State implications vary widely under new Medicaid landscape

June 1, 2010

The Patient Protection and Care Act will allow health insurance coverage through state-based health insurance exchanges, expand Medicaid eligibility, and subsidize insurance premiums, all of which involve state implementation.

NATIONAL REPORTS-For uninsured Americans, the Patient Protection and Affordable Care Act (PPACA) likely seems a winning proposition. But do cash-strapped states win or lose under its provisions? The answer is not so simple.

Alan Weil, executive director of the National Academy for State Health Policy, offers the analogy of a $300 pair of designer shoes marked down to $30.

"On the one hand, it's a good deal, because you can get something at a highly discounted price," he says. "On the other hand, you still have to come up with the $30, which you may or may not feel that you have. How states feel depends very much on whether they focus on the $300 value or the $30 cost."

"The implications for states are highly variable, depending on factors such as their current level of Medicaid coverage, their current number of uninsured, the status of their current small group and individual insurance markets, and the nature of the state's healthcare delivery system," Weil says.

The biggest impact of PPACA on states comes from the expansion of Medicaid eligibility. Rolls have already expanded significantly because of rising unemployment, and Medicaid already represents an average 21% of state spending. Beginning in 2014, when PPACA expands Medicaid eligibility to 133% of the federal poverty level (FPL), enrollment is sure to grow exponentially.

"Some states are in a better position than others going into this because they already are funding at a level closer to the 133% federal poverty level," adds Nicole Johnson, senior vice president of Moody's Investor Services.

Those states, however, are the exception. The new requirement is more than double the average of 66% FPL in most states and nearly triple the 44% FPL in 12 states, according to "Healthcare Reform Expected to Create Longer Term Financial Pressure for States," a report from Moody's that Nichols co-authored.

MORE MOVE TO MEDICAID

The federal government initially will subsidize 100% of the cost to add newly eligible patients to Medicaid for the first two years. Beginning in 2017, however, the federal government will begin to reduce its subsidy, phasing it down to 90% by 2020. So, states will likely feel greater financial pressure in the long term, especially those whose current Medicaid eligibility is significantly below FPL.

"Depending on what [the state's] population is, even that 10% could be a large number," Johnson says.

Also, beginning in 2014, PPACA will extend Medicaid eligibility to childless adults, a group not covered by Medicaid in 39 states. States will be responsible for covering the costs of those who are currently eligible but do not receive Medicaid.

"All this comes at a time when states have been struggling with the recession," Johnson says. "I still expect them to have budget strains for the next couple years as we climb out of the recession. Even the strength and timing of the recovery are uncertain."

Individual states face at least $21.9 billion in budget gaps for fiscal 2011, with some states facing "one of the worst, if not the worst, fiscal periods since the Great Depression," according to a 2009 report from the National Governors Association and National Association of State Budget Officers. The report predicts that state revenues will remain depressed throughout fiscal 2010 and likely be sluggish into fiscal years 2011 and 2012.

Federal funds will be available January 1, 2015, to help states establish exchanges. Afterward, however, states will incur increased management and administration expenses associated with the exchanges, including enrollment mechanisms, eligibility determination, transparency regarding plan provisions, premium costs, covered benefits, and coordination between the exchanges and state insurance departments, the report from Moody's states.

Although provisions of PPACA will likely put further strain on state budgets, it potentially could improve them, according to a September 2009 report by the Presidents Council of Economic Advisers. The savings would come from the reduced need for charitable care for the uninsured, which costs billions of dollars each year.

Depending on how states look at it, it's almost like saving 90% on a pair of designer shoes.

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