The Impact of the Affordable Care Act on State Budgets

A substantial increase in Medicaid enrollment may impact state general obligation credit quality.

-Will Rogers

Medicaid plays a crucial role in providing health care services to more than 70 million low-income Americans, including over 30 million children. The Affordable Care Act (ACA) has sought to expand eligibility to anyone who earns up to 133% of the federal poverty level. For states that agree to participate and expand eligibility, the federal government has agreed to reimburse them 100% of the costs for new enrollees through 2016, declining to 90% by 2020. Currently 31 states and the District of Columbia have agreed to expand their Medicaid programs, while other states continue to debate the merits and costs associated with joining. On the surface, 100% reimbursement from the federal government may sound positive, but a 10% decline in the reimbursement rate to 90% in 2020 will have a significant impact on state budgets. Also, keep in mind the 100% reimbursement rate applies only to new enrollees; existing participants are covered at a 50% reimbursement rate by the federal government.

Fiscal Consequences of Medicaid Enrollment Increases

At this point, many states have seen dramatic increases in their Medicaid enrollment levels beyond original expectations, which may pose serious fiscal consequences. In particular, enrollment levels in Illinois totaled 541,000, well past the state's original estimate of 199,000 in 2014. The same is true in Michigan, which has seen total new Medicaid enrollment of 605,000 relative to its expectations of 323,000. Many other states have experienced similar growth trends. 1 While this growth speaks volumes about the progress toward meeting the federal government's goal of increasing the number of Americans with health insurance, it arguably falls short in addressing the financial burden to state governments. According to a recent article in The Wall Street Journal, some states have had to increase their budgets and make difficult fiscal decisions to finance this growing demographic group. 2 For example, in Ohio the expansion of the Medicaid program has resulted in cost overruns of $2.7 billion, while Washington State had to increase its 2015 budget by $2.3 billion to accommodate growing Medicaid costs. At a time when both the U.S. and global economies face challenging economic prospects, this unforeseen expenditure increase could be very problematic to select states.

Medicaid spending accounts for nearly one-quarter of a state's budget on average, second only to states' K-12 education funding. 2 With federal reimbursement levels declining in a few years, states have largely focused on the most economical and efficient delivery methods (e.g., health maintenance organizations) to help alleviate fiscal costs going forward. Still, budgetary pressures are likely to persist. Enrollment projections were wrong and costs have exceeded expectations. That is why more than 20 states, mostly conservative, Republican-dominated states, opted out of joining the ACA program and are now enjoying an "I told you so" moment after analyzing the program's fiscal costs. Proponents of the ACA argue that a growing number of insured Americans will ultimately reduce health care costs as health care institutions will contend with fewer bad debt expenses while the government's power to negotiate lower health care reimbursement rates will increase. While this policy perspective may or may not come to fruition, it does not address the immediate fiscal impact.

Many states are currently in the midst of serious fiscal struggles. For example, Illinois has yet to pass a fiscal 2016 budget amid fierce disagreements over spending priorities between the governor and state legislature. Pennsylvania, too, is operating amid a difficult political environment as evidenced by its nine-month budget delay. If cost overruns for Medicaid spending escalate and more of the burden falls on states, how will other programs be funded? Which programs will be prioritized? In short, the opportunity cost to funding ACA could come at the expense of other worthy state programs.

Another Potential Risk: Future Subsidy Reductions

Another potential risk that could exacerbate this state burden would be a reduction in the federal reimbursement level below the 90% level. If the federal deficit were deemed too high, for example, it is possible that Congress could vote to reduce the subsidy level. Both the Congressional Budget Office and Joint Committee on Taxation report that the cost to the federal government of expanding Medicaid will be significantly higher than projected. As such, a growing deficit could result in federal subsidy reductions based on the political environment at the time.

Given the upcoming presidential election and the fact that 2016 is the last year for 100% federal reimbursements for new Medicaid enrollees, this topic is likely to gain additional attention. A slowing global economy and its implications for U.S. state budgets could further amplify the issues.

Despite Budget Agreement, Pennsylvania Woes Linger

While the Commonwealth of Pennsylvania ended its nine-month delay in passing its fiscal 2016 budget, the state still faces significant financial challenges. Governor Tom Wolf announced he would not veto the legislature's passed budget in late March and, in effect, ended the stalemate. Much of the debate that caused the delay has yet to be resolved and could result in another delayed budget for fiscal 2017. While ending the stalemate is a positive sign for Pennsylvania's higher education institutions, school districts and other government agencies in the short term, it does little to address its longer-term funding challenges given the state's difficult political environment. The likelihood of political gridlock may continue as Governor Wolf was unable to pass any of his revenue enhancement proposals and there was no consensus reached on spending cuts or pension reform measures. With the state facing a fiscal 2017 deficit of more than $2 billion, serious challenges remain and there continues to be a lack of confidence in the Commonwealth's political governance. The ability or lack thereof to reach a consensus on the state's growing fiscal problems speaks loudly about Pennsylvania's credit quality.

1 Politico, May 15, 2015, "Skyrocketing Medicaid Signups Stir Obamacare Fight."

2 The Wall Street Journal, April 7, 2016, "Obama's Medicaid Budget Trap."

3 The Hill, November 20, 2014, "State Medicaid Spending Soars Under ObamaCare."

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