WASHINGTON – The pressures states feel from increased Medicaid spending could resonate at the local levels, according to a bond rating analyst.

“It’s not just for states directly,” Fitch Ratings director Eric Kim said at last week's Brookings Municipal Finance Conference.

“What we have seen historically is that problems run downhill in public finance. So when states face budget issues, they just download those issues,” Kim added. “School districts in particular, higher education institutions and healthcare providers when it comes to Medicaid, they suffer consequences of states having to manage these issues.

Eric Kim, analyst at Fitch Ratings
“What we have seen historically is that problems run downhill in public finance," said Fitch Ratings analyst Eric Kim.


“So if there were changes in terms of how the federal government pays for Medicaid and contributes to that program, certainly there would be stresses at the state level, but we think the stresses might be even more severe lowered down.”

Most states have continued to increase Medicaid spending in fiscal 2019, including ramp-ups related to Affordable Care Act expansion.

Medicaid's expenditures are roughly 25% of many states’ total annual expenditures, according to the National Association of State Budget Officers. That, said Kim, makes management an important credit factor.

Virginia became the 33rd state to expand. Maine's voters approved an expansion ballot initiative last November, but Gov. Paul LePage has blocked implementation to date. Utah voters will decide on an ACA expansion ballot initiative in November, while similar initiatives may appear on Nebraska and Idaho ballots.

“It’s a big issue for states,” Louise Sheiner, policy director for Brookings’ Hutchins Center on Fiscal and Monetary Policy, said at the conference on July 17. “Health spending at the state level, which is mostly Medicaid, is a really big deal. It’s a larger share of budgets.”

Federally approved waivers from Medicaid's statutory requirements provide flexibility for state governments. All states have approved Medicaid waivers from the Centers for Medicare and Medicaid Services, “but requests are complicated, not always successful, and even after CMS approval, waivers are subject to legal challenges,” Kim said.

CMS on June 27 denied a Massachusetts waiver request for the nation's first Medicaid closed formulary for prescription drugs. “[It] would have made some pretty significant changes in how they do prescription drugs,” said Kim.

By limiting covered drugs, Massachusetts believed it could negotiate better savings than what the federal Medicaid Drug Rebate Program offers. The commonwealth's waiver request also proposed shifting certain enrollees in the ACA’s Medicaid expansion to subsidized private insurance.

Two days later, Judge James Boasberg in the U.S. District Court for the District of Columbia nullified Kentucky's Medicaid work requirements waiver in the Stewart v. Azar case.

Kentucky, in its waiver application, projected Medicaid enrollment would decline by 95,000 over five years, generating possible savings of $300 million to $400 million for the commonwealth over five years and $2 billion for the federal government.

Short-term pressure on states, according to Sheiner, includes ACA status, Medicaid status and expansion state regulation of insurance markets, and the opioid epidemic.

“We’re all confounded by the incredible crisis around opioids,” said Kate McEvoy, health services director at the Connecticut Department of Social Services. “It’s a public health issue that has definitely defied easy resolution.”

She cited the rise in deaths despite such interventions as supply restrictions, education for providers and consumer literacy.

Long-term variables for states, said Sheiner, include the possibility of block grants, budget pressure from continued cost growth, aging populations and pension obligations.

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