November 8, 2011

Medicaid FAIL Why cutting appropriations doesnt control costs

Earlier this year, Illinois lawmakers purportedly passed a budget that reduced overall state spending. As part of this supposed budget reform, the states runaway Medicaid budget was to be brought under control. Specifically, Gov. Quinn proposed $552 million in budget cuts from the Medicaid program. The General Assembly passed a budget that incorporated those cuts and then cut another $530 million from the program. Finally, Quinn cut an additional $276 million from the program through line-item vetoes.1 Altogether, the money appropriated to the Medicaid program for fiscal year 2012 was reduced by $1.4 billion. In theory, taxpayers finally were getting a break, and spending would be held below the previous years budget. The problem, however, is that these Medicaid budget cuts are illusory. Rather than reduce state spending, Illinois lawmakers used an accounting gimmick to hide additional spending from tax-

What is Medicaid?
In a nutshell, Medicaid is government health insurance dedicated primarily for the poor. More specifically, it is a joint state and federal health insurance program that currently serves over 2.5 million Illinoisans. It operates on a fee-forservice basis, reimbursing doctors and hospitals for services they provide at a specified rate. State and federal guidelines determine eligibility standards, services covered and reimbursement rates. In addition, many states have expanded Medicaid to serve additional populations who do not belong to the core groups targeted by the original federal program. The program should not be confused with Medicare, a federal health insurance program for the elderly.

Health Care Brief

Graphic 1. Illinois unpaid Medicaid bills will soar without reform

Source: Authors calculations based upon estimates of appropriations and liabilities, reports of Section 25 liabilities, annual growth trends in liabilities and flat 2013 appropriations. All underlying data is from COGFA, HFS and the Comptroller. Projections of unpaid bills do not include accrued interest.

Jonathan Ingram is a Health Care Policy Analyst with the Illinois Policy Institute.

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payers. The states backlog of unpaid Medicaid bills are approaching record levels and could double if lawmakers fail again to control costs and adequately fund the program.

Graphic 2. Medicaid spending in Illinois by funding source

The way to trim Medicaid spending is not to cut

appropriations,

but to trim Medicaid costs.

Under Illinois law, bills incurred in one year generally must be paid with that years appropriations.2 There is an exception for Medicaid reimbursements, however, that allows the state to pay those bills with appropriations from future years.3 This exception is meant to ensure that doctors and hospitals get paid even if their bills arrive late, but its broad language has turned this exception into a loophole that allows Medicaid bills to pile up.4 The fiscal year 2012 budget exploited this loophole in an unprecedented fashion.5 The availability of Medicaid services to patients is not determined by appropriation. State and federal standards generally determine what services patients can receive and which patients can receive them. The state then determines the rates that doctors and hospitals can charge for these services. When a doctor sees a Medicaid patient, he bills the state for services provided under these guidelines. State and federal law requires that those bills must be paid. Legislative appropriations are irrelevant to the costs actually incurred, in the same way that a persons checking account balance is irrelevant to his credit card balance. The way to trim Medicaid spending is not to cut appropriations, but to trim Medicaid costs. As the director of the Illinois Department of Healthcare and Family Services explained, the fiscal year 2012 appropriation cuts dont actually reduce costs, they simply continue a pattern of deferring payment of bills.6 By cutting only appropriations, the budget merely lets the bills pile up until next year. Illinois just gave itself a longer grace-period to pay its bills.

Using gimmicks

Source: Authors calculations of average share of Medicaid spending by funding source for fiscal years 2000 through 2008, based upon National Associations of State Budget Officers annual expenditure reports.

state taxes, local taxes and taxes on health care providers.8-9 Since 2000, the federal government has picked up on average 48.7 percent of Illinois Medicaid costs. State taxes account for 34.8 percent of the costs and the remaining 16.5 percent comes from local taxes and provider taxes.10 The federal share temporarily increased with the stimulus, but has now receded to pre-stimulus levels.

Fiscal year 2012 budget

Funding sources

Illinois Medicaid program gets its funding from multiple sources. Because Medicaid is a joint state-federal program, the federal government provides Illinois with roughly half of the funds necessary to run the program.7 Illinois covers the remaining share through a combination of

This years budget, although smaller at first glance, actually increases spending. In fiscal year 2011, Illinois appropriated $10.7 billion in general revenue and related funds to Medicaid, the payment cycle was approximately 35 days, and the fiscal year ended with $763 million in unpaid Medicaid bills on hand.11-12 By contrast, in fiscal year 2012 Illinois appropriated $9.295 billion in general revenue and

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Graphic 3. Appropriations, unpaid bills, and payment cycles in fiscal years 2011 and 2012
2011
Actual appropriations Unpaid Medicaid bills at end of year Length of payment cycle $10.7 billion $763 million 35 days

2012
$9.3 billion $2.4 billion 162 days

general revenue and related funds to Medicaid. This would appear to be a $1.4 billion reduction in spending. However, Illinois is expected to have $2.4 billion in unpaid bills at the end of fiscal year 2012. This represents a backlog that is $1.6 billion greater than the previous year. After adding that to the $9.3 billion appropriated, the programs annual cost for the year is expected to reach nearly $11 billion. To keep the backlog of bills from growing over the year, the state must appropriate at least enough to cover the true annual cost of Medicaid. Based on annual growth trends, this would require $11.6 billion in fiscal year 2013.16 This is an additional $2.3 billion from 2012 appropriations. If the legislature instead appropriates the same amount to Medicaid in 2013 as it did in 2012, the unpaid bills at the end of the fiscal year will grow to an astounding $4.7 billion.17 Illinois policy of pushing off current bills into future years cannot continue forever. Ironically, many of the same lawmakers that pushed a record number of bills into the future had, only months before, passed a law that will eventually close that loophole for good.18 The new law sets a ceiling for the maximum amount of all deferred payments, which will gradually decrease until it reaches $0 in 2021.19 If the General As-

Source: COGFA 2012 Budget Summary and authors calculations based upon estimates of annual liabilities and deferred liabilities.

related funds to Medicaid, the payment cycle is expected to reach 162 days,13 and the fiscal year is expected to end with $2.4 billion in unpaid Medicaid bills on hand.14-15 To know the trust cost of Medicaid, any growth in the number of unpaid bills on hand must be added to the appropriated amount. For example, Illinois ended fiscal year 2011 with $763 million in unpaid bills. This represents a backlog that is $100 million greater than the previous year. Added to the $10.8 billion in appropriations, the Medicaid programs actually annual cost for the year was $10.9 billion. This year, Illinois appropriated $9.3 billion in

Illinois policy of pushing off current bills into future years cannot continue forever.

Graphic 4. Costs of Illinois Medicaid program rise while appropriations shrink

Source: Authors 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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sembly continues its pattern of deferring payment, the amount of unpaid Medicaid bills will hit this ceiling by 2013.20 pass historic tax increases and put off paying its bills through gimmicks and loopholes. These policies cannot lead to balanced budgets and the certainty needed to foster job creation. Pushing bills into next year may make this years budget look smaller, but those bills will come due. When they do, will Illinois have the money to pay for them? Illinois Medicaid program will require $3.1 billion in additional appropriations next year just to keep from falling further into debt. The federal government will only cover half of those costs. Theres no reason to believe that local taxes or provider taxes will be able to make up the programs shortfall. When these bills come due, the state will be scrounging for general revenues to pay the its half. The Medicaid programs current growth in Illinois is unsustainable. If Illinois is to get its fiscal house in order, it must seek freedom from the federal government to pursue all known cost-saving measures and begin designing a new Medicaid program from the ground up that fits the unique needs of the states population. Lawmakers should seek greater program flexibility in exchange for capped federal funding to begin the process of these costs under control. There are real solutions to the states overspending problem. Its time we use them.

If Illinois is to get its fiscal house in order, it must seek freedom from the federal government to pursue all known cost-saving measures and begin designing a new Medicaid program from the ground up that fits the unique needs of the states population.

Under federal law, Illinois is required to pay 90 percent of its Medicaid bills within 30 days and 99 percent of its bills within 90 days.21 The state consistently fails to meet this standard. In fiscal years 2008 and 2009, Illinois paid only half of its Medicaid bills within the 30 day window.22-23 In some months, the state paid fewer than 10 percent of its bills within the specified time frame. These payment delays caused the state to lose nearly $50 million in federal funding in fiscal years 2009 and 2010.24-25 Illinois must also pay interest to doctors and hospitals for taking longer than 60 days to reimburse them for their services.26 The interest rate for these delays is 2 percent per month. Under the fiscal year 2012 budget, Illinois would be paying approximately 7 percent interest for the average Medicaid claim.27 This would represent up to an additional $760 million just in interest charges.28-29 Accounting for accrued interest, Illinois will need to appropriate an additional $3.1 billion to the Medicaid program just to keep from going further into debt.30

Paying extra for paying late

Conclusion: Freedom to design a better system

Illinois solution to revenue shortfalls was to

Graphic 5. Additional $3.1 billion needed in 2013 to keep six-month backlog

Source: Illinois Policy Institute calculations based upon estimates of annual liabilities, reports of Section 25 liabilities, annual growth trends in liabilities and accrued interest. All underlying data is from COGFA, HFS and the Comptroller.

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Appendix

Graphic 6. Annual liabilities in Illinois Medicaid program, by component, for fiscal years 2003 to 2013 (in millions)
2003
Long Term Care Hospitals Prescribed Drugs Practictioners Other Medical Non-EntitlementsRebate Total Liabilities

2004

2005

2006

2007

2008

2009

2010

2011
$1,991.3 $3,445.6 $1,991.5 $1,395.6 $1,769.7 $24.2

2012
$1,909.7 $3,297.4 $2,031.4 $1,496.5 $2,107.5 $27.9

Average Change
3.1% 5.2% 4.1% 10.6% 12.1% 10.9% 6.2%

2013 (Projected)
$1,968.9 $3,468.9 $2,114.7 $1,655.1 $2,362.5 $31.0 $11,601.0

$1,464.2 $1,455.5 $1,541.0 $1,587.2 $1,576.7 $1,716.8 $1,759.3 $1,793.0 $2,105.3 $2,283.9 $2,363.8 $2,572.3 $2,749.5 $2,876.8 $3,016.5 $3,300.7 $1,473.5 $1,799.8 $2,096.0 $1,829.1 $1,751.8 $1,675.9 $1,709.2 $1,794.4 $606.5 $765.1 $13.1 $658.3 $838.4 $17.4 $729.8 $811.1 $945.1 $1,016.6 $1,125.5 $1,246.6 $1,015.9 $1,053.3 $1,183.7 $1,353.0 $1,427.7 $1,544.2 $12.2 $17.1 $22.2 $20.8 $23.4 $22.6

$6,427.7 $7,053.3 $7,758.7 $7,870.1 $8,229.0 $8,659.9 $9,061.6 $9,701.5 $10,617.9 $10,870.4

Source: COGFA 2012 Budget Summary (fiscal years 2003-2012) and authors calculations based upon ten-year average growth trend by component (fiscal year 2013).

Page 6 of 6 Endnotes
1 Institute for Illinois Fiscal Sustainability, State of Illinois Enacted Budget FY2012: A Review of the Operating and Capital Budgets Enacted for the Current Fiscal Year, Civic Federation (2011), http://www.civicfed.org/sites/default/ files/State%20of%20Illinois%20Enacted%20Budget%20FY2012.pdf. 2 State Finance Act, 30 ILCS 105/25 (2011), http://www.ilga.gov/legislation/ilcs/documents/003001050K25.htm. 3 State Finance Act, 30 ILCS 105/25 (b-4) (2011), http://www.ilga.gov/ legislation/ilcs/documents/003001050K25.htm. 4 Daniel W. Hynes, The Section 25 Budget Loophole, Fiscal Focus (2008), http://www.ioc.state.il.us/index.cfm/linkservid/66C37090-BD33-446CB59D6E57CDE9088F. 5 Collin Hitt, Budget FAIL: Plan Awaiting Gov. Quinns Signature Grows Spending, Debt, Illinois Policy Institute (2011), http://illinoispolicy.org/news/ article.asp?ArticleSource=4219. 6 Julie Hamos, Explanation of Medicaid Program Budget Incorporating House Budget Cuts, Healthcare and Family Services (2011), http://www. civicfed.org/sites/default/files/HFS%20Statement.pdf. 7 Health and Human Services, Federal Financial Participation in State Assistance Expenditures; Federal Matching Shares for Medicaid, the Childrens Health Insurance Program, and Aid to Needy Aged, Blind, or Disabled Persons for October 1, 2011 through September 30, 2012, 75 Federal Register 69082 (2010), http://edocket.access.gpo.gov/2010/pdf/2010-28319.pdf. 8 Commission on Government Forecasting and Accountability, State of Illinois Budget Summary: Fiscal Year 2009 (2008), http://www.ilga.gov/commission/cgfa2006/Upload/FY2009budgetsummary.pdf. 9 National Health Policy Forum, The Basics: Medicaid Financing (2011), http://www.nhpf.org/library/the-basics/Basics_MedicaidFinancing_02-04-11. pdf. 10 National Association of State Budget Officers, State Expenditure Reports, (2000-2009), http://nasbo.org/Publications/StateExpenditureReport/ StateExpenditureReportArchives/tabid/107/Default.aspx. 11 Commission on Government Forecasting and Accountability, State of Illinois Budget Summary: Fiscal Year 2011 (2010), http://www.ilga.gov/commission/cgfa2006/Upload/FY2011budgetsummary.pdf. 12 Illinois Office of the Comptroller, Section 25 Deferred Liabilities (2011), http://www.ioc.state.il.us/index.cfm/linkservid/A0FD646B-1CC1DE6E-2F485BDED411AF81. 13 Commission on Government Forecasting and Accountability, State of Illinois Budget Summary: Fiscal Year 2012 (2011), http://www.ilga.gov/commission/cgfa2006/Upload/FY2012budgetsummary.pdf. 14 Authors calculations based upon COGFA 2012 Budget Summary and HFS estimates. Medicaid liabilities for the year are expected to be $1.6 billion above total appropriations for the program. In addition, $763 million of this years appropriations will go to pay off old bills instead of new liabilities. Together, the total backlog will be approximately $2.4 billion. With accrued interest, the actual backlog may be much higher. 15 HFS estimated the backlog to be $1.9 billion at the end of the fiscal year, prior to Gov. Quinns veto of $267 million and before a statutory fund transfer was blocked. It now estimates a $2.4 billion backlog. See: Department of Healthcare and Family Services, FY 12 Budget: Update on Final Medical Assistance Budget (2011), http://illinoispolicy.org/uploads/files/HFSBudget-12-Impacts.pdf. 16 Authors calculations based upon ten-year trends in Medicaid liabilities, disaggregated by component, as reported in COGFA 2012 Budget Summary. For a full breakdown of spending growth by component, see the Appendix. 17 Authors calculations based upon disaggregated ten-year trends in Medicaid liabilities, as reported in COGFA 2012 Budget Summary. 18 Illinois Public Act 096-1501 (2011), http://ilga.gov/legislation/publicacts/96/PDF/096-1501.pdf. 19 State Finance Act, 30 ILCS 105/25 (j) (2011), http://www.ilga.gov/ legislation/ilcs/documents/003001050K25.htm. 20 Authors calculations based upon annual growth trends in Medicaid liabilities and flat 2013 appropriations. The 2014 ceiling is $4.6 billion. If the appropriations remain flat in 2013, the backlog will reach $4.7 billion. In fiscal year 2014, the backlog would need to be reduced. In order to comply with the law, it would require at least $3.2 billion in additional appropriations. This does not include the increased liabilities from ObamaCares Medicaid expansion or accrued interest. 21 Timely Claims Payment, 42 C.F.R. 447.45(d)(2)-(3) (2011), http:// edocket.access.gpo.gov/cfr_2010/octqtr/pdf/42cfr447.45.pdf. 22 Illinois Auditor General, Single Audit Report for the Year Ended June 30, 2008 (2009), http://www.auditor.illinois.gov/Audit-Reports/PerformanceSpecial-Multi/Statewide-Single-Audit/FY08-Single-Full.pdf. 23 Illinois Auditor General, Single Audit Report for the Year Ended June 30, 2009 (2010), http://www.auditor.illinois.gov/Audit-Reports/PerformanceSpecial-Multi/Statewide-Single-Audit/FY09-Single-Audit-Full.pdf. 24 Illinois Auditor General, Single Audit Report for the Year Ended June 30, 2009 (2010), http://www.auditor.illinois.gov/Audit-Reports/PerformanceSpecial-Multi/Statewide-Single-Audit/FY09-Single-Audit-Full.pdf. 25 Illinois Auditor General, Single Audit Report for the Year Ended June 30, 2010 (2011), http://www.auditor.illinois.gov/Audit-Reports/PerformanceSpecial-Multi/Statewide-Single-Audit/FY10-Single-Audit-Full.pdf. 26 State Prompt Payment Act, 30 ILCS 540/3-2 (2011), http://www.ilga. gov/legislation/ilcs/documents/003005400K3-2.htm. 27 Authors calculations based upon a 162 day payment cycle and 2 percent interest per month after the first 60 days. 28 Authors calculations based upon a 7 percent interest rate on $10.9 billion in bills. The actual interest accrued may be lower than this amount, as HFS will expedite some payments to doctors and hospitals. See, e.g., Julie Hamos, Medical Assistance Budget Management Policies, Healthcare and Family Services (2011), http://www2.illinois.gov/hfs/agency/Documents/BudgetManagementPolicies.pdf. 29 HFS also estimates that it would need approximately $700 million more than the 2012 backlog in appropriations to maintain a similar backlog in 2013. Because the 2012 fiscal year will end with approximately $1.6 billion more overdue bills than 2011, and liabilities will increase by $731 billion, a significant portion of the remaining $700 million HFS estimates it will need must be from unpaid interest. See: Department of Healthcare and Family Services, FY 12 Budget: Update on Final Medical Assistance Budget (2011), http://illinoispolicy.org/uploads/files/HFS-Budget-12-Impacts.pdf. 30 Department of Healthcare and Family Services, FY 12 Budget: Update on Final Medical Assistance Budget (2011), http://illinoispolicy.org/uploads/ files/HFS-Budget-12-Impacts.pdf