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Comptroller Hynes:  State Medicaid Program Faces Funding Challenges

The Comptroller's Office latest Fiscal Focus report centers on health care funding, specifically Medicaid.  The report is a comprehensive guide to health care financing, including in-depth reports on universal health care, unpaid Medicaid bills, intergovermental transfers, AllKids, uninsured in the U.S., medical assistance spending and Medicaid legislation in Illinois.

What is Medicaid?
Medicaid is the nation's primary public health insurance program for low-income families, the disabled
and the poor elderly, providing health care for over 55 million uninsured Americans.  Created in 1965, it is funded through the federal and state government and is now one of the largest government programs. 

Both enrollees and liabilities have increased over the years in Illinois.  According to the Comptroller Medicaid total appropriated expenditures reached $11.6 billion in fiscal year 2007.  An average of 2.1 million persons per month are covered by Medicaid.  Children, non-disabled, low-income adults and low-income pregnant women represent 72% of the people who receive Medicaid services.  However, the elderly, blind and disabled account for 65% of the spending.

Medicaid is also an economic engine in the health care industry that plays a vital role in the state's economy.  Many Illinois hospitals, doctors, nursing homes, pharmacists and other health care providers depend on Medicaid funds to keep their doors open.  To illustrate, according to the Illinois Hospital Association, Medicaid now accounts for more than 13 percent of total patient revenue for Illinois hospitals, is the primary payer for nearly two-thirds of Illinois nursing home residents, and pays Medicare premiums for more than 100,000 poor senior citizens throughout the state.  Illinois hospitals in turn employ over 233,000 individuals throughout the state.  Based on the multiplier effect, every $1 million invested in Illinois' Medicaid program results in nearly $2.4 million in new business activity and more than 20 new jobs (Families U.S.A.).

Two problems with the Medicaid program in Illinois are the carryover of unpaid bills into the next fiscal year and payment delays to providers.  According to the Illinois Auditor General, from FY 2005 to FY 2007, an average of $1.5 billion in unpaid Medicaid bills went unpaid and was carried over into the next fiscal year.  (Read CTBA's overview of the audit here).


How is Medicaid Financed?
Medicaid is financed jointly by the federal government and the state.  The federal contribution to each state's program is determined by a federal matching rate called the Federal Medical Assistance Percentage, or "FMAP."  A state's FMAP rate is based on the state's per capita income, with the poorest states receiving a larger percentage of federal funding than wealthier states.  The FMAP ranges nationally from a low of 50 percent, to a high of 76 percent, with Mississippi receiving the highest federal match rate.  Eleven states, including Illinois, receive the lowest federal match rate of 50 percent.  That means for every dollar Illinois spends, it is reimbursed 50 cents by the federal government.


State Currently Owes $1 Billion
It is very important to understand how Medicaid affects the state budget. Illinois' chronic fiscal problems make it increasingly difficult for the state to keep up with soaring health care costs, which are growing three times faster than general inflation, making health care funding one of the state's greatest challenges.  Skyrocketing  Medicaid costs only compound Illinois' annual revenue shortfalls, resulting in cuts to other vital human services and the financing of a greater portion of government operations with debt rather than tax revenue.

While many states have elected to cut Medicaid benefits or restrict eligibility as a way to curtail program costs, Illinois should be applauded for not taking that approach, recognizing that providing basic health care to low-income, uninsured families is an essential public service. Rather, the state has dealt with the predicament another way: by delaying payment of Medicaid bills owed to health care professionals, in many cases for months. By deferring these "Medicaid liabilities," the state essentially pushes costs from one fiscal year to the next, making the state budget appear balanced each
year when in fact it is not. This results in long payment delays to hospitals, doctors and pharmacists that treat the most vulnerable in our society.

In fact, as the Comptroller reports, once the fiscal year 2009 budget is actually signed, an immediate backlog of nearly $1 billion in Medicaid bills from the Department of Healthcare and Family Services will be added to the bills due.  That means almost $1 billion of bills owed to health care providers went unpaid in FY 2008. 

Section 25 of the Illinois Finance Act allows the state to delay payment of certain types of expenses, such as Medicaid bills, state employee and retiree health insurance costs and specified costs from the Department of Public Health, from one fiscal year to the next.  The delayed payments are called "Section 25 deferred liabilities."  "Liability" is another financial term-of-art, and simply means the service costs incurred within the fiscal year, whether paid within that fiscal year or the next.  "Deferred liabilities" are paid from a subsequent fiscal year's appropriations, thereby shifting costs from one year to the next. 

Section 25 was initially setup to make payments to health care providers if bills arrived after the close of the state's lapse period.  The Comptroller writes that the state is now using it as a "budgeting tool" so if the state has fiscal difficulties it can budget an insufficient amount of Medicaid appropriations to cover costs for a given fiscal year knowing that any remaining bills will be paid from the net year's appropriations.  This makes the budget appear balanced. 

Because the state is unable to generate sufficient revenue under its current tax structure to pay for the operating expenses of public services, it has come to rely on deferring costs, particularly Medicaid costs, as a way to make the budget appear balanced (30 I.L.C.S. 105/25(b).

Using this budgeting maneuver only creates a budget hole for the next fiscal year, increasing difficult for the state to climb out of.
 
(It is important to note that deferred liabilities are different from "lapse period spending."  Lapse period spending occurs when a liability is paid after the close of the fiscal year but within 60 days of the year-end.  When paid within this 60-day window, the liability is paid from appropriations for the year in which the liability arose (i.e., the year the service was provided), rather than from the next year's appropriations.  With lapse period spending, state expenses are not shifted between fiscal years).
 
The state's unpaid Medicaid liabilities have increased from $337 million in 1998, to the current past due amount of about $1 billion (Comptroller's Quarterly, July 2008).

Illinois' Medicaid spending is not the result of an overly generous benefits package or eligibility requirements.  To the contrary, Illinois' Medicaid spending per beneficiary mirrors the national average when compared to other states' Medicaid spending (Kaiser Family Foundation).  Rather, the nine percent average annual growth rate in program liabilities, which is the most appropriate measure of Medicaid expansion over time, is primarily due to rising health care costs in general, the cost of prescription drugs, the cost of covering the disabled and the elderly, and increased enrollment in AllKids.

Delayed Payments
The use of the Section 25 "budgeting tool" means that payments to providers of Medicaid are delayed.  It can be months before some health care providers are paid.  According to the Auditor General's report, it took the Department of Health Care and Family Services (the department that administers the Medicaid program) an average of 57 days to submit claims for payment to the Comptroller.  By stretching out the payment cycle for months, the state is putting an enormous, and unfair, financial strain on Medicaid providers. 

Under Illinois' Prompt Payment Act, the state is charged an interest penalty, owed to providers, at a rate of one percent per month on the unpaid balance of the provider's bill (30 I.L.C.S. 540/§ 3-2).  This amounts to a significant cost when the state's unpaid Medicaid bills are in the billions of dollars. 
 
Prompt Payment interest begins to accrue 60 days following approval of a provider's bill (the state is permitted 30 days within which to approve an invoice as "clean" for payment).  Accordingly, following a 90-day period after a doctor, hospital or other provider has submitted an invoice to the state for Medicaid services provided, if the state still cannot pay the bill, interest begins to accrue on the unpaid balance (30 I.L.C.S. 540/3-2(1) (Prompt Payment interest begins to accrue 60 days after a Medicaid invoice is approved); 74 Ill. Reg. § 900.70 (a state agency has 30 days to approve vendor invoices).

Short Term Borrowing to Pay Bills
Because the state lacks sufficient cash flow to pay providers for Medicaid services rendered, it is often forced to borrow the funds to make a substantial reduction in the deferred liabilities rather than using tax revenue to pay down the liability.  While short-term financing allows payment to providers, the state is simply robbing Peter to pay Paul - one liability gets paid (i.e., Medicaid bills), but another is incurred (i.e., debt), actually leaving the state worse off when the interest expense on the short-term borrowing is considered. 

Short-term borrowing is sometimes appropriate to help with cash flow or to weather one-time revenue shortfalls caused by a recession or unique event (like significant flood damage). Borrowing to pay for public services is problematic, however, if used to cover ongoing revenue shortfalls caused by structural
inadequacies in a fiscal system. In such cases, natural revenue growth will never catch-up with both the cost of repaying the debt, plus interest, and the inflationary cost of maintaining public services over time. This is exactly what is happening in Illinois. Over the past six years, the state has short term borrowed over $7.2 billion, mostly to pay Medicaid bills. Prior to FY 2002, the state had not practiced short term borrowing in over five years, since it borrowed $500 million in FY 1996.

Proposed Federal Rules Means Illinois Could Lose $2.5 Billion
Making things worse for the states, the Comptroller writes that the federal government has proposed changes to Medicaid that could pass more costs onto the states if they elect to keep their programs intact.  Groups such as the National Governors Association and the National Conference of State Legislatures are arguing that the proposals would shift billions of dollars in Medicaid costs to the states. Early estimates from CMS suggested that federal payments to the states would be reduced by approximately $15 billion over the next five years, but March 2008 estimates by the Committee on Oversight and Government Reform of the U.S. House of Representatives indicate that states could lose nearly $50 billion over the five year period.
 
The proposed changes are included in seven regulations proposed by The Centers for Medicare and Medicaid Services (CMS). Two of the regulations would reduce Medicaid reimbursements for services provided by public hospitals and teaching hospitals. Another regulation would restrict how states can raise revenues to fund their share of Medicaid, and the remaining regulations would narrow the scope of allowable Medicaid coverage for outpatient hospital services, rehabilitation services, school-based administrative and transportation services and case management services.
 
The proposed rules would:
1) clarify that providers participating in intergovernmental transfers must be part of a unit of government, and impose cost limits on payments to public hospitals and other safety net providers thereby reducing the Medicaid reimbursements they receive.
 
2) prohibit federal Medicaid funding for graduate medical education, eliminating support for training medical interns and residents.
 
3) redefine the types of expenditures that will be considered intergovernmental in nature, revise the meaning of a unit of government and shift to a facility-specific cost structure rather than permitting aggregation by class of provider. Such restrictions on medical provider taxes could reduce the amount of funds raised via provider taxes, thus reducing the level of state matching funds and ultimately the amount of medical services that can be funded.
 
4) narrow the scope of allowable Medicaid coverage for outpatient clinic and hospital services which could lead providers to limit or eliminate services that were previously reimbursed.
 
5) narrow the scope of coverage of rehabilitation services for Medicaid eligible people with disabilities which could, among other things, take money away from counseling and rehabilitation services provided to children in foster care and juvenile justice programs.
 
6) halt payments for school-based administrative and transportation services which could stop payments for school administrative costs associated with enrolling children in
Medicaid and scheduling and coordinating services and bar schools for billing Medicaid for home-to-school transportation for special education students who receive school-based Medicaid services.
 
7) restrict federal reimbursement for case management services which could unfortunately affect those most in need of such services: namely, the mentally ill, aged or disabled, and children and adults needing protective services.

Opposition to the new rules reached Congress.  A moratorium through March 2009 on six of the seven rules was included in the recent war supplemental spending bill (Public Law 110- 252). The remaining rule, covering outpatient hospital services payments, went into effect.
 
Based on survey responses received from  43 out of 50 state Medicaid directors, the Committee on Oversight and Government Reform estimates that states could lose nearly $50 billion over a five-year
 
The potential impact on Illinois for the five-year program is $2.5 billion according to the state's Medicaid director. Like the national total, the largest impact ($1.3 billion) will be from the reduced payments to public hospitals.
 
According to the Comptroller, the proposed rules come at an unfortunate time for the states.  States that want to maintain their Medicaid programs without cutting services will face enough difficulties with economy-driven caseload increases and revenue decreases, to say nothing about the impact of reductions in federal funding.
 
Even though Congress successfully blocked the implementation of most of the proposed rules until the end of March 2009, the states will still face Medicaid spending pressures.
 

Medicaid Legislation in Illinois
HB 3397:  Drafted by Comptroller Dan Hynes and introduced by Representative William Davis. This legislation amends Section 25 of the State Finance Act to eliminate the ability to carryover certain bills into future fiscal years. Instead, it allows payment during a 4-month lapse period after the end of the fiscal year for Medicaid and certain other bills, an extension of the traditional two month lapse period. Despite passage by a committee in the spring of 2007, it remains in House Rules.

SB 292:  Amends Section 25 of the State Finance Act concerning the carryover of certain types of bills to future fiscal years. It eliminates this Section 25 "loophole" on June 30, 2010. This bill and the identical Senate Bill 2060 have been referred to the Rules Committee with no further action.

SB 1533: This bill amends Section 25 of the State Finance Act by providing a cap of the dollar amount of bills that can be carried over into future fiscal years under the Section 25 loophole. This cap gradually ramps down with a complete phase out by fiscal year 2017. Beginning in fiscal year 2018, Medicaid and other specific bills are allowed to be handled in a 3 month lapse period, a small extension beyond the traditional lapse period. This bill was referred to the Rules Committee where it
has not moved.

Conclusion 
The primary reason Illinois is not able to pay Medicaid providers in a timely manner is due to the state's revenue problems.  As state tax revenue falls short of the inflationary costs of funding the current level of public services every year (the state's structural deficit), it is forced to delay Medicaid bills, cut essential public services, and use debt to pay for state operating expenses to "balance" the state budget.  As a result, Medicaid providers suffer long payment delays.  Unless Illinois addresses the structural problems in its fiscal system, this cycle of dependence on debt and deferred payments will only continue.
 
Comprehensive fiscal reform is needed to address the state's structural deficit.

Resources
CTBA has numerous reports analyzing Medicaid and health care financing in Illinois.  Visit http://www.ctbaonline.org/healthcare.htm to read the following reports:

 

• The State of Illinois Shortchanges Cook County on Federal Medicaid Funds
• Illinois' Medicaid Program: Financing Challenges in the Face of Federal Medicaid Cuts and a Flawed State Fiscal System
• An Analysis of the Tax Exemptions Granted to Cook County Non-Profit Hospitals and the Charity Care Provided in Return
• The Impact of State Budget Shortfalls on Payments to Medicaid Health Care Providers
• Proposed Federal Cuts Threaten Illinois' Medicaid Program
   

To read the entire Comptroller's Fiscal Focus report, please visit http://www.ioc.state.il.us/