Sequestration Concerns: Part 2

E-newsletter Issue #106 | January 17, 2013

While Congress averted the fiscal cliff with a last-minute New Year’s Day vote, it kicked the sequestration can just a little farther down the road.

Basically, the deadline for some “grand bargain” to avoid automatic spending cuts mandated by the Budget Control Act of 2011 was extended to the beginning of March. If that extension expires with no further Congressional action, it would mean cuts of 6 percent rather than 8 percent to 28 federal programs, Chris Whatley, director of The Council of State Governments’ Washington, D.C., office, said during a CSG webinar, “Beyond the Cliff.”

“We’re not tipped into recession, but there’s certainly been an economic impact by the cliff that remains,” Whatley said.

The deal Congress agreed to basically stuck to the status quo, Whatley said, and it left Medicaid untouched.

But Matt Salo, executive director of the National Association of Medicaid Directors, said that protection for the state-federal program isn’t as good as it seems. That’s because sequestration would take a chunk of money from other discretionary programs, like HIV/AIDS programs and other public health spending.

“Medicaid does not exist in a vacuum,” said Salo. “It has very strong correlations and connections with all of those programs. To the extent that any of those programs—funding for Native American clinics, whatever—if those get hit, what you often see is Medicaid being forced to step up and fill in the gaps.

“Keep that in mind; if sequestration happens, Medicaid might not be truly exempt.”.

Salo said many unknowns remain, including how Medicaid will be affected by any grand bargain Congress makes on cutting the deficit. But those discussions are no longer hypothetical. Governors and state legislatures, he said, soon will decide whether to expand Medicaid as the Obama administration had hoped and as the Affordable Care Act originally prescribed. The Supreme Court ruled that states can opt out of that expansion.

“It has become very, very clear that the president and administration are acutely aware of any effort to significantly reduce federal funding in Medicaid, to do any kind of cost shift will have an immediate and direct impact on governors and states who are making that decision,” Salo said.

If Medicaid is cut, he said, some states may not trust the federal government to keep its commitment to funding the program at the levels it says it will and they will refuse the expansion.

But policymakers should expect hospitals in their states to push for expansion, Salo said. He said the Obama administration is counting on that aggressive lobbying for expansion.

Medicaid also could be impacted by any decision Congress makes on Medicare, the health care program for the elderly, Salo said.

“To the extent that Congress goes after Medicare—cracking down on home health payments, for example, as they’ve done in the past, raising the age of eligibility as they have certainly proposed—any of those could potentially have a direct and immediate cost-shift to Medicaid,” he said.

Great unknowns remain for states in many areas, said Kathryn White, a fiscal analyst with the National Association of State Budget Officers. States still don’t know what programs would be cut with sequestration or by how much.

“Overall, sequestration, while not a large percentage of the federal funding to the states, is still significant enough to create some real uncertainty for state budgets,” she said.

States have made contingency plans, but many governors had to make the risky assumption that some deal would hold off sequestration, since they were required to submit their budgets long before Congress acted, she said. While the amount of the cuts is smaller, White pointed out that they’ll be implemented over a shorter period of time.

“The bottom line is, with so much uncertainty around federal action, it’s been very difficult for states to plan for the 2013 fiscal year budgets,” White said.

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