Breaking down budgets: COVID-19, Medicaid shortfalls and economic uncertainty

Over the last several years, COVID-19 and its economic aftershocks have broken budgets one way or another as states scrambled to stabilize during fiscal upheaval. Indiana missed the target in 2020 after it delayed tax collections only to be inundated with federal assistance in the following years, ending back-to-back periods with billions of dollars in its reserves.

But most recently, the Family and Social Services Administration (FSSA) announced a "variance" in its Medicaid budget of nearly $1 billion in December, a departure from a rosy April forecast.

Mid-year gaps aren't unusual by themselves, observed Josh Goodman, a senior officer and researcher with Pew Charitable Trusts' State Fiscal Health project. State revenues are more sensitive following a recession, when economic activity plummets, while expenses might increase with more people utilizing government programs — potentially triggering some mid-year gaps.

"It's happening somewhere almost every year or in a few places almost every year," Goodman said. "That's because of things like … some particular program or some particular part of a program where costs are higher than expected, especially for an entitlement program."

States can't perfectly predict enrollment in Medicaid, one of those entitlement programs where anyone who qualifies must receive services.

Goodman said his organization's research indicated the importance of preparing for possible budget deficits and exploring whether to use tax increases, rely on reserves or cut services ahead of time.

"Unless they have a plan, (states) rely on a few options which aren't always the best options and so planning ahead can be really important," Goodman said.

How did we get here?

During the COVID-19 pandemic, hundreds of billions of dollars transferred from the federal government to state coffers to support pandemic health programs and shore up finances in a time of economic uncertainty.

This aid, combined with an unexpectedly hot economy, boosted Indiana's finances and allowed state leaders to pay down debt, triggered two rounds of taxpayer refunds and gave the budget writers the flexibility to pay for billions of dollars of capital projects with cash.

But funds are drying up and states must transition away from those dollars.

One of the largest forms of federal spending came in the form of Medicaid. In exchange for not booting residents off of their Medicaid rolls, the federal government increased its share and covered 71.2% of Indiana's expenses, rather than the traditional 65%.

This meant that even as Indiana's enrollment swelled the state actually saved money on the program.

But that boost in funding is slowly returning to normal levels and states can again remove beneficiaries who no longer qualify, meaning Indiana will again have to pick up the tab. The state anticipates that Medicaid enrollment will remain elevated even once it finishes reviewing 2.3 million enrollees and won't return to the pre-pandemic 1.5 million beneficiaries.

These changes, after years of booming state revenues, present a challenge to those crafting the state's two-year budget. West Virginia reported its own $114 million Medicaid deficit partially came from these factors combined with rising drug costs and court orders to expand benefits and payments. Florida, similarly, said the "unwinding" process in Medicaid contributed to its own shortfall of a couple hundred million.

But in an email to the Capital Chronicle, FSSA said the above challenges had nothing to do with the $1 billion "variance."

"The forecast variance is unrelated to the end of the enhanced federal Medicaid dollars. The state has planned well and properly accounted for the expected end of the enhanced federal dollars," said FSSA.

The agency has revealed little about how the mistake occurred, saying lagging data used in the April forecast contributed as well as higher-than-expected enrollment in Medicaid programs. Specifically, they point to one program paying Legally Responsible Individuals — often parents — as attendants for medically complex children.

State leaders have decided to use a combination of reserves and surplus money to cover the initial deficit. And they are looking at program cuts of roughly $300 million — which includes the attendant care program along with pausing a 2% Medicaid indexing among other changes — to limit future growth.

Goodman said he was surprised at how suddenly the deficit was revealed, noting that other states were more public about expense reports and not just revenue reports — the latter of which Indiana releases monthly.

"(In) Connecticut, as an example of this … there's a report that comes out every month that says — not just for Medicaid but generally for the budget — 'here's what we expected for spending. Here's what we expected for revenue,'" Goodman said. "'Therefore, the budget we adopted is on course to have a surplus or on course to have a deficit.' There's this careful and publicly available monitoring of whether there's a shortfall or not and that can help us if a problem starts to emerge."

Such a maneuver may have signaled to the public earlier about emerging issues in the Medicaid budget. Costs for attendant care doubled from $60 million over the summer to $120 million by December and were a key driver behind the $1 billion gap.

But requiring reporting of such warning signs has — so far — been dismissed in the House by the Republican supermajority.

Republican leadership killed an agency bill rather than discuss amendments targeted at FSSA and Medicaid. Last week another Democratic amendment on auditing the agency died on a party-line vote. Previous amendments would have required quarterly FSSA reports to the State Budget Committee.

"The Holcomb administration made a $1 billion mistake in estimating the cost of Medicaid," Rep. Ed DeLaney, D-Indianapolis, said about the death of his latest authored amendment. "We owe it to the taxpayers to make this administration explain how on earth a mistake of this magnitude occurred in the first place. Getting to the bottom of this is the only way to prevent citizens from being punished in the future for government blunders."

Why does it matter?

To trim costs, FSSA has decided to cut families out of the attendant care program and transition them to structured family caregiving, which means that parents previously getting livable wages up to $15 per hour will now get a smaller per diem.

In response, families have repeatedly rallied at the Indiana Statehouse and participated in numerous press conferences, lambasting the agency for a change they say would plunge many of them into poverty.

FSSA has declined to share how many families are impacted by the change with the media, House Representatives and even Lt. Gov. Suzanne Crouch, who has called for an agency audit.

Republicans, from Gov. Eric Holcomb to caucus leaders, have pointed to increasing Medicaid costs as a cause for concern in the state budget. On Wednesday, Holcomb emphasized the need to keep Medicaid, the fastest-growing part of the budget, sustainable and affordable.

State spending on Medicaid is expected to increase 17.2% nationwide following the expiration of federal support, according to health policy group KFF.

Combined with other budget factors, Medicaid is expected to become an even larger part of the debate over state budgets.

"There is room to work with each and every one of the families (impacted) as we go forward … we want to make sure that they're receiving services," Holcomb said. "… We have to make sure that we can provide those services. How we do it is the absolute key and the FSSA will continue to work directly with each and every family."

As health care costs increase across the board, Goodman said states saw the same bumps for Medicaid enrollees and incarcerated residents as well as under their own insurance policies for state employees.

"I think part of the big question going forward is what the future of … these rapid increases in Medicaid costs and Medicaid becomes a larger and larger and larger share of state budgets," Goodman said. "… I think a great question, if the state's having problems with Medicaid problems or anything else, what is the long-term picture?"

He continued, "Is this something (that's) one time, a sort of idiosyncratic situation and a particular part of the Medicaid program? Or do we have a long-term imbalance here that would sort of require more structured solutions to our budget?"

Goodman noted that managed care programs in Medicaid tend to have more stable and predictable budgets, as opposed to fee for service. Under managed care, the government pays a lump sum upfront to managed care entities to cover enrollees and manage their services. Under fee for service, the government pays afterward.

Indiana is transitioning to managed care for long-term care and services for aged and disabled Hoosiers and is set to go live this summer. All of Indiana's other Medicaid programs have already transitioned.