County Medicaid Swap Or Comprehensive Reform?

Senator Dan Clodfelter (D-Mecklenburg) has recently developed a proposal to shift all nonfederal Medicaid costs in North Carolina to the state government. Unfortunately, this plan fails to address the comprehensive reform needed for a Medicaid system that has grown out of control.

Details of the Plan

Under current law, county governments are required to contribute 15 percent of all nonfederal Medicaid service costs. Out of total Medicaid costs in North Carolina, the federal government pays roughly 64 percent, the state 30 percent and the counties 5 percent. North Carolina is one of only three states (the other two being New York and South Carolina) that requires counties to pay a fixed share of most or all Medicaid services.

Senator Clodfelter’s plan is basically this:

• The state would assume the county share of Medicaid payments. In exchange, counties would turn over several tax revenue streams to the state. These revenues include:
  • ¼ cent of the retail sales tax
  • Half of the local sales tax collections on food
  • Corporate tax revenue currently appropriated to local school construction
  • Beer and wine tax revenues

Clodfelter’s plan initially gained support in large part because it does not raise any taxes in the short term. “The virtue is that it doesn’t require raising taxes right now, and that seems to be something people like,” Clodfelter said.

Winners and Losers

The county-state “swap” is estimated to be an even exchange in the immediate future, but the state’s newly gained revenue streams will quickly fall short of growing county Medicaid costs. Estimates place the gap at $117 million as early as FY2009-10, with projected growth to $219 million by FY2011-12.

Winners

• Low Income Counties — Ridding themselves of rising Medicaid costs is a boon to those counties that have unusually high Medicaid costs. Low income counties such as Robeson and Vance, for instance, have higher rates of Medicaid enrollees: 34 percent compared to the statewide average of 18 percent. This translates into a high percentage of their budget being dedicated to Medicaid costs: 13 percent in the case of Robeson County and 10 percent for Vance. Because of such high enrollment rates, low income counties will come out well ahead by giving up the designated tax revenues in exchange for the state assuming their growing Medicaid burden.

Losers

• High Income Counties — High income counties will lose from the Medicaid swap because a smaller percentage of their residents are reliant on Medicaid. For example, Orange, Wake, Mecklenburg, Dare and Durham counties each spend less than 3 percent of their budgets on Medicaid costs. It is estimated that 13 counties will end up losing money in the first year of the proposed swap because the revenues generated from the foregone taxes will exceed the money saved by turning Medicaid payments over to the state. (Clodfelter’s plan does include a provision to compensate these counties for this difference for three years. Where this money is to come from, and what happens after three years, is unclear.)
• State Government — As mentioned above, the state government’s newly acquired revenues will fall short of the growing county share of Medicaid payments. This gap will grow to an estimated $219 million by FY2011-2012. State lawmakers will be forced to go searching for other revenues to compensate for this shortfall.
• Cities — Because cities receive a share of the county tax collections involved in this swap, they will lose revenues while not being relieved of any Medicaid costs. Cities receive some compensation in the form of “hold harmless” payments, but these fall short of the revenues they would have obtained from the foregone taxes in the first full year after the swap.
• Taxpayers — As long as comprehensive Medicaid reform is left off the table, taxpayers will continue to be on the hook for this ever-expanding program. With shortfalls projected to both cities and the state, tax increases will be sure to follow.

The Real Problem: Out of Control Medicaid Growth

Fiscal Research data reveals that total Medicaid spending in North Carolina has nearly tripled since 1995; since 2000 alone, spending has shot up by 96 percent. Clodfelter’s plan includes projections that Medicaid expenses will grow by another 30 percent between FY2008-9 and FY2011-12. But this estimate is conservative, given past growth trends. To put these numbers in perspective, Fiscal Research estimates that each 1 percent increase in Medicaid expenditures equals an additional $29 million in General Fund appropriations. Thus even if Medicaid spending only grows by 30 percent, the additional cost to taxpayers will be $870 million over four years.

What Can be Done in the Meantime?

The political reality appears to be that comprehensive reform is still a long way off. If this is true, what steps can state lawmakers take in the meantime to curb the growth of Medicaid?

• Grow the State’s Economy

Fiscal Research Division research shows that the number of Medicaid enrollees is closely related to the performance of the economy. In times of economic growth, enrollment slows or even decreases. In times of recession, enrollment inevitably picks up. In addition, poor counties have higher rates of Medicaid recipients. Economic growth and job creation are key ingredients to limiting the number of people who turn to Medicaid.

• Limit Eligibility

Expanding eligibility requirements also significantly increases Medicaid enrollment. This happened after eligibility expansions in 1987 and 2000. In fact, 45 percent of North Carolina Medicaid recipients in 2006 belong to eligibility groups added since 1987.

 

• Priorities need to be set. For example, should tax dollars continue to fund the high number of recently eligible Medicaid recipients, or to finance new schools and roads?

• Eligibility expansion also “crowds out” private insurance. Rather than insuring more children overall, Medicaid expansion in North Carolina has for the most part merely shifted kids from private to public insurance. The number of children enrolled in Medicaid went from 10.8 percent in 1987 to 26.7 percent in 2005. Meanwhile, children covered by private plans dropped from 75.8 percent to 63.6 percent. This means that 12 of the 16 percentage point increase in Medicaid recipients came from the ranks of the privately insured.

Researchers at the Robert Wood Johnson Foundation, a New Jersey-based healthcare advocacy organization, surveyed 22 leading studies on this issue and concluded that such crowd out “seems inevitable.”

• Reduce Optional Services

 Certain services covered by Medicaid are mandated for all states by the federal government while states can choose to add coverage from a menu of 38 optional services. North Carolina’s rapidly rising Medicaid costs are being driven in part by the large number of optional services state lawmakers have decided to cover.

•  According to the Fiscal Research Division, 56 percent of Medicaid expenditures in 2004 were dedicated to optional services.
• North Carolina currently covers 33 optional services, which include such items as transportation, dentures, eyeglasses, chiropractors and private duty nursing. Only eight states in the U.S cover more options for their Medicaid enrollees while neighboring South Carolina covers 25 and Virginia 30.
• North Carolina’s decision to extend coverage to the “medically needy” is a prime example of how optional services fuel increasing Medicaid costs. This program extends services primarily to people with too much income to be eligible for standard Medicaid coverage. Fifteen states (including neighboring South Carolina) do not cover this group of people at all. On the other hand, North Carolina is quite generous – state spending per “medically needy” enrollee is 70 percent higher than the U.S. average.

Conclusion

The dramatic growth of Medicaid spending is a nationwide problem. Senator Clodfelter’s plan does nothing to bring about comprehensive reform, but only shifts the cost from one governmental entity to another. Without real reform, the state’s Medicaid burden will continue to grow unchecked, and taxpayers will continue to be stuck paying the tab.