Medicaid Time Bomb in Budget

August 16, 2010

Investigative Reports

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The NerveThere’s a ticking time bomb in the state budget, and it’s labeled “Medicaid in South Carolina.”

Even with the addition of recently approved federal financial aid for the state, the time bomb is set to explode this fiscal year.

It could blow a $200 million hole in the state budget, and that gap almost certainly will widen if the S.C. General Assembly diverts some of the state’s new federal aid away from Medicaid.

In addition, the effects of the Medicaid budget bomb could be even worse next fiscal year.

Some of those who would feel the impacts, such as the South Carolina Hospital Association, already are sounding alarm bells.

Expect to hear a lot more of that as the budget calendar turns.

A combination of factors has contributed to the situation, beginning with the Great Recession and continuing with federal and state mandates.

Medicaid is a health care program for the needy funded jointly by the federal government and the states based on a matching formula. The federal portion is called Federal Medicaid Assistance Percentage, or FMAP.

With the onset of the recession toward the end of 2007, the number of people enrolling in the program began to increase – in South Carolina, by something like 2,500 to 5,000 per month.

Since December 2007, the state’s Medicaid enrollment has climbed by about 90,500, according to Jeff Stensland, spokesman for the S.C. Department of Health and Human Services (HHS), the agency that administers the program in this state.

“The largest increase has been in the children’s category,” Stensland says.

The second largest: low-income families.

National research indicates that much of the growth in Medicaid enrollment has resulted from people losing their jobs and, therefore, their health insurance, Stensland says. “We think that’s what it is.”

To help states cope with the surge, Congress upped the federal Medicaid match as part of the stimulus. That allowed states to stretch the dollars they allocate to the program.

For example, the funding formula for South Carolina prior to the stimulus was roughly 70 percent federal, 30 percent state. The stimulus, formally the American Recovery and Reinvestment Act, changed the ratio to 80/20, respectively.

However, the stimulus also barred states from tightening their Medicaid eligibility rules. That restriction was made permanent under national health care reform legislation, the Patient Protection and Affordable Care Act. President Barack Obama signed it into law in March.

Prior to the stimulus, states could tweak eligibility to help deal with funding and enrollment fluctuations.

Now, Stensland says, “Federal law restricts us from doing anything that has the net effect of reducing eligibility or making it harder for folks to become eligible for Medicaid.”

That’s one Health and Human Services hand tied behind the agency’s back.

The Legislature tied the other via a state budget proviso.

The proviso forbids HHS from reducing reimbursement rates paid to health care providers that serve Medicaid patients.

South Carolina is the only state in the country with such a restriction, Stensland says. “We estimate you get about $5 million for every 1 percent you cut,” he says of provider rates.

This is the second year the thou-shalt-not has been in effect. Gov. Mark Sanford vetoed it in 2009-10 and parts of it again this year, but the Legislature overrode his veto both times.

“There are certain industries related to health care that have a lot of influence with lawmakers,” Stensland says.

But even if the federal and state shackles were removed, Medicaid would still be a ticking time bomb in the state budget.

“Cutting Medicaid eligibility and rates won’t make up the deficit Medicaid is facing,” says the most recent edition of the South Carolina Hospital Association newsletter, published last week. “Program cuts are possibilities, and South Carolina could end up without a legal Medicaid program if additional revenue is not made available.”

Why?

Simply put, the Legislature underfunded Medicaid this year.

Health and Human Services requested $375 million for the program, but received about $205 million – a difference of some $170 million less, according to Stensland.

The recently authorized federal aid for states could help close the gap, but it’s not a foregone conclusion. And even if it does, HHS is still looking at an approximately $200 million shortfall this year.

With stimulus funds running out this year, the outlook for 2011-12 is even worse.

Obama signed off on the aid for states last week – about $26 billion in the American Jobs and Closing Tax Loopholes Act. The money is intended to help prevent layoffs of teachers, police officers and firefighters, and temporarily continue higher federal Medicaid match rates for the states.

The $26 billion will come from cuts in food stamps and eliminating tax benefits for companies that ship jobs overseas. The nonpartisan Congressional Budget Office says the measure will reduce the federal deficit by more than $1 billion over the next 10 years.

The S.C. Health and Human Services department estimates that the state could receive $127 million in Medicaid funding from the package, Stensland says.

But the feds won’t just write the state a check for that amount.

Rather, $127 million is the amount HHS projects that South Carolina could get because the higher federal Medicaid match is continuing for a while. “You’ve got to spend the state money to get the additional benefit of the federal dollars,” Stensland says.

Thus, it’s up to the General Assembly to make that happen.

If recent history is any guide, look for the Legislature to try to divert at least part of that money.

Knowing that the state could bring in another $127 million in federal Medicaid funding, lawmakers might try to reallocate a percentage of that amount in state HHS revenue to other uses.

That’s what they attempted to do for this budget year, writing $213.5 million in extra FMAP money into the state’s spending plan even though those dollars had not been appropriated in Washington, D.C.

Objecting to the state budgeting money it doesn’t have, Sanford vetoed that part of the budget, and his veto stood.

Will history repeat itself?

In this budget climate, it’s anybody’s guess.

Reach Ward at (803) 254-4411 or eric@thenerve.org.