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Facing Medicaid Budget Shortfalls in 2006: State Context Influences Government Health
Service Cut-Backs
Introduction
Challenges in Medicaid implementation present a potential public policy crisis at the
intersection of state fiscal policies and health care in a federal system. State budgets have been
strained since the national economic downturn in 2001 and remain unstable as state Medicaid
expenses continue to rise (Kaiser Commission on Medicaid and the Uninsured 2005). The
integrity of the Medicaid program is threatened as Medicaid budget shortfalls have occurred in
more than half the states, and are anticipated to occur in 40 states in 2006 (National Association
of Budget Officers 2004).
Devolution of responsibility from the federal government continues to present basic
questions about state capacity to perform the functions devolved (Kincaid 1998). State revenues
are an essential element of the Medicaid service delivery equation. However, it is not clear that
state revenue streams can provide a sufficiently stable source of funds in the devolution
environment (Tannenwald 2002). Lav, McNichol and Zahradnik (2005) argue that states may
exist in structural deficit, with a chronic inability to grow along with growth in the economy and
the cost of government (2005: 1). This paper tests the influence of state structural deficits along
with other state contextual factors that may explain current state Medicaid budget shortfalls. The
influence of state structural deficits and other contextual factors on Medicaid implementation has
implications for state capacity to implement policy in the American federal system.
State Capacity in the Context of Devolution
The capacity of the federal government and the states to perform complementary roles in
the areas of their relative functional superiority is at the heart of functional federalism (Peterson
Convention