As state revenues recover,health costs remain a burden

State revenues are finally returning to pre-recession levels, but the growing cost of providing health care for the poor is leaving most governments in dire fiscal straits, according to a report to be released Tuesday.

States are finally seeing a bit of revenue growth in a turnaround from the economic downturn that devastated budgets in fiscal 2009 and 2010, according to a survey by the National Governors Association (NGA) and the National Association of State Budget Officers (NASBO).

The problem is that many states are contending with costs that are rising even faster, as help from the federal government dwindles. Total spending has returned to levels seen before the recession.

The biggest culprit has been Medicaid. State spending on the joint federal-state health-care program for the poor surged by 20 percent this year, following a rise of 23 percent in fiscal 2011.

Officials say the increases are expected to be much smaller next year, but states are still struggling to close the gap.

Jumps in Medicaid spending have doubled the pace of growth in education spending over the past decade, the report said. Overall, Medicaid accounted for 17.4 percent of state general-fund spending last year, making it the second-largest category of spending, behind K-12 education at 35 percent.

“With the growth of Medicaid expenditures, spending priorities will again face competition for state budget dollars this fiscal year,” said Dan Crippen, the NGA’s executive director. “States have undertaken numerous actions to contain Medicaid costs, including reducing provider payments, cutting prescription drug benefits, limiting benefits, reforming delivery systems, expanding managed care and enhancing program integrity efforts. These efforts alone, however, cannot stop the growth of Medicaid.”

The federal government had provided extra Medicaid help to states during the worst of the downturn as part of the stimulus program. But that aid began to wind down last year as states saw continued jumps in Medicaid rolls.

Medicaid enrollment increased by 5.1 percent during fiscal 2011 and 3.3 percent in the current fiscal year, the report said. Enrollments are projected to swell an additional 3.6 percent next year.

Those increases, coupled with the rising cost of providing medical care, are overwhelming the modest revenue increases being experienced by many states.

Beyond Medicaid, states are pressed by demands for additional fiscal help from struggling local governments and by the need to replenish “rainy day” and other reserve funds that were often drained to help states make it through the worst of the recession.

“Despite some improvement in state budgets since the depths of the recession, state budget growth is still significantly below average — growing at less than half the average growth of the past few decades,” said Scott Pattison, executive director of ­NASBO.

The fiscal pressure on states has become a drag on the economy; local and state governments are shedding jobs, even as the private-sector job market has shown signs of improvement.

State and local governments have cut more than 600,000 jobs since 2009, according to the Bureau of Labor Statistics.

Michael A. Fletcher is a national economics correspondent, writing about unemployment, state and municipal debt, the evolving job market and the auto industry.
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