The timing of a  state’s economic downturn is determined by its individual economic  condition and revenue structure, which can also affect a state’s capacity to  fund its Medicaid program. To help states meet additional Medicaid program needs, and to provide  fiscal relief, Congress established temporary FMAP increases for states in  2003, 2009, and 2010. Increased FMAPs help states maintain their  Medicaid programs during downturns. The enactment of PPACA affects federal and state funding of the Medicaid  program. Past Recessions in 2001 and 2007 Hampered States’ Ability to Fund Medicaid

Past recessions hampered states’ ability to fund increased Medicaid  enrollment and maintain existing services. For example, due to the  2007 recession, total state tax revenues declined by 10.2 percent from the  fourth quarter of 2007 to the fourth quarter of 2009. Over this same period, North Dakota’s tax revenue increased by  6.9 percent. Recovery Act Funds Were More Responsive to State Medicaid Needs than Previous Assistance

Increased FMAP funds provided by the Recovery Act were better timed  and targeted for state Medicaid needs than were funds provided following  the 2001 national recession. Overall, the Recovery Act funds were timed  for state Medicaid needs because assistance began during the 2007  national recession while nearly all states were experiencing Medicaid  enrollment increases and revenue decreases. In contrast, the increased FMAP funds for  the 2001 recession were provided well after the recession ended and not  targeted on the basis of need. Recovery Act Funds Were Targeted to Increased Medicaid Enrollment, but Not to State Revenue Decreases

The increased FMAP funds provided by the Recovery Act were targeted  for increases in states’ unemployment, but did not target the varying  degrees of state revenue decreases that occurred during the 2007  recession. Therefore, the Recovery Act did not distinguish  among states with varying degrees of reduced revenue capacity in the  allocation of assistance. Although the increased FMAP following the 2001 recession coincided with  states’ needs due to increased Medicaid enrollment, it was not timed to  assist states in responding to decreased revenues as indicated by lower  total wages and salaries. Past Recessions Offer Insights on Improving the Responsiveness of FMAP Adjustments

States’ experiences with past recessions offer insights for improving the  responsiveness of FMAP adjustments. More responsive assistance can aid states in  addressing increased Medicaid enrollment resulting from a national  recession, as well as addressing reductions in states’ revenues. Starting Increased FMAP Assistance Closer to Onset of Recession Could Help States Avoid Program Cuts

Although the Recovery Act assistance timing was an improvement over the  assistance for the 2001 recession, an automatic trigger (a provision that  would start the assistance program without the need for legislation) that  would provide an increased FMAP to states close to the onset of an NBER- designated recession has additional advantages. As we noted earlier,  increased Medicaid enrollment and decreased revenue continued after  both the 2001 and 2007 recessions ended. Adding several quarters of  transitional assistance and gradually reducing the percentage of increased  FMAP provided could help mitigate the effects of a slower recovery. A more responsive increased FMAP would calculate  the increased funding needed on the basis of the economic conditions of  each state. Agency Comments and Our Evaluation

In commenting on a draft of this report, the Department of Health and  Human Services stated that it agreed with the analysis and goals of the  report while emphasizing that any changes to the FMAP formula must be  authorized by statute and implemented by the Assistant Secretary for  Planning and Evaluation in HHS. The department further stated its belief  that it is critical to as closely as possible align changes in the FMAP  formula to individual state circumstances in order to avoid unintended  consequences for beneficiaries as well as provide budget planning stability  for states. We agree that statutory changes would be necessary to  implement any adjustments to the FMAP, but we do not make  recommendations regarding particular actions in this report. In this report, we use the acronym  CHIP to refer to the program.
Why GAO Did This Study

In response to the most recent U.S. recession, from December 2007 to June 2009, Congress passed the American Recovery and Reinvestment Act of 2009 (Recovery Act). To help states maintain their Medicaid programs and provide states with general fiscal relief, the Recovery Act temporarily increased the federal share of Medicaid funding for states. The federal funding states receive for Medicaid is determined by a statutory formula--the Federal Medical Assistance Percentage (FMAP). The Recovery Act also required GAO to study options for providing a temporary increased FMAP in response to future recessions. GAO reviewed how past recessions affected states' ability to fund Medicaid, examined the responsiveness of past increased FMAP assistance to state needs, and identified options for adjusting the increased FMAP formula for use during future recessions. To conduct this work, GAO reviewed its previous reports on recessions and the increased FMAP and similar work from other organizations. GAO analyzed federal Medicaid data and enrollment data provided by state Medicaid directors. GAO also analyzed labor market data from the Bureau of Labor Statistics, state revenue data from the Census Bureau, and the Federal Reserve Bank of Philadelphia's Coincident Indexes to assess states' ability to fund Medicaid during economic downturns. GAO identifies options for Congress to consider but does not make recommendations in this report.

What GAO Found

Past recessions hampered states' ability to fund increased Medicaid enrollment and maintain existing services. Both the 2001 and 2007 recessions resulted in increased Medicaid enrollment and decreased revenues, though states' experiences varied. During the 2007 recession, total state tax revenues declined by 10.2 percent from the fourth quarter of 2007 to the second quarter of 2009, with individual state experiences varying. For example, North Dakota had a revenue increase of 6.9 percent while Arizona had a decline of 23.1 percent. In addition, the effect of increased Medicaid enrollment and decreased revenues persisted after the recessions ended, causing states to further adjust their Medicaid programs. The increased FMAP funds provided by the Recovery Act were more responsive to state Medicaid needs than were funds provided after the 2001 recession. Overall, the Recovery Act funds were timed for state Medicaid funding needs. Assistance began during the recession while nearly all states were experiencing Medicaid enrollment increases as indicated by rising unemployment and revenue decreases as indicated by declining wages and salaries. The FMAP funds were targeted for Medicaid enrollment growth, but did not distinguish among states with varying degrees of reduced revenue in the allocation of assistance. The increased FMAP following the 2001 recession was provided well after the recession ended and was not targeted for state Medicaid needs. Past recessions offer options for improving the responsiveness of temporary FMAP increases to state Medicaid program needs. More responsive assistance can aid states in addressing increased Medicaid enrollment resulting from a national recession, as well as addressing decreases in states' revenues. GAO has revised a prototype formula for temporary FMAP increases it developed in 2006. The revised formula would address the timing and targeting of funds, and further improve the responsiveness of the increased FMAP funding. In particular, these revisions (1) use an automatic trigger to start the assistance program closer to the onset of a national recession, (2) add several quarters of transitional assistance before ending the increased FMAP assistance, and (3) target assistance by calculating the increased funding needed on the basis of the economic conditions of each state. In commenting on a draft of this report, the Department of Health and Human Services (HHS) agreed with the analysis and goals of the report while emphasizing that changes to the FMAP formula must be authorized by statute. HHS also stated that it is critical to align changes in the FMAP formula to individual state circumstances in order to avoid unintended consequences for beneficiaries as well as provide budget planning stability for states. GAO agrees that statutory changes would be necessary to implement any adjustments to the FMAP, but does not make recommendations regarding particular actions in this report.