As it returns to work today, the Senate will take up the tax extenders bill passed by the House before the Memorial day recess. Democratic leaders divided the House bill into two parts, after members couldn’t agree on how much of the new spending would be paid for, and stripped provisions extending a 65 percent COBRA subsidy for people laid off after May 31 and a six-month extension of the increase in the federal government’s contribution (called FMAP) to the Medicaid program. The $116 billion bill included a package of tax extenders and a short-term patch to the sustainable growth rate (SGR) formula:

– $39.5 billion extension of unemployment benefits through November (not offset), $53 billion in tax extensions, a new summer jobs program and $1.15 billion in payments to black farmers who suffered discrimination. (offset)

– $23 billion and includes a 19-month “doc fix” that delays a cut in Medicare reimbursements to doctors. Doctors will receive a 2.2% raise for the rest of 2010, retroactive to June 1, followed by another 1% raise in 2011. But in 2012, physicians are scheduled to receive a 33% cut

Democrats in the Senate will need to attract one Republican vote to pass the measure, but remain uncertain about the size of the senate measure. “One group of Democratic senators, including Kent Conrad (D-ND) and Ben Nelson (D-NE), is expected to seek changes that would further reduce the bill’s effect on the deficit, perhaps by cutting certain benefits. Other Democrats might hinder progress by seeking alterations to certain tax provisions in the bill,” CQ reports.

An array of interest groups are pressuring Congress to act swiftly. The American Medical Association, which is warning that another pay cut would cause doctors to drop Medicaid patients, has launched “a new, multimillion dollar nationwide advertising campaign urging Americans to contact their senators” and ask Congress to pass a permanent fix to the SGR formula. But since a permanent solution would cost north of $200 billion, the organization will likely have to settle for a temporary patch and live to fight another day. Meanwhile, Families USA is arguing that if Congress doesn’t include provisions extending the COBRA subsidy and FMAP expansion in the extenders package, many lower income Americans will drop their doctors.

Without the COBRA subsidy, Families USA estimates that “unemployed workers nationally will have to spend, on average, 84.3 percent of their monthly unemployment insurance checks on COBRA premiums to keep their families covered.” States will react to the reduction in Medicaid federal dollars by cutting the program and swelling the ranks of the uninsured, the group predicts. “This outcome is ironic for at least two reasons,” Families USA writes. First, eliminating the COBRA subsidy would increase the number of uninsured in the interim period between now and 2014, undermining the intention of the new health care law. “Second, the relevant help that was initially offered through ARRA will come to an end even though the unemployment rate today exceeds the rate when ARRA was first adopted in February 2009.”

In short, eliminating additional health care spending may save money in the short term, but could very well increase health care costs by 2014, if the government has to subsidize coverage for a larger (and possibly sicker) uninsured population. It’s also worth pointing out that it makes little sense to cut health care benefits for the unemployed during a period of high unemployment rates and as a growing number of discouraged job seekers are leaving the labor market.

The COBRA measure cost $8 billion, while the FMAP increase totaled $24 billion.

With health care reform legislation on life support, President Obama’s new budget offers a short-term patch for cash-strapped public health care programs. The administration’s FY 2011 budget invests $25.5 billion into a 6-month extension of “the help that states got in last year’s economic stimulus bill with their Medicaid programs,” increasing the federal contribution by 6.2%. States with higher unemployment rates would qualify for more aid.

The extra federal dollars will help states meet the demands of increasing enrollment and reduce the need for tax increases or cuts to other essential state services. States could plug existing budget holes, transfer funds earmarked for Medicaid into other spending priorities or increase their program’s reimbursement rates, which fell in 2008 as states tried to compensate for budget shortfalls.

Congressional conservatives will characterize the funding boost as irrelevant to ‘stimulating’ the economy or, worse yet, a ploy to reward ‘bad behavior.’ During the stimulus bill debate, for instance, MSNBC’s Joe Scarborough argued, “what this [Medicaid] spending does is it bails out states that haven’t made tough decisions.” Sen. Charles Grassley (R-IA), the ranking Republican on the Senate Finance Committee, explained that he “opposes the nearly $90 billion in aid to states for Medicaid because some governors would use the money to mask poor decisions in other portions of their budgets.”

In fact, rather than strengthening Medicaid, Republicans are openly looking for ways to privatize the program, which they call a “medical ghetto.” Last week, Rep. Paul Ryan (R-WI) — the ranking member on Budget Committee — outlined a plan that would allow Medicaid to to “provide supplemental payments to low income recipients so they too can obtain the health coverage of their choice and no longer be consigned to the stigmatized, sclerotic care that Medicaid has come to represent.”

For all its problems, Medicaid currently covers around 60 million Americans, including people who are often rejected by private plans. Medicaid protects low-income Americans from uncontrollable out-of-pocket costs charged by private insurers and also “covers services not usually covered in private health insurance.” Increasing the federal government’s contribution to Medicaid would provide immediate relief to cash-strapped states and protect other essential services from painful budget cuts.

The House has already attached a Medicaid funding increase to a jobs bill it passed in 2009 and Sen. Jay Rockefeller (D-WV) is considering “using the jobs bill under discussion in the Senate” as a vehicle to extend the federal government’s contribution. Some senators are already expressing skepticism about “his proposal, arguing the funds would not be used directly to create jobs.”

Inside Health Policy is reporting that Senate Finance health subcommittee Chair Jay Rockefeller (D-WV) is considering “using the jobs bill under discussion in the Senate to extend enhanced federal Medicaid matching funds, the first provision to be carved out of the health reform effort even as Democrats vowed to continue fighting for a comprehensive reform bill.” The additional federal dollars would help struggling states meet the demands of increasing enrollment and reduce the need for tax increases or cuts to other essential state services.

In 2008, states reduced Medicaid payments to hospitals and other health care providers to compensate for budget shortfalls even as enrollment in Medicaid grew 2.6%, up significantly from 0.7 percent in 2007. The Recovery Act increased the federal government’s Medicaid contribution to help states maintain their health programs during the recession, but that extension expires on December 31, 2010 “in the middle of most states’ fiscal years.” Many states are already struggling to keep up with the exploding growth in safety net programs, due to rising unemployment and increasing health care costs.

In Kentucky, Gov. Steve Beshear’s proposed budget “calls for spending an additional $782 million on Medicaid over the next two years.” However, Beshear is also calling for $108 million in cuts to the program over two years, and 2-percent nearly-across the board cuts to Cabinet for Health and Family Services program.” Vermont would have to invest $53 million “to close the gap between available revenues and expenditures next year” in its human service programs and New York is contemplating cutting Medicaid reimbursements to hospitals and nursing homes to reduce Medicaid spending by a $1 billion.

It’s not clear that Rockefeller’s proposal will garner significant Congressional support. The Hill reports that “some of his colleagues are skeptical of his proposal, arguing the funds would not be used directly to create jobs.”

As Pat Garofalo points out in today’s Progress Report, most conservatives have been attacking the stimulus on the premise that its initiatives “may be worthy in themselves, but have little to do with ‘stimulating’ the economy.” Yesterday, for instance, Republican strategist Jennifer Millerwise Dyck suggested that boosting funding to Medicaid would not create jobs and should not be part of the Democrats’ economic stimulus package.

Today, Sen. Charles Grassley (R-IA), the ranking Republican on the Senate Finance Committee, said he could “buy into 90 percent” of the emerging plan but “opposes the nearly $90 billion in aid to states for Medicaid because some governors would use the money to mask poor decisions in other portions of their budgets.”

But allowing sates to plug their budget holes with federal funds is sort of the point. While Medicaid is one of the largest drains on every state’s budget, giving governors some latitude to use the funds balance the budget, keeps the government running and reduces other painful cuts in essential services or tax increases.

Just as the New York Times reported that “Medicaid rolls are surging, by unprecedented rates in some states,” Republican strategist Jennifer Millerwise Dyck appeared on MSNBC this afternoon to argue that extra federal funding for health care initiatives (expanding Medicaid, subsidizing COBRA) would not create jobs and should not be part of the Democrats’ economic stimulus package:

There is money in there getting us prepared for universal health care. I mean, this is supposed to be a stimulus package that gets people into jobs, that gets the economy moving, gets money back into the pockets of the people and I think this is ideologically where you see a real difference between Republicans.

Watch it:

In fact, investing federal dollars in Medicaid, as House Democrats have proposed, is far from an “ideological divide”; it actually generates business and “gets people into jobs.”

A recent report by Families USA, for instance, found that “every dollar a state spends on Medicaid pulls new federal dollars into the state—dollars that would not otherwise flow into the state. These new dollars pass from one person to another in successive rounds of spending”:

For example, health care employees spend part of their salaries on groceries, which adds to the income of grocery store employees, enabling them to spend part of their salaries on new shoes, which enables shoe store employees to spend additional money on home improvements, and so on. The new dollars pass from one person to another in successive rounds of spending, generating additional business activity, jobs, and wages that would not otherwise be produced. Economists call this the “multiplier effect.” The magnitude of the multiplier effect varies from state to state, depending on how the dollars are spent and on the economic structure of, and conditions in, the state.

Moreover, health insurance protects families from medical bankruptcy and allows healthy individuals to keep looking for employment.

Today, during a House Commerce and Energy Subcommittee on Health hearing, CAPAF Senior Fellow Gene Sperling, Gov. Janet Napalitano (D-AZ), Rep. Frank Pallone (D-NJ), and Rep. Gene Green (D-TX) unanimously called for increasing the percentage the federal government reimburses states for Medicaid expenditures. These Federal Medical Assistance Percentages (FMAP) are based on a sliding scale and states with lower personal incomes have higher FMAPs.

As the Wonk Room has argued, helping states finance their Medicaid programs makes sense in the context of a souring economy and massive job losses. At least 27 states are facing budget gaps and most are simultaneously experiencing an increase in Medicaid enrollment. In fact, research indicates that a 1 percent increase in unemployment results in 1 million more people enrolling in Medicaid and SCHIP and another 1.1 million more people becoming uninsured. In Arizona alone, as Napalitano pointed out, Medicaid enrollment grew by 13,000 more applicants in October:

States can’t borrow money and they must balance their budgets. So how do they deal with increasing demand during a period of decreasing revenue? As Gene Sperling pointed out, “FMAP allows states to expand Medicaid enrollment without requiring other contractionary policies and has one of the highest multiplier effects of any form of economic stimulus”:

A 2004 study by Families USA found that a 2.95 percent increase in the FMAP rate would bring a return of $3.85 million in business activity for every $1 million in Medicaid investment, a multiplier of 385 percent.

An increase of $35-50 billion dollars allows states to: 1) keep up with growing enrollments 2) injects more money into the health care system 3) ensures that states aren’t forced to increase taxes or make cuts elsewhere.

In fact, in 2003, during another period when Medicaid enrollment and spending growth peaked, Congress provided a 2.95 percent FMAP increase, helping states meet Medicaid and overall state budget shortfalls and warding off potentially larger Medicaid program cuts. States used the extra cash to preserve Medicaid:

The Center for Budget and Policy Priorities (CBPP) finds that “17 states have cut or are considering cuts to low income child and family health care programs and at least 15 states are cutting care for the elderly and those with disabilities.” Without federal assistance — specifically increasing FMAP within the second stimulus — those numbers will only grow in the coming months.