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Medicaid FAIL: Why cutting appropriations doesn’t control costs

Medicaid FAIL: Why cutting appropriations doesn’t control costs

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Published by: Illinois Policy Institute on Nov 08, 2011
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Earlier this year, Illinois lawmakers purport-edly passed a budget that reduced overall statespending. As part of this supposed budget re-form, the state’s runaway Medicaid budget wasto be brought under control. Specically, Gov.Quinn proposed $552 million in budget cutsfrom the Medicaid program. The General As-sembly passed a budget that incorporated thosecuts and then cut another $530 million from theprogram. Finally, Quinn cut an additional $276million from the program through line-item vetoes.
Altogether, the money appropriated tothe Medicaid program for scal year 2012 wasreduced by $1.4 billion. In theory, taxpayers -nally were getting a break, and spending wouldbe held below the previous year’s budget. The problem, however, is that these Medicaidbudget cuts are illusory. Rather than reduce statespending, Illinois lawmakers used an accounting gimmick to hide additional spending from tax-
 Jonathan Ingram
is a Health Care Policy Analyst with the Illinois Policy Institute.
Medicaid FAIL
Why cutting appropriations doesn’t control costs 
   H  e  a   l  t   h   C  a  r  e
   B  r   i  e   f  
   N  o  v  e  m   b  e  r   8 ,   2   0   1   1
Graphic 1. Illinois’ unpaid Medicaidbills will soar without reform
Source: Author’s calculations based upon estimates of appropriations and liabilities, reports of Section 25 liabilities, an-nual growth trends in liabilities and at 2013 appropriations. All underlying data is from COGFA, HFS and the Comptrol-ler. Projections of unpaid bills do not include accrued interest.
What is Medicaid?
In a nutshell, Medicaid is governmenthealth insurance dedicated primarily forthe poor. More specically, it is a jointstate and federal health insurance pro-gram that currently serves over 2.5 mil-lion Illinoisans. It operates on a fee-for-service basis, reimbursing doctors andhospitals for services they provide at aspecied rate. State and federal guide-lines determine eligibility standards, ser-vices covered and reimbursement rates.In addition, many states have expandedMedicaid to serve additional populationswho do not belong to the core groupstargeted by the original federal program.The program should not be confusedwith Medicare, a federal health insuranceprogram for the elderly.
Page 2 of 6
 The state’s backlog of unpaid Med-icaid bills are approaching record levels andcould double if lawmakers fail again to con-trol costs and adequately fund the program.
Using gimmicks
Under Illinois law, bills incurred in one year gen-erally must be paid with that year’s appropria-tions.
There is an exception for Medicaid re-imbursements, however, that allows the state topay those bills with appropriations from futureyears.
This exception is meant to ensure thatdoctors and hospitals get paid even if their billsarrive late, but its broad language has turned thisexception into a “loophole” that allows Medic-aid bills to pile up.
The scal year 2012 bud-get exploited this loophole in an unprecedentedfashion.
 The availability of Medicaid services to patientsis not determined by appropriation. State andfederal standards generally determine what ser- vices patients can receive and which patientscan receive them. The state then determines therates that doctors and hospitals can charge forthese services. When a doctor sees a Medicaidpatient, he bills the state for services providedunder these guidelines. State and federal law re-quires that those bills must be paid. Legislativeappropriations are irrelevant to the costs actually incurred, in the same way that a person’s check-ing account balance is irrelevant to his creditcard balance. The way to trim Medicaid spending is not tocut appropriations, but to trim Medicaid costs. As the director of the Illinois Department of Healthcare and Family Services explained, thescal year 2012 appropriation “cuts” don’t actu-ally reduce costs, they simply continue a “patternof deferring payment of bills.”
By cutting only appropriations, the budget merely lets the billspile up until next year. Illinois just gave itself alonger grace-period to pay its bills.
Funding sources
Illinois’ Medicaid program gets its funding frommultiple sources. Because Medicaid is a jointstate-federal program, the federal governmentprovides Illinois with roughly half of the fundsnecessary to run the program.
Illinois coversthe remaining share through a combination of 
The way totrim Medicaid spending is not to cut 
but to trim  Medicaid costs.
state taxes, local taxes and taxes on health careproviders.
Since 2000, the federal government has pickedup on average 48.7 percent of Illinois’ Medic-aid costs. State taxes account for 34.8 percentof the costs and the remaining 16.5 percentcomes from local taxes and provider taxes.
  The federal share temporarily increased withthe stimulus, but has now receded to pre-stim-ulus levels.
Fiscal year 2012 budget
 This year’s budget, although smaller at rstglance, actually increases spending. In scalyear 2011, Illinois appropriated $10.7 billion ingeneral revenue and related funds to Medicaid,the payment cycle was approximately 35 days,and the scal year ended with $763 million inunpaid Medicaid bills on hand.
By contrast, in scal year 2012 Illinois appro-priated $9.295 billion in general revenue and
Graphic 2. Medicaid spendingin Illinois by funding source
Source: Author’s calculations of average share of Medicaid spend-ing by funding source for scal years 2000 through 2008, based upon National Associations of State Budget Ofcers’ annual ex-penditure reports.
Page 3 of 6
Graphic 3. Appropriations, un-paid bills, and payment cyclesin fiscal years 2011 and 2012
Actual appropriations$10.7 billion$9.3 billionUnpaid Medicaid bills atend of year$763 million$2.4 billionLength of paymentcycle35 days162 days
Source: COGFA 2012 Budget Summary and author’s calculationsbased upon estimates of annual liabilities and deferred liabilities.
related funds to Medicaid, the payment cycle isexpected to reach 162 days,
and the scal yearis expected to end with $2.4 billion in unpaidMedicaid bills on hand.
 To know the trust cost of Medicaid, any growthin the number of unpaid bills on hand must beadded to the appropriated amount. For example,Illinois ended scal year 2011 with $763 millionin unpaid bills. This represents a backlog thatis $100 million greater than the previous year. Added to the $10.8 billion in appropriations, theMedicaid program’s actually annual cost for theyear was $10.9 billion. This year, Illinois appropriated $9.3 billion ingeneral revenue and related funds to Medicaid. This would appear to be a $1.4 billion reduc-tion in spending. However, Illinois is expectedto have $2.4 billion in unpaid bills at the end of scal year 2012. This represents a backlog that is$1.6 billion greater than the previous year. Afteradding that to the $9.3 billion appropriated, theprogram’s annual cost for the year is expected toreach nearly $11 billion. To keep the backlog of bills from growing overthe year, the state must appropriate at leastenough to cover the true annual cost of Medic-aid. Based on annual growth trends, this wouldrequire $11.6 billion in scal year 2013.
This isan additional $2.3 billion from 2012 appropria-tions. If the legislature instead appropriates thesame amount to Medicaid in 2013 as it did in2012, the unpaid bills at the end of the scal year will grow to an astounding $4.7 billion.
Illinois’ policy of pushing off current bills intofuture years cannot continue forever. Ironically,many of the same lawmakers that pushed a re-cord number of bills into the future had, only months before, passed a law that will eventu-ally close that loophole for good.
The new law sets a ceiling for the maximum amount of alldeferred payments, which will gradually decreaseuntil it reaches $0 in 2021.
If the General As-
Illinois’  policy of  pushing off current bills into future  years cannot continue  forever.
Graphic 4. Costs of Illinois’ Medicaid programrise while appropriations shrink
Source: Author’s calculations based upon estimates of appropriations and liabilities, annual growth trends in liabilities. All underlying data is from COGFA, HFS and the Comptroller. Projections of costs do not include accrued interest.

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