States Have an Unhappy New Year with the Loss of Billions in Federal Aid

The new fiscal year for most states begins July 1. With it comes an increase in their portion of the Medicaid burden.
by | June 30, 2011

A federal program that has provided $100 billion in aid to states over the last two-and a half years comes to an end tomorrow.

The result: Even though states will make huge increases in Medicaid spending in FY 2012, the programs will actually face cuts.

As part of the 2009 stimulus package, the federal government increased its share of Medicaid costs. The enhanced contributions – which took effect from October 2008 through today – allowed states to try to close budget shortfalls, pay for increases in Medicaid enrollment that accompanied the recession, and avoid some cuts to benefits.

That program ends with the start of a new fiscal for states on July 1, and they'll be forced to shoulder a larger portion of Medicaid costs, even though revenues haven't returned to pre-recession levels.

Across the board, federal funding for Medicaid will decrease by 13 percent for the fiscal year starting July 1, according to an analysis by the National Association of State Budget Officers.

States accounted for the end of the program in their recently completed budgets, but the loss of revenue still poses a challenge, especially for states still dealing with high employment.

To compound problems for states, they're still bound by rules they accepted as a condition of the aid, even though it's gone. When they accepted the funds, they agreed to rules known as maintenance of effort requirements that prohibited them from reducing Medicaid eligibility requirements. The feds didn't want states booting people from the program during a recession, the time when it is needed most.

But the health reform law signed by the president last year also prohibits states from reducing their eligibility requirements through 2013, and it doesn't give extra money to pay for it.

Medicaid represents the single largest component of state spending. The loss of federal funds means that even though states are projected to increase Medicaid spending by 18.6 percent in the new fiscal year, overall Medicaid spending will be down 2.9 percent

At the start of the fiscal year, the federal government was paying, at a minimum, 56.2 percent of Medicaid costs in each state. That rate, known as the Federal Medical Assistance Percentage or FMAP, has been declining gradually over the last year. Today, it’s at 51.2 percent, and July 1 it returns to its pre-stimulus level of 50 percent.

But many states had been receiving much more than the minimum payout and will be hard hit by the end of the program. Louisiana, for example, suffers the most, according to figures published by the Kaiser Family Foundation. The federal government’s share of Medicaid costs will fall more than 20 percent starting July 1.

States including California, Florida and Rhode Island -- facing double-digit unemployment -- will see FMAP’s decreases of 10 percent or more.

That shift comes at a time when Medicaid enrollment is projected to increase next year – by about 3.8 percent – after several years of growth already. States are addressing the crunch by freezing provider rates, limiting prescription drug spending, and increasing copays, among other changes.

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