Accelify Blog

Cash-Strapped States Target Medicaid To Close Budget Gaps (US)

March 30, 2011

Cash-strapped states are taking aim at Medicaid, the health-care program for low-income people, as stubbornly high employment is pushing an increase in enrollment and costs.

Trying to cut such a large expense sends a good signal to municipal bond holders, analysts said, since health care is second only to education in state spending, according to one estimate.

States that try to make cuts in as many areas as possible have better flexibility and a stronger standing against any pushback by those affected, said Gary Pzegeo, head of fixed income for Atlantic Trust, the pri vate wealth management division of Invesco Ltd.

"If you show some effort to spread the cuts around, you may have luck in avoiding some of the protests and some of the volatility down the road," said Pzegeo.

While the nation’s unemployment nearly doubled to 9.5% from December 2007 through June 2010, Medicaid enrollment has jumped by 17.8%, according to the Kaiser Commission on Medicaid and the Uninsured.

Medicaid spending nationwide hit $381 billion in 2009, a 13% increase from 2007. States are responsible for anywhere from 20% to 50% of that bill, depending on the age of patients and average income levels. In 2009, states paid 34% of the total, according to the Department of Health and Human Services.

Enrollment is only expected to continue to rise, as unemployment stays high and more employers cut health insurance coverage. January’s unemployment rate stood at 9%. The increase in Medicaid rolls in 2012 since 2008 is likely to be over 9%, according to Michael Leachman, assistant director of the state fiscal project at the Center on Budget and Policy Priorities.

On average, Medicaid consumes 22% of a state’s budget, rising to as much as 28% in New York and 33% in Illinois, according to a report from the Wells Fargo Research & Economics team.

"Medicaid is likely to be the biggest battleground" for cuts in state budgets, the analysts wrote.

States have already started cutting, reducing payments to providers and scaling back services not mandated by the federal government, said Leachman. At least 23 states have proposed deep cuts in health care, according to his research.

Arizona Gov. Janic e Brewer, for example, has asked Washington for a temporary waiver that would let her reduce Medicaid eligibility for certain adults. "This simple step would preserve our state’s underlying Medicaid program for more than 1 million Arizonans, while sparing education, public safety and other essential state programs from hundreds of millions of dollars in additional costs," she wrote in a letter to Health and Human Services Secretary Kathleen Sebelius.

In New York, Gov. Andrew Cuomo has tapped something called a Medicaid Redesign Team to figure out how to cut Medicaid spending by 1.8%. Illinois wants to move half the Medicaid caseload into managed care by 2015.

California, Colorado, Georgia, Illinois, Mississippi, Nebraska, Nevada, Oklahoma, Oregon and South Dakota are also proposing cuts to payments to providers, according to Leachman.

States are limited on the services and eligibility they can cut, but areas that aren’t mandated by federal legislation are game as states overall face 2012 budget gaps of around $125 billion.

Arizona has already rejected organ transplants, California wants to terminate vision benefits under a family health program, and Kansas, Massachusetts, and Mississippi are discarding certain mental health services.

By taking on cuts to the popular social services program, states are receiving greater financial flexibility, which helps protect state bond holders. But investors in debt from other issuers such as hospitals may not fare so well with such actions.

"While that might help balance budgets and protect bondholders, it may hurt the actual service providers such as hospitals, nursing homes and managed care facilities," said Howard Cure, director of municipal rese arch at Evercore Wealth Management.