Faced with the end of stimulus money and a continuing weak economy, Medicaid officials in virtually every state are enacting a variety of cost-cutting measures. States' spending on Medicaid programs is projected to increase 28.7% in fiscal year (FY) 2012 to make up for the loss of stimulus funds, according to a new survey by the Kaiser Family Foundation's Commission on Medicaid and the Uninsured.

In 2008 the American Recovery and Reinvestment Act (ARRA)—the “stimulus package”—created a substantial but temporary increase in federal matching funds for Medicaid, which is jointly financed by the federal government and the states. From 2009 to 2010 state spending on Medicaid declined for the first time in the program's history, even as the recession meant sharp rises in Medicaid enrollment and overall Medicaid spending. With the expiration of those funds in June 2011, states must boost their own spending to replace lost funds. However, even with these increases, total Medicaid spending is expected to grow by a modest 2.2% in FY 2012, after a 7.3% increase the previous year.

Provisions in ARRA and health reform legislation prohibit states from enacting new restrictions on Medicaid eligibility or enrollment procedures. Thus the states have focused on cost containment actions ranging from restrictions on provider payments and benefits, to new copayments for beneficiaries and new efforts to contain the costs of prescription drugs, according to the Kaiser report, the 11th in Kaiser's annual survey of state Medicaid programs. State programs are also trying to be more efficient by increasing reliance on Medicaid managed care, moving long-term care toward community-based care models, and streamlining enrollment procedures. Even with such measures, Medicaid officials in more than half the states estimate at least a 50-50 chance that they will see a budget shortfall in FY 2012 as enrollment continues to grow, according the survey.

The state focus on cutting costs occurs against a backdrop of deficit reduction efforts in Washington that could reduce federal support for Medicaid and shift costs to states at a time when states are coping with historically difficult budget conditions and must also lay the groundwork for a significant expansion of Medicaid under the health reform law.

The survey found that provider rate restrictions was the most frequently reported cost containment strategy, with 39 states restricting rates in 2011 and 46 reporting plans to do so in 2012. Several states also increased or imposed new provider taxes that can generate more federal matching revenue and help mitigate the effects of cuts to some providers. States focusing on benefit reductions and restrictions have eliminated, restricted, or reduced Medicaid benefits in areas such as dental care, medical supplies, durable medical equipment, and personal care services. Almost all states have been making substantial changes in Medicaid pharmacy programs, the survey found, including preferred drug lists, supplemental rebates, and prior authorization requirements, and states are now focusing on controlling costs for specialty drugs, a rising share of prescription drug spending.

Five states in FY 2011 and 14 states in FY 2012 increased copayment amounts or imposed new copayments, compared with only one state in FY 2010. Most copayment changes were for pharmacy and emergency room visits, although a few states are requesting federal waivers to implement broader changes that would entail higher payments and apply to populations traditionally exempt in federal law.

States are also making changes in the delivery of services, according to the survey report. Even under the pressures of strained budgets, states have worked to enact reforms to improve delivery of care and prepare for health reform, which calls for a major expansion of Medicaid beginning in 2014. The report describes changes in three key areas of service delivery: Medicaid managed care, dual eligibles (persons dually eligible for Medicaid and Medicare), and long-term care. Seventeen states in FY 2011 and 24 states in FY 2012 reported expanding their managed care programs, primarily by expanding areas and populations covered. As of October 2010, two-thirds of the 54 million Medicaid beneficiaries were enrolled in some form of managed care. States are expanding the use of disease and care management programs and patient-centered medical homes to help coordinate care for dual-eligible and other populations with chronic medical conditions. Thirty-seven states submitted letters of intent to pursue additional opportunities to coordinate care for dual eligibles on the basis of guidance released by the federal Centers for Medicare and Medicaid Services in July 2011.

In the area of long-term care, states have continued to shift the delivery away from institutions and into community settings. Thirty-two states in FY 2011 and 33 in FY 2012 expanded long-term care services, primarily by expanding Medicaid home- and community-based service programs. Most states continue to consider whether to adopt new options in the health reform law designed to increase community-based long-term care; six states reported that they are moving forward with the new options.

The 129-page survey report, Moving Ahead Amid Fiscal Challenges: A Look at Medicaid Spending, Coverage and Policy Trends, Results From a 50-State Medicaid Budget Survey for State Fiscal Years 2011 and 2012, is available on the Kaiser Web site at www.kff.org/medicaid/8248.cfm.