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September 21, 2016

Balancing the Medicaid Budget: Opportunities and Challenges

The budget request submitted by the Department of Health Services (DHS) last week estimates that Wisconsin’s share of the cost of maintaining the Medicaid budget will grow by about $452 million during the next two fiscal years (2017-19), relative to the current base. Obviously that’s not peanuts, but it’s a manageable amount.

DHS has also projected that the state share of Medicaid spending in the 2015-17 budget will be about $260 million less than expected. Those savings, which will lapse to the General Fund, are very good news because tax collections fell short in the last fiscal year and the Medicaid underspending significantly reduces the risk that reduced tax revenue will put the current budget in the red.  [Note: See the update below about a new DHS estimate that increases the projected savings, and regarding a positive change in federal cost-sharing.]

I won’t go into all the details, but here are a few other general observations about and reactions to the 343-page DHS document:

  • The cost increase for maintaining current programs is much less than in the last three budgets – Although $452 million is a substantial amount, it’s a much lower increase than DHS has projected in any or the last three biennial budgets. That stems in part from the lower-than-anticipated Medicaid spending in the current budget – thanks to a number of factors, including caseloads well below expected levels, lower managed care rate growth, and a slightly higher federal reimbursement rate. As a result of those factors and others, the projected cost increase is much more manageable than the amounts needed during the previous six years, when the projected cost increases amounted to $650 million or more.
  • Expanding BadgerCare would close most of the budget shortfall – The state could offset more than four-fifths of the increased cost by modestly expanding eligibility for BadgerCare, which would qualify Wisconsin for a higher federal reimbursement rate and would yield a net savings of about $190 million per year. (Delays in making that change until after July 1, 2017 would reduce the savings by about $16 million per month.) Some lawmakers argue that we can’t count on the higher reimbursement being continued, but the November elections could put that concern to rest.
  • The DHS “request” doesn’t tell us much about what the Walker administration actually plans to do – This budget “request,” like many others at this early stage of the process, isn’t so much a request or recommendation as a projection of the cost of the status quo and an explanation of the anticipated cost changes. When an agency has controversial ideas for how to cut its budget, those aren’t generally announced before an election; and if the agency has ideas for popular changes, those are typically held back for the Governor to announce later in the budget process.
  • The aging of Wisconsin’s population is a major cost driver – Wisconsin has been a national leader in using community based care to reduce costs and improve satisfaction with long-term care for the elderly and people with disabilities. Despite that success, the DHS document repeatedly points to reasons why a growing elderly population and other factors relating to long-term care costs are expected to push Medicaid spending higher. That has led to some speculation that the Governor may dust off last session’s proposal to restructure the Family Care program, even though that plan was derailed by concerns about quality and accountability, as well as doubts about the hoped-for cost-savings.
  • Congressional proposals to cap Medicaid spending could create huge budget problems for states – The department’s budget request underscores our concerns about proposals in Congress to cap growth in the federal support for state Medicaid budgets. Those proposals fail to account for the way the aging of our country’s population boosts Medicaid spending. The increase in that population is a major factor in rising health care spending, especially for Medicaid – because even though the long-term care recipients are now just 8.2% of our state’s Medicaid participants, they account for about 41% of Wisconsin’s Medicaid costs. By failing to take demographic factors into account in spending growth, proposals to cap federal Medicaid support could create huge holes in state budgets or force states to make very large and growing cuts in Medicaid services.

It will probably be four or five months before we learn what the Walker administration actually has in mind for the next DHS budget, and their recommendations are likely to depend to some extent on the results of the November elections.  But in the meantime, the document released last week shows that the task of financing the Medicaid budget won’t be as challenging as it has been over the last six years – unless Congress approves proposed changes that would cap federal support for Medicaid and don’t account for the demographic factors that play a huge role in increasing states’ Medicaid spending.

October 6th update: Two recent developments after DHS submitted their budget request should bring down the amount needed to balance the next Medicaid budget. First, we now know that the federal share of Medicaid spending will be a little higher in Wisconsin than DHS assumed, beginning in October 2017. I estimate that that change could save the state about $32 million in the 2017-19 budget period.  Second, DHS estimated at the end of the calendar quarter that state Medicaid spending will be $268 million less than budgeted for 2015-17 — which is $8 million more savings than they had estimated in mid-September.  Read more in this Oct. 5th blog post.

Jon Peacock