Medicaid costs balloon for cash-strapped states

NEW YORK (Money) -- As stimulus funds dry up, cash-strapped states are facing steep rises in Medicaid spending, forcing them to slash services and trim costs.

States will have to spend another 28.7% on Medicaid this fiscal year -- by far the largest increase ever, according to new data released by the Kaiser Family Foundation Thursday.

Much of the increase comes from the loss of more than $100 billion in federal stimulus funds, which helped buffer states from the massive jump in Medicaid enrollment during the Great Recession. But those federal funds ran out in June, leaving states to shoulder the burden of covering nearly 60 million people on their own.

Though tax revenues have started to creep back, states are still ill-equipped to handle their inflated Medicaid rolls. So most have enacted cost-cutting measures, ranging from reducing provider payments to eliminating certain benefits to raising co-payments for beneficiaries, according to the foundation's Commission on Medicaid and the Uninsured, which released the report.

"Unemployment remains high with increasing numbers of poor and uninsured keeping pressure on state budgets and Medicaid programs to meet growing needs," said Diane Rowland, the commission's executive director. "But the cumulative effect of two recessions since 2001 and a decade of constrained spending has left no cushion and many of the latest cuts will hit at the core of the Medicaid program."

Faces of poverty

But the good news is that enrollment growth is expected to slow to 4.1%, on average, the survey said. That's down from 5.5% the year before.

That slowdown will help restrict the overall rise in Medicaid spending, which is jointly financed by states and the federal government, to 2.2% this fiscal year, one of the lowest rates on record. But it may also underestimate actual spending since more than half of states are projecting at least a 50-50 chance of a shortfall in their Medicaid budgets this year.

States have aggressively been trying to reduce their Medicaid costs in recent years, especially since the stimulus and health care reform acts restricted them from cutting enrollment.

The most common strategy has been to slash rates to medical providers, with 39 states doing so in fiscal 2011 and 46 planning such moves this year.

Also, states are continuing to eliminate or reduce certain Medicaid benefits, such as dental coverage, therapies, medical supplies and personal care. Almost all have already made major changes to their pharmacy programs, including instituting preferred drugs lists and prior authorization requirements. They are now focusing on controlling costs for specialty drugs.

Some beneficiaries are also paying more for coverage. Some 19 states have instituted or increased co-payments this year or last year, mostly for pharmacy or emergency room visits.

States are also pushing more Medicaid participants into managed care programs to lower costs while still providing access to primary care services. Two-thirds of the nation's 54 million Medicaid beneficiaries in October 2010 were already enrolled in some form of managed care.