Highlights from NASBO’s Fiscal Survey of the States

As state budget season comes to a close, states have their financial blueprint and priority list for the next year or two. This provides those of us who work in health care a sight line to where and how Medicaid fits into a state’s big picture. It is also when we can evaluate the overall current health of a state’s finances, the priorities of state policymakers both inside and outside of health care, and the pressures states are facing as they work to balance their finances.

The National Association of State Budget Officers (NASBO) uses data gathered from state budget offices to release a report that provides an analysis of the fiscal conditions of all 50 states. In their spring edition, proposed budgets for fiscal year (FY) 2020 were reviewed. For budget wonks and former Medicaid Directors like me, they revealed some telling things about the state of the economy. Contained in the report was a specific chapter on Medicaid while all other major components of state budgets (i.e. K-12 education, transportation, etc.) were rolled into one chapter and reviewed together. This structure and the content of the report itself helped paint a picture of the impact Medicaid spending continues to have on the fiscal condition of states.

The spring report reflects stable fiscal conditions with 47 states proposing moderate spending increases and revenue growth. States estimate that their general fund spending grew by 5.8 percent in FY 2019, which is the fastest annual growth rate since 2007. No state made mid-year budget cuts last fiscal year and the majority of states report general fund revenue collections exceeded projections. However, while fiscal conditions are positive and have stabilized in the years after the recession, states continue to face long-term budget challenges from areas such as health care, where costs are expected to grow faster than revenue.

In addition to outlining revenue and spending changes at the state level, the report provides detailed analysis of each state’s financial condition by looking at their “rainy day” fund accounts. If/when tax collections drop below estimates, states can use these account balances to fill the gap between the money coming in and the money going out.

While not a permanent solution to a budget shortfall, rainy day funds and other balance accounts provide policymakers additional time to better understand the core drivers of the gap and make policy adjustments that can be implemented over a longer period of time.

Specific to Medicaid, these funds can serve as a source for states to manage those system costs instead of resorting to cuts through benefit changes, eligibility restrictions, or provider rate cuts. 

What was highlighted in the Medicaid chapter of the report was that last year the Medicaid spending rate slowed. This slow down aligns with a reported decrease in overall U.S. health care expenditures. However, Medicaid spending is following a long-term upward trajectory—Medicaid spending year-over-year continues to increase, topping out at over $600 billion in 2018.1 The decrease last year in overall Medicaid spending is partly attributed to a strengthening economy (including a steadily declining unemployment rate), which slowed the growth in the number of people covered by Medicaid that in turn mitigated spending growth.

State budgets project that Medicaid spending will grow 4 percent in FY 2020, with state funds increasing by 3.1 percent and federal funds growing by 4.5 percent. As with the national trend, state Medicaid spending growth is expected to slow slightly next fiscal year given the strong economy and low unemployment. Even with that, it is estimated that states will spend more than $640 billion (all funds) on Medicaid in FY 2020. That makes Medicaid the single largest portion of total state expenditures.

Even with growth in Medicaid spending, the stable fiscal conditions overall enabled many states to increase provider payments, expand Medicaid benefits, and restore benefits that were limited or eliminated in the past, including enhanced access to behavioral health services. At the same time, states are taking actions to contain costs through heightened program integrity efforts, eligibility changes, delivery system reforms, policy changes related to covered benefits, and expansion of managed care.

Following are my key takeaways from the NASBO report:

  1. 1The cycle of economic stability and Medicaid’s impact on state budgets (i.e. Medicaid enrollment goes up when revenue goes down) means that Medicaid and overall state budget health are closely aligned. Therefore, we must look beyond the Medicaid and health care numbers and monitor the whole state budget picture.
  2. While Medicaid is stable, Medicaid directors and their teams continue to deploy, manage, and monitor concepts that will meet budget expectations while helping to improve the health and well-being of their Medicaid populations. This report shows the diversity of ideas and approaches in managing Medicaid. While some states are looking at changes in eligibility, others are looking to expand services and spending.
  3. While this report shows relative stability in state budgets, the growth of Medicaid continues to be the top budget management priority for governors and state legislators. Decisions made this budget cycle will have impacts on future budgets (and future policymakers and Medicaid populations), especially as national and state political environments remain fluid.
  4. The report highlights the critical role rainy day funds and budget stabilization accounts play in helping legislators and governors mitigate reductions in state revenue caused by slowing economic conditions.
  5. Evaluation of a state’s overall financial health is even more important as states look to incorporate social and other non-health care services and initiatives into improving health and stabilizing Medicaid expenditures. And with social interventions requiring a long-term “runway” to determine impact, immediate budget cycle pressures and changes in social services budgets today can have a long-term impact on the health care reform goals of tomorrow.

The bottom line is that we should all be focused on how to get the most value for the money being spent across state budgets, while working specifically to reduce the pace at which Medicaid spending is rising. It is our duty to ensure that this important public medical assistance program continues into the future.

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