundations that includes the Robert Wood Johnson Foundation.

The eight states reviewed were Alabama, California, Colorado, Massachusetts, Michigan, New York, Texas, and Washington.

The states had little political support for tax increases in 2003 but were more likely to increase taxes and fees or close loopholes in 2004. Only two states increased broad-based taxes: New York enacted a temporary three-year increase in personal income taxes along with sales taxes, and Michigan increased its sales tax.

States frequently borrowed from dedicated accounts, such as education, transportation, or human service funds, to help finance Medicaid. California, Colorado, and Michigan delayed paying bills to shift spending from one fiscal year to the next. Several states imposed provider taxes to raise Medicaid payment rates, which states use to increase the federal government’s contribution to state Medicaid accounts without expenditures from the state general fund. Other similar Medicaid maximization strategies also were employed.

To reduce spending, states were more likely to change administrative rules to reduce the number of Medicaid or SCHIP enrollees than they were to enact broad-based benefit cutbacks. The states also imposed copayments for some Medicaid and SCHIP beneficiaries, strengthened asset collection activities, and cut or froze provider payment rates.

While tax revenues have begun to recover, the authors write that the decisions made in their review period will need to be addressed in the near future.

“After the difficult fiscal period that states have just weathered, getting back on track will undoubtedly be a challenge,” they write. “Because of the tax cuts many states adopted in the late 1990s, states have a much lower tax base to pay their bills.

“To compound the problem, many states borrowed or pushed current obligations into the future. Although these obligations could be dealt with through new revenue sources, the reluctance to raise taxes makes that quite unlikely. However, if these structural deficits cannot persist indefinitely, states will be forced to confront the choice between cutting spending drastically and bucking the antitax sentiment.”

The article can be read at http://content.healthaffairs.org/cgi/content/abstract/hlthaff.w5.385.

Health Affairs , published by Project HOPE, is the leading journal of health policy. The peer-reviewed journal appears bimonthly in print with additional online-only papers published weekly as Health Affairs Web Exclusives at www.healthaffairs.org. The full text of each Health Affairs Web Exclusive is available free of charge to all Web site visitors for a two-week period following posting, after which it will switch to pay-per-view for nonsubscribers. The abstracts of all articles are free in perpetuity. Web Exclusives are supported in part by a grant from the Commonwealth Fund.

©2005 Project HOPE–The People-to-People Health Foundation, Inc.