Across the country, state Medicaid health insurance programs serving low-income children and families, people with disabilities, and older adults are struggling in an environment of chronic underfunding.

Consider that, nationwide, at least one child in four relies on Medicaid for health coverage. Medicaid funds healthcare services for two out of every five births and fills in gaps in Medicare coverage for the elderly and disabled.

But inadequate payments and outmoded methods of delivering them to providers are limiting access to primary care and wellness and prevention services for these vulnerable populations.

Historically, Medicaid pays physicians and hospitals at rates below the cost of the care provided. Nationally, acute care hospitals are paid, on average, 88 cents for every dollar spent caring for Medicaid patients.

Such low reimbursements create a payment gap that privately insured employers and consumers must close through a cost shift.

Overall, this cost shift represents 15% of the current amount spent by commercial payers on hospitals and physicians, according to a study released in 2008 by the American Hospital Association and insurers.

An analysis of data from 1995 to 2006 shows that hospital operating margins:

* from care provided to patients with commercial insurance increased from about 15% to more than 23%
* from Medicare fell from 0% to nearly minus 10%
* from Medicaid fell from about minus 5% to nearly minus 15%

These underpayments are especially troublesome to hospitals that serve large numbers of Medicaid patients with few commercially insured patients to balance resulting losses.

In the five-county Philadelphia metropolitan area, for instance, hospitals on average receive about half their patient care revenue from public payers, with about 12% of the total coming from services provided to patients with Medicaid.

In fiscal year 2008, about 40% of the region’s hospitals had total margins of less than 2% — the bare minimum needed to maintain operations.

Of the 10 hospitals where Medicaid accounted for more than 15% of net patient revenue, 70% had total margins of less than 2%.

Today, the long recession and slow jobless recovery are pushing Medicaid budgets and payment systems further into crisis.

While state tax revenues have plummeted, causing unprecedented budget shortfalls, the number of Medicaid enrollees is rising sharply as consumers lose jobs and health insurance benefits.

According to the Kaiser Commission, a one-point increase in the national unemployment rate results in an additional 1.1 million uninsured, one million more enrollees in Medicaid and the Children’s Health Insurance Program, and a 3% to 4% decline in state revenues.

Fiscal year 2009 saw the largest ever one-year increase in Medicaid recipients. Nationwide, enrollment grew 7.5% — more than double the previous year’s 3.1% growth rate — to 46.9 million. In the Philadelphia region, Medicaid enrollment increased 8% in 2009, 18% in the past two years.

Yet, because states must balance their budgets yearly, and Medicaid comprises a large portion of these budgets, Medicaid becomes a prime target — just at a time when increases are needed.

The American Recovery and Reinvestment Act’s stimulus money brought significant increases in federal Medicaid matching rates, providing an estimated $87 billion to states over a nine-quarter period. But that extra funding is scheduled to end Dec. 31, 2010. And to date, state revenues show no signs of recovery.

Meanwhile, governors and hospitals across the country are advocating for a six-month extension of the federal Medicaid matching rates through June 2011.

It’s important that state leaders understand the financial burden that Medicaid underpayments place on providers.

The recently enacted federal healthcare reform legislation acknowledges as much, increasing state Medicaid payment rates for primary care physicians to Medicare levels in 2013 and 2014. But hospital providers also need Medicaid payment increases.

Beginning in 2014, the healthcare reform legislation also requires state Medicaid programs to cover people making up to 133% of the federal poverty level. This expansion could result in more than 15 million more Medicaid enrollees — regardless of what the economy does.

Although federal funding will be available to help pay for newly expanded populations, will existing payment systems be able to attract and sustain the providers needed to care for these new enrollees?

For the foreseeable future, Medicaid will play a large role in our nation’s healthcare. Payment systems must be developed to allow providers to serve this population without jeopardizing their financial stability or their ability to serve other consumers.

David B. Nash is Founding Dean of the Jefferson School of Population Health at Thomas Jefferson University and blogs at Nash on Health Policy.

Originally published in MedPage Today. Visit MedPageToday.com for more health policy news.