Government budget crises have been widely reported and have virtually dominated local and national news coverage in recent months. Funds shortages for Medicaid and other healthcare programs in many states have reached critical stages, all while Medicaid enrollment has risen. Many states have contemplated a variety of mechanisms for limiting spending on state healthcare programs while simultaneously examining revenue-enhancement opportunities for the program through participation and other provider-level fees. Part I of this blog series will discuss the state-level challenges generally. Subsequent parts of this blog series will examine states and industries most hard hit, as well as which sectors may continue to flourish despite state program cuts.

Bloggers Lea Winerman and Vanessa Dennis of PBS’s The Rundown have published a truly fascinating pictorial description of the funding crises, with a state-by-state examination of the situation. According to data presented by Winerman and Dennis, states are looking at a combined $125 billion shortfall in fiscal year 2012 — which begins in July 2011 for most states – and that states estimate that the Medicaid program will cost them $195 billion in 2012.    That’s up 48% from what they spent in 2010 budgets.

In one ongoing state effort, Maine’s Gov. Paul LePage is leading the charge to narrow eligibility requirements for Medicaid, an approach other state leaders are considering in lieu of, or in tangent with, cutting reimbursement. Many industry analysts believe that certain changes proposed in Maine, such as making families of three earning more than $24,645 annually ineligible for the program, are likely to be approved by the federal government, whereas changes such as cutting eligibility for adults without children are not permitted by PPACA (aka the Affordable Care Act).

Unless specific state-level industry protections are implemented, such changes to eligibility and cuts to state Medicaid programs logically impact certain industries most dependant on Medicaid dollars the most, such as the skilled nursing (SNF) industry. For example, Eljay LLC recently released an analysis of Nevada Medicaid payment cuts to SNFs proposed by Gov. Brian Sandoval that provides a bleak outlook for the industry. Eljay LLC used cost report information from 32 of Nevada’s skilled nursing facilities to assess the impact of the loss of $20 per Medicaid patient per day residing in a skilled nursing home. The analysis estimates that the $20 rate reduction would equate to an average loss of almost $500,000 for each facility used in the analysis. More specifically, three facilities would have annual revenue reductions exceeding $1 million and the average shortfall between Medicaid allowable costs and the rates paid would be almost $40 per patient day. The report concludes that the cuts would result in significant facility closures and loss of jobs.

Despite the sobering picture painted by these state-level program analyses, investments in many healthcare and life sciences sectors continue to perform well. It is simply more critical than ever for investors and providers to closely examine their current and potential revenue sources to understand challenges and opportunities coming down the road.