Budget Cuts Continue to Threaten State Medicaid Programs

August 1, 2004
Volume 21, Issue 8

With states set to lose their one-time fiscal relief in June, mental health care services are bound to be hard-hit, particularly for Medicare. What services are the most likely to be cut and how will this affect Medicare beneficiaries?

Since 2001, states have faced their worst fiscal crisis in more than 50 years. And even now, as the U.S. economy shows signs of improving, state revenues continue to lag, leaving officials and lawmakers grappling with ongoing budget deficits and an unsettled financial outlook. After three years, states have exhausted their options for one-time budget fixes, leaving deeper budget cuts as an only option. Controlling Medicaid growth is at the top of the list, and mental health care funding is especially vulnerable.

Efforts to cuts costs are expected to intensify as $20 billion in one-time federal fiscal relief for Medicaid and other health care programs expired on June 30--the end of the 2004 fiscal year in most states. A survey conducted by the Kaiser Commission on Medicaid and the Uninsured has found that few states will have the financial means to make up budget gaps and aggressive cost-cutting measures are expected in fiscal year 2005.

According to the National Association of State Budget Officers, Medicaid cost-containment strategies affecting mental health care services so far include limiting access to prescription medicines through preferred drug lists; prior authorization; limits on the number of prescriptions per month that a Medicaid recipient can have; and forcing patients to use older, less expensive drugs before receiving newer ones.

States also have eliminated optional services such as psychological counseling and psychosocial rehabilitation, cut eligibility for people with incomes above the federal poverty level, established or increased co-payments, and restricted the use of case management services. Such measures have resulted in significant staff and service cuts that limit access to treatment.

"The integrity of mental health treatment in general is being denigrated here," Irvin (Sam) Muszynski, J.D., director of health care systems and financing at the American Psychiatric Association, told Psychiatric Times.

Public mental health systems have become increasingly dependent on Medicaid, and more than 60% of all public mental health care dollars now come from the Medicaid program. By contrast, in the 1980s, the majority of funding came directly through state mental health care agencies.

Systems are quickly reaching a crisis point, with an ever-widening gap between service need and the capacity to meet that need, Muszynski said. Services will become more inaccessible, case management won't be available, and the presence of people with serious mental illnesses in jails and prisons, which have become the nation's new primary mental health care system, will continue to grow.

"The systems are going to pay for this one way or another. The problem is not going to vanish because we don't treat it," he said. "In both the short and the long run, it is more efficient to treat."

According to the Kaiser report, which was issued in January, 49 states and the District of Columbia implemented or planned to implement Medicaid cost-cutting measures in fiscal year 2004 (Figure). In a statement to the press announcing the release of the report, Vernon Smith, the report's co-author and principal of Health Management Associates, said, "We know that 2003 and 2004 were two of the worst years financially for state Medicaid programs since its inception nearly forty years ago, and 2005 could be just as bad from the states' perspective."

The Kaiser report found that during fiscal year 2004:

  • 43 states had taken actions to limit prescription drug costs.
  • 17 states had made plans to limit benefits.
  • 18 states were restricting eligibility.
  • 21 states planned to initiate or increase beneficiary co-payments, including co-payments for prescription drugs.

So far, at least 32 states have implemented preferred drug lists. The APA's Committee on Managed Care has expressed concern that pharmacy benefit management (PBM) is fast becoming a new form of managed care that has little federal regulation. The committee is concerned that pharmacy benefit managers use a number of methods for limiting patient access to medications that override the judgment of the treating physician.

Pharmacy is the technology of modern psychiatric treatment, and mental health care systems need to provide both services and technology, Muszynski said. By placing limits on the medications that psychiatrists can prescribe, state Medicaid programs are limiting the technology needed to best treat patients, and the outcomes are not likely to be good.

As states seek ways to control the cost of Medicaid programs, they have looked closely at pharmaceutical costs, Joel E. Miller, acting director of the Policy Research Institute at the National Alliance for the Mentally Ill (NAMI), told PT. "They're getting pretty serious about trying to control the rate of escalation in prescription drug costs."

The problem is that psychiatric medications serve as a key lifeline for people with serious mental illness, Miller said, and NAMI opposes any move to restrict access to medications.

So far, most states have exempted psychiatric drugs from cost-cutting efforts, but that is beginning to change as states rethink those exemptions, Erica D. Malik, senior director of health care reform at the National Mental Health Association (NMHA), told PT.

Texas and Kentucky have excluded Zyprexa (olanzapine) from their preferred drug lists, and states such as West Virginia, which has no mental health care exemption, have made only a few medications available. Other states that may eliminate their mental health care exemptions include Florida, New Hampshire, Missouri and California, Malik said. Some of those changes could occur this year.

"Restricting medications for people with serious mental illnesses is a very dangerous public policy, and it interferes with the practice of medicine," Miller stated. While medications that treat other chronic illnesses might be used interchangeably, that is not the case for psychiatric disorders.

Advocates' Coalition

The APA, NAMI and NMHA are working together to get the message out on a state-by-state basis that Medicaid needs to fund mental health care treatment and supports.

All stakeholders in the system must look beyond their short-term self-interests and realize that the most seriously mentally ill have a range of medical, social and housing-related needs, Muszynski said. To that end, the organizations have been developing a joint agenda for protecting public mental health care systems against further Medicaid cuts. "We need more resources, and that's got to become a focused agenda item," he said. "There are many facets of need and service requirements that these people face."

The system is undermedicalized, Muszynski explained, and it cannot provide quality care to people who have medical conditions if physicians aren't treating them. Patients run the risk of being misdiagnosed or underdiagnosed. However, that is not to say that other components of the system do not play an important role.

Miller stated that Medicaid-funded community-based services are a necessary part of the equation. "Access to services is critically important to helping patients adhere to their medications, ensure effective treatment and help them deal with the everyday things in life."

His message to state lawmakers is, "Little or no real savings, even in the short run, will result from Medicaid cuts that limit medication choice and services for people with mental illness." As people suffer serious episodes because of a lack of services, it will result in immediate short-term costs to the Medicaid budget through increased visits to emergency departments, rehospitalizations and crisis management services, as well as create additional long-term costs through increased incarceration and homelessness.

However, with the loss of the one-time federal assistance, which totaled $10 billion for Medicaid and another $10 billion to help defray costs in other health care programs, the fear is that states will arbitrarily cut services and programs in the fiscal year beginning July 1.

Shrinking Systems

During the financially flush 1990s, states with budget surpluses expanded their optional Medicaid populations by increasing income limits on eligibility, often to 200% of the federal poverty level. States are now cutting eligibility to 150% of the federal poverty level or lower. That leaves uninsured and underinsured low-income residents having to rely on safety-net providers who are already overwhelmed and struggling to stay afloat.

States were trying to avoid reducing eligibility during the first two years of the funding crisis but had to cut eligibility in 2003 and 2004, Malik said. About half the states have cut eligibility.

Another source of cuts for states is optional Medicaid services, an area that can hit mental health care services hard. Texas, for example, cut mental health counseling services out of the Medicaid benefit, limiting beneficiaries to medication checks, according to Malik. "This puts a terrible burden on psychiatrists because people come in for a med check when they really need a counseling session."

Children have been protected from cuts to an extent because more of them are in the mandatory service population, and the Early and Periodic Screening, Diagnosis, and Treatment (EPSDT) program requires that a certain level of services be provided. However, Malik said, many times those requirements are not enforced and, even though children's Medicaid services are protected from cuts, state-based children's mental health care funding has been cut over the last four years in almost every state.

It's hard to say which of the Medicaid cuts is most critical to the mental health care system because there is no way of knowing which one will cause the system to collapse, Malik said. "That's really what our concern is. Every single piece of this is critical to the entire system."

States are going to have to make a commitment to making sure that people have access to the services they need and that service providers have adequate support, Malik said. "It's a matter that states have got to prioritize mental health services in a way that they have not done in the past."

Advocates face an uphill battle, as competing interests argue for a greater share of shrinking state budgets. Primary and secondary education in particular is a priority area for most state legislatures.

Last November, NAMI established the Campaign for the Mind of America. Its primary purpose, Miller said, is to highlight the gaps and fragmentation in mental health care systems and advocate increased funding and greater coordination of mental health care services. It is also linking broader social issues, such as overcrowding in jails and emergency departments, to the need for mental health care system reform at the state level. The campaign is working with organizations such as the American College of Emergency Physicians, the National Association of Counties, the National Association of County and City Health Officials, the Society of Adolescent Medicine, and the National Association of Social Workers.