Larry DeBoer

Professor of Agricultural Economics,
Purdue University

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Flat-lining Medicaid

One of the sticking points in the debate over the 2003-05 Indiana budget is Medicaid funding. That's the federal-state health care program for low-income people. In Indiana in 2003, the feds will pay about two-thirds of the total cost of $3.8 billion. That leaves about $1.25 billion to be paid by Indiana, mostly out of state sales and income tax revenues.

Medicaid is an entitlement program. If you're eligible, you get the care, and the state reimburses the doctor, hospital or nursing home. The state doesn't know in advance how much the program will cost, because it doesn't know how many eligible people will show up for care.

So, the Indiana Office of Medicaid Policy and Planning does a Medicaid forecast every December. It does an update in April during budget years, like 2003. The office figures that in fiscal 2004 (beginning July 1, 2003), general fund Medicaid costs will rise 5 percent. In 2005, costs will rise an additional 8 percent. That's a total increase in the general fund of about $218 million over 2003. You can find this information on the Indiana Family and Social Services Administration Web site, at http://www.in.gov/fssa/.

Those are big increases, but they're not unusual. Medicaid costs have been rising rapidly for all states and the federal government for a long time. Indiana's population keeps getting bigger and older, so more people are eligible. And health care gets more expensive every year. Over the past 10 years, Indiana's costs have increased more than 5 percent per year.

Revenues are tight, and if Indiana spends $218 million more on Medicaid, there won't be money left over to increase funding for other services, like education. That means fewer teachers in the classroom, because inflation keeps increasing school costs. So, instead, both the House and the Senate proposed budgets that flat-lined Medicaid. The appropriation for Medicaid in 2004 and 2005 are the same as in 2003.

An appropriation is an authorization to spend state money. If the appropriation is less than required for the Medicaid entitlement, something's got to give.

Perhaps the state could reduce Medicaid costs. The state says it has already cut hundreds of millions of dollars through cost-containment measures, but there may be other options. The state could decide to provide fewer services. Many of the services that Medicaid provides are required by the federal government; however, others are optional. The state could decide not to provide reimbursements for prescribed drugs or dental care, for example. Or the state could reduce the reimbursement rates for doctors, hospitals and nursing homes, even on required services.

These possibilities might create their own problems, though. Most optional services can't be eliminated without action by the General Assembly. Eliminating some services could mean that people would go to the emergency room instead. That could cost the state budget more than Medicaid. And if reimbursement rates are cut too much, doctors, hospitals and nursing homes could refuse to provide care to Medicaid recipients.

If the state runs out of money to pay Medicaid entitlements, what happens? We might be able to muddle through until the next legislative session, and, with luck, revenues could recover. Or the governor could call a special session in the fall. Service cuts or even tax hikes could be considered.

But we can't turn eligible Medicaid recipients away. The budget bill says that if appropriations are insufficient to fund entitlements, 'There is appropriated from the state general fund such further sums as may be necessary." The money will be found to pay the entitlements.

With no other options, the governor would have to tell the other state agencies to spend less than their appropriations, to free up money to pay Medicaid. That means that if Medicaid appropriations are flat-lined, state agencies--including schools and universities--won't get to spend their full appropriations. The numbers may say it's Medicaid that's been flat-lined, but the budget may really flat-line education.


Writer: Larry DeBoer
Editor: Olivia Maddox