Why Most States Will Not Replace Federal Medicaid Cuts
Whether you are for the Medicaid cuts under discussion or against them, don’t expect many states to replace significant cuts in federal Medicaid funding. If any state does, it may lead to cuts in other state programs outside of health care such as corrections, environmental protection, social services, transportation, education or higher education, or possibly force some states to raise taxes.
That’s primarily because states are required to balance their budgets, and generally only increase spending to cover inflation unless state revenue growth is unusually strong. Even then, many states choose to put new revenues into rainy day funds rather than increase spending they may not be able to sustain in the future. State revenue growth has been weak and is at best expected to return to normal.
State spending on Medicaid is already the second-largest item in most state budgets (and the largest with federal funds added in). Because health costs almost always outpace inflation, merely maintaining current Medicaid coverage and benefits generally requires a larger percentage increase in spending than other budget lines do, and Medicaid consumes an oversized share of the new dollars available to states each year when they put their budgets together. I have experience being the least popular person around the table in state cabinet meetings when education, higher education, corrections, environmental protection, and transportation could not get their share of new dollars for their priorities because it was already spoken for by the routine annual Medicaid increase. As one state senator said to me: “Commissioner, you mean you need a third of the budget increase just for your Medicaid division, but you are not covering a single new person?”
In the “umbrella” agency I ran (for a Republican governor), more money for Medicaid also meant less money for welfare and welfare checks, children’s and family services, psychiatric hospitals and community mental health services, developmental disabilities, veteran services, school-based services, homelessness, people who are blind or visually impaired, as well as a long list of other social services programs. Partly that was about money and partly it was about the realities of state budget politics. A single department and cabinet member, no matter how worthy the purposes or artful the leader, could only get so much of the new money available in a state budget each year.
A few illustrative numbers help show why it’s so hard to replace lost federal Medicaid funding and how it would impinge on other state priorities to do so:
A rough estimate is that Ohio would have to replace $2 billion a year in lost federal funding if Congress discontinued the enhanced federal match for the Medicaid expansion. That’s about what it spends on higher education ($2.7 billion), and corrections ($2.3 billion).
Arizona would lose approximately $1.9 billion annually in federal matching funds for its expansion. It spends $1.5 billion a year on corrections and $3.1 billion on transportation.
Eliminating the enhanced federal match for the expansion may or may not happen. Or it may partly happen. Some Republicans in Congress now question whether the enhanced match should have been provided in the first place (it operates to incentivize states to expand coverage knowing they could not do it on their own). But if the enhanced match is cut or eliminated, it will illustrate how difficult it will be for states to replace lost federal Medicaid funding. For many states it’s the equivalent of coming up with an amount equal to their corrections or transportation or higher education budgets. Typically, it would be more than all state spending on social services on which hundreds, and in larger states like California, thousands of community organizations depend.
States would also save by no longer providing their 10% state share of the match for the expansion population, unless they have to put more dollars into backstopping local rural and urban public hospitals that will see larger numbers of uninsured. It varies by state, but states have also used provider taxes and a variety of other intergovernmental transfers to bolster their Medicaid programs and their finances generally.
Here is one more example from a larger analysis we will be producing shortly. For illustrative purposes, if you allocate the $880 billion dollars in Medicaid cuts Republicans are currently contemplating to the states based on their usual share of federal funding, and look at a few swing states, a similar picture emerges. Michigan would lose $2 billion a year, which is a bit less than it spends annually on higher education ($2.7 billion). Wisconsin would lose $1 billion a year, about what the state spends annually on corrections ($1.3 billion). North Carolina would lose $3 billion annually, more than the state spends each year for corrections ($2.1 billion).
The comparisons with other state budget line items show how difficult it would be in the real world of state budgets to replace lost federal Medicaid funding. For states, it would be the equivalent of coming up with funding equivalent to many of the other major line items in their budgets or cutting them altogether to replace lost Medicaid dollars. (Some of these other state budget line items are supported by special revenue sources such as casino funds or dedicated taxes.)
Cuts also roll downhill in many states in the form of less funding for counties which, in turn, have to make cuts of their own.
There is an unwritten handbook state human services and Medicaid officials use for cutting Medicaid if they have to. First, make the case for the state funding to replace any shortfalls. Then cut payments to providers (which are often already low). Then selectively reduce benefits if you can. Then last on the list, cut people from the program. With large cuts in federal spending, the latter will be unavoidable.
In the past, when Republican governors resisted big Medicaid cuts, Republicans in Congress would try to make a deal with them, delaying the implementation of cuts until they were out of office in return for their support. Tea Party Republican architects of a Medicaid block grant used this strategy in 1996, for example, although they were not successful. This time around, however, Republicans have to try to pay for tax cuts one way or another, making delaying the impact of spending cuts a less attractive strategy to use to win over Republican governors.
Governors know they will take the heat if they get billions less in Medicaid funding during their terms, knocking a hole in their state budgets and forcing them and their human services and Medicaid chiefs to make cuts in eligibility, benefits and reimbursement that will upset providers and voters. Cuts to “provider taxes” or directed payments” may be opaque and hard to follow for the public. But governors will do the math, and a lot will depend on how they respond.
The health care industry will also feel the pinch of Medicaid cuts. Medicaid accounts for 19% of all hospital revenue, and 50% of Medicaid spending goes to the managed care industry which provides care to 75% of the Medicaid population. It remains to be seen how forceful their lobbying may or may not be.
Whatever the arguments for and against the Medicaid cuts that end up being proposed and however the politics play out, don’t expect very many states to replace lost federal funding.