Growth of Medicaid expenditures 2002-2012
Growth of Medicaid expenditures 2002-2012

As Senate budget writers put the final touches on their spending plan for the upcoming biennium, the state Medicaid program announces a shortfall.

By Rose Hoban

Medicaid will have a bigger shortfall this year than predicted, state health officials announced Thursday morning.

In a press release, Department of Health and Human Services spokesman Ricky Diaz said the problem is a result of Medicaid forecasting during the administration of Gov. Bev Perdue that “overestimated the amount of federal receipts to North Carolina due to an error in the forecasting model.”

Growth of Medicaid expenditures 2002-2012
Growth of Medicaid expenditures 2002-2012

Already, the Medicaid program has been running into cost overages. In March, Medicaid head Carol Steckel told legislators that the program would be between $70 million and $130 million over budget. Along with the forecasted overage announced today, the total overrun will come to at least $248 million by the end of the fiscal year, in June.

Medicaid spends about $13 billion in state and federal funds annually to care for about 1.8 million low-income children and their parents, pregnant women, the disabled and the elderly. State expenditures will be around $3.1 billion this year.

It’s … complicated

Funding for Medicaid is complex, with many streams of money flowing into the program for many different uses. The federal Centers for Medicare and Medicaid Services pays, on average, 64 percent of medical and treatment costs, while the state covers 36 percent. The federal government pays at least 50 percent of administrative costs.

Because Medicaid is an entitlement program, the state and federal governments don’t pay a set fee at the beginning of the fiscal year. Instead, they have to pay for all the treatment that gets delivered, so budgeting each year is the result of a sophisticated set of projections.

Senate Health and Human Services committee co-chair Ralph Hise (R-Spruce Pine) said budget planners have been seeing this coming for a while.

“Even before the change of administrations, we saw numbers that indicated a path that was a problem,” Hise said. “We asked about it in committee.”

By February, he said, the governor had said it was a $70 million to $130 million gap, and since then the progression upward has been steady.

Hise said a variety of factors are playing into the overruns. He said new mental health managed care organizations were projected to save millions, but several of the MCOs got started late, delaying projected savings. He said the flu season was worse than expected, and prescription drugs – even generics – have been more expensive than forecast.

“I’ve also had indication that we had an overestimate of federal matching dollars,” he said.

Hise also criticized the Department of Health and Human Services for their longstanding habit of rolling expenses for June into the following fiscal year. That practice has carried forward debts and contributed to overruns in the past, and was criticized in a report by the state auditor in January.

He also critiqued the way the state has budgeted for Medicaid overall.

“We do a forecast that has no variability in it. It’s a static forecast, ‘This is what your enrollment will be; this is what your mix will be.’ No insurance company would ever do that,” he said, explaining that insurance companies tend to overestimate expenses so that they’ll meet their monetary demands.

Insurers also budget for reserve funds to help smooth out the ups and downs of claims payments and higher-than-expected demand.

“Historically, we have come up with one number and we think that we can justify it by having a lot of people agree to it,” Hise said.

Fluctuations in Medicaid expenditures from year to year are why Gov. Pat McCrory allowed for a $90 million Medicaid reserve fund in his budget. The proposal is part of McCrory’s plan to overhaul Medicaid that’s still looking for a green light from legislators.

But Thursday’s announcement far exceeds the requested reserve amount. Repeated requests to DHHS for comment about the overrun were not returned by late Thursday afternoon.

“We’ve never fixed the Medicaid problem,” said Hise “Every time you want to take a motion in education or job creation, a Medicaid hole opens up.”

Slow progress

“Medicaid funding is an entitlement,” Hise said. “We have to make a budget; we can’t control enrollment, we can’t control utilization, so the only firewall we have is to do good forecasting.

“As a matter of fact, the $100 million to $150 million that [we were off] in the last few years are historically good numbers.”

Since Steckel has come into her position, financial planners from Medicaid have been meeting weekly with planners from the Office of State Budget and Management and the legislative Division of Fiscal Research.

Officials from the Office of State Budget and Management will be working with the legislature to fill the shortfall, according to a statement released Thursday morning. The statement also said the OSBM would revise upwards the budgetary needs for Medicaid by about $446 million over the next two years. That money, and money to cover the shortfall, will come from any additional tax revenue generated by a slowly improving economy.

According to the legislative Fiscal Research Division, tax revenues have been up over the first three quarters of the fiscal year. Budget writers are still waiting for results of the annual income tax collections in April, but those are also expected to be better than the past few years.

Steve Owen, who was the primary Medicaid financial advisor during several administrations, recently moved over to the legislature to work in the Fiscal Research Division.

Department of Health and Human Services Sec. Aldona Wos has brought in former State Auditor Les Merritt to assist in financial issues in the department.

“We have been taking a close look at previous Medicaid forecasting practices in order to create a more transparent and accurate process going forward,” Wos said in a departmental statement.

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Rose Hoban is the founder and editor of NC Health News, as well as being the state government reporter. Hoban has been a registered nurse since 1992, but transitioned to journalism after earning degrees...