1. Smith1 The Economic and Fiscal Climate: The Impact on State Budgets, Medicaid and Long Term Care Presentation and discussion with User Liaison Program on State Long Term Care Programs Indianapolis, Indiana May 6, 2002 Vernon K. Smith, Ph.D. Health Management Associates

2. Smith2 Medicaid: Critically Important –Provides health coverage for over 44 million Americans (vs. 40 million on Medicare) in 2002 –Pays for 35 percent of all U.S. births –Health coverage for 1 in 5 children –Pays for half of all nursing home care –Covers 6 million low-income elderly and disabled persons on Medicare –Largest source of Federal grants to states SOURCE: Kaiser Commission on Medicaid and the Uninsured

3. Smith3 Incomes of Four in Nine Elderly Were Below 200% of Poverty, 2000 Total = 33 million Less than 100% of Poverty 14% 100-149% of Poverty 16% 150-199% of Poverty 14% 200% of Poverty or more 56% Source: Urban Institute estimates based on the March 2001 Current Population Survey. Kaiser Commission on Medicaid and the Uninsured, 2002. Low-Income (< 200% of poverty) 44%

4. Smith4 Medicaid Spending on Services for the Elderly, 1998 Total Spending on the Elderly = $46 billion Note: Does not include DSH payments. Lab and X-ray services included in site of receipt of service. SOURCE: Urban Institute estimates, 2000, based on HCFA-2082 and HCFA-64 reports. KCMI, 2002. Inpatient 5% Physician/ Outpatient 3% Drugs 7% Other Acute 3% Payments to MCOs 3% Nursing Facilities 61% ICF/MR 1% Mental Health 2% Home Health 5% Personal Care 4% Payments to Medicare 6% Acute care: 27% Long-Term care: 73%

5. Smith5 Medicaid’s Role in Long-Term Care Total = 1.5 million residentsTotal = $ 87.8 billion Source: HCFA, National Health Accounts, 2000. Nursing home care includes intermediate care facilities for the mentally retarded (ICFs/MR). Georgetown University Institute for Health Care Research and Policy. Slide by KCMI, 2002. Nursing Home ResidentsNursing Home Expenditures

6. Smith6 Medicaid as a Share of Total Federal Grants to States 1987 and 2000 SOURCE: National Association of State Budget Officers, 1999 State Expenditure Report, June 2000. Federal Medicaid 26% Federal Medicaid 43% Education 18% All other 28% Transportation 14% Transportation 9% All other 32% Education 16% Cash Assistance 10% Public Assistance 4% Total = $245 billion 2000 Total = $108 billion 1987

7. Smith7 Average Annual Growth Rates of Total Medicaid Expenditures 1990-2001 SOURCE: For 1990-1999: Urban Institute estimates prepared for the Kaiser Commission on Medicaid and the Uninsured, 2000. For 1999-2001: Health Management Associates survey for Kaiser Commission on Medicaid and the Uninsured, 2001. Average Annual Growth

8. Smith8 Average Increases in Medicaid Spending vs. Total State Spending FY2000-2002 SOURCE: Health Management Associates for the Kaiser Commission on Medicaid and the Uninsured, June 2001. Number of States Reporting: 323429

9. Smith9 Top Reasons Reported by State Medicaid Officials for Medicaid Expenditure Growth in FY 2001 Number of States reporting as top two or three reasons: SOURCE: Health Management Associates for the Kaiser Commission on Medicaid and the Uninsured, June 2001.

10. Smith10 Note: All growth rates shown represent changes in total fee-for-service expenditures for the types of services listed (except for ‘managed care,’ which includes a wide range of medical services). Source: CMS, CMSO, Financial Management Reports (HCFA-64 data). KCMI, 2002. Average Annual Rate of Growth in Selected Medicaid Expenditures, 1998-2000

11. Smith11 Converging Trends Impacting Medicaid Now 1. Health care cost inflation 2. Health care market place changing 3. Medicaid enrollment up 4. State revenue trends force budget cuts

12. Smith12 Annual Increase In Health Insurance Premiums, 1992-2001 SOURCE: Kaiser/HRET survey of employer-based health plans for 1998-2000 and KPMG survey for 1992-1998, as cited in: Hogan, Ginsburg and Gabel, “Tracking Health Care Costs: Inflation is Back,” Health Affairs, Nov/Dec 2000. 2001 by Hewitt Associates. 10.9% 8.0% 4.8% 2.1% 0.5% 2.1% 3.3% 4.1% 7.5% (Firms with 200 or more workers) 10.2%

13. Smith13 Managed Care is less able to control costs for states... Consumer backlash Providers now less willing to bear risk or participate in Medicare or Medicaid MCOs less able to restrict access Managed care savings already realized Costs driven by technology and prescription drugs

14. Smith14 “Direct-to-Consumer” ads linked to higher Rx costs? The 50 most heavily advertised Rx accounted for 48% of the increase in total retail Rx sales (1999-2000). The 9,850 other Rx accounted for 52% of the increase in Rx sales. Sales rose 32% for the 50 most heavily advertised drugs; all others up 13.6%. Source: Prescription Drugs and Mass Media Advertising, 2000, NIHCM, November 2001, citing: American Institutes for Research analysis of Competitive Media Reporting data cited in June 2001 Med Ad News and Scott-Levin Year 2000 Prescription Audit Data.

15. Smith15 Total Medicaid Enrollment in 50 States and the District of Columbia Monthly Enrollment in Millions Source: Compiled by Health Management Associates from State Medicaid enrollment reports for the Kaiser Commission on Medicaid and the Uninsured, 2001.

16. Smith16 Source: USDHHS: Administration for Children and Families

17. Smith17 Total U.S. SCHIP Enrollment 0.9 Million 1.8 Million 2.7 Million Source: Vernon Smith, David Rousseau and Jocelyn Guyer, CHIP Program Enrollment December 2000, The Kaiser Commission on Medicaid and the Uninsured, October 2001. Publication #4005. December

18. Smith18 Prepared by HMA for the Kaiser Commission on Medicaid and the Uninsured, 2001. Source: Health Management Associates from State enrollment reports, for the Kaiser Commission on Medicaid and the Uninsured, 2001.

19. Smith19 Medicaid Prescription Drug Spending, 1998 Total = $14.5 billion* * 8.2% of total Medicaid spending on services. Includes both fee-for-service expenditures and estimated drug spending by managed care organizations SOURCE: Urban Institute Estimates, 2000. Expenditures by Eligibility Group

20. Smith20 Medicaid Expenditures Per Enrollee, 2001 $1,447 $2,283 $11,238 $12,322 SOURCE: CBO January 2002 Baseline.

21. Smith21 Medicaid Payments vs. Recipients U.S. in 2001 Recipients: Most are children and families Disabled 17% Elderly10% Children and Families73% Payments: Most are for disabled and elderly: Disabled 43% Elderly28% Children and Families29% Source: Calculated by Health Management Associates from CBO January 2002 Baseline. Percentages exclude payments not for specific services, e.g., disproportionate share payments to hospitals.

22. Smith22 Projected Total Medicaid Spending Per Enrollee, 2001-2005 Note: Includes federal and state spending on benefits. SOURCE: Health Management Associates calculation based on CBO baseline, April 2001 Update. 25

23. Smith23 FY2002 State Fiscal Stress General Tax Revenues down 3.8% Rainy day and reserve funds are being drained Net borrowing by state and local governments is at record levels Spending pressure is increasing, led by Medicaid Source: Mark M. Zandi, The Outlook for State Tax Revenues, Economy.com. February 2002

24. Smith24 “They are not crying wolf.” Gail R. Wilensky, former HCFA Administrator, on national Public Radio, commenting on the crisis facing states due to the economic slowdown, decreasing state revenues and increasing Medicaid costs. Source: National Public Radio interview in NPR series titled: “States Fear Medicaid Meltdown,” Interview by Julie Rovner on April 10, 2002.

25. Smith25 Average State Year-End Balances as a Percentage of Expenditures, FY 1995 -2002 SOURCE: NASBO, December 2001. Fiscal year 2001 is preliminary actual; fiscal year 2002 is based on appropriations, prior to mid-year adjustments.

26. Smith26 Total Medicaid Expenditures as % of Total State Expenditures 1987-2004 Percent 10% 14% 20% 23% Est. Source: For 1987-2001, from NASBO, State Expenditure Reports. Various years. For 2002-2004, projections by Health Management Associates, February 2002.

27. Smith27 State and Medicaid Budgets are now under Stress Revenue forecasts are down, Medicaid spending up, forcing States to cut budgets By October 2001, 2/3 of States had initiated budget reduction actions Medicaid programs are being asked to propose reductions of up to 10% - 15% Options previously off the table are now being considered Source: Survey of State Medicaid and Budget Officials by Health Management Associates for Kaiser Commission on Medicaid and the Uninsured, October 2001.

28. Smith28 The Medicaid Budget Dilemma Medicaid need goes up just when the state’s ability to pay for it goes down States must cut total Medicaid spending $2 - $4 to save one state general fund dollar Every Medicaid cut affects local health care providers and individuals who need health care services Medicaid spending cuts are usually needed immediately, but it takes time to achieve savings Choices are limited by federal rules

29. Smith29 Budget Cuts are the Rule in FY2002 Medicaid options previously off the table are now being considered, including cuts and restrictions in eligibility, benefits, payments Key areas for cost containment are pharmacy, hospital, long term care, managed care Even with cuts, most states will likely need supplemental funding for Medicaid

30. Smith30 Medicaid Cost Reduction Actions FY2002 Restrictions in pharmacy costs and use –Prior authorization, preferred Rx lists –Discounts from AWP: –13% to –15% for brands –PBMs, pharmacist fees, purchasing coalitions Limits on provider payment increases Care coordination, disease management, managed care SOURCE: Health Management Associates Survey of States for Kaiser Commission on Medicaid and the Uninsured, June 2001.

31. Smith31 Long Term Care Medicaid Cutbacks FY2002 Payment freezes, delays in scheduled payment increases Curtailing Home and community-Based Care Medically Needy eligibility limits Looking at ways to “organize” the system

32. Smith32 More Medicaid Cutbacks FY2002 Benefit reductions or limits, copays Delaying Cervical and Breast Cancer coverage Reducing eligibility for expansion groups, medically needy Curtailing SCHIP outreach Expanding managed care, bid services New edits, audits, prior authorizations, maximize Rx rebates, other insurance Supplemental appropriations, Upper Payment Limit (UPL) arrangements

33. Smith33 Number of States with Supplemental Medicaid Budget Funding FY2000-2002 SOURCE: Health Management Associates for the Kaiser Commission on Medicaid and the Uninsured, June 2001. Mid-Year Overall Budget Shortfall + +

34. Smith34 Medicaid is a Federal – State Partnership, but… All the important decisions about Medicaid are made by states State decisions about eligibility, coverage and payments reflect the values, priorities, economics and health care traditions in each state…a virtue of the current structure State fiscal capacity is too limited to finance Medicaid expenditure growth…an Achilles’ heel

35. Smith35 The Outlook: Increasing Medicaid Budget Stress Medicaid cost pressure will be driven by enrollment growth, more elderly and disabled, double-digit cost growth in the medical market place Even with rebounding economy, increases in state revenues will be dwarfed by Medicaid expenditure growth States’ ability to finance Medicaid in the long run is in question, under the current federal rules and federal financing formula