Posted by J.W. Mason, January 16, 2009

As many Capitol Hill watchers expected, the latest version of a federal stimulus bill from the House includes significant assistance to state and local government. Some of the aid would come from Washington picking up a bigger share of Medicaid costs, just as it did temporarily in the wake of September 11.

The details of the bill probably will not be available for several weeks. But it’s expected that some key provisions of the new bill will resemble those in H.R. 7110, a federal stimulus bill passed by the House in October 2008, which also included language increasing the federal Medicaid share. So the earlier bill still serves as a good indicator of how much in Medicaid savings—a nearly $6 billion a year expense in the city’s budget—New York may be able to expect.

Currently, the share of a state’s Medicaid costs covered by the federal government, called the Federal Medicaid Assistance Percentage or FMAP, is based on mean state income, with higher-income states getting a lower federal share of Medicaid spending than poorer ones. (This formula is sometimes criticized for focusing on average incomes rather than the fraction of low-income residents.) FMAPs range from 50 percent to 75.84 percent; New York is one of a number of states with 50 percent. The 2008 stimulus bill would leave this basic structure in place but increase the FMAP by 1, 2, or 4 percentage points depending on various economic trends. In the absence of a major improvement in the state economy, New York would meet the criteria for the full 4 percentage point increase. So, federal payments would have increased by 8 percent, from 50 percent to 54 percent of total Medicaid spending.

New York is one of a handful of states that requires counties (including New York City) to bear a portion of the nonfederal share of Medicaid. The 2008 bill specifically required states to share the savings from an increased FMAP with local governments in proportion to their current share of costs. Therefore, one would expect it to reduce both the state and the city’s Medicaid costs by 8 percent. But two special Medicaid payments to hospitals with a high proportion of low-income and uninsured patients—the Disproportionate Share Hospital and Upper Payment Limit programs—were specifically excluded from the FMAP increase.

New York City hospitals receive about $2 billion through these special payments, and the state and local shares are different from other Medicaid payments; most importantly, the city pays the entire nonfederal share of the $760 million going to public hospitals through these programs. As a result, they account for a large fraction of city Medicaid spending—about 12 percent. Relatively little of the special payments go to hospitals in other parts of the state, and in all other counties the cost is divided between county and state, just like other Medicaid spending. So New York City would get significantly less relief under the 2008 stimulus bill than other counties in the state.

By IBO’s estimate, the 2008 stimulus bill would reduce state Medicaid expenditures by 7.7 percent, or $1.1 billion. Counties outside of New York would save a similar proportion of their Medicaid costs. But New York City savings would be nearly a full percentage point lower: 6.8 percent, or $377 million for 2009. If the higher federal match covered all Medicaid payments, the city would save an estimated $428 million.

It appears that the FMAP increase being considered now is somewhat larger—4.8 percentage points, plus more for states with high unemployment. New York’s unemployment rate of 6.1 percent in November 2008 (the most recent month available) was significantly below the national average, so under this formula, as opposed to the one in the 2008 bill, the state may get only the basic FMAP increase. That means the savings to the city and state would be 20 percent higher than estimated above. Of course, the exact savings depend on the details of the bill, which are still being worked out; in particular, it is unclear whether the new stimulus bill will have the same exclusion for the special Medicaid payments as the 2008 bill.

One other point is worth noting: The state legislation that capped annual growth in local Medicaid spending is specifically written to limit local shares of Medicaid spending before the federal match. So in the absence of specific language like that in the 2008 bill, nothing in state law would require an increase in FMAP to be shared with New York City or other local governments. This is an issue New York City policymakers will want to watch closely as negotiations over the federal stimulus move forward.