State Budget Crises Under Further Pressure from Obamacare

Published May 31, 2016


With several states facing budgetary crises during the current economic downturn, states may have their troubles compounded by President Obama’s health insurance reform. The federal government has promised to reimburse states for some added expenses, but other costs will have to be borne by state taxpayers.

Brian Blase, a policy analyst at the Center for Health Policy Studies of the Heritage Foundation, says states will face several new costs under the Patient Protection and Affordable Care Act (PPACA).

“There will be two main cost impacts: An expansion of state Medicaid programs and the creation of state-based health insurance exchanges,” Blase said. “Of the two, Medicaid expansion will have the most financial impact on states.”


Driving State Spending

According to Mathew Mitchell, a research fellow at the Mercatus Center at George Mason University, states generally pay half or less of the cost of treating a covered individual under Medicaid, with the federal taxpayers picking up the rest. The cost split varies by state, however, according to the Federal Medical Assistance Percentages (FMAP).

“The Medicaid program is by itself one of the major drivers of state spending. It’s the fastest growing component of state spending over the last 20 years. And if you look at the incentives of the program itself with the federal matching program, it incentivizes states to increase spending,” Mitchell said. “By adding millions more people to Medicaid, in terms of limiting state spending, the health care reform is actually moving in the opposite direction.”

Blase notes northeastern states such as Massachusetts, New York, and New Jersey, as well as California, cover an extraordinary number of people with their Medicaid programs.

“In New York and California, almost 30 percent of the people who live in those states are covered by Medicaid,” Blase said. “President Obama’s law mandates that states cover all people up to 133 percent of the Federal Poverty Level (FPL). The big group that that’s going to bring in are people up to 133 percent of FPL who don’t have kids—childless adults. Medicaid will be their only legal option.”


Medicaid’s Cost Explosion

Blase notes states are concerned about the cost of Medicaid expansion because Medicaid spending nationally has more than quadrupled over the last 20 years.

“Regular health care spending has been growing at about 6 percent [per year], but Medicaid is closer to 9 percent,” Blase said. “That’s unsustainable growth, and states were worried that they were going to be left with these massive cost increases when all of these people were going to be dumped into the program.”

Under the PPACA, the federal government will pay 100 percent of the costs for those newly eligible for Medicaid. The reimbursement rate decreases to 90 percent by 2020, according to Blase.

However, “There are millions of Americans who are currently eligible for Medicaid who have not enrolled,” Blase said. “Under the new rules, the federal government will reimburse the states for this group according to the current FMAP rates, not the 90-100 percent rate.”


‘Taxpayers on Hook Either Way’

Citing another major driver of costs hitting the states, Blase points out the U.S. Department of Health and Human Services is going to be doling money out for states for the establishment of the exchanges. The PPACA gives states little flexibility in what kind of insurance plans may exist. Blase says there are to be four types of plans, on a sliding price scale.

“The exchange is just supposed to be a marketplace where individuals can go and buy insurance,” Blase said. “But setup costs will be an issue for states.”

Only Massachusetts currently has an exchange set up, Blase says, and Utah is in the process of developing one.

The budgetary requirements for creating these exchanges are as yet unknown. According to Mitchell, the Massachusetts Connector exchange required $25 million in start-up funding to cover only about 2 percent of the U.S. population—indicating start-up costs for the other 98 percent could be quite high.

“Whether it’s a cost borne at the state or federal level is almost pointless, since the point is that taxpayers are on the hook either way,” said Mitchell.


Loren Heal ([email protected]) writes from Neoga, Illinois.