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Medicaid and State Budgets in FY 2004: Why Medicaid is So Hard to Cut

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To assess the treatment of Medicaid in state budgets, researchers examined fiscal year 2004 budgets for 10 states: Arizona, Colorado, Kansas, Michigan, New Jersey, Ohio, Oregon, Texas, West Virginia and Wisconsin. They reported eight major findings. The states' financial conditions were weak in FY 2004, with seven states reporting gaps between revenues and expenditures greater than 10 percent. Revenue decline resulting from a slow economy and the stock market drop, rather than increased spending, was the major cause of state financial problems. States used a combination of revenue increases and expenditure cuts to balance budgets. Most states included some reduction in Medicaid expenditures in their budget balancing, but these cuts tended to be modest in comparison to budget gaps and total Medicaid expenditures. Additional Medicaid funding enacted by Congress generally did not affect decisions about Medicaid cuts; most states did not use the extra funds to prevent Medicaid reductions but for general budget support. States made more significant cuts to other state functions, especially public higher education, than to Medicaid. The strongest factors in decisions to cut Medicaid expenditures were the views of elected officials, with four governors explicitly protecting Medicaid from significant cuts.

States find it difficult to cut Medicaid due to:

* The availability of Medicaid funds to support social service programs otherwise needing state funds.
* Techniques that increase Medicaid funding without increased state spending.
* Hospital and nursing home constituencies opposed to Medicaid reductions that are significant employers and purchasers in legislative districts.