THE URBAN INSTITUTE Medicaid, SCHIP and Economic Downturn: Policy Challenges and Policy Responses Analysis Prepared for the Kaiser Commission on Medicaid and the Uninsured Stan Dorn, Bowen Garrett, John Holahan and Aimee Williams The Urban Institute Alliance for Health Reform February 15, 2008

THE URBAN INSTITUTE 2 Effect of Economic Downturn on Health Coverage Unemployment causes many workers and dependents to lose employer-sponsored insurance (ESI) People who lose ESI either:  Become uninsured, increasing state and local uncompensated care costs  Enroll in Medicaid or SCHIP  Enroll in another source of private coverage (spousal ESI or non-group coverage) States experience revenue declines that affect ability to fund Medicaid and pay for uncompensated care.

THE URBAN INSTITUTE 3 The Impact of a 1% Point Increase in the Unemployment Rate on the Number of Children and Non-Elderly Adults with Various Types of Health Coverage: 2008 Children Non-elderly adults Total ESI-700, million-2.5 million Medicaid/ SCHIP +600, , million UninsuredNo statistically significant change +1.1 million Non-group coverage No statistically significant change +300, ,000 Source: Urban Institute, February Notes: (1) ESI is employer-sponsored insurance. (2) Totals may not add because of rounding.

THE URBAN INSTITUTE 4 The Impact of a 1% Point Increase in Unemployment on Projected Medicaid and SCHIP Costs: 2008, in Billions of $ Total Baseline projected costs (Total) $335.2b (State) $142.9b Additional costs for each 1.0 percentage point increase in unemployment rates Total $3.4b State share $1.4b Percentage increase 1.0% Sources: Urban Institute, February 2008; Congressional Budget Office, March 2007 Medicaid and SCHIP baseline. Notes: (1) ESI is employer-sponsored insurance. (2) Totals may not add because of rounding.

THE URBAN INSTITUTE 5 A one percentage point increase in the unemployment rate leads to a 3 to 4 percent decline in state revenues, according to Urban Institute research by Kim Rueben  Assuming states must balance their budgets and that all state spending would be cut proportionately, Medicaid and SCHIP would face 3-4 percent cuts Revenue loss is thus a bigger fiscal problem than increased enrollment Impact of Economic Downturn on State Revenue

THE URBAN INSTITUTE 6 State Budget Implications Unlike the federal government, almost all states are legally required to balance their budgets To balance their budgets in hard times, states tend to first  Tap reserves, borrow from trust funds, securitize future revenue streams  Delay spending from one fiscal year to the next and second  Raise taxes; and/or  Cut spending on Medicaid and other programs (e.g., infrastructure, post-secondary education) and aid to localities Latter state actions are procyclical, i.e. worsen economic downturn

THE URBAN INSTITUTE 7 What Fiscal Relief Was Provided During the Last Economic Downturn? $10 billion in block grants distributed to states $10 billion in increased Federal Matching Assistance Percentage (FMAP)  2.95 percentage point increase in FMAP for each state  15 months (May 2003 – June 2004)  To qualify for increased FMAP, a state had to agree not to reduce eligibility standards below prior levels

THE URBAN INSTITUTE 8 What Were the Effects of Medicaid Fiscal Relief? States did not cut Medicaid eligibility during period covered by temporary FMAP increase Federal funds prevented some (but not all) Medicaid cuts in many states But delays in reaching federal agreement meant that many states made large cuts before fiscal relief was first available States varied in length and depth of economic downturn, as well as beginning and end points, so a single uniform FMAP increase meant  Some states received windfalls, were able to devote funds to other purposes, including building reserves  Other states got less help than they needed

THE URBAN INSTITUTE 9 Economic Conditions Vary Greatly Among States: December 2007 Source: BLS, January 2008, seasonally adjusted monthly unemployment rates.

THE URBAN INSTITUTE 10 What Are Options for Providing States Fiscal Relief Through Medicaid? Uniform FMAP increase for all states, with the amount and duration defined by Congress Provide federal funds based on changes in unemployment  Assistance should vary with the depth and length of individual states’ economic distress  Assistance should begin and end based on state unemployment changes  Funds should be sufficient to offset state costs associated with increased enrollment AND the Medicaid “share” of the projected revenue loss

THE URBAN INSTITUTE 11 Summary When the economy declines  Medicaid/SCHIP costs rise, state revenues decline, and the number of uninsured increases.  To balance their budgets, states may cutback on Medicaid, which could reduce coverage and weaken economic stimulus precisely when it is most needed legislation preserved Medicaid eligibility and helped states avoid many (but not all) Medicaid/SCHIP cutbacks. As the country begins a new downturn, Congress can and should design new Medicaid/SCHIP stimulus legislation that improves on past policy by being more timely and better targeted.