CHICAGO - The Medicaid expansion program that is part of federal health care reform is fast becoming one of the most controversial aspects of the new law, but whether or not a state ends up participating could end up having little impact on its credit, industry experts say.

Before the Supreme Court's ruling last week, the Affordable Care Act was expected to mean 32 million more Americans would be covered by insurance. Of that, 16 million were expected to be covered under Medicaid, the joint program paid for by individual states and the federal government that typically accounts as a top budget item for states.

The court's ruling, however, made states' participation in the expansion voluntary. Nearly a dozen states, all led by Republican governors, have said they plan to opt out.

The decision to opt out could reduce the 16 million figure, spawning problems for hospitals and local governments in the states that have opted out. As the new law draws closer to reality in 2014, the lobbying from hospital officials and other supporters is expected to grow more intense.

But for the states themselves, the decision to participate or not appears to have little impact on their bottom line, credit analysts and other municipal market participants said.

"From our perspective, we don't at this point envision any near-term impact to state credits regarding the question of whether they choose to opt out or in," said Moody's Investors Service analyst Robert Kurtter.

Under the new law, Medicaid will be expanded to cover people who earn up to 138% of the federal poverty line, and the federal government has pledged to cover states' expansion costs by 100% through 2016, then gradually reduce it to 90% by 2020 and after.

The federal government currently pays between 50% to 80% of Medicaid costs.

"The increased costs to the states are not yet known, but we would suggest that they appear to be manageable," Kurtter said.

Standard & Poor's analyst Robin Prunty also said she expects little near-term impact from the new law.

"A lot of the rules and regulations are still in process, so some of the fiscal implications are still yet to be determined," Prunty said during a recent Standard & Poor's webinar on the reform law. "A lot of the initial costs of expansion are largely funded by the federal government, so it's not an immediate credit issue for U.S. states," she said. "Health care overall will be a medium-term challenge."

Medicaid programs vary widely among the states, and that means the costs of expansion will vary widely. States that have small Medicaid programs - and high numbers of uninsured residents, like Texas - would face higher costs due to expansion than those with more generous Medicaid programs.

Reform could increase the variability among Medicaid as some states opt out or change their program to help offset costs, Prunty said.

"There is a lot of variation across the 50 states, and we probably would see this variability increase," she said. "It was also the primary vehicle for enhancing insurance coverage, so the challenges of the uninsured population could be there for states that opt not to expand the Medicaid program."

The Congressional Budget Office is expected to release updated figures on the program's cost the week of July 23. Its most recent analysis estimated the federal government would spend $923 billion on the Medicaid expansion between 2014 and 2022, and that states would spend $73 billion over that same period.

So far, six governors have said they plan to opt out of the Medicaid expansion provision of the new law and another six have said they are likely to.

The governors of the opt-out states, which include Wisconsin, Texas and Florida, said the expansion will prove too costly, in part because they will need to cover residents who are currently eligible for Medicaid but have not yet enrolled and at existing match levels.

That increase will happen whether or not a state opts to participate in the formal expansion.

"States that choose to opt out, as Texas announced, for the state itself, we see it as a credit-neutral event," said Bart Mosley, co-president of Trident Municipal Research.

"You take a state like Texas, where 20% of the population is already uninsured, opting out is essentially choosing the status quo," Mosley said. "You can argue whether there's a very long-term impact on the overall infrastructure and appeal of the state, and the business climate, with a demographic of a high number of uninsured, but this is definitely not an immediate impact."

States face the cost of covering residents who are now eligible but not enrolled, as well as the political uncertainty of the federal government's pledge, said Howard Cure, director of municipal research at Evercore Wealth Management LLC.

"There is a fear that what the federal government can legislate in, they can legislate out," Cure said. "What's stopping them from making the 90% lower?"

Like Mosley, Cure said local governments and hospitals, which will bear the direct costs of the uninsured population, will face long-term problems if a state opts out.

"Having less people insured, somebody is going to pay for that," Cure said. "States have the ability to balance their budgets on the backs of other entities, like schools, and sometimes it will be hospitals."

The price tags of expansion will vary widely among the states.

Ohio Gov. John Kasich, who is leaning toward opting out, said the new law will cost the state $950 million starting in the 2014 biennium, largely due to people who are currently eligible for Medicaid but have not enrolled. That "$950 million problem" will likely lead to cuts in K-12 or higher education, Kasich warned in a recent conference call with reporters.

In Florida, where more than 20% of the residents are uninsured, expansion could cost between $1.2 billion to $2.5 billion through 2019, depending on final enrollment size, according to a recent study by the Kaiser Family Foundation.

But Michigan fiscal officials say participating in the program could end up saving the state money over the long term.

The expansion is not expected to cost Michigan any more money over the near term, and could lead to savings of $200 million in general fund dollars that are now spent on non-Medicaid services for people who will be eligible under expansion, according to an analysis by the nonpartisan Michigan Senate Agency.

The agency projects the expansion will mean about 400,000 new individuals will be covered at the cost of about $2 billion annually, a tab that will be fully covered by the federal government in the early years.

"Thus, while there would be long-term general fund/general purpose costs for the expansion, there would be savings that would more than offset any costs from the first day," the agency wrote in the memo. "Therefore, the decision on whether to comply with the Medicaid expansion will be more of a policy issue than a fiscal issue. The fiscal impact of the expansion would not be an impediment to compliance."

States also face the administrative and information technology costs of expanding Medicaid and setting up the insurance exchanges. Those costs, like much of the new law, won't fully be known until states begin to implement the law in 2014.

Many states continue to wait until after November to embark on the changes, as Republican presidential candidate Mitt Romney has said he would repeal reform immediately upon taking office.
Assuming a victory by President Obama in November, however, many observers are doubtful that any states will leave the federal money on the table, and most states are starting to move forward with plans for expansion.

"Medicaid was before reform the greatest area of fiscal integration between states and the federal government," Prunty said. "Health care overall is a significant budget issue, and how these costs are managed over the longer term will certainly have an effect on individual state budgets and will continue to be a credit focus."

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