CARLSBAD, Calif. – The future of federal healthcare programs remains a major long-term uncertainty for California's budgets even as the immediate GOP effort to repeal the Affordable Care Act appears to have fallen short.

Though the latest attempt — the bill introduced by Sens. Lindsey Graham, R-South Carolina, and Bill Cassidy, R-Louisiana, was pulled Wednesday when it looked unlikely to garner the needed votes, change is coming, according to speakers at this week's Bond Buyer's California Public Finance Conference.

Martin Arrick of S&P Global Ratings
"We are questioning the reliability of Medicaid with the federal government as a funding partner," said S&P Global Ratings analyst Martin Arrick.

"It is our view the federal government is still focused on changes in federal funding to Medicare," said Moody's analyst Genevieve Nolan, a panelist at the conference.

No one is resting easy even though the bill did not make it to a Senate vote.

The Golden State would take a hit with any substantial loss of federal funding.

Only Nevada, Oregon and Colorado saw larger enrollment growth in Medicaid than California after the state tied its Medicaid program to ACA, according to a Sept. 21 Moody's report.

Moody's has a list of eight states that would be impacted if ACA were repealed – and all eight are expansion states just like California, Nolan said.

California expanded its Medicaid program in connection with ACA in 2014, one of the first states to launch a full-scale program aimed at insuring all of its poor and self-employed uninsured workers. The Golden State's move has created a situation where it has a growing reliance on federal funding.

California Treasurer John Chiang, who is running for governor, named repeal of ACA as one of the highest fiscal concerns for the state during his remarks at the conference, because of the magnitude of the loss of federal funding.

A partial ACA repeal could cost the state $138 billion over the next decade, he said. California's fiscal 2018 general fund is $125 billion.

Studies have also estimated 209,000 jobs could be lost in the healthcare sector, he said.

"That would stall out the economy and put huge headwinds to economic progress for the state," he said.

The 31 states that adopted expansion plans under ACA are the ones most likely to suffer if federal funding is ratcheted back, analysts from all three rating agencies said in separate reports.

"We are questioning the reliability of Medicaid with the federal government as a funding partner," said S&P Global Ratings analyst Martin Arrick, who moderated the panel on ACA. "I can imagine the day when the federal government wakes up and says we will not fund this."

Shifting to block grants would have been not just a rollback of ACA, but of Medicaid itself, Nolan said.

Under the Graham-Cassidy bill, states would have received capped funding on a per-enrollee basis, rather than as an open-ended entitlement basis. By diminishing the countercyclical fiscal feature of Medicaid's traditional funding arrangement, S&P analysts said, the legislation would have resulted in more acute fiscal pressure on the states in economic downturns.

Medicaid accounted for more than half of all federal funding to the states, at $330 billion, S&P said in its report.

Silhouette
Genevieve Nolan

The effort in the Senate to repeal the ACA would have represented “nothing short of an overhaul to the federal-state fiscal relationship,” S&P analysts said in a report Monday.

The flow of federal funding for Medicaid has functioned as a fiscal stabilizer for state finances, S&P analysts wrote, because it's countercyclical: it increases during economic downturns. Diminishing the countercyclical fiscal feature of Medicaid's traditional funding arrangement would result in more acute fiscal pressure on the states in economic downturns.

Rolling back federal funding for Medicaid would also be negative for not-for-profit healthcare providers, analysts said.

When Medicaid legislation was approved in 1964, it was a $3 billion program; now it is close to $1 trillion, said panelist Kevin Holloran, a Fitch managing director.

"No one thought it would go where it has," Holloran said. "The question is: where do we go from here, and no one knows."

Nationally, a full repeal of the act may cost hospitals about $399.77 billion of revenue in the next 10 years, according to a report released December 2016 by the Federation of American Hospitals and the American Hospital Association. That would put pressure on ratings of the health care sector, which has issued almost $154 billion of bonds from 2010 through 2015, with pain likely to spread to state and local budgets as well.

California’s federal Medicaid funding increased substantially over the last five years, largely due to growth in the state’s expansion program, according to a Sept. 21 Moody’s report.

“This growth exposes the state to difficult decisions ahead if changes in federal healthcare policy result in reduced federal Medicaid funds or if the expansion program is phased out, Moody’s analysts wrote.

Medi-Cal, California’s Medicaid program, is the largest among the states as measured by total expenditures and enrollment: 2016 enrollment was 13.4 million or 33.2% of the state’s population, according to Moody’s.

California’s $82 billion of state and federal Medicaid expenditures equate to 50% of the state’s own-source revenues in fiscal 2016, the report said.

The Graham-Cassidy bill would have reduced the number of people with comprehensive health insurance by millions, according to a preliminary analysis from the Congressional Budget Office.

The CBO had said it would not be able to do a comprehensive analysis of the bill that would roll back ACA expansion and shift Medicaid to federal block grants by Saturday deadline, after which proponents can no longer use a special rule that allows them to advance repeal legislation with only 50 votes instead of the 60 normally required to pass controversial bills in the Senate.

California has three options to control Medicaid costs: reduce eligibility, cut services or lower provider payments, Moody’s analysts wrote. But removing residents from the eligibility roles or eliminating some services would shift the financial burden to lo- income residents and hospitals.

The state already has one of the lowest fee reimbursement rates in the country at 76% of the national reimbursement rate, according to Moody’s.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.