Gov. Pat Quinn said in his February address to the General Assembly that the budgeting process this year would be a rendezvous with reality. In the coming weeks, Illinoisans will see if lawmakers plan to keep that date or take a rain check.
One of the largest goals Quinn set for legislators is the task of curbing growth in the state’s Medicaid budget by $2.7 billion for next fiscal year. Restrictions set by the Affordable Care Act and concerns over unintended consequences make the number an ambitious target, and one that no other state has met in a single year.
Arizona cut just $500 million from its Fiscal Year 2012 budget, but the reductions led to a court battle that wasn’t resolved until February, when hospitals in the state chose not to appeal a ruling. However, they are asking that some of the 5 percent rate cut they took under the savings plan be restored. Such a rate increase would cost that state about $60 million. Gov. Jan Brewer’s current budget already calls for returning 3 percent of the money cut from nonhospital providers.
While the federal government signed off on many of Arizona’s cuts, other ideas, such as a fee for smokers and an enrollment cap, were nixed.
Federal officials said such purely cost-saving changes to state Medicaid programs are not allowed under the Affordable Care Act. “It’s not sufficient justification to depart from federal law because there are cost pressures on the state,” Cindy Mann, a federal Medicaid administrator, told the Arizona Republic. The rejected changes would have produced an estimated $52 million in savings.
Wisconsin was able to cut about 10 percent out of its Medicaid budget in 2010 after a focused six-month effort that resulted in major reforms to the state’s system and about $635 million in savings. According to Stateline.org, legislators and policy experts weighed 500 ideas before settling on the cuts and changes that were approved.
States are having trouble cutting Medicaid costs because the Affordable Care Act greatly restricts the changes they can make before 2014. At that time, online health insurance exchanges are scheduled to be up and running, and states may be able to trim their Medicaid rolls by pushing some patients into the marketplace. The federal government will offer subsidies to help many who cannot afford insurance on their own cover the costs. Of course, if the U.S. Supreme Court tosses out some or all of the federal health care reform law, states may suddenly find themselves operating under a new set of rules.
“All the restrictions under current law have to be met,” Joy Johnson Wilson, health policy director for the National Conference of State Legislatures, told the Illinois Senate.
“That’s why it is so difficult to get large savings in a current year. Most states have to get savings over a span of years. Your challenge is, you don’t have that time. You really need to get substantial savings in the current year. That’s very hard to do.” Wilson pointed out that the federal law leaves only a few areas to look at for substantial savings. Lawmakers can reduce the rates paid to health care providers, limit how often patients can access some services, go after fraud and reduce services that are not required by the federal government.
Quinn says everything is on the table, and all groups should have to make sacrifices. The final plan could include cuts to rates paid to providers, reductions in services that are not required by the federal government and limits on how often Medicaid patients use some services.
“Optional programs in Medicaid are not like options on a car,” Wilson says. Options on a vehicle, she says, are often considered luxury items, such as seat warmers or nice stereos, but they are not essential to making the car run. Wilson says many so-called optional Medicaid offerings, such as prescription drug coverage, are essential to the success of the program. She cautioned lawmakers to look at the “downstream financial, legal and political impacts” of cuts and reductions to services.
Wilson says states that moved to HMO-style managed care programs in the past saw savings of up to 20 percent. But she says that has not been the case in recent years. “I think that you’re not going to get those big savings up front. In fact, it may actually cost something to expand Medicaid [managed care] to get savings later on because you have to make sure that your [health care provider] networks are adequate and that you do all the education outreach activities that are necessary to get people in the system and teach them how to utilize managed care.” She also said that managed care programs in the state’s rural areas would face challenges, but as the trend grows, more providers have become familiar with managed care.
No matter how difficult the task, Quinn and others argue that cuts must be made to save the state’s Medicaid system from collapse. Some providers are waiting six months for payment, and almost $2 billion in Medicaid bills from the current fiscal year are going to be pushed into the next. The Civic Federation estimates that if Illinois does nothing, it could have a stack of $21 billion in unpaid Medicaid bills by the end of FY 2017.
In his budget address, Quinn threatened to keep lawmakers in a summer special session if they cannot produce the savings he asked for. Whatever options lawmakers choose to reduce the Medicaid liability, they will likely be unpopular. If the legislature passes a savings package and Quinn signs it into law, it will probably not be the end of the story. Federal officials may have to approve aspects of the plan. Some cuts could also open the state up to lawsuits or put it in danger of violating legal agreements, known as consent decrees.
If cutting about 15 percent out of Illinois’ Medicaid budget wasn’t enough, Quinn has also called on lawmakers to reform the state’s pension system for public employees.
The state faces a more than $80 billion unfunded pension liability, and the cost of the required payment is estimated at $5.1 billion for the current fiscal year, or about $1 billion more than last year.
It seems that Quinn and Democratic legislative leaders agree that some of the cost of the pension system could be shifted to school districts and universities. They point to the fact that the city of Chicago covers most of its cost for teachers’ pensions, while the state pays for a large chunk of the retirement costs of teachers outside the city.
“It’s been clearer and clearer to people that some employers are not directly responsible for the cost of paying retiree benefits,” said Jerry Stermer, who heads working groups to address both Medicaid cuts and pension changes. Quinn recently tapped Stermer to take over as his budget director.
But Republican leaders say that cost shifting alone will not solve the problem. Downstate Republicans also say they are worried that increasing cost to local districts, which have seen cuts in state dollars elsewhere in their budgets, would lead to teacher layoffs and increased property taxes.
Other changes to the pension system, such as requiring employees to pay more for current benefits, reducing benefits or cutting cost-of-living increases for retired employees are hotly contested because many believe that they violate the state’s Constitution. If a pension reform bill passes, expect a court challenge. Quinn has called for pension changes by the end of the year, so lawmakers will likely be hesitant to vote on the issue before the November elections.
In addition to considering those two lightning rod issues, lawmakers are also on track to pass a frugal state budget.
The House approved House Resolution 706, which calls for paying pension costs, retiree health care expenses, debt service on borrowing, Medicaid costs and some of the state’s overdue bills up front. Of the $800 million set aside for bills, $500 million would go toward Medicaid. That would trigger federal matching funds, so the state could pay off a total of $1.3 billion in outstanding bills. The downside in the view of some is that there would be cuts to virtually every area of state spending under the plan. Spending on operations would be reduced by about $900 million from the current fiscal year. And if lawmakers cannot reach Quinn’s goal for Medicaid reductions, the costs would come from other spending areas, such as education, public safety and human services.
Rep. John Bradley said as he presented the resolution on the House floor in March: “This is going to be the beginning of many difficult choices that we’re going to have to make. We should not take this lightly. We should not take this cavalierly. The decisions beginning today are going to be hard.”
Now that May has rolled around, those hard decisions are becoming more real. Will lawmakers be able to do the nearly impossible by cutting billions from the state’s Medicaid liability? If not, will Quinn keep them in overtime session when many are likely eager to get to the business of campaigning for the November election? Will they pass a budget that addresses a portion of the backlog but cuts almost all areas of government? Will they touch the third rail of pension reform? Will a revived gaming expansion package be able to find momentum among so many big issues? Will downstate Democrats take another shot at legalizing concealed carry of firearms? For the answers to those and more questions, stay tuned this month to the Illinois General Assembly through the Illinois Issues’ blog.
Illinois Issues, May 2012
