State Fiscal Conditions and Medicaid: 2014 Update

Executive Summary

Medicaid plays an important role in supporting states’ ability to finance health coverage for their low-income populations; Medicaid has helped finance coverage of over 66 million low-income Americans across the country, including over 9.5 million low-income Medicare beneficiaries.¹ The program is the primary payer for long-term care services and a major source of revenue for safety-net providers. This issue brief provides an overview of Medicaid financing, Medicaid’s role in state budgets, the relationship between Medicaid and the economy and how the ACA and the Medicaid expansion could affect state budgets. Key findings include:

• State lawmakers must balance competing spending and revenue priorities. Medicaid’s role in state budgets is unique; it is jointly financed by states and the federal government. States receive at least $1 of federal funds for every $1 of state funds spent on the program. This financing structure means that Medicaid acts as both an expenditure and the largest source of federal revenue in state budgets.
• Economic conditions have a substantial effect on Medicaid spending and enrollment. During economic downturns demand for Medicaid rises which increases program spending at the same time, state tax revenues fall.  In response, Congress has twice passed temporary increases to the FMAP rates to help support states during economic downturns, most recently in 2009. These increased federal funds resulted in declines in state Medicaid spending for the first time in the program’s history.
• More recently, states are beginning to see slow, but sustained economic improvements following the worst recession since the Great Depression. States have now seen 16 consecutive quarters of tax revenue growth while unemployment continues to slowly decline. As economic conditions continue to improve, pressure on Medicaid enrollment and state budgets has lessened, allowing for some restorations. States have also engaged in more fundamental transformations to Medicaid payment and delivery systems to control costs and improve care delivery particularly for high-cost populations.

The ACA played a significant role in state budget decisions about Medicaid for FY 2014. Required changes to streamline and coordinate enrollment as well as broader ACA outreach were expected to result in increased enrollment (and thus increased spending) in all states. States also weighed decisions on the Medicaid expansion. For those that expand Medicaid, the federal government will pay 100 percent of the costs of those newly eligible from 2014-2016; it then phases down to and stays at 90 percent by 2020 (well above regular match rates.) In addition to substantial new federal revenues and increases in coverage, state budget savings within and outside of Medicaid as well as broader economic effects have also been projected in a number of studies. States that do not adopt the expansion will forgo substantial federal revenues and poor adult residents may fall into a “coverage gap”.