Pat Quinn previewed his Wednesday budget address, and the big news is a proposed drastic cut in the state's Medicaid spending:

Aides say Quinn will suggest trimming projected Medicaid spending by $2.7 billion in the budget year that starts July 1. If they don't, aides warn, a backlog of unpaid bills that already stands at $1.9 billion will grow so large that doctors, hospitals and pharmacies may cut off services because the state can't pay for them.

The state's heel-dragging on Medicaid reimbursement has long been a problematic part of the state budget. In 2003, it was $1 billion. In 1994, Jim Edgar and gubernatorial candidate Dawn Clark Netsch trotted out dualing estimates of the state's Medicaid backlog: $1.2 billion and $2.2 billion. Long waits for payments have followed. In 2005, providers were waiting 150-160 days, more than twice generous comparisons with the average state. In 1994, Loyola University Medical Center in Maywood waited 309 days for payments, the Tribune reported. The year prior, the Tribune produced a nine-part series, "Medicare: System In Chaos," which reported on a system that was "out of control":

Today's gimmicks employed to handle the cost pressures—pay freezes, pay cuts and slower payments to doctors, hospitals, nursing homes, pharmacies and other health providers—are not new. Ogilvie and his successor, Dan Walker, established the precedent. From 1970 to 1975, Medicaid spending in Illinois more than tripled, to $686 million. It would double again in five years.

The most serious effort—and perhaps the last, best chance the states would have to rid themselves of the scourge of Medicaid—came in the late 1970s when the National Governors Association proposed a trade with the federal government: The states would take full responsibility for the Aid to Families with Dependent Children program in exchange for Washington's taking over Medicaid. The trade broke down over the issue of who would pay for long-term care.

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Although low-income families constituted nearly three-fourths of total Medicaid beneficiaries, the aged and disabled accounted for nearly two-thirds of the program spending. In 1991, the per-beneficiary cost of children was $1,086 and $1,844 for adults. For the aged and disabled, the costs were $8,254 and $7,789, respectively.

In recent years, the state has done a reasonably good job in recent years checking the growth of Medicaid spending: from 2001-2004, it grew 8.7 percent; from 2004-2007, 7.6 percent (likely driven by Blagojevich's eligibility expansion); and from 2007-2009, 1.9 percent. That's compared to national averages of 9.4 percent, 3.6 percent, and 7.1 percent. This trend will likely continue, as the new health-care bill has certain requirements that Illinois already meets.

Of all the Great Lakes states, Illinois has the second-lowest expenditure per enrollee, just a hair more than Michigan, and our 2009 average was over a thousand dollars lower per enrollee than the national average. But over the past two decades, it's grown quickly: from 1991-2009, Illinois had the highest average annual growth in the Great Lakes, and our annual growth of 5.2 percent was 1.5 percent higher than the national average. So this has been building for a long time.

Quinn has floated some ideas; the first of which should sound familiar:

On the table is cutting payment rates for doctors, pharmacies and hospitals. Also under consideration is setting more uniform standards of care, such as allowing patients to receive one new set of eyeglasses each year instead of more frequently. The administration also wants to look at curtailing some services — weight loss surgery is one example — and reduce how much the state pays for others.

It would be surprising if payment rates are cut; they're already among the lowest in the nation, which has long been an issue of tension between the state and providers. It may also be pennywise and pound-foolish: in the Civic Federation's lengthy 2009 brief (PDF) on the state's Medicaid program, they're critical of the state's reimbursement levels, and suggest that they contribute to the state's acute-care expenses (more on that in a second):

Moreover, Illinois Medicaid reimbursement for hospital outpatient care, which is the appropriate setting for a large amount of specialty diagnosis and treatment, is reimbursed particularly poorly. Although it is impossible to generate more specific data without a detailed analysis, it seems almost certain that the lack of resources in ambulatory care leads to increased hospitalization and other more expensive interventions.

Reimbursement for Illinois providers is low. It's worse for outpatient care. Which, obviously, creates incentives for more expensive inpatient care:

There is no evidence that hospitals are overpaid; Medicaid reimbursement across the state averages less than hospitals’ actual costs for providing care. On the other hand, at least in regard to inpatient care, hospitals are more likely to recoup a higher percentage of their actual costs than most other providers.

A look at how the state's Medicaid spending breaks down, however, provides some clues for the future and some other possibilities:

• In 2009, 70 percent of the state's spending went to acute care, compared to a national average of 62 percent.
• Of acute-care spending, half went to inpatient hospital expenses, compared to the national 22.5—less than a quarter. Illinois's proportion of all Medicaid spending is 3.6 percent; its proportion of all Medicaid spending on inpatient care is nine percent.
• Most of the acute-care expenses are reasonably close to the national average, so most of that difference comes in Illinois's spending on managed care and health plans: 2.6 percent, compared to a national average of 35 percent.

So the state's approach to hospital care versus managed care and health plans is considerably different from most other states. Nicole Kazee and Robert Kaestner of UIC suggest savings could be found there (PDF):

One possibility to reconcile the tension between fiscal responsibility and caring for poor residents is greater use of Medicaid managed care that is completely risk-based and where providers have a financial incentive to reduce unnecessary use of services that drive up costs. The recent implementation of the Integrated Care Program for disabled adults demonstrates that even with low provider reimbursement that limits firm revenue, health care organizations believe they can make a profit by more effectively managing care. Accordingly, the state found willing bidders and providers to accept 95 percent of what the state pays for 37,000 enrollees with disabilities and high medical expenditures. The only way these firms will turn a profit is by more effectively managing care and reducing unnecessary and costly care. These firms obviously believe they can do this. As a result, the state saves approximately 5 percent on each enrollee. If this experience could be replicated for the entire Medicaid/SCHIP population, the state could save $400 million annually. It would be a start.

Another breakdown is how Illinois spends on long-term care:

• 48 percent of the state's long-term care expenses go to nursing facilities, compared to the 42 percent national average; for intermediate care for the intellectually disabled, it's 17.4 versus 11.4.
• 31.5 percent of the state's long-term care expenses go to home health and personal care, compared to a national average of 43.3 percent.

This comes at a substantial cost to the state, as the Civic Fed has pointed out:

Of particular concern in Illinois’ institutional care practices are state expenditures for patients in institutions that do not qualify for Medicaid funds. In Illinois, for-profit nursing homes known as Institutions for Mental Diseases (IMDs) provide care for about 4,300 mentally ill people. Federal rules preclude use of Medicaid funds for people between 22 and 64 years of age in institutions in which more than half of the patients have mental illnesses. One of the federal class-action lawsuits against the state alleges that people are being illegally confined to IMDs and that the state should develop suitable community-living alternatives for them. Similarly, the federal government does not provide Medicaid reimbursement for the 1,400 or so people living in state-run psychiatric hospitals, some of whom would be eligible for Medicaid if they could be moved to other settings.

The Illinois Department of Public Health annual survey suggests that in 2007 there might have been as much as $400 million in state payments for mental patients who are not eligible for the federal Medicaid match. Because these patients are in non-Medicaid eligible facilities, other medical costs that would probably be Medicaid matchable, such as physician and drug costs, are not eligible. Expenditures for these other services are estimated to be about 75% of the cost of the institutional services, so the total unmatched state cost could approach $700 million.

The authors also note that Illinois's payments per enrollee for children, adults, and the elderly are all comparatively low—45th through 49th in state rank. Payments per disabled adult, however, are 23rd, so it seems clear that how the state deals with disabled adults will have to be a focus of the administration and the legislature.

The discussion of Illinois's Medicaid system often comes back to Rod Blagojevich and his eligibility expansion, particularly for children. And the state does spend a higher-than-average percentage of its Medicaid budget on children (28 percent to 20 percent). But that's tricky for a couple reasons. First, the Patient Protection and Affordable Care Act requires "maintenance of effort," meaning that you can't cut back on the number of people eligible for Medicare in your state, even if you cover more than other states. Kazee and Kastner write that it's "intended to prevent states from
reducing eligibility for, and enrollment in, Medicaid, which is partly state funded, and pushing low-income residents into the federally mandated and federally subsidized insurance exchanges."

Finding what exactly that means will take some doing. The state is actually trying to cut Medicaid spending by tightening up the system, and that's recently brought them in conflict with the same PPACA requirement:

Under a law enacted in January 2011, the state opted to require new beneficiaries to provide additional paperwork to verify state residency. The new procedures would also require people to provide one month’s worth of pay stubs to verify income. And instead of automatically renewing a client’s Medicaid card, the state would insist on updated paperwork.

But the federal government rejected the new law, saying it violated the federal health law’s requirement that states maintain their current “eligibility standards, methods and procedures.” Instead, the U.S. Department of Health and Human Services suggested Illinois cross-check the information in Medicaid applications with existing federal and state income and residency data.

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Illinois immediately agreed to switch to an electronic procedure and outlined a detailed plan to try to get federal approval. Washington still refused to approve the plan and asked Illinois to show that it had a program integrity problem in the first place.

Illinois Medicaid Director Julie Hamos finally said the state could wait no longer to make changes to its program. In a February 7 letter to the U.S. Department of Health and Human Services, she outlined the steps the state would take to verify where people lived and how much money they made.

So you can't really cut back on Medicaid enrollment, according to the PPACA. The state could still cut back on All Kids, but it wouldn't save that much, according to Kazee and Kaestner:

However, Illinois could eliminate state funding for children in families with incomes above 200 percent of federal poverty who are currently eligible for state-funded, subsidized insurance regardless of income. The rationale for this state program is unclear post health care reform because the federal government will now provide subsidies to the families targeted by the expanded All Kids program. Unfortunately, the number of higher-income children in the program is not large: a report from the Illinois Auditor General concluded that 94,525 children were enrolled in the state-only funded portion of All Kids for a total cost of approximately $70 million in 2009. Thus, discontinuing this part of the All Kids program would not save the state much money.

Illinois is in a bit of a bind. We can't cut back on enrollees. Cutting provider reimbursement even further may not actually save money in the long run. Aside from the governor's idea to cut covered services, the only other option is the dreaded "doing more with less." But in this case, it might actually be true.