Smith1 The Economic and Fiscal Climate: The Impact on State Budgets, Medicaid and Long Term Care Presentation and discussion with User Liaison Program.

Smith 1

The Economic and Fiscal Climate: The Impact on State Budgets,

Medicaid and Long Term Care

Presentation and discussion with

User Liaison Program on

State Long Term Care ProgramsIndianapolis, Indiana

May 6, 2002

Vernon K. Smith, Ph.D.Health Management Associates

Smith 2

Medicaid: Critically Important

– Provides health coverage for over 44 million Americans (vs. 40 million on Medicare) in 2002

– Pays for 35 percent of all U.S. births

– Health coverage for 1 in 5 children

– Pays for half of all nursing home care

– Covers 6 million low-income elderly and disabled persons on Medicare

– Largest source of Federal grants to states

SOURCE: Kaiser Commission on Medicaid and the Uninsured

Smith 3

Incomes of Four in Nine Elderly Were Below 200% of Poverty, 2000

Total = 33 million

Less than 100% of Poverty 14%

100-149% of Poverty 16%

150-199% of Poverty 14%

200% of Poverty or more 56%

Source: Urban Institute estimates based on the March 2001 Current Population Survey. Kaiser Commission on Medicaid and the Uninsured, 2002.

Low-Income(< 200% of poverty) 44%

Smith 4

Medicaid Spending on Services for the Elderly, 1998

Total Spending on the Elderly = $46 billion

Note: Does not include DSH payments. Lab and X-ray services included in site of receipt of service. SOURCE: Urban Institute estimates, 2000, based on HCFA-2082 and HCFA-64 reports. KCMI, 2002.

Inpatient 5%

Physician/ Outpatient 3%

Drugs 7%

Other Acute 3% Payments to MCOs 3%

Nursing Facilities61%

ICF/MR 1%

Mental Health 2%

Home Health 5%

Personal Care 4%

Payments to Medicare 6%

Acute care: 27%

Long-Term care: 73%

Smith 5

Medicaid’s Role in Long-Term Care

Medicare6%

Private and Other25% Medicaid

69%

Total = 1.5 million residents Total = $ 87.8 billion

Source: HCFA, National Health Accounts, 2000. Nursing home care includes intermediate care facilities for the mentally retarded (ICFs/MR). Georgetown University Institute for Health Care Research and Policy. Slide by KCMI, 2002.

Nursing Home Residents Nursing Home Expenditures

Medicare12%

Out-of-Pocket33%

Medicaid46%

Private Insurance

5%

All Other10%

Smith 6

Medicaid as a Share of Total Federal Grants to States

1987 and 2000

SOURCE: National Association of State Budget Officers, 1999 State Expenditure Report, June 2000.

Federal Medicaid 26%

Federal Medicaid 43%

Education 18%

All other 28%

Transportation 14%

Transportation

9%

All other 32%

Education 16%

Cash Assistance 10%

Public Assistance 4%

Total = $245 billion2000

Total = $108 billion1987

Smith 7

Average Annual Growth Rates of Total Medicaid Expenditures

1990-200127.1%

9.7%

3.2%5.4%

9.0%

0%

5%

10%

15%

20%

25%

30%

1990-92 1992-95 1995-97 1997-99 1999-2001

Federal Fiscal Year

SOURCE: For 1990-1999: Urban Institute estimates prepared for the Kaiser Commission on Medicaid and the Uninsured, 2000. For 1999-2001: Health Management Associates survey for Kaiser Commission on Medicaid and the Uninsured, 2001.

Average Annual Growth

Smith 8

Average Increases in Medicaid Spending vs. Total State Spending

FY2000-2002

7.7%

9.9%

5.6%7.1% 7.4%

11.1%

0%

5%

10%

15%

2000 2001 2002 proposed

Medicaid GF Spending Total GF Spending

SOURCE: Health Management Associates for the Kaiser Commission on Medicaid and the Uninsured, June 2001.

Number of States Reporting:

32 34 29

Smith 9

Top Reasons Reported by State Medicaid Officials for Medicaid Expenditure Growth in FY 2001

2427

31

48

PrescriptionDrugs

Provider Rates Enrollment Long-Term Care

Number of States reporting as top two or three reasons:

SOURCE: Health Management Associates for the Kaiser Commission on Medicaid and the Uninsured, June 2001.

Smith 10

15.9%

11.7%

7.9%

19.7%

5.5%

1.7%

5.2%

8.8%

0% 5% 10% 15% 20%

Managed Care

Home Care

Nursing Facilities

Prescription Drugs

Outpatient Hospital, Clinic

Physician, Lab, X-Ray

Inpatient Hospital

All Medicaid Services

Average Annual Rate of Growth

Note: All growth rates shown represent changes in total fee-for-service expenditures for the types of services listed (except for ‘managed care,’ which includes a wide range of medical services). Source: CMS, CMSO, Financial Management Reports (HCFA-64 data). KCMI, 2002.

Average Annual Rate of Growth in Selected Medicaid Expenditures, 1998-2000

Smith 11

Converging Trends Impacting Medicaid Now

1. Health care cost inflation

2. Health care market place changing

3. Medicaid enrollment up

4. State revenue trends force budget cuts

Smith 12

Annual Increase In Health Insurance Premiums, 1992-2001

SOURCE: Kaiser/HRET survey of employer-based health plans for 1998-2000 and KPMG survey for 1992-1998, as cited in: Hogan, Ginsburg and Gabel, “Tracking Health Care Costs: Inflation is Back,” Health Affairs, Nov/Dec 2000. 2001 by Hewitt Associates.

0

2

4

6

8

10

12

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

10.9%

8.0%

4.8%

2.1%

0.5%

2.1%3.3%

4.1%

7.5%

(Firms with 200 or more workers)

10.2%

Smith 13

Managed Care is less able to control costs for states...

• Consumer backlash

• Providers now less willing to bear risk or participate in Medicare or Medicaid

• MCOs less able to restrict access

• Managed care savings already realized

• Costs driven by technology and prescription drugs

Smith 14

“Direct-to-Consumer” ads linked to higher Rx costs?

• The 50 most heavily advertised Rx accounted for 48% of the increase in total retail Rx sales (1999-2000).

• The 9,850 other Rx accounted for 52% of the increase in Rx sales.

• Sales rose 32% for the 50 most heavily advertised drugs; all others up 13.6%.

Source: Prescription Drugs and Mass Media Advertising, 2000, NIHCM, November 2001, citing: American Institutes for Research analysis of Competitive Media Reporting data cited in June 2001 Med Ad News and Scott-Levin Year 2000 Prescription Audit Data.

Smith 15

Total Medicaid Enrollment in 50 States and the District of Columbia

31.330.8 30.7 30.9

31.431.9

32.5

33.3

29.029.530.030.531.031.532.032.533.033.534.0

Jun-97 Dec-97 Jun-98 Dec-98 Jun-99 Dec-99 Jun-00 Dec-00

Monthly Enrollment in Millions

Source: Compiled by Health Management Associates from State Medicaid enrollment reports for the Kaiser Commission on Medicaid and the Uninsured, 2001.

Smith 16

Source: USDHHS: Administration for Children and Families

Smith 17

Total U.S. SCHIP Enrollment

0.9 Million

1.8 Million

2.7 Million

Source: Vernon Smith, David Rousseau and Jocelyn Guyer, CHIP Program Enrollment December 2000, The Kaiser Commission on Medicaid and the Uninsured, October 2001. Publication #4005.

0

500

1000

1500

2000

2500

3000

1998 1999 2000

Separate SCHIP Medicaid Expansion SCHIP

December December December

Smith 18

Prepared by HMA for the Kaiser Commission on Medicaid and the Uninsured, 2001.

Aged and Disabled Medicaid Enrollment in 45 States

8.8

8.7

8.68.6

8.58.4

8.38.3

8,000.0

8,100.0

8,200.0

8,300.0

8,400.0

8,500.0

8,600.0

8,700.0

8,800.0

8,900.0

Jun-97 Dec-97 Jun-98 Dec-98 Jun-99 Dec-99 Jun-00 Dec-00

Monthly Enrollment in Thousands

Source: Health Management Associates from State enrollment reports, for the Kaiser Commission on Medicaid

and the Uninsured, 2001.

Smith 19

Medicaid Prescription Drug Spending, 1998

Children12%

Adults8%

Aged25%

Blind & Disabled

55%

Total = $14.5 billion*

* 8.2% of total Medicaid spending on services. Includes both fee-for-service expenditures and estimated drug spending by managed care organizationsSOURCE: Urban Institute Estimates, 2000.

Expenditures by Eligibility Group

Smith 20

Medicaid Expenditures Per Enrollee, 2001

$0

$3,000

$6,000

$9,000

$12,000

$15,000

Children Adults Blind &Disabled

Elderly

$1,447$2,283

$11,238

$12,322

SOURCE: CBO January 2002 Baseline.

Smith 21

Medicaid Payments vs. Recipients U.S. in 2001

Recipients: Most are children and families• Disabled 17%• Elderly 10%• Children and Families 73%

Payments: Most are for disabled and elderly:• Disabled 43%• Elderly 28%• Children and Families 29%

Source: Calculated by Health Management Associates from CBO January 2002 Baseline. Percentages exclude payments not for specific services, e.g., disproportionate share payments to hospitals.

Smith 22

Projected Total Medicaid Spending Per Enrollee, 2001-2005

$14,800$16,300

$12,300$11,200

$2,300$1,400

$3,200$1,800

Children Adults Disabled Elderly

FY2001 FY2005

Note: Includes federal and state spending on benefits.SOURCE: Health Management Associates calculation based on CBO baseline, April 2001 Update.

25

Smith 23

FY2002 State Fiscal Stress

• General Tax Revenues down 3.8%

• Rainy day and reserve funds are being drained

• Net borrowing by state and local governments is at record levels

• Spending pressure is increasing, led by Medicaid

Source: Mark M. Zandi, The Outlook for State Tax Revenues, Economy.com. February 2002

Smith 24

“They are not crying wolf.”

• Gail R. Wilensky, former HCFA Administrator, on national Public Radio, commenting on the crisis facing states due to the economic slowdown, decreasing state revenues and increasing Medicaid costs.

Source: National Public Radio interview in NPR series titled: “States Fear Medicaid Meltdown,” Interview by Julie Rovner on April 10, 2002.

Smith 25

Average State Year-End Balances as a Percentage of Expenditures,

FY 1995 -2002

5.8%

7.7%

10.4%

8.4%9.2%

7.9%

5.8%6.8%

0%

4%

8%

12%

1995 1996 1997 1998 1999 2000 2001 2002

SOURCE: NASBO, December 2001. Fiscal year 2001 is preliminary actual; fiscal year 2002 is based on appropriations, prior to mid-year adjustments.

Smith 26

Total Medicaid Expenditures as % of Total State Expenditures

1987-2004

0

5

10

15

20

25

1987 1989 1991 1993 1995 1997 1999 2001 2003

Percent

10%

14%

20% 20%

23%Est.

Source: For 1987-2001, from NASBO, State Expenditure Reports. Various years.

For 2002-2004, projections by Health Management Associates, February 2002.

Smith 27

State and Medicaid Budgets are now under Stress

• Revenue forecasts are down, Medicaid spending up, forcing States to cut budgets

• By October 2001, 2/3 of States had initiated budget reduction actions

• Medicaid programs are being asked to propose reductions of up to 10% - 15%

• Options previously off the table are now being considered

Source: Survey of State Medicaid and Budget Officials by Health Management Associates for Kaiser Commission on Medicaid and the Uninsured, October 2001.

Smith 28

The Medicaid Budget Dilemma

• Medicaid need goes up just when the state’s ability to pay for it goes down

• States must cut total Medicaid spending $2 - $4 to save one state general fund dollar

• Every Medicaid cut affects local health care providers and individuals who need health care services

• Medicaid spending cuts are usually needed immediately, but it takes time to achieve savings

• Choices are limited by federal rules

Smith 29

Budget Cuts are the Rule in FY2002

• Medicaid options previously off the table are now being considered, including cuts and restrictions in eligibility, benefits, payments

• Key areas for cost containment are pharmacy, hospital, long term care, managed care

• Even with cuts, most states will likely need supplemental funding for Medicaid

Smith 30

Medicaid Cost Reduction Actions FY2002

• Restrictions in pharmacy costs and use– Prior authorization, preferred Rx lists– Discounts from AWP: –13% to –15% for brands– PBMs, pharmacist fees, purchasing coalitions

• Limits on provider payment increases• Care coordination, disease management,

managed care

SOURCE: Health Management Associates Survey of States for Kaiser Commission on Medicaid and the Uninsured, June 2001.

Smith 31

Long Term Care Medicaid Cutbacks FY2002

• Payment freezes, delays in scheduled payment increases

• Curtailing Home and community-Based Care

• Medically Needy eligibility limits

• Looking at ways to “organize” the system

Smith 32

More Medicaid Cutbacks FY2002

• Benefit reductions or limits, copays• Delaying Cervical and Breast Cancer coverage• Reducing eligibility for expansion groups,

medically needy• Curtailing SCHIP outreach • Expanding managed care, bid services• New edits, audits, prior authorizations,

maximize Rx rebates, other insurance Supplemental appropriations, Upper Payment Limit (UPL) arrangements

Smith 33

Number of States with Supplemental Medicaid Budget Funding

FY2000-2002

40

3730

FY 2000 FY 2001 FY2002 (Asof Jan 2002)

SOURCE: Health Management Associates for the Kaiser Commission on Medicaid and the Uninsured, June 2001.

Mid-Year OverallBudget Shortfall

++

Smith 34

Medicaid is a Federal – State Partnership, but…

• All the important decisions about Medicaid are made by states

• State decisions about eligibility, coverage and payments reflect the values, priorities, economics and health care traditions in each state…a virtue of the current structure

• State fiscal capacity is too limited to finance Medicaid expenditure growth…an Achilles’ heel

Smith 35

The Outlook: Increasing Medicaid Budget Stress

• Medicaid cost pressure will be driven by enrollment growth, more elderly and disabled, double-digit cost growth in the medical market place

• Even with rebounding economy, increases in state revenues will be dwarfed by Medicaid expenditure growth

• States’ ability to finance Medicaid in the long run is in question, under the current federal rules and federal financing formula