President Bush has asked Congress to approve a $48 billion increase for defense spending, on top of the already huge increase included in his proposed 2003 budget (see discussion guide #4). Already, states find themselves in fiscal crisis following cuts in federal programs such as Medicare, creating a landslide effect that has pulled 19 states into deficit spending already for the 2003 fiscal year.
According to John Isaacs, of the Council for a Livable World, "Just the increase from last year is greater than the military budget of any other nation in the world…. We now spend more on our military than the rest of the world combined." This increase comes at a time when the country is returning to deficit spending and when the Administration's tax cut is blamed for a large portion (1.3 trillion) of the loss in budget surpluses over the next 10 years (CBO testimony, 1/23/02).
ECONOMIC CONDITIONS - STATES' REALITY
- Some 19 states have already made specific, identifiable cuts to low-income and human services programs. Of these 17 have cut health care programs, and ten have cut income support or employment support programs (child care, job training).
- Of the additional $48 billion defense spending, Senator Robert C. Byrd of Virginia said in a New York Times article (In a sign of changing times, Bush calls for more spending, by Richard W. Stevenson, 1/28/02), "It's going to have to come out of somewhere….Out of somebody else's hide."
- Medicaid, which depends on Federal funding and state revenue-based income, accounts for nearly one-fifth of state budgets. It is squeezing state budgets due to higher drug prices, higher provider costs and growth in the eligible population. Federal support and state revenue are falling far behind the demand for increased funding, creating a Medicaid crisis in some states that result in huge cuts in services and numbers served.
PART II - Articles and Questions for Discussion
States Face Hard Choices on Medicaid Cuts
Questions for Discussion
States Cutting Low-Income Programs in Response to Fiscal Crises
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States Face Hard Choices on Medicaid Cuts
WASHINGTON, Jan. 13 — Medicaid, the insurance program for 44 million low-income people, is in a fiscal crisis, forcing state legislatures convening around the country this month to look for ways to cut benefits and reduce payments to hospitals, nursing homes and pharmacies.
The 36-year-old program, which pays for one-third of all births and nearly two-thirds of all nursing home patients, is caught in the financial vise of soaring costs and declining state revenues.
Overall Medicaid spending grew by 11 percent last year, and many states report that spending on prescription drugs, which are covered by Medicaid, is rising at an annual rate of more than 20 percent.
At the same time, state revenues are declining because of the national recession, and most states, unlike the federal government, must balance their budgets.
"I think it's quite serious," said Gov. John Engler of Michigan, a Republican who is chairman of the National Governors Association, noting that Medicaid now represented the fastest-growing item in state budgets. States are struggling to decide which services to trim and which groups should bear the brunt.
"These are terrible choices," Mr. Engler said, "extraordinarily difficult."
Gov. Howard Dean of Vermont, a Democrat and former chairman of the governors association, agreed, saying that Medicaid was "under enormous pressure everywhere because of the catastrophic increase in health care costs, particularly pharmaceutical costs and hospital costs."
The political fallout has already begun. Parents of children with severe illnesses and disabilities held a rally on Wednesday at the Capitol in Little Rock, Ark., to protest new cuts in Medicaid and requirements that families pay some of the costs in the form of co-payments.
Ray Hanley, the Medicaid director in Arkansas, said, "We are getting our brains beat out by health care providers and advocates" for patients who rely on the program.
C. J. Moorman, the father of a Medicaid patient, a 16-year-old boy with cerebral palsy, said, "They could easily co-pay a family to death."
Governors of both parties are putting pressure on the federal government to increase its contribution to Medicaid, which is financed by the federal government and the states.
The need is particularly acute in a recession, officials say, because many people turn to Medicaid when they lose their jobs and their health insurance.
"The need for Medicaid goes up just when the states' ability to pay for it goes down," said Vernon K. Smith, the former Medicaid director of Michigan, who is now a health policy consultant.
The situation in Oklahoma illustrates the hard choices facing many states. The board of the Oklahoma Health Care Authority, the state Medicaid agency, voted on Thursday to adopt stricter income tests for pregnant women, children and the elderly, blind and disabled; to reduce dental services for adults; to reduce payments for prescription drugs; and to delay indefinitely a scheduled increase of 3 percent in payments to hospitals and doctors. The state also decided to eliminate its Medicaid program for people deemed "medically needy" because of very high medical bills.
The cuts will affect at least 50,000 of the 461,000 Medicaid recipients in Oklahoma. Under the new policy, for example, Medicaid will no longer cover children 6 to 18 in families with incomes that are 100 percent to 185 percent of the federal poverty level ($14,631 to $27,065 for a family of three).
In Indiana, Gov. Frank L. O'Bannon, a Democrat, is trying to cut the state contribution to Medicaid by $251 million, or about 10 percent, over the next two years. State officials made a first round of cuts last fall, reducing payments to hospitals, nursing homes and pharmacies by about 5 percent. The nursing homes and drugstores filed suit to block the cuts. At a forum this month, state officials unveiled a "Medicaid balanced budget plan" with two dozen options for further cuts.
Prescription drug spending for Medicaid recipients in Indiana grew 20 percent last year, to $549 million, and state officials estimate that it will rise more than 50 percent in the next two years, to $845 million.
To control costs, Indiana officials will develop a list of "preferred drugs" and want to require prior authorization for anyone trying to fill prescriptions for more than four brand-name drugs in a month.
In Idaho, Gov. Dirk Kempthorne, a Republican, told the State Legislature on Wednesday: "Prescription drugs are quickly becoming our single largest Medicaid expense. Prescriptions are expected to cost almost 40 percent more this year than they did two years ago." He, too, wants to require prior authorization. But drug companies oppose such requirements, saying they limit patients' access to medicines.
Like many governors, Mr. Kempthorne lamented that Medicaid was taking resources that might be used for other programs. If the state does nothing, he said, "we will see Medicaid growth that continues to outpace that of education and economic development."
In Maine, Gov. Angus King, an independent, proposed on Tuesday a 5.6 percent cut in Medicaid payments to doctors, with slightly deeper cuts for hospitals and nursing homes. Doctors said some Medicaid patients would inevitably be turned away if the Legislature approved the cuts.
Governor Dean of Vermont, a state that takes pride in its health policies, said he was committed to controlling Medicaid costs by reducing benefits, like podiatry or dental coverage, but not the number of people eligible for basic insurance coverage. He said it made no sense to preserve a generous benefit package for fewer and fewer people.
In his State of the State address on Tuesday, Mr. Dean declared, "As I have said annually for the past decade, I will not allow any child to be cut from the health care rolls."
New York has felt the same fiscal pressures as other states, but with special intensity. The state has lost hundreds of millions in tax revenue as a result of damage done to its economy by the Sept. 11 attacks. Layoffs increased the number of people without health insurance, and many turned to a special temporary program known as disaster-relief Medicaid, which makes benefits available with little screening or paperwork.
Gov. George E. Pataki, a Republican, has led the bipartisan effort by governors to persuade Congress to provide billions of dollars in additional aid for Medicaid.
In Illinois, Gov. George Ryan, a Republican, announced last month that he was cutting state Medicaid payments to hospitals by $114 million, or 13 percent, to help fill a $500 million gap in the state budget. After an outcry by hospital executives, Mr. Ryan said on Tuesday that he would restore $24 million to hospitals.
To help pay for the restorations, Illinois officials said they would reduce Medicaid payments to doctors, dentists, chiropractors and other health care professionals.
Ohio's Medicaid director, Barbara Coulter Edwards, said the state had expected to see a net increase of about 43,000 in its Medicaid rolls from July to December. The actual increase, driven by the recession, was 84,000, raising the total number of recipients to 1.4 million. "While our service budget has not been cut, for which we're grateful, we have a real challenge because we're having to serve more people within it," Ms. Edwards said.
Advocates for low-income people are already sounding alarms here in Washington, arguing that Congress and the administration must confront the problem or face renewed growth in the number of uninsured. "I think this is going to be a very tough year for low-income and low- wage working families who depend on Medicaid as a lifeline," said Ronald F. Pollack, executive director of Families USA, a consumer advocacy group.
In recent years, Medicaid has been an important tool for extending coverage to children and families. In fact, state officials said, their success in adding people to the Medicaid rolls, encouraged by the federal government, is one reason the program is such a burden on states today.
Medicaid provides health insurance for one-fifth of all children and is the largest source of federal grants to states, accounting for nearly one-fifth of state budgets.
STATES CUTTING LOW-INCOME PROGRAMS
IN RESPONSE TO FISCAL CRISES
Some 19 states have already made specific, identifiable cuts to low-income and human services programs, according to the report. Of these, 17 have cut health care programs, and ten have cut income support or employment support programs (such as child care and job training). Seventeen of the 19 states have also cut other social service programs.
Another eight states have implemented broad, percentage-based reductions in agency budgets that include agencies serving low-income populations. And at least eight other states are currently considering budget cuts to low-income and human services programs proposed by their governors. All told, more than two-thirds of the states have already taken steps to cut spending on programs that serve low-income residents.
Although the study highlights the cuts in programs for low-income populations, it also catalogues the many approaches that states are using to balance their budgets. These include tactics as disparate as de-linking state estate taxes from the federal estate tax changes, postponing scheduled tax cuts, joining multi-state lotteries, and using funds from state settlements with the tobacco industry that states otherwise would have received over the next 25 years to close current deficits.
Specific examples of states that are cutting programs for low-income populations include Washington, where the governor has proposed budget cuts that disproportionately target human services; Florida, Illinois, Indiana, and Oklahoma, where significant reductions in Medicaid spending have been implemented; and Kentucky and Michigan, which cut welfare spending. In all, 35 states so far have moved to cut aid to poor families, and others may follow.
"Cutting programs for low-income families may be the single most damaging step that states can take during a recession," said report co-author Kevin Carey. "Such programs are intended to act as automatic economic stabilizers, because they naturally expand to meet increased levels of need when families lose jobs and income. Because low-income families tend to spend the entirety of the income they receive from such programs, the automatic stabilizers help bolster state economies."
State Fiscal Crisis the Worst in Two Decades;Poorly Chosen Cuts Can Worsen Downturn
State fiscal conditions, already in decline prior to the September 11 attacks, are rapidly approaching a state of crisis. According to the National Conference of State Legislatures, revenues in 43 states are below estimates and 36 states have already planned or implemented cuts in public services. The National Governors Association estimates that total state budget deficits nationwide for the current fiscal year will exceed $40 billion.
"States must balance their budgets each year, so they can’t simply borrow funds to cover deficits," Carey said. "Instead they usually must cut spending and/or raise taxes. The trouble with both kinds of measures is that, to varying degrees, they take money out of the state economy, so they potentially can worsen the economic downturn. It is important to try to close deficits in ways that are least damaging to the economy, such as raising revenues from higher-income residents."
Reducing services for low-income people is especially hard on a state’s economy, according to the report, because these people tend to spend most or all of every dollar they receive.
According to a recent report by economists Peter Orszag and 2001 Nobel Prize winner Joseph Stiglitz, cutting spending on programs that serve low-income people tends to reduce consumption — and thus state economic activity — by the full amount of the spending reduction. By contrast, measures that reduce the incomes of higher-income people, such as certain types of tax increases, cause a smaller decline in consumption because such families are likely able to draw down savings to pay the taxes.
Examples of Reductions in Low-Income Programs
The Arkansas Department of Health Services took administrative actions to reduce state Medicaid expenditures in FY 2002 by approximately $13 million. The cutbacks include eliminating a program for people with high medical expenses, which will affect 13,000 people, and ending or modifying coverage for disabled children who require home health services, which will affect 3,000 children.
The Florida legislature met for two special sessions before passing $1 billion in cuts to the state budget, which included $48.6 million from Medicaid services to individuals, $5 million from long-term care programs, $4.7 million from child protection programs, and $2.4 million from home and community services for the elderly.
In response to falling revenues, the governor of Illinois made cuts to FY 2002 Medicaid expenditures, including $90 million from hospitals that serve high percentages of low-income patients.
Indiana has taken steps to cut Medicaid funding by $251.1 million through eligibility restrictions and reductions in spending on services including pharmacy drugs, nursing homes, and dental care.
Executive budget cuts in Kentucky included $5.9 million from the TANF program, $1 million from welfare-to-work programs, and $8.5 million from health services.
The governor of Maine has proposed a budget-balancing plan that includes Medicaid cuts of $5.2 million from funding for hospitals, $4 million from delaying expanded coverage, $4.1 million from nursing homes, and $2 million from group homes.
The governor of Washington included $246 million in cuts to human services programs as part of his budget-balancing proposal — more than the reductions in higher education, K-12 education, natural resources, and general government combined. While human service programs constitute 32 percent of the state’s general fund budget, they account for 43 percent of the governor’s proposed reductions.
Maintaining Low-Income ProgramsCan Assist Families and Strengthens Economy
The need for programs that assist low-income families has risen sharply in recent months, largely due to rising unemployment. The ranks of the unemployed increased from 5.7 million to 8.2 million workers from November 2000 to November 2001, the largest one-year increase since 1982.
"The automatic economic stabilizers are apparently working," said Center Deputy Director and report co-author Iris J. Lav. "With rising joblessness and declining family incomes, applications for programs such as Medicaid, the Food Stamp program, and cash assistance have risen in most states over the last several months.
"By meeting these growing needs and providing resources to the households most likely to spend immediately the financial assistance they receive, states can help support consumer spending and bolster their economies," Lav said.
Some States Are Choosing Less-Harmful Ways to Balance Budgets
States can balance their budgets without cutting low-income programs or undermining the automatic stabilizers. In fact, several states are choosing other options. Some states have explicitly protected low-income programs from budget reductions. Budget cuts in Colorado and Ohio, for example, specifically excluded Medicaid funding.
Other states have drawn down on state "savings," which add dollars to the state economy and can help improve economic activity. Lawmakers in Arizona and Massachusetts chose to use rainy day funds and other fiscal reserves to forestall larger program reductions.
Other states have looked at the revenue side of the budget. States including Florida and Virginia have delayed new tax cuts that were scheduled for 2002, while Alabama, North Carolina, and Ohio raised new taxes to help balance their budgets.
"Increasing revenues to avoid taking benefits away from families that need them can be a positive step for state budgets and state economies," Carey said.
By Robert Pear and Robin Toner
New York Times, 1/14/02
Center on Budget and Policy Priorities, News Release, January 17, 2002
PART III - RESOURCES
Center of Budget and Policy Priorities
www.centeronbudget.org
Project on Defense Alternatives
www.comw.org/pda/Congressional Budget Office
www.cbo.gov
Military Spending Working Group
www.fas.org/pub/gen/mswgBusiness Leaders for Sensible Priorities
www.businessleaders.org/
Office of Management & Budget Watch
www.ombwatch.org/budget
PART IV - Action on Military Spending
By ROBERT PEAR and ROBIN TONER
The New York Times 1/14/02
www.nytimes.com/2002/01/14/national/14MEDI.html
Center on Budget and Policy Priorities Press Release
January 17, 2002
www.centeronbudget.org/1-17-02sfp-pr.htm
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