Medicaid’s Exploding Costs Threaten Tight State Budgets

Tennessee’s Medicaid woes illustrate the intractable nature of the problem

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MEDICAID FINANCING in Tennessee has reached a crisis point. But Tennessee is not alone. Soaring Medicaid costs are stressing state budgets across the country.

According to figures issued by the National Association of State Budget Offices, total state and federal spending on Medicaid services will top $300 million for 2004. More remarkably, that is 50% more than what was spent just 48 months earlier! In 2000, total state and federal Medicaid spending was about $200 billion.

Since 2000, states have collectively spent about 10% more each year to fund their share of Medicaid programs. It will be the same in 2005, with double-digit increases expected during the year.

Understanding The Problem

For lab administrators and pathologists, understanding the fundamental economics of the Medicaid program is necessary to understand how and why Medicaid officials in different states are tinkering with Medicaid laboratory testing reimbursement and contracting practices. Below-cost reimbursement schedules and irrational laboratory testing contract requirements are a response to inadequate finances in the program.

In the absence of a free market, bureaucrats are left to devise strategies to help their state’s Medicaid program make available funding stretch enough to cover costs.

Medicaid is suffering from its design flaws. When it was originally conceived some 40 years ago, it covered about 4 million low-income people. Today, Medicaid covers 53 million people. That’s one in six Americans. It spends more than the federal Medicare program. There are states where Medicaid now eats up more than one- third of the state budget.

Tenncare’s Temporary Fix

As an update to our coverage of radical reforms to Tenncare, Tennessee’s experiment in managed Medicaid, the latest proposal from the governor is to abandon its current model and adopt a managed care form of Medicaid. (See TDR, December 13, 2004.) Of the 1.3 million individuals covered under the existing Medicaid program, 323,000 people will be dropped from coverage. These are individuals who do not meet Medicaid requirements and who have chronic conditions that put private insurance beyond their reach.

Estimates are that Tennessee will save $575 million during the next budget cycle. This Medicaid plan preserves full benefits for 612,000 children and maintains “reasonable” benefits for 396,000 adults. However, there has been no discussion of how this state will fund increased Medicaid costs in coming years.

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