Robert GreensteinCenter on Budget and Policy Priorities

Grantmakers In Health

Fall Forum 2002

November 7, 2002

Medicaid: Now Even More Important• Provides health coverage for over 47 million

Americans in 2002 (Medicare covers 40 million)

• Health coverage for over 1 in 5 children

• Pays for over one-third of all U.S. births

• Pays for over half of HIV/AIDS care and mental health and substance abuse care

• Pays for half of all nursing home care

• Covers 7 million low-income elderly and disabled persons on Medicare

Source: Kaiser Commission on Medicaid and the Uninsured

As Private Insurance Eroded, Medicaid and SCHIP

Shored Up Insurance Coverage.

2001 (Annual Average)

First Quarter 2002

Children Under 18 Years

Private insurance 67.1% 63.8%

Public insurance 23.4% 27.7%

Uninsured 10.8% 10.0%

Adults 18-64 Years Old

Private insurance 73.9% 72.8%

Public insurance 9.4% 10.4%

Uninsured 18.1% 18.6%

Source: CDC Estimates from National Health Interview Survey, First Quarter 2002

(Two Million More Children and One Million More Adults Would Have Lost Coverage If Not for Program Growth)

3

Long-Term Factors Affecting Medicaid Expenditure Growth

• Medical inflation inherently higher than average economic growth: prescription drugs, technology, etc.

• Aging of population and rising disability.• On a long-term basis, three-quarters of all

Medicaid expenditure growth is due to care for aged and disabled.

• Costs for children and adults will rise and fall with the economic cycle.

Health Care Cost Increases Affects Public and Private Insurers: Medicaid Growth Moderate Compared to Employer-Sponsored Insurance

• Most factors driving up health care costs affect all sectors: prescription drugs, new technology, aging of society, retreat of managed care, etc.

• CBO estimates average Medicaid cost for adults rose 7.5% and average cost for children rose 6.7% in 2002.

• In contrast, average employer-sponsored insurance premium rose 12.7% in 2002 and average cost of federal employees’ plans rose 13.3%.

Sources: CBO, Kaiser Family Foundation survey, Office of Personnel Management

Medicaid and Medicare

• Almost all elderly and 40% of disabled on Medicaid are also on Medicare. About 35% of total Medicaid costs are for “dual eligibles.”

• Medicare does not cover prescription drugs nor long-term care services, so Medicaid must pay all those costs.

• Medical innovation has been lowering hospitalization rates, but increasing use of drugs and physician services. This lowers costs for Medicare but increases them for Medicaid.

Expenditures for the Elderly and Disabled Have Grown Faster in Medicaid than in

Medicare, so Medicaid Pays for a Growing Share of Care for These Populations

6.5% 6.7%

8.7% 8.9%

12.5%10.7%

1990-98 (actual) 2001-2012 (projected)

Medicare Medicaid Elderly Medicaid Disabled

Average Annual Growth Rate

State Budget Deficits

• Nearly every state has faced or is facing a budget deficit

• 2002 deficits: about $40 billion (9% of total state spending)

• 2003 deficits: about $50 billion• 2004 deficits: totals unclear, but

widespread• Worst state fiscal crunch in 20+ years

The State Fiscal Crisis: Biggest Drop in Tax Revenue in Two Decades

-15%

-10%

-5%

0%

5%

10%

1991 1993 1995 1997 1999 2001 2003

Change fro

m p

revi

ous

year

Adjusted for inflation and legislated tax changes. Source: Rockefeller Institute of Government.

Tax Revenue Decline, FY 2002

Source: CBPP calculations based on Rockefeller Institute’s data (September 2002).

P ercen t C h a n g e , A d ju sted fo r In fla tio n

-3 0 % to -1 0 %-1 0 % to -5 % -5 % to 0 %N o C h an g e o r In c rea se

Surging Capital Gains Bolstered Revenue – Unlikely to See Again

0

1

2

3

4

5

6

7

8

Per

cen

t of

GD

P

2001 Estimate Capital Gains Realizations 46 - year average

??

TRA 86

State Budget Problems Mostly Result from Revenue Decline

$0

$10

$20

$30

$40

Bil

lio

ns

Decline in tax revenue,2002

Increase in Medicaidspending, 2002

Decline in tax revenue is a preliminary calculation of the decrease in sales and income taxes from FY 2001 to FY 2002, adjusting for inflation. Source: Rockefeller Institute of Government.Increase in Medicaid spending is a preliminary estimate of the amount by which Medicaid spending exceeded the original budgeted amount. Source: National Assn. of State Budget Officers.

Three Sources of Revenue Decline

• Economic weakness– Recession– Stock market decline

• Structural problems in tax systems– State taxes don’t keep pace with economic

growth

• Tax cuts in the second half of the 1990s

Prospects for Improvement?

• The economy is part of the problem; recovery remains slow

• Unclear when the stock market might recover

• Even if the economic recovery were strong, state fiscal recovery always lags economic recovery by 12 to 18 months

• Unclear if that clock has begun to run

State Fiscal Recovery Lags Economy

2.80%

6.20%6.50%

0%

1%

2%

3%

4%

5%

6%

7%

1990 1991 1992

Budget Shortfall

Recession Ends

Source: National Association of State Budget Officers

States Must Close Deficits

• Most states must balance their budgets – constitutional or statutory requirement

• In first year of fiscal crisis, states had “Rainy Day” funds and other reserves to use

• States also could postpone capital and other spending, reduce payrolls by attrition and early retirement, and make similar cuts

Now States Face Hard Choices

• Some 20 states in 2002 raised cigarette taxes and/or gambling taxes

• So far, only a few states have raised taxes other than “sin” taxes

• In some states, phasing-in tax cuts offset new cigarette tax revenue

• Only six states — IN, KS, MA, NE, NJ, and TN — increased taxes more than 3% in 2002

States Are Cutting Spending

• Total state spending, adjusted for inflation, shrank last year and is expected to shrink again this year– Double-digit university tuition increases in ID,

IA, KS, MN, MO, NJ, NV, PA, VA, WA, others– K-12 cuts in ID, IL, IN, KS, MA, WA, & others

Most States Expect Medicaid Budget Shortfalls in FY2003

FY2001 FY2002 FY2003

31 Actual

36Actual

41Projected*

*41 states indicated the likelihood of a Medicaid funding shortfall in FY2003 was 50% or greaterSOURCE: KCMU survey of Medicaid officials conducted by Health Management Associates, Sept. 2002.

Number of States with Shortfalls Requiring Supplemental Funding and/or Cuts

States Have Already Begun Major Medicaid Cutbacks: Examples

• Oklahoma has approved eligibility cutbacks for almost 80,000 by March 2003, including low-income children, seniors and the disabled.

• Nebraska has trimmed eligibility for 25,000 members of families.

• New Jersey has lowered the income level under which it will admit low-income parents from 200% of the poverty line to about 40%.

Budget Cutbacks Planned by State Medicaid Programs for FY 2003

40

29

15

15

18

Lower Pharmacy Costs

Freeze/ Cut Provider Payments

Increase Cost-sharing

Reduce Benefits

Reduce Eligibility

Source: KCMU Survey of state Medicaid officials, conducted by HMA, Sept. 20028

States Have Focused Cost Containment Efforts on the Medicaid Drug Benefit

• In FY 2002, 32 states instituted prescription drug cost controls.

• In FY 2003, 40 states plan to institute Rx cost controls.

Source: Kaiser Commission on Medicaid and the Uninsured (2002)

A Few States’ Revenue Solutions

• Postpone/reverse tax cuts (Conn., D.C., Fla., Mass., Okla., etc.)

• Avoid losing state revenue as a result of federal bonus depreciation tax cut (30 states)

• Avoid losing revenue as a result of federal estate tax changes (15 states)

• Raise individual income tax revenue (Mass., N.C., Neb., Ore. January referendum)

• Tighten tax expenditures and otherwise broaden base of corporate income tax (Ala., N.C., N.J.)

• Broaden sales tax base (Neb.)

State Tax Increases in 2002 to Date Are Far Smaller Than Cuts of 1994-2001

-10.0%

-7.5%

-5.0%

-2.5%

0.0%

2.5%

Tax cuts 1994-2001 Tax increases 2002

Per

cen

t ch

ang

e

Total Federal Budget Surpluses, 2002-2011

January 2001 projection $5.6 trillion

August 2002 reestimate $0.3 trillion

Change -$5.3 trillion

Source: Congressional Budget Office, August 2002

Likely Costs Not Counted in CBO Budget Estimates

• Bush increases in defense spending and spending on homeland security

• Extending expiring tax credits that are always extended

• Preventing the number of taxpayers subject to the Alternative Minimum Tax from skyrocketing from 1 million today to 39 million by 2012, and encroaching heavily on the middle class

• Extending some or all of the tax cut enacted last year

• Responding to natural disasters (e.g., hurricanes, tornadoes, floods)

• Averting scheduled cuts in payments to Medicare providers

Likely total cost of these items: $1.5 trillion to $2 trillion over ten years

Where Did $5.3 Trillion Go?Reductions in the 2002-2011 surplus

$0.0

$0.5

$1.0

$1.5

$2.0

10-y

ear

cost

in

tri

llio

ns

Tax Cut

$1.7 trillion

Technical Reestimates

$1.5 trillion

Economic Reestimates

$0.8 trillion

Military & International

$0.8 trillion Other Legislation

$0.5 trillion

Source: Congressional Budget Office, August 2002

Cost of Making the Tax Cut Permanentwith interest, adjusted for inflation

$0

$100

$200

$300

$400

$500

$600

$700

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

Bil

lion

s of

200

3 do

llar

s

Tax cut as enacted If extended, with AMT fix

Source: CBO and CBPP; timing shifts not included

The Tax Cut and Social SecurityCosts over the next 75 years

0.0%

0.5%

1.0%

1.5%

2.0%

Percen

t o

f G

DP

Social Security estimate from 2002 Trustees Report; all figures are “net present values” of costs from 2002-2076. Estimates of the tax cut assume all provisions are permanent (including AMT relief) and grow only with the economy after 2011.

Tax cut if made permanent

75-year shortfall in Social Security

Annual Cost of Tax Cut Compared to Agency Budgets

When fully in effect, the annual cost of the tax cut will

be:

• Five times as large as the budget of the Department

of Housing and Urban Development

• Four times the budget of the Department of

Education

• More than three times the Department of Veterans

Affairs and Department of Transportation budgets

• Twenty-four times larger than the EPA budget

Annual Cost of Tax Cuts for the Top One Percent Compared to Agency Budgets

When fully in effect, the annual cost of the tax cut for

the top one percent of filers will be:

• Twice the budget of the Department of Housing and

Urban Development

• 1 ½ times the Department of Education budget

• Larger than the Department of Veterans Affairs and

Department of Transportation budgets

• Nearly nine times as large as the EPA budget

The Tax Cut and Agency Budgets Comparable annual costs

$0

$50

$100

$150

$200

Bil

lion

s of

dol

lars

Tax cut

Tax cut for the top 1%

Dept of Veterans

AffairsDept of

Education Dept of HUD

EPA

Note: Figures for the tax cut represent the annual cost when fully effective (including AMT relief), scaled to the size of the economy in 2002. Figures for agency budgets represent the annual average, 2001-2003.

Distribution and Phase-In of Tax Cut(in 2002 dollars)

Average tax cut from

provisions in effect through

2002

Average tax cut from

provisions still to be

implemented

Average tax cut when all provisions

fully in effect

Bottom 60 percent

$220 $124 $344

Top 1 percent

$9,259 $39,974 $49,233

Source: Urban Institute-Brookings Institution Tax Policy Center

Percentage Change in Real After-Tax Income, 1979-1997

-50%

0%

50%

100%

150%

200%

Top 1 percent Middle fifth Bottom fifth

Per

cen

tage

ch

ange

Source: Congressional Budget Office

+157%

+10%-1%

Future Outlook

• Budget outlook likely to worsen

• Freezing tax cuts in 2003 virtually impossible

• Continued pressure for additional tax cuts:

– making 2002 tax cuts permanent, as well as

other expiring tax breaks

– enacting new tax cuts

• Limited funding for spending initiatives, and likely

proposals for budget cuts

Annual Appropriations for 2003(for programs that are not entitlements)

-$40

-$20

$0

$20

$40

$60

Bil

lion

s of

dol

lars

+$42

+$1 Senate -$9

House

-$14 Bush

Agreed-upon defense, homeland

security, and international affairs

Domestic programs outside homeland security

OMB Estimates SCHIP Enrollment Will Fall by 900,000 from

FY 2003 to FY 2006

3

3.9

4.34.1

3.63.4

2.5

3.0

3.5

4.0

4.5

5.0

2001 2002 2003 2004 2005 2006

Federal fiscal year

mil

lio

ns

of

enro

llee

s

Source: Office of Management and Budget (2002).

20 States Are Projected to Face Federal SCHIP Funding Shortfalls by FY 2007

• By 2007, projected spending in 20 states will exceed the total available federal funds the states will have. States will either have to increase their contributions or cut enrollment.

• Alaska, Arizona, California, Florida, Georgia, Iowa, Kansas, Kentucky, Louisiana, Maryland, Minnesota, Mississippi, Missouri, New Jersey, New York, Rhode Island, South Dakota, Texas, West Virginia and Wisconsin

Why is SCHIP Enrollment At Risk?

• Reduction in federal SCHIP funding by 26% or more than $1 billion in each of FY 2002, 2003 and 2004.

• Expiration and reversion to the Treasury of a total of $2.7 billion in federal SCHIP funds at the end of FY 2002 and FY 2003.

• The current reallocation system does not provide for sufficient redistribution of unspent funds to states that have fully used their SCHIP allotments and need additional funds to avoid program cutbacks.

Administration SCHIP Proposal

• Proposal would extend the expiring SCHIP funds through 2006. The proposal does little to avert the substantial enrollment decline:– 17 states will still have insufficient federal funding: Alaska, Arizona,

Florida, Georgia, Iowa, Kentucky, Louisiana, Maryland, Minnesota, Mississippi, Missouri, New Jersey, New York, Rhode Island, South Dakota, Texas and Wisconsin.

– 515,000 children will lose SCHIP coverage between 2003 and 2007.

– 200,000 fewer children will be enrolled in 2003 because three states will have insufficient funding this year: Alaska, New Jersey and Rhode Island.

– Proposal would spend only $1.2 billion of the $2.7 billion in expiring funds.

Tax Credits for Health Insurance

• Administration likely to pursue its budget proposal to provide refundable tax credits to low-income families to purchase health insurance in the individual market.

• Individuals would get a $1,000 credit; families up to $3,000 credit.

• Available to families with incomes below $60,000 (starts phasing out at incomes of $25,000); individuals with incomes below $30,000 (starts phasing out at incomes of $15,000).

• Individuals not participating in employer-based or public coverage could use the credit to purchase insurance in the individual market.

Threat to the Employer-Based Health Insurance System

• Availability of credit could encourage firms not to offer health insurance to their employees. Research from Jonathan Gruber of M.I.T. found that 2.4 million currently insured people would be dropped by their employers, 1.4 million of whom would become uninsured.

• Credit could attract young and healthy individuals into the individual market, leaving older and sicker workers in ESI. Gruber found that 1.5 million would voluntarily leave. Adverse selection likely would drive premiums higher and lead over time to more employers dropping coverage and more workers becoming uninsured.

• Broader credit (greater subsidy and expanded eligibility) would intensify these adverse effects.

Other Problems with Tax Credit Approach

• Lack of access in the unregulated individual market: people can be excluded from market based on their health status, and benefits are often less comprehensive and may not cover certain medical conditions.

• Tax credit of insufficient size to purchase comprehensive coverage, but increasing the subsidy only encourages more employer dropping.

• Lack of effectiveness: 2/3 of those likely to participate in the tax credit proposal are already insured.

• Effect on public coverage: could encourage states facing budget crises to scale back Medicaid and SCHIP coverage because the credit is available.

About One-Third of Low-Income Uninsured Children Are in Immigrant Families

64%5%

19%

12%

Citizen ChildrenWith Native Citizen Parents

NoncitizenChildren

Citizen ChildrenWith Non-Citizen Parents

Citizen ChildrenWith NaturalizedParents

Source: CBPP analyses of March 2001Current Population Survey

Analyses for 6.7 million uninsured children in families with incomes below 200% of poverty in the year 2000

Children in Immigrant Families Are Much More Likely to Be Uninsured

16%20%

27%

50%

Citizen Children Whose Parents

Are Native Citizens

Citizen ChildrenWhose ParentsAre Naturalized

Citizens

Citizen ChildrenWhose Parents

Are Non-Citizens

Non-Citizen Children

Data for Low-income ChildrenWhose Family Incomes AreBelow 200% of the Poverty Line

Source: Mar. 2001CPS data

The Immigrant Children’s Health Improvement Act

• The 1996 welfare reform law barred states from providing federally subsidized Medicaid and SCHIP coverage to most legal immigrants, including children and pregnant women, for their first five years in the United States, if they entered the country after August 22, 1996.

• ICHIA establishes an option for states to provide Medicaid and SCHIP coverage for legal immigrant children and pregnant women regardless of their date of entry.

Figure 47

K A I S E R C O M M I S S I O N O N

Medicaid and the Uninsured

Improvements in Coverage for Children

• In 2001, despite concerns about a weakening economy, states continued to:

– Expand health coverage eligibility for children• 14 states made it easier for children to qualify for coverage

– Simplify enrollment and renewal procedures in children’s Medicaid and SCHIP

• 20 states made it easier for children to enroll in health coverage programs and retain their benefits

– Align procedures in children’s Medicaid and separate SCHIP programs

Figure 48

K A I S E R C O M M I S S I O N O N

Medicaid and the Uninsured

Why Do More to Simplify During Hard Economic Times?

• Families affected by increased unemployment that become eligible for Medicaid and SCHIP should be able to obtain coverage without delay

• Prompt enrollment assures:– Continuity of care for an individual with a current medical condition– Protection from financial exposure should a medical need arise

• Simplification measures of special importance during an economic downturn:– Allow for smooth transfer between state’s separate SCHIP program

and Medicaid– Adopt strategies that assure children coverage without delay

• Reduce or eliminate mandatory periods without insurance

• Presumptive eligibility

– Take steps to enroll children through other public benefit programs– Implement easy renewal policies

Figure 49

K A I S E R C O M M I S S I O N O N

Medicaid and the Uninsured

Simplifying Enrollment:Strategies States are Using in Children’s

Health Coverage Programs, Fall 2001

139

4744

No Asset Test No Face-to-FaceInterview

PresumptiveEligibility

Self-Declarationof Income

SOURCE: Center on Budget and Policy Priorities, National Survey of State Enrollment/Renewal Procedures, 2001 conducted for the Kaiser Commission on Medicaid and the Uninsured

Number of States with:

Figure 50

K A I S E R C O M M I S S I O N O N

Medicaid and the Uninsured

Simplifying Renewal:Strategies States are Using in Children’s

Health Coverage Programs, Fall 2001

17

4248

No Face-to-FaceInterview

12-Month RenewalPeriod

12-Month ContinuousEligibility

SOURCE: Center on Budget and Policy Priorities, National Survey of State Enrollment/Renewal Procedures, 2001 conducted for the Kaiser Commission on Medicaid and the Uninsured

Number of States with:

Figure 51

K A I S E R C O M M I S S I O N O N

Medicaid and the Uninsured

Medicaid Coverage of Parents

• Some states have:– Expanded coverage to low-income parents – Simplified enrollment and renewal procedures for

parents• BUT, it remains more difficult:

– For parents to qualify for coverage than it is for their children

– For income-eligible parents to enroll in or renew their health coverage than it is for their children

– For parents and children applying as a family unit to enroll or renew health coverage than it is for children without other family members

Figure 52

K A I S E R C O M M I S S I O N O N

Medicaid and the Uninsured

States Have Simplified Health Coverage for Children but not for Parents

4447

42

19

3538

No Asset Test No Face-to-FaceInterview atEnrollment

12-month RenewalPeriod

Children Parents

SOURCE: Cohen Ross and Cox, Enrolling Children and Families in Health Coverage: The Promise of Doing More, Center on Budget and Policy Priorities for the Kaiser Commission on Medicaid and the Uninsured, May 2002.

Number of States Reporting:

Finishing the Job

States can take further steps to simplify their health coverage programs by:

• Reducing verification requirements• Covering all children in a family under the same

program (eliminating “stair step” eligibility)• Adopting presumptive eligibility for children• Simplifying renewal procedures to the same

extent they have simplified enrollment• Adopting simplified procedures for parents so

whole families have easy access to health coverage.

Improvements Can Follow on the Heels of Grim Economic Conditions

• After recession of early 1980s and early Reagan Administration cutbacks, Medicaid expansions for pregnant women and children were initiated in the mid- to late-1980s.

• After recession of early 1990s and collapse of Clinton health care reform plan, the Children’s Health Insurance Program was initiated in 1997.

• Times are tough now, but there will be opportunities in the future, if we are prepared.