As Ariz. Seeks Smaller Medicaid Rolls, Cash-Strapped States Look to Mimic

BY Betty Ann Bowser  February 17, 2011 at 6:13 PM EST

This week, Health and Human Services Secretary Kathleen Sebelius said that Arizona could drop 250,000 childless adults from the state’s Medicaid program. The decision is being watched closely in statehouses all over the country, where governors facing massive budget deficits are trying to find ways to cut costs. State funded programs from education to Medicaid are on the chopping block.

Betty Ann Bowser Thirty-three Republican governors and governors-elect recently signed a letter to the Obama administration complaining that the health care reform law‘s Medicaid provisions are unfair and impose crushing costs on them at a time when they’re desperately trying to deal with revenue shortfalls.

Over the past several years, recession-strapped states have seen their Medicaid rolls expand. Federal stimulus money has helped states shoulder the cost of increasing Medicaid populations during the long recession, but that money runs out at the end of June. Meanwhile, under the health care reform law, states are not allowed to tighten Medicaid eligibility requirements to cut people from the program.

So beginning in July, the states will face responsibility for bigger Medicaid case loads with less money coming from Washington.

The states are demanding financial relief from Washington, and that’s where Arizona enters the picture.

Arizona has the second-highest foreclosure rate in the country, some of the highest unemployment and a fast-growing Medicaid population fueled by people who have lost their jobs and then their health insurance. Because of the long recession and a dramatic one-third drop in revenues, the state’s budget has a giant hole that can only be filled by cutting programs across the board.

And like most states, Arizona is legally required to balance its budget.

Because Arizona is one of only a handful of states that provide Medicaid coverage to childless adults, Gov. Jan Brewer wrote to Secretary Sebelius to ask her to grant the state a waiver from the Medicaid requirement in the health reform law. Dropping more than a quarter-million adults, plus another 50,000 families that make more than about 50 percent of the poverty level, the governor argued, would bring the state $541 million it could use to cover part of its budget deficit.

Governors in 48 states facing huge budget deficits have been closely watching this situation and wondering — if Arizona got a waiver, might their states also be able to do the same?

Then, in a surprise move this week, Sebelius told Arizona that the state doesn’t need her permission to cut childless adults from Medicaid at all. She told officials they could eliminate at least 250,000 people from the program later this year when a different waiver that Arizona’s Medicaid program has been operating under expires.

Federal law does not require states to cover childless adults through Medicaid. In 2000, Arizona chose to expand its coverage to childless adults, an expansion made possible by a federal waiver that funded the expansion as a “demonstration program.” Sebelius said that because that waiver expires on Sept. 30, Arizona is free to drop most of the people in that category at that time.

“Arizona may choose to terminate its current demonstration,” and “either not pursue a new demonstration or pursue a different demonstration,” Sebelius said. She added that “any reduction in eligibility associated with the expiration” would not be considered a violation of the health care reform law’s provision regarding Medicaid eligibility.

Arizona Medicaid spokeswoman Monica Coury said “[Sebelius's] promptness will allow the state to begin reviewing its options and determine the right approach for Arizona.”

The bottom line is that Arizona’s situation is unique and unusual.

Most of the buzz about this decision in the health policy community from both the left and the right has gone something like this: Secretary Sebelius is trying to appear sympathetic to the states’ plight and not present the federal government as “rigid” or “inflexible.”

Edmund Haislmaier of the conservative-leaning Heritage Foundation said “Secretary Sebelius has carefully avoided the core issue,” meaning that she did not rule on the issue of granting waivers to states to circumvent the Medicaid provision in the health reform law. And, Haislmaier said, she “did not give one inch” on the issue of allowing states to ignore the Medicaid eligibility provision of the law. “This is a dodging exercise,” he said. “They’re trying to have it both ways.”

Meanwhile, Ron Pollack, of the health care advocacy group Families USA, which supports the health reform law, said that the decision would be a “huge tragedy” for the people of Arizona who could lose their Medicaid coverage. However, he said, he does not think the decision will have much impact on Medicaid coverage in other states because “the Arizona situation is unusual.” Pollack said eligibility standards in most states were not established by waivers in the first place, and so this decision would not apply to them.

Len Nichols, Director of the Center for Health Policy Research and Ethics at George Mason University in Fairfax, Virginia, thinks the answer to the problem for states is “for Congress to come to it senses and extend Medicaid money in the stimulus bill” until 2014 when the full weight of the new health care kicks in.

But, Nichols says, the atmosphere in Washington right now around the budget deficit makes that almost impossible — so, he says, “We’re stuck.”

In the meantime, states can look toward some federal help in 2014, when most of the provisions in the health reform law take effect. At that time,16 million more Americans (everyone who earns below 133 percent of the federal poverty level) will qualify for Medicaid — including childless adults. But the new enrollees won’t cost the states money; instead, the federal government will pick up the tab for the expansion this for several years.

On Thursday’s NewsHour, we’ll have more perspectives from Arizona, and coverage of the Medicaid budget crunch that states are facing around the country.