Medicaid Teetering on the Fiscal Cliff

How Washington resolves its looming financial obligations could have major implications for the low-income insurance program.
by | November 21, 2012

For full coverage of the fiscal cliff's impact on states and localities, click here.

State Medicaid offices are nervously fidgeting these days, as the White House and Congress emerge from the post-election haze and confront the “fiscal cliff”—Beltway lingo for the mix of tax increases and spending cuts set to take effect in January that is viewed as potentially disastrous for the economy.

It’s primarily the convergence of two policy decisions: one, to allow the Bush tax cuts to expire (in other words, taxes will go up for everyone); and two, to enact the automatic spending cuts that were part of the debt ceiling deal that President Obama and Congressional Republicans reached in 2011. The Congressional Budget Office has estimated that, if both policies remain in place through the end of 2013, national GDP growth would slow by 3 percent. Since the economy is growing at a 2 percent pace now, that means sliding into a second recession.

Now, neither side likes either policy, and so, Obama, House leaders and Senate leaders are expected to feverishly negotiate through the end of the year to find a more agreeable alternative that still reduces the nation’s long-term deficit. And it’s the prospect of an alternative deal that is actually most worrisome for state Medicaid programs. You see, Medicaid is actually exempted from the automatic budget cuts that were part of the 2011 debt ceiling deal. But many analysts have speculated that a new deal—as part of “entitlement reform” that Hill Republicans are demanding if they are to agree to any new tax revenues, as Obama desires—could include Medicaid cuts.

Simply put, there is a lot of uncertainty. And this is coming at the same time that states are starting to debate whether they want to expand Medicaid under the Affordable Care Act (ACA). Part of the incentive for doing so is the 100 percent federal match in the first three years (and a permanent 90 percent match after that). If that enhanced federal matching is reduced as part of a fiscal cliff deal, that could have major fallout for what states decide to do on the expansion, says Matt Salo, executive director of the National Association of Medicaid Directors (NAMD). He points out that Obama’s FY 2013 budget included an overhaul of the Medicaid matching rate formula that would have reduced the federal government’s contribution to the program by $3.4 billion starting in 2017.

“What's our guarantee that those numbers will still be set in stone?” Salo says. “The president has already proposed a plan for reducing the deficit that included reducing the federal match. What's the likelihood that that's going to be the case again tomorrow?”

Other old ideas—setting a per capita cap for matching, instead of a fixed percentage; limiting the amount of taxes that states can charge providers to pay for Medicaid; or using a combined blended rate for Medicaid and the related Children’s Health Insurance Program instead of separate formulas—could also resurface, according to Kaiser Health News’s Mary Agnes Cary.

She described the mood on Capitol Hill this way in a Nov. 15 podcast for the news agency:

“Everyone seems to be talking about a ‘balanced approach.’ We hear this from the president. We hear it from Democrats. We hear it from Republicans. The president and Democrats are saying to Republicans, ‘If you move on taxes, if you ask some high-income individuals to pay more on taxes, we’ll move on entitlements, on Medicare and Medicaid.’ People seem very, very open to this idea of avoiding the fiscal cliff, of avoiding these automatic spending cuts that are set to kick in in January. But the thing we have to remember from watching Capitol Hill for a long time is that this is where folks always are at the beginning of a negotiation.”

And recent comments from Congressmen in both parties serve as a reminder that there remains a significant gap between Democrats and Republicans on how to approach Medicaid and other entitlement programs during the fiscal cliff talks.

A group of liberal lawmakers held an event last week stating their stark opposition to cutting Medicaid, Medicare or Social Security as part of any deal. "When it comes to Social Security, Medicare and Medicaid, the American people told us to protect and strengthen these programs, not cut them," said Sen. Tom Harkin (D-Iowa), chairman of the Senate Health, Education, Labor and Pensions Committee, said, according to The Hill. "The American people want a change in the structure of who pays and making sure that we keep the programs that protect the poor, the disabled and the elderly.”

Meanwhile, House Speaker John Boehner (R-Ohio) wrote an op-ed in the Cincinnati Enquirer Tuesday, saying that the full repeal of the ACA—and with it, presumably, the law’s Medicaid expansion—should be up for debate during the fiscal cliff negotiations.

“We can’t afford it, and we can’t afford to leave it intact,” Boehner wrote. “That’s why I’ve been clear that the law has to stay on the table as both parties discuss ways to solve our nation’s massive debt challenge.”

Even if Medicaid survives the fiscal cliff largely intact, state Medicaid officials know that the program could consistently be placed on the cutting board as long as the country is grappling with trillions of dollars of debt. The only certainty, they say, is that they don’t know what federal support for the program will look like 10 years from now—or 20.

“We’re in this new reality of living with uncertainty. I think it's an open question whether we’ll have finality in November or in January or in May. I'm not sure we ever will,” says Andy Allison, Arkansas’s Medicaid director and president of NAMD. “I wonder if when we look back in 2020 and reminisce on this time frame, what will actually define it is the uncertainty itself.”

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