CHICAGO — States already facing big challenges balancing their budgets should brace for new costs and volatility stemming from implementation of the new federal health care law over the next few years, Standard & Poor’s said in a new report.
The expansion of the Medicaid program, a key element in the new law, could strain state budgets, analysts said in the report, which is called “U.S. States Brace for Health Care Reform and Higher Medicaid Spending.”
Medicaid programs typically are among states’ top expenditures, making up an average of 20% of general fund costs. States often cut them to bring down deficits.
Federal stimulus money that helped states cover Medicaid costs the past two years will expire June 30, when fiscal 2011 ends in 46 states.
“We believe many states will probably try to protect their financial position by developing proposals to reduce Medicaid program costs,” analyst Robin Prunty said in the report. “How they accomplish this while pursuing the reform act’s goal of expanding eligibility will bear watching over the next year.”
Governors across the country, from New York to Wisconsin, are unveiling fiscal 2012 budget proposals that feature Medicaid cuts to help close large budget gaps. Arizona Gov. Jan Brewer, for example, has requested a federal waiver to suspend Medicaid coverage for 280,000 adults to help balance the budget.
The expansion provision will make anyone earning up to 133% of the federal poverty level eligible for Medicaid starting in 2014. Federal funding will cover the expansion for the first several years, before gradually decreasing to 90% coverage by 2020.
“As more costs shift from the federal government to the states, budget pressures will mount in the absence of cost containment initiatives,” Prunty said in the report. “In states with large uninsured populations, the stakes for fiscal balance could be quite high.”
The federal government will not cover costs for individuals who were previously eligible for Medicaid but declined to enroll until the insurance mandate kicked in. The costs of covering those individuals could also strain state budgets, Prunty said.
States could see other new costs as a result of the requirement for them to set up insurance pools to facilitate the law’s provision that every American purchase insurance. Administrative requirements associated with the reform will also mean more costs, analysts said.
The report comes as several challenges to the law, many from states, begin to wind their way through the court system. Standard & Poor’s said it expects a legal resolution to take a few years.
Analysts do not expect the Senate to follow the House’s efforts to repeal the law.
