Medicaid Extension Failure Would Create $121 M illion Budget Hole (IA)

June 29, 2010

Iowa will face an unexpected $121 million budget shortfall in the fiscal year that starts Thursday if Congress fails to approve legislation providing extra funding for Medicaid.

The American Recovery and Reinvestment Act, more commonly known as the federal stimulus, temporarily provided states with a 6.2 percent increase in the portion of Medicaid financed by the federal government. That increase, however, expires in December, right in the middle of Iowa’s fiscal year. This means lawmakers would have to find a way to balance the budget they passed during the last legislative session when they return to Des Moines next year.

“Legislators created the fiscal year 2011 budget assuming the funding would be extended to June 2011,” said Andrew Cannon, a research associate with the nonpartisan Iowa Policy Project. “The state has no contingency plan if the money goes away.”

The extension is part of the larger jobs bill that also includes numerous tax credits and an extension of unemployment benefits. The legislation failed to garner enough votes last week to overcome a Republican filibuster. The unemployment extension has gotten the lion’s share of attention, with one Senate Democrat planning to draft a stand-alone bill specifically targeting unemployment if the larger jobs bill continues to stall.

Jess Benson, a fiscal analyst with the state’s Legislative Services Agency, said his projections show a $121 million shortfall without the Medicaid extension. In order to cut the cost of the jobs bill in the hopes of garnering some GOP support, some Democrats have suggested phasing down the Medicaid funding over time, from 6.2 percent th is year to 5.3 percent increase in the first quarter of 2011, to a 3.2 percent increase in the second quarter of 2011. The money would then expire completely.

Benson said that will force lawmakers to close a smaller budget hole, just a little more than $37 million.

Federal requirements for Medicaid, the government’s low-income insurance program, mean Iowa would not legally be allowed to make the cuts in Medicaid alone, Benson said. For example, he points out pregnant women are eligible for Medicaid up to 300 percent of the poverty level. The state would not have the authority to raise that eligibility threshold in order to save money.

“Basically, legislators will have to either increase revenues or cut expenditures in other places,” Benson said. “There isn’t a lot they can do within the Medicaid program, and six months into the fiscal year, there isn’t a lot that they could do that would go into effect quickly enough to have an impact.”

That could mean lawmakers will have to tap into the state’s cash reserves again, institute more layoffs, cut from other departments or increase taxes and fees.

But Cannon points out the impact on the state’s budget pales in comparison to the impact a loss of the funding will have on the state’s overall economy. His research has found that federal stimulus for Medicaid created a $252 million increase in the value of goods and services produced in the state during fiscal year 2009, and $114 million in income for 2,354 workers in created or saved jobs.

“Because Medicaid recipients save money on their health care bills, they are able to spend most of their incomes on meeting necessities through local payments for housing costs and through purchases from Iowa retail stores and service pro viders,” a report by the nonpartisan Iowa Fiscal Partnership said in November. “In turn, these retailers and service providers are better able to keep their workers employed and have more income to spend purchasing from other businesses or residents in the state.”

Those who will be most effected by the failure of Congress to pass an extension will be those “who have already borne the brunt of this recession,” Cannon said. And the loss of the money could damage the still fragile economic recovery, increasing the length and depth of the recession, he said.