The President’s Health Budget: Federal Savings May Translate to Increased State Expenditures

President Obama released his 2013 budget yesterday, tying the package together under three themes: building a strong economy, reducing the deficit and investing in the future. While these themes have broad appeal to taxpayers and policymakers of all stripes, the federal government’s deficit reduction actions may spell trouble – and additional spending – at the state government level.

The contraction of federal funding and its trickle-down impact on state budgets is no more dramatic than in the area of Medicaid. The federal budget document lays out savings of $51 billion in Medicaid over the next ten years. It begs the question of whether states will be left to pick up additional spending to maintain services levels for elderly, disabled and low-income children and adults enrolled in Medicaid.

The $51 billion Medicaid savings are the sum of several major initiatives:

  • “Blending” the Medicaid and Children’s Health Insurance Program (CHIP) match rates beginning in 2017 to save $17.9 billion by 2022. While the justification for the initiative is to simplify and consolidate the match calculations states make for Medicaid, CHIP, and the new Medicaid expansion population under the Affordable Care Act, the bottom line is a loss of federal matching funds to states.
  • Reducing the amount of provider taxes for which states can draw down federal matching dollars. The phase-down will start in 2015 – in order to give states planning time – and by 2022, the federal savings are projected to be $21.8 billion. Notice that the federal budget does not, realistically so, assume states will find general fund dollars to replace the provider tax receipts formerly collected from nursing homes, hospitals and other health care providers. The projected federal savings translate directly to less Medicaid spending at the state level.
  • Reducing disproportionate share funds for hospitals by $8.25 billion in 2021 and 2022. These funds flow through the Medicaid program to provide funding to assist hospitals to recoup charity care expenses. Hospitals have always argued that without this funding their Medicaid rates would need to be adjusted upward.
  • Initiatives to reduce waste, fraud and abuse and to limit Medicaid reimbursement for durable medical equipment, are projected to save $3.166 billion and $2.950 billion, respectively, in the next decade. States should experience some savings from these initiatives.

The President’s budget continues implementation of the Affordable Care Act, even though the Supreme Court may make a major course correction when it decides the constitutionality of the ACA later this year. In a budget briefing yesterday at the Department of Health and Human Services, officials said the budget contains $864 million for the federal creation and administration of health insurance exchanges in those states that opt out of a state administered exchange. Officials said grant funds contained in the ACA will continue for states that are moving toward state administered exchanges.

Medicare proposals include both those directed at providers, with a savings of $267 billion over 10 years and those called “structural” reform, which come in with a $32 billion savings tag. A few that might have spill-over effects on states include reductions in hospital reimbursements, especially rural hospitals, post-acute care providers, and rehabilitation and skilled nursing facilities. Lower Medicare payments will apply pressure to state Medicaid payment rates.

States stand to benefit from the administration’s plans to expand Head Start and child care subsidy programs – adding $7 billion over 10 years. The budget also expands state incentive programs to improve permanency and safety in child welfare programs, providing nearly $2.5 billion to states over the decade.

The overall size of the Department of Health and Human Services budget is plenty big – total outlays are proposed to be $941 billion. Most of this is mandatory spending, including 56 percent for Medicare and 30 percent for Medicaid. The "discretionary" budget is $76.4 billion  – and the proposal only allows for an increase of $0.3 billion, a growth rate of less than 4 tenths of one percent for any programs outside the mandatory spending.

Besides Medicaid, states will feel the belt tightening in a number of other areas the budget document calls “tough choices,” including reductions in federal funding for the community services block grant, substance abuse services and chronic disease treatment, all of which flow directly to states.

To see a summary of the President's proposal for the Department of Health and Human Serivces click here.

For a more detailed Department of Helath and Human Services budget document click here.