CHICAGO — The federal health care overhaul could cost Indiana up to $2.9 billion through 2020, a new report estimates.

The impact is less than the $3.6 billion projected in an earlier report, but is still high enough to require major cuts or new taxes in future budgets, said Gov. Mitch Daniels.

Indiana hired actuary Milliman Inc. to estimate the cost of the new law. Daniels ordered a revised report using lower Medicaid assumptions after a pair of Democratic congressmen in favor of the reform bill challenged the $3.6 billion figure.

“Under any scenario this is going to be a whopping big cost to the taxpayers of Indiana,” Daniels said at a press conference last week. “It’s going to crowd out education and other important state functions or lead to a big tax increase a few years down the line.”

Indiana is one of 18 states that sued over the law, saying it violates constitutional rights by forcing Americans to buy insurance, and that the new Medicaid standards will force states to spend billions in additional dollars.

Like other states, Indiana is trying to get a handle on how the new law will affect future budgets. Michigan fiscal analysts, for example, predict the reform will have little effect on the state until 2020, and then mean only a $200 million annual cost that can be offset with other savings from the new law.

The law’s key cost to states and local governments will be an expansion of the Medicaid program, according to experts.

Medicaid is already a top expenditure for most states, accounting for up to 20% of their budgets. The expansion — which begins in phases but will largely start in 2014 — accounts for nearly half of the cost of the new $940 billion law over the next 10 years.

Of the 50 million Americans that will be newly insured under the law, 20 million will be covered under Medicaid, according to an analysis of the legislation by law firm Holland & Knight. The expansion is expected to cost $400 billion nationally over the next 10 years.

“There will be some significant budgetary implications going forward for states and other governmental entities that rely on Medicaid or use it,” said Randolph Fenniger, a senior policy advisor with Holland & Knight and one of several policy advisers who held a webinar highlighting the law’s effect on state and local governments last week.

In fact, by 2020 Medicaid is expected to be larger than Medicare, the firm said. Medicare cuts are one of the main ways the government expects to help pay for the new law.

“We are looking at substantial growth in one of our public payer programs,” said Holland & Knight adviser Kate Leeson.

In Indiana, the Medicaid expansion will cost between $972 million and $1.3 billion over the next 10 years, the Milliman report said. The cost comes despite federal matching funds that cover 100% of the expansion through 2016. Starting in 2017, states will be required to start chipping in, starting at 5% and reaching 10% by 2020. Assuming that 1.4 million Hoosiers join Medicaid after 2014, the cost to the state would total just over $2.9 billion, Milliman said. With full participation of 1.5 million new members, the impact would likely be around $3.6 billion.

“These are new costs on top of what is already a huge expenditure for state government,” Daniels said. “Our job here is to deal with the grim reality of all these new costs the federal government has imposed on the state.”

In addition to Medicaid, the new law’s top costs to Indiana come from physician reimbursement rates that are likely to rise, and a reduction in the state’s federal rebates from the pharmacy rebate program.

But the state will also save up to $250 million over the next 10 years from other provisions, mainly from increased federal funding for the Children’s Health Insurance Program. The law also features new programs that could mean new federal money for states and local governments, Holland & Knight advisers said.

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.