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Medicaid Pressures State Budgets

Sun, 12/19/2004 - 1:00am — Karen Stevenson
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PRESS RELEASE

Spending Pressures Continue Despite Revenue Growth
Recovery Continues, but Rise in Medicaid Costs Outstrip Growth in Revenue

WASHINGTON--Despite the gradual improvement in the nation's economy, states, increasingly burdened by rising health care and Medicaid costs, continue to recover slowly from the worst fiscal crisis in the last six decades, according to the National Governors Association (NGA) and the National Association of State Budget Officers (NASBO).

In a report released today, The Fiscal Survey of States, NGA and NASBO found that revenue collections are now narrowly exceeding budgeted estimates in nearly all states in fiscal 2004. However, state spending pressures, specifically costs associated with health care, remain especially significant. Moreover, Medicaid continues to grow at high rates with no relief in sight.

"It's important to remember that we have just come through a tremendously difficult fiscal period, one in which we are only now beginning to see relief," said NGA Executive Director Raymond C. Scheppach. "The light at the end of the tunnel is beginning to appear; unfortunately, it's a long tunnel. Are states better off than they were a couple years ago? Certainly. Are they where they want to be or where they should be? No way, and that is attributable to the rising health care costs."

During fiscal 2005, Medicaid is estimated to grow as high as 12.1 percent due in part to the expiring federal fiscal relief. Long term growth of Medicaid is expected to be a hefty 8 to 9 percent--well above expected state revenue growth. In fact, according to NASBO's State Expenditure Report, estimates for fiscal 2004 revealed that for the first time ever, Medicaid is now a larger component of total state spending than elementary and secondary education combined.

While state finances are showing signs of improvement, state expenditures have increased slightly after being flat for a two-year period. State spending is expected to grow at 3.0 percent and 4.5 percent respectively in 2004 and 2005, below the 6.3 annual average since 1979, when the Fiscal Survey began tracking budget data.

"While there is relative improvement from the fiscal malaise of the past few years, our findings show that states' fiscal situations will remain difficult for the foreseeable future," said Scott Pattison, executive director of NASBO. "Medicaid spending continues to be driving state budgets. The bottom line is that the pressure from Medicaid and other skyrocketing health care costs makes it difficult for states to completely recover from these difficult fiscal times."

To control rising Medicaid costs, states have employed aggressive actions over the past four years. According to a recent Kaiser Family Foundation study, all 50 states implemented at least one new Medicaid cost containment strategy in fiscal 2004. Despite states' best efforts, Kaiser Foundation says, 35 states experienced Medicaid shortfalls in fiscal 2003 and 34 states anticipated shortfalls in fiscal 2004.

"The growth rate on Medicaid is rapidly reaching its breaking point. While the federal fiscal relief package that ended in June was a welcome reprieve for states, it was only a temporary band-aid for a much more serious ailment," Scheppach said. "States are employing a variety of cost containment strategies, but serious structural changes to Medicaid are necessary if they are to meet the needs of the nation's burgeoning senior population in the years to come."

In a sign that the national economy is continuing to improve, 15 states reduced their enacted budgets in fiscal 2004 by more than $2 billion, down from 40 states in fiscal 2003 that cut previously enacted budgets by nearly $12 billion. Three states report negative growth budgets in fiscal 2005, down significantly from fiscal 2003 when 21 states enacted negative growth budgets.

Following numerous years in which states did not meet growth expectations, revenue collections in fiscal 2004 narrowly exceeded budget estimates in 35 states. Ten states met their expected revenue targets, and only five states reported revenue estimates below original projections for the last fiscal year. In fiscal 2005, 24 states enacted tax and fee changes accounting for about $3.5 billion with more than $888.4 million coming from cigarette and tobacco taxes, and $710.6 million coming from sales taxes.

"After several years during which collections failed to meet targets, seemingly no matter how low states set their sights, a measure of revenue stability has returned. As economic recovery continues, state tax collections have become more robust," the report says. "However, from a budget perspective the margin of revenue security is narrow, even more so considering the spending pressures states are under, and states still face fundamental challenges regarding how they collect taxes and on what."

Against a backdrop of soaring health care costs and sluggish revenue growth, states are employing a variety of budget-balancing efforts. "Even though the overall fiscal situation seems to be getting better in many states, most are still keeping expenditures reigned in, especially considering pent-up demand that resulted from the recent fiscal crisis," the report says.

In addition to spending and revenue, year-end balances are another bellwether of the fiscal health of states. And, according the report, the total balances in the last few years "remain below what are generally considered an adequate financial cushion." The total balances for fiscal 2003 were $16.4 billion or 3.2 percent of expenditures, $25.3 billion or 4.8 percent of expenditures in fiscal 2004, and $18.6 billion or 3.4 percent of expenditures in fiscal 2005.

The Fiscal Survey of States assembles data self-reported by states on their general fund budgets. General fund budgets are the current operational plans states use to finance most broad-based state programs and services and thus are the most important element in determining states' overall fiscal health. General funds constitute about one-half of state expenditures. States also make expenditures from other dedicated state funds (such as for education or transportation), from bonds and federal grants-in-aid.

NASBO conducted the field survey between July and November 2004 and governors' state budget officers completed the surveys. Fiscal 2003 data represent actual figures, fiscal 2004 figures are preliminary, and fiscal 2005 data reflect appropriated budgets.

PRESS RELEASE

Spending Pressures Continue Despite Revenue Growth
Recovery Continues, but Rise in Medicaid Costs Outstrip Growth in Revenue

WASHINGTON--Despite the gradual improvement in the nation's economy, states, increasingly burdened by rising health care and Medicaid costs, continue to recover slowly from the worst fiscal crisis in the last six decades, according to the National Governors Association (NGA) and the National Association of State Budget Officers (NASBO).

In a report released today, The Fiscal Survey of States, NGA and NASBO found that revenue collections are now narrowly exceeding budgeted estimates in nearly all states in fiscal 2004. However, state spending pressures, specifically costs associated with health care, remain especially significant. Moreover, Medicaid continues to grow at high rates with no relief in sight.

"It's important to remember that we have just come through a tremendously difficult fiscal period, one in which we are only now beginning to see relief," said NGA Executive Director Raymond C. Scheppach. "The light at the end of the tunnel is beginning to appear; unfortunately, it's a long tunnel. Are states better off than they were a couple years ago? Certainly. Are they where they want to be or where they should be? No way, and that is attributable to the rising health care costs."

During fiscal 2005, Medicaid is estimated to grow as high as 12.1 percent due in part to the expiring federal fiscal relief. Long term growth of Medicaid is expected to be a hefty 8 to 9 percent--well above expected state revenue growth. In fact, according to NASBO's State Expenditure Report, estimates for fiscal 2004 revealed that for the first time ever, Medicaid is now a larger component of total state spending than elementary and secondary education combined.

While state finances are showing signs of improvement, state expenditures have increased slightly after being flat for a two-year period. State spending is expected to grow at 3.0 percent and 4.5 percent respectively in 2004 and 2005, below the 6.3 annual average since 1979, when the Fiscal Survey began tracking budget data.

"While there is relative improvement from the fiscal malaise of the past few years, our findings show that states' fiscal situations will remain difficult for the foreseeable future," said Scott Pattison, executive director of NASBO. "Medicaid spending continues to be driving state budgets. The bottom line is that the pressure from Medicaid and other skyrocketing health care costs makes it difficult for states to completely recover from these difficult fiscal times."

To control rising Medicaid costs, states have employed aggressive actions over the past four years. According to a recent Kaiser Family Foundation study, all 50 states implemented at least one new Medicaid cost containment strategy in fiscal 2004. Despite states' best efforts, Kaiser Foundation says, 35 states experienced Medicaid shortfalls in fiscal 2003 and 34 states anticipated shortfalls in fiscal 2004.

"The growth rate on Medicaid is rapidly reaching its breaking point. While the federal fiscal relief package that ended in June was a welcome reprieve for states, it was only a temporary band-aid for a much more serious ailment," Scheppach said. "States are employing a variety of cost containment strategies, but serious structural changes to Medicaid are necessary if they are to meet the needs of the nation's burgeoning senior population in the years to come."

In a sign that the national economy is continuing to improve, 15 states reduced their enacted budgets in fiscal 2004 by more than $2 billion, down from 40 states in fiscal 2003 that cut previously enacted budgets by nearly $12 billion. Three states report negative growth budgets in fiscal 2005, down significantly from fiscal 2003 when 21 states enacted negative growth budgets.

Following numerous years in which states did not meet growth expectations, revenue collections in fiscal 2004 narrowly exceeded budget estimates in 35 states. Ten states met their expected revenue targets, and only five states reported revenue estimates below original projections for the last fiscal year. In fiscal 2005, 24 states enacted tax and fee changes accounting for about $3.5 billion with more than $888.4 million coming from cigarette and tobacco taxes, and $710.6 million coming from sales taxes.

"After several years during which collections failed to meet targets, seemingly no matter how low states set their sights, a measure of revenue stability has returned. As economic recovery continues, state tax collections have become more robust," the report says. "However, from a budget perspective the margin of revenue security is narrow, even more so considering the spending pressures states are under, and states still face fundamental challenges regarding how they collect taxes and on what."

Against a backdrop of soaring health care costs and sluggish revenue growth, states are employing a variety of budget-balancing efforts. "Even though the overall fiscal situation seems to be getting better in many states, most are still keeping expenditures reigned in, especially considering pent-up demand that resulted from the recent fiscal crisis," the report says.

In addition to spending and revenue, year-end balances are another bellwether of the fiscal health of states. And, according the report, the total balances in the last few years "remain below what are generally considered an adequate financial cushion." The total balances for fiscal 2003 were $16.4 billion or 3.2 percent of expenditures, $25.3 billion or 4.8 percent of expenditures in fiscal 2004, and $18.6 billion or 3.4 percent of expenditures in fiscal 2005.

The Fiscal Survey of States assembles data self-reported by states on their general fund budgets. General fund budgets are the current operational plans states use to finance most broad-based state programs and services and thus are the most important element in determining states' overall fiscal health. General funds constitute about one-half of state expenditures. States also make expenditures from other dedicated state funds (such as for education or transportation), from bonds and federal grants-in-aid.

NASBO conducted the field survey between July and November 2004 and governors' state budget officers completed the surveys. Fiscal 2003 data represent actual figures, fiscal 2004 figures are preliminary, and fiscal 2005 data reflect appropriated budgets.