The Effects of the Medicaid Expansion on State Budgets: An Early Look in Select States

As enacted, the Affordable Care Act (ACA) broadened Medicaid’s role, making it the foundation of coverage for nearly all low-income Americans with incomes up to 138 percent of the federal poverty level (FPL) ($16,242 per year for an individual in 2015). However, the Supreme Court ruling on the ACA effectively made the decision to implement the Medicaid expansion an option for states. For those that expand, the federal government will pay 100 percent of Medicaid costs of those newly eligible for Medicaid from 2014 to 2016. The federal share gradually phases down to 90 percent in 2020, where it remains well above traditional federal medical assistance percentage (FMAP) rates. As of March 2015, 29 states (including the District of Columbia) adopted the Medicaid expansion, though debate continues in other states. In deciding whether to implement the Medicaid expansion, the effect on state budgets has been a key issue for policy makers. However, isolating the full effects of the Medicaid expansion across all parts of the state budget has proven challenging. State-specific estimates of the Medicaid expansion were created with varying degrees of completeness; those that were complete found net fiscal gains, with state savings and revenues exceeding increased state costs.¹

This brief looks beyond the estimates and examines the early budget effects of expansion in three states: Connecticut, New Mexico, and Washington State. The study was conducted during the Fall of 2014; budgets had been enacted for state fiscal year 2015, the first full state fiscal year with the Medicaid expansion in effect. Budget officials were also in the process of closing the books on SFY 2014, the latter half of which included the first 6 months of the Medicaid expansion in each of these states. These findings are based on interviews conducted with budget officials and staff in each of the three states; the interviews focused on their state’s experiences in this early period, when the costs of those newly eligible are fully financed with federal dollars.  Specifically, budget officials were asked about assumptions and early experiences with state savings and costs from the expansion across state budgets (within and outside of Medicaid) as well as the expansion’s impact on state revenue. (See the Methodology section for more details on how the study was conducted.) Findings from a separate report commissioned by Kentucky are also included. Key findings include:

• Overall Finding. Early evidence from interviews with budget officials in these case study states shows state savings and revenue gains with limited costs resulting from expansion, even as some potential fiscal gains have not yet been tracked.
• Medicaid Enrollment and State Costs. Enrollment of those newly eligible exceeded expectations; however, these individuals are fully financed with federal dollars through December 31, 2016, presenting no costs to states during this period. While enrollment among those previously eligible but not enrolled (which is financed at the state’s regular matching rate) increased in each of the study states, the majority of this enrollment growth was driven by other changes in the ACA rather than just the Medicaid expansion.
• Savings within Medicaid Budgets. Savings were reported within Medicaid programs in all study states as beneficiaries who otherwise would have qualified for pre-ACA Medicaid categories at the state’s regular match instead enrolled in the new expansion group and were eligible for the higher ACA enhanced match rate (and therefore reduced state costs.)
• Savings outside of Medicaid Budgets. All study states experienced savings in other areas of the state budget beyond Medicaid, such as state-funded behavioral health services and corrections. Some savings were captured for state general funds and others were reinvested, often to compensate for earlier cutbacks.
• Revenue Effects. The impact on state revenue, as monitored by budget officials, was primarily reflected in increased provider and premium taxes. Only one study state (New Mexico) accounted for the increased economic activity resulting from expansion in general revenue forecasts. A separate study found the Medicaid expansion in Kentucky led to increases in jobs and tax revenues for the state and localities.
• Long-Term Estimates of Full Effects. Disentangling the revenue and budgetary impact of the Medicaid expansion from other ACA effects as well as other factors shaping health care costs, state economies and state budgets is a tremendous challenge that is generally not part of state budget processes. The one study state that produced net estimates, Washington, projected that state savings from expansion would exceed costs, resulting in net fiscal gains. During the current fiscal year (2015), net gains of expansion are estimated to equal 1.7 percent of total General Fund spending.² Net savings through 2021 due to the expansion were also found in a separate report examining the impact of the Medicaid expansion in the Kentucky. Both states projected net state savings in future years when the federal share of spending on newly eligible adults will fall to 90 percent.

Summary Table

The Effects of the Medicaid Expansion on State Budgets: An Early Look in Select States
	Connecticut	New Mexico	Washington
Enrollment
Newly Eligible Enrollment	Higher than projected; no state costs.	Higher than projected; no state costs.	Higher than projected; no state costs.
Previously Eligible but not Enrolled	Higher than projected; mostly children.	Higher than expected; mostly adults but also some children.3	Lower than expected; mostly children.
Savings within Medicaid
Limited Medicaid programs for low-income adults	Savings from conversion of early expansion state plan group.	Substantial source of one-time savings from conversion of SCI waiver.	Substantial source of one-time savings from conversion of Bridge to Reform waiver.
Medically Needy Spend-Down	Enrollment decline noted; not included in budget.	N/A	Moderate savings noted.
Breast and Cervical Cancer Treatment	No change in enrollment.	Not noted or tracked (limited program to begin with.)	Limited savings noted from enrollment declines.
Family Planning	Limited savings noted from declining enrollment.	Not noted or tracked (limited program to begin with.)	Limited savings noted from declining enrollment.
Pregnancy Related Enrollment	Not noted or tracked.	Not noted or tracked.	Not included in budget, but enrollment decline noted (due mostly to the expansion.) Planning to take limited savings.
Savings outside of Medicaid
Mental Health and Substance Abuse	Substantial savings included in budget.	Moderate savings noted, most funds reprogrammed within agency.	Moderate savings included in budget.
Uncompensated Care	Significant savings included in budget.	N/A – mostly county responsibility.	N/A – programs had mostly been eliminated by the state in earlier years.
State Funded Indigent Care**	N/A	N/A	N/A
High Risk Pools	N/A	Moderate savings included in budget; savings are slower than expected.	N/A
Inpatient Care for Prisoners	Not explicitly accounted for in budget. Many of those eligible under the expansion enrolled in the state’s early expansion.	Not included in budget; anticipated to be small savings for counties and state.	Limited savings included in budget.
Public Health Services	Limited savings included in budget.	Exploring potential savings.	Limited savings included in budget.
Other Health Care Programs for Vulnerable Populations			Limited savings included in budget.
Revenues
Taxes or Fees on Providers	No additional revenue included in budget.	Additional revenue included in budget.	Additional revenue included in budget.
General Revenue due to increased economic activity	Did not include in economic and revenue estimates at this time.	Included in economic and revenue estimates.	Did not include in economic and revenue estimates at this time.
** Connecticut and Washington State had state-funded indigent care programs before the ACA; both states transitioned these programs to Medicaid financing before the Medicaid expansion went into effect. See Appendix A for more details.