Unless it gets cold feet or weasels out of its promise to localities, New York has fundamentally changed both the financing structure of its Medicaid program and its budgetary and program dynamics. It's not obvious yet, but as this change takes effect, it will become increasingly important and evident. This change, a cap on the local share of Medicaid costs will:
- Provide financial relief to counties and New York City. That part is obvious.
- Change State budget dynamics by requiring that the State itself be financially responsible for an increasingly larger share of cost growth.
- Move toward aligning policy, financial, and operational responsibility for the nation's largest Medicaid program.
The cap works like this. This calendar year, 2005, will be used as a base year for Medicaid spending. In 2006, the local share will be the base year (2005) plus an increment of 3.5 percent. In 2007, the local share will increase by an additional increment of 3.25 percent for a total of the base plus 6.75 percent. In 2008, the local share will increase by an additional increment of 3.0 percent for a total of the base plus 9.75 percent or, if the locality chooses, a fixed percentage of local sales tax revenues based. Each year thereafter, the increment will be 3.0 percent. (See the attached table.) The subtlety here is that the local share increases are not compounded.
In 2008, the State will fold the local share into the State budget process and localities will simply make a payment to the State based on the formula. Localities will be engaged in a form of "reverse revenue sharing," whose only relationship to Medicaid spending will be historical.
There are also some insurance provisions for localities. If the Federal share is increased, localities will share in the savings as well as the State. In the unlikely event that Medicaid expenditures fall and the local share under today's rules would have been less than under the cap, localities will reimbursed for the difference.
While basing a financial formula on data which can still be manipulated is risky, the fundamental nature of the change is unmistakable. The local share will be fixed regardless of how quickly Medicaid costs increase.
Since its inception, New York has required its "local social services districts," counties and New York City to share in the program costs of Medicaid. Only North Carolina has had a similar financing structure and now having seen the change in New York, there's talk of change there too. For most services, the local districts pay half of the non-Federal share of the costs. There are exceptions, especially for the costs of long term care, so local governments now pay over $7 billion per year toward the costs of Medicaid while having very little influence on the program's cost.
For State policy makers this financing arrangement has meant that it was easier to spend and politically harder to restrain program cost growth. After all, when taking the Federal and local shares into account, the State budget only had to come up with about a third of the actual costs.
But now this will change. Let's start with next year.
Assume base year local expenses of just over $7.2 billion, about 20 percent of the total. Also assume an overall growth rate of 6.62 percent. It's a relatively modest rate, but it's the same as the overall growth rate from 2003 to 2004. On a calendar year basis, the State will be responsible for over $225 million in 2006 that it otherwise would have left in the laps of local officials. If growth continues at that 6.62 percent, the State assumes responsibility for an additional:
- $500 million in 2007
- $828 million in 2008
- $1.2 billion in 2009
- $1.6 billion in 2010
If the growth rate is eight percent, the State picks up responsibility for an additional:
- $330 million in 2006
- $725 million in 2007
- $1.2 billion in 2008
- $1.7 billion in 2009
- $2.3 billion in 2010
Those figures are on top of the increase what would have been the State's share under the old system. This is a prescription for increasing financial pressure.
Now it's possible that Medicaid cost growth will slow naturally in the next few years. I'll return to that in another post. But clearly the State will be hard pressed to allow rapid growth.
And even more clearly, in New York the cost to the State of Medicaid growth has just gotten much more expensive.