Medicaid, the State Budget, and Federal Funds

There is much attention paid to Medicaid these days, because it is a large item in the stressed state budget, and because some observers think the Bush Administration is considering scaling back the federal financial role in the program.  Medicaid provides health insurance for about 1.7 million Illinois residents, including children (a million), working parents, elderly, and people with disabilities.  While under a quarter of the people served by the program are elderly or disabled, over 70% of the program's funds go to meet their higher medical needs.

 

The program is tremendously important to Illinois.  Governor Blagojevich considers it a core priority of his administration, and the health care needs of Illinois residents consistently score highly in polling about what people expect from state government.  Decisions that will affect its continued vitality and effectiveness must be based on good information and an accurate understanding of the issues related to its funding.  While there are many aspects of Medicaid, the following three issues related to its funding need to be better understood. 

 

1.  Medicaid in Illinois is not "out of control."

 

Illinois spends a significant amount of money on Medicaid (and the closely related KidCare and FamilyCare programs), and the gross amount (about $10 billion across several state agencies) has been rising substantially in the past several years.  It is easy to cite this one fact and cry that the program is "out of control."  For example, this assertion was a taken-for-granted primary premise for the hearings on managed care convened by the General Assembly in the second half of 2004.  But that is a mistaken premise. 

 

Far from out of control, the increases in spending have been driven by conscious decisions to offer health insurance to more people who need it, and by the high medical inflation that prevails in the larger economy.  Illinois actually has managed this inflation well, so that the inflation in the Medicaid program is about half as large as medical inflation generally.  The growth of Illinois spending on Medicaid is substantially lower than the national average of state Medicaid spending.  And, most importantly, Illinois spending of state-source funds on Medicaid has been moderate and well-controlled.  State-source spending on Medicaid is about the same percentage of general revenue spending as it was in the mid-1990s, about 10%. 

 

Just because Illinois spends "a lot" on Medicaid does not mean Illinois spends "too much," nor even that Illinois spends "enough."  It is too simplistic to just look at bottom line gross spending when trying to make a responsible judgment about whether the spending is appropriate or not.   Specialists in almost every field funded by Medicaid make compelling cases that the program is actually underfunded.

 

There are 2 million uninsured in Illinois, and the number is rising (including many thousands actually eligible for Medicaid but not enrolled).  Many people covered by Medicaid, especially children, have extreme difficulty accessing health services.  Studies have shown that payments pediatricians receive from Medicaid are less than half of what they are paid by Medicare for the same primary care services (which in turn is less than what private market insurers pay).  Hospitals are reimbursed at substantially less than their cost.  Nursing homes around the state are in danger of having to close due to financial difficulties.  There is a large unmet need for community-based services for the elderly and disabled.  Only in the largest area of medical inflation – prescription drugs – is there no compelling case for underfunding.  But there is no compelling case for overspending on prescription drugs, either.  Illinois has made tremendous progress in the last few years in controlling drug costs through administrative improvements, harder bargaining with manufacturers and better targeting of services.  However, it is important to remember that appropriate drugs are the most effective way to avoid even higher costs of hospitalization or institutionalization, while improving patients' quality of life.  Increases in this area of spending are desirable when they serve these functions.

 

In a program the size of Medicaid there will always be ways to improve service while also introducing economies and efficiencies that save money.  That should always be a priority.  But that does not mean the program is out of control.  It has grown mostly because Illinois has decided, carefully and consciously, that it is an important role for state government to provide health insurance to almost 2 million residents.  It costs money, but we knew that when the decisions were made.  To spend substantially less will mean fewer people covered and less access to actual health care for those who retain coverage.

 

2.  Federal Medicaid funds are a key to the whole Illinois general funds budget.

 

Illinois receives 50% federal matching funds for all of its expenditures on Medicaid, and 65% for its expenditures on KidCare and FamilyCare.  If Illinois spends more because of more people getting insurance or higher utilization of services or inflation in the cost of services, the federal government comes along with open-ended matching funds at these percentages.  The burden of meeting higher costs over time is shared.  Under this open-ended matching scheme, Illinois now receives about $5 billion in federal funds every year, which is placed in the General Revenue Fund (GRF) and forms a very large part of the $23 billion total in that fund.

 

As the Bush Administration and Congress begin to consider the Medicaid program, it is important to understand the impact on Illinois of any substantial decrease in federal Medicaid funds.  A cut in federal funds could come from a straight funding reduction, and/or it could come as a result of moving the funding mechanism away from the current matching system.  Changing to a fixed amount of federal funding (either a "cap" or a "block grant") would result in decreased funding for Illinois because the whole burden of program growth would shift to Illinois.  Without matching federal funds, any increase in the covered population (through program expansions to reach more uninsured, or through demographics such as the aging of baby boomers), in health care utilization, or in medical inflation would have to be funded with state funds alone or offset by program cuts.

 

If Illinois loses substantial federal funding for Medicaid, it will of course threaten the services provided by Medicaid itself.  But policymakers also have to understand that this would be first and foremost a strong hit on the whole general funds budget in Illinois.  Illinois puts its federal matching funds into the GRF.  A substantial reduction in federal Medicaid funding would be no different, in terms of the Illinois GRF, than, for example, a comparably-sized cut in the sales tax.  All programs funded by the GRF, therefore, would be threatened – K-12 education, higher education, corrections and public safety, child care, and so on.  For example, funds that may have previously been available for K-12 education might be diverted to meet the newly heightened need for state funds to address compelling needs for long term care, hospital care, home care, or immunizations (previously met with federal funds).

 

Every group that has an interest in a program funded by the Illinois GRF must be aware that their interest is threatened by a federal pullback from Medicaid funding.  The Illinois congressional delegation needs to understand this, too.

 

3. Substantial reductions in federal health care spending would hurt the economy.

 

While health care spending is a difficult task for governments at all levels to sustain, there is a significant flip side of economic benefits that flow from this investment.  That is the conclusion of a recent study of six metropolitan areas in diverse parts of the country done for the Brookings Institution.  Daniel Gitterman, Joanne Spetz, Matthew Fellowes, "The Other Side of the Ledger:  Federal Health Spending in Metropolitan Economies," Brookings Institution (September 2004). 

 

The study examined the impact of federal expenditures for Medicare and Medicaid and other health care programs on the economies of Atlanta, Milwaukee, Oakland, Philadelphia, San Antonio and San Diego.  Among the findings:

 

• Direct federal health spending ranged between $2.3 and $10.2 billion annually depending on the city (Philadelphia, comparable to Chicago, was the highest).  It was an average of 4.4% of the metropolitan gross product (Philadelphia was close to 6%).  This spending generates many more billions of economic impact for local economies through multiplier effects.
• Health service jobs numbered over 11.9 million nationally, and were between 6.6 and 12% of the jobs in the cities studied.  Between 1993 and 2002, jobs in the major health employer groups grew at an average rate of 20% in the studied cities.  About 16% of all new jobs created between 2002 and 2012 are expected to be health services jobs.
• Health service jobs are better-paying than average jobs and do very well in comparison to service sector jobs. 

 

Health care spending is worth it for the health care access that it produces.  But, as this study demonstrates, it also produces much more than that.  The coming federal health care debate needs to be a high priority for Chicago and other localities around the state, and for the state policymakers as well.  The stakes involve much more than just health care or the state budget.  They threaten a key beneficial sector of the state and local economies and labor markets.