Why are Medicaid costs increasing in South Dakota?

Added December 23rd, 2010 by

Multiple factors affect South Dakota’s Medicaid expenses

South Dakota’s Medicaid costs are increasing. As our Governor and Legislature look at options to address costs, it is helpful to understand the elements that determine costs.   

There are four primary factors that affect South Dakota’s Medicaid contribution. An increase or decrease in any of those factors changes our costs. Let’s take a more detailed look at each of these factors for South Dakota.

1.  Number of people enrolled in the program:

Poverty has increased in South Dakota as a result of the national recession. Statewide, 14.2% of South Dakotans are poor and 18.2% of children are poor.1 South Dakota partners with the federal government to provide health care to this increasing number of low-income children, elderly and disabled citizens.

In FY10, 13.66% of all South Dakota residents were eligible for Medicaid or CHIP – the Children’s Health Insurance Program. This is an increase from a four-year average participation rate of 12.89% of residents from FY06 and FY09.2  More enrollees means more costs.

Eighty percent of the new enrollese in Medicaid during the past two years have been uninsured children from families whose household income is less than 200% of the federal poverty level ($40,100 per year for a family of four). One of every three South Dakota children is insured by CHIP/Medicaid.

2.  Utilization trends among those enrolled in the program:

Every Medicaid enrollee has unique health care needs. Required services vary from year to year. The Department of Social Services conducts regression analysis of past service utilization trends to predict the volume of services they will need to pay for in the upcoming fiscal year(s).  FY11  analysis projected an increase in the utilization of hospital inpatient and physician services, slightly decreasing outpatient hospital services and near flat prescription drug utilization. To see examples of this analysis, see the DSS FY11 Recommended Budget pp 32,34,36 & 38

3.  Percentage of Medicaid costs paid by the federal government:

Under Medicaid, the federal government contributes at least $1 for every $1 a state spends on its Medicaid program, whatever the costs may be. The fixed percentage paid by the federal government, known as FMAP (Federal Medical Assistance Percentage), varies from state to state. Poorer states receive a greater federal amount for each state dollar spent than do wealthier states. The FMAP is adjusted each quarter to reflect changes in the total personal income received by the citizens of each state. 

For the first quarter of FY11, the federal government will pay about 71% of all Medicaid costs in South Dakota – leaving the state’s general fund paying only 29%. However, by the first quarter of FY12, the FMAP will only be 59%, raising the state’s share of expenses to 41%. 

In FY03-04 and FY09-11 the federal government provided state fiscal relief by temporarily increasing the FMAP rate for all of the states. This helped balance state budgets during a period when Medicaid enrollments were surging and tax revenues faltering due to a weak economy. The ending of federal fiscal relief leaves states with a “budget deficit cliff” if their revenues have not recovered. Like most states, South Dakota is struggling to fill the void that will be created when stimulus dollars expire.  As of August 20, 2010 South Dakota had received over $105 million extra FMAP dollars since the beginning of federal FY09 [$47,663,282 in FY09; $57,648,400 in FY10).3

4.  Amount medical providers are paid for the services they render:

Medical service providers are reimbursed at a rate lower than their normal charges for services they provide under Medicaid and CHIP. Each year the South Dakota Legislature decides if it will provide an inflation increase to the reimbursement rates to the over 10,000 providers of Medicaid and CHIP Services. 

An analysis comparing South Dakota provider increases against general inflation and medical inflation since 2003 shows that Medicaid provider reimbursements lagged medical inflation through FY09. There were no increases in provider reimbursements legislated in either FY10 or FY11.  Between 2003 and 2009 the state’s reimbursement rate for Medicaid providers went up 18%.  During the same time period (2003 to 2009) the cost of employer-provided private family health insurance premiums in South Dakota increased 36%4 – double the  rate of increases to Medicaid providers and higher than the 27% increase in general medical inflation reported by the Bureau of Labor Statistics CPI for Small Midwest Cities. 

Proposals to freeze or cut reimbursement rates create savings for both the state and federal government. For every dollar South Dakota’s general fund cuts from our state’s Medicaid providers in FY12, the federal government will cut an additional $1.44. 

However, freezes or cuts in reimbursement do not mean that providers necessarily are able to continue delivering services with less money. The potential provider responses to decreasing reimbursement include:

  • COST SHIFTING Medicaid  loses to other patient populations. That increases the amount that non-medicaid patients (or their insurance companies) pay for services to absorb the lost revenue from Medicaid. The variance cited earlier in rate of increase in Medicaid provider reimbursement, private premium costs and general medical inflation suggests cost shifting has been happening in South Dakota.
  • Refusing to serve or limiting the number or Medicaid patients accepted.  Currently the state has a high percentage of providers who accept Medicaid:
    • 100% of hospital and primary care physicians accept Medicaid
    • 98% of nursing homes accept Medicaid
    • 80% of dentists accept Medicaid
  • Discontinuing programs or services consumed primarily by Medicaid patients.  Some nursing homes and programs offering specialized medical care for children receive nearly 100% of their revenue from Medicaid.  These providers are at particular risk for service discontinuation since cost shifting or limiting Medicaid caseload are not an option.
  • Internal expense reduction – usually in the form of decreasing staff compensation or cutting staff. 


Proposals to control South Dakota’s general fund appropriations for Medicaid will only be effective if they adjust one or more of the four factors influencing costs:  number of eligibles, service utilization, FMAP or reimbursement rates.  And the potential consequences in the form of lost federal matching dollars, service reductions or cost shifting to other health care consumers in the state must be weighed against the potential savings. 


1US Census Bureau, American Community Survey Poverty Statistics, September 2010.

2DSS Annual Statistical Reports FY06 to FY10

3Health and Human Services http://transparency.cit.nih.gov/RecoveryGrants/grant.cfm?grant=Reinvestment

4The Commonwealth Fund, State Trends in Premiums and Deductibles, 2003-2009, http://www.commonwealthfund.org/~/media/Files/Publications/Issue%20Brief/2010/Dec/1456_Schoen_state_trends_premiums_deductibles_20032009_ib_v2.pdf

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3 Responses to “Why are Medicaid costs increasing in South Dakota?”

  1. […] Dakota’s budget crunch is coming in part because of increased enrollment and costs in Medicaid. It’s funny, then, that South Dakota is trying to block one way to fix that fiscal problem: […]

  2. Roland Day says:

    South Dakota Medicaid and CHIP could save lots of money by eliminating medically-unncessary, non-therapeutic child circumcision as a covered service. Eighteen other states have done this, have saved millions and improved child health and well-being.

    The money saved could be used to fund medically-necessary and beneficial services.

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