How Health Reform’s Medicaid Expansion Will Impact State Budgets

Executive Summary

This issue brief from the Center on Budget and Policy Priorities examines the financial impact of the adult Medicaid expansion on state budgets. It disputes some over-inflated cost-estimates projected by some officials and financial analyses.

Federal Government Will Pick Up Nearly All Costs, Even as Expansion ProvidesCoverage to Millions of Low-Income Uninsured Americans

By January Angeles

Shortly after the Supreme Court ruled that states can choose whether to adopt the health reform law?s Medicaid expansion to cover low-income parents and other adults, some governors declared that they will forgo the expansion, claiming it would place a heavy financial burden on their states.1 Claims that states will bear a substantial share of the costs of expanding Medicaid, however, and that the expansion would drain state budgets do not hold up under scrutiny.
The Congressional Budget Office (CBO) estimates that the Medicaid expansion will add very little to what states would have spent on Medicaid without health reform, while providing health coverage to 17 million more low-income adults and children. In addition, the Medicaid expansion will reduce state and local government costs for uncompensated care and other services they provide to the uninsured, which will offset at least some ? and in a number of states, possibly all or more than all ? of the modest increase in state Medicaid costs. Expanding Medicaid is thus a very favorable financial deal for states.
  • CBO estimates show that the federal government will bear nearly 93 percent of the costs of the Medicaid expansion over its first nine years (2014-2022). The federal government will pick up 100 percent of the cost of covering people made newly eligible for Medicaid for the first three years (2014-2016) and no less than 90 percent on a permanent basis.
  • The additional cost to the states represents a 2.8 percent increase in what they would have spent on Medicaid from 2014 to 2022 in the absence of health reform, the CBO estimates indicate.
  • This 2.8 percent figure significantly overstates the net impact on state budgets because it does not reflect the savings that state and local governments will realize in other health care spending for the uninsured. The Urban Institute has estimated that overall state savings in these areas will total between $26 and $52 billion from 2014 through 2019. The Lewin Group estimates state and local government savings of $101 billion in uncompensated care.

Other independent analyses show similar or even more favorable results for states. An Urban Institute analysis finds that state Medicaid expenditures would likely increase by 1.4 percent over what states would otherwise spend on the program from 2014 through 2019, before taking offsetting savings in uncompensated care and other health services into account, while the Lewin Group estimates an increase in state Medicaid expenditures of 1.1 percent over that period. These estimates reflect the increased state costs for Medicaid but not the offsetting savings states will also secure in uncompensated care and other health services.

Critics argue that state budgets will be hit hard by the costs of extending Medicaid to people who are already eligible for the program but unenrolled under current state rules, but will enroll as a result of health reform. States will receive the standard federal Medicaid matching rate for covering these individuals (57 percent, on average), which is well below the 93 percent average federal match noted above for people whom the Affordable Care Act makes newly eligible for Medicaid. But the CBO, Urban Institute, and Lewin Group estimates all account for the cost to states of covering the already-eligible individuals who will enroll. CBO?s 93 percent average federal share of the Medicaid expansion?s costs and the estimate that state Medicaid costs will rise just 2.8 percent on average ? and the even lower Urban Institute and Lewin estimates of state costs ? reflect this cost.
Moreover, health reform?s other provisions, such as the individual responsibility requirement to have health coverage (sometimes referred to as the ?individual mandate?) and the measures to simplify Medicaid enrollment procedures, will remain in place under the Supreme Court decision. These provisions will themselves boost enrollment among those already eligible for Medicaid regardless of whether states take up the expansion. Thus, the additional cost to states of expanding Medicaid to cover more low-income people is smaller than the CBO and other estimates would indicate, because those estimates don?t distinguish the increased costs due to higher enrollment of already-eligible individuals that will occur from the other features of the bill from the increase in cost and enrollment that may result just from the Medicaid expansion.

In short, the Medicaid expansion will cover 17 million low-income people at a very modest cost to states ? a cost that will be at least partly offset by savings in uncompensated care and other state-funded services for the uninsured.

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