As health care costs have risen at a rate far outpacing inflation and overall economic growth, states are having trouble containing the costs of Medicaid.
A report by Fitch Ratings finds that average annual Medicaid costs have increased by 6 percent to 7 percent over the past 20 years, compared to an average annual medical cost growth rate of 4.5 percent. That gap has for many years threatened states with long-term budget problems, but Fitch notes that a number of changes to the public health programs offer many state governments a way to avoid fiscal crisis.
Critically, a number of states have sought to implement a payment system that favors managed care instead of the long-prevailing fee-for-service system.
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"These efforts have been successful to some extent at slowing growth, but it will continue to be a formidable challenge," said Fitch's Eric Kim, who directed the report.
The report also said reforms that are part of the Patient Protection and Affordable Care Act could offer states hope for greater efficiency, but that any dramatic budget impact from the PPACA is unlikely to be realized in the near-future. Thus, Fitch does not foresee any states improving their credit rating solely due to PPACA reforms.
Although a massive federally-funded Medicaid expansion is a key component of PPACA, only 30 states have accepted the federal dollars offered to expand coverage for their low-income residents, with Alaska becoming the most recent to take part in the initiative.
Numerous studies have shown that the federal funds that come along with the expansion have more than paid for the increase in services, allowing states to achieve major budget savings.
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