With the debts mounting and no end to the recession in sight, everyone with a hand in state government is looking for ways to balance Illinois' budget. For some political figures -- including several Republican gubernatorial candidates -- the state's Medicaid program is a primary target.  Indeed, forcing beneficiaries into a private managed care network has become a central plank in the GOP's platform over the past year. Some candidates have also suggested lowering the income eligibility for participants as a sound way to rein in state spending.

Lost in these discussions is the value generated by the public insurance option for the state's poor, which Heather O’Donnell of the Center for Tax and Budget Accountability (CTBA) outlined last month in a report titled Medicaid Plays a Critical Role in Illinois’ Economy (PDF). It's worth reviewing the facts in her white paper.

First, let's be clear how much the General Assembly actually pays into Medicaid. In FY 2008, the last year for which data was available, Illinois spent an estimated $13.9 billion on its Medicaid program. Of that sum, local governments and private providers (hospitals and nursing homes) kicked in $2.9 billion. Because the federal government jointly finances the program, $6.6 billion was sent from Washington via matching funds. The state government itself only paid $4.4 billion.

Where does that money go? It's funneled to those providers that extend health care coverage to Medicaid enrollees. (The income eligibility standards are available here.) In 2008, 2.6 million Illinoisans received insurance through Medicaid (about 20 percent of the state's population).  More than half of them were children.

That brings us to the dim prospect of cuts. Trimming the rolls, not surprisingly, would be devastating for the growing number of enrollees demanding the government-run coverage. Between 1980 and 2005, over 15 percent of Illinois private sector workers lost their employer-provided health insurance. Lawmakers from both parties quickly realized that the income eligibility thresholds were too low, so they extended Medicaid coverage marginally. Rescinding that expansion would mean that the overwhelming majority of axed enrollees -- too poor to purchase increasingly expensive insurance on the individual market -- would join the ranks of the uninsured. The costs of uninsurance -- untreated medical problems, cost-shifting, wider risk of medical bankruptcy -- should be self-evident.

But O'Donnell's research also suggests that cutting Medicaid funding would have a detrimental effect on the state's overall economy. Many medical providers and the employees they hire -- professionals, technicians, custodians, and administrators -- rely on Medicaid reimbursements for their livelihood. That means Medicaid dollars (half of which the state does not pay) funnel through the local economy in the way of mortgage and rent payments, groceries, and other consumer goods. From the report:

Using multipliers developed by Families USA that reflect the increased federal matching rate under ARRA, Illinois’ investment in Medicaid (from both state dollars and federal matching funds) resulted in an estimated $46 billion in increased business activity in 2009. The estimated value of the wages generated through the multiplier effect was $15.8 billion, supporting approximately 385,742 jobs. [Emphasis added.]

Shrinking the amount of Medicaid spending, even marginally, could have a nasty ripple effect. For example, reducing payments by $10 million would result in a loss of $16.2 million in federal matching funds (using the higher matching rate facilitated by the stimulus package). In turn, reducing provider payments by $26.2 million translates into an estimated loss of $80.4 million in business activity and $27.6 million in lost wages. That's a significant hit for a state already facing double-digit unemployment.

To be sure, the state's share of Medicaid spending is rising quickly; thanks to the combination of slightly higher eligibility levels and rising health care costs, Illinois increased inflation-adjusted spending 4.34 percent between 2002 and 2007. But that growth will be alleviated if and when major cost-control reforms are passed nationally. And locally, the state's Primary Care Case Management (PCCM) program is working very well -- despite uninformed GOP critiques -- achieving a net savings of $104 million in FY 2008. (Only eight states in the nation have a lower cost-per-patient ratio than Illinois.)

We also can't overlook the fact that the positive economic impact of Medicaid spending is partially mitigated by the state's chronic payment delays, which places an enormous economic strain on health care professionals. But that can be solved by reforming the state's structural deficit, allowing for prompt and full payments.

There are plenty of important reforms that legislators can implement to keep the cost of government down and raise adequate revenue. Stripping public health insurance from the state's most vulnerable shouldn't even be on the table.

(H/T Shriver Center)