State Budgets

Medicaid Expansion Weighs Heavily on State Budgets

States should be wary of the actual cost of Medicaid expansion.

It has been almost ten years since Medicaid expansion was first enacted, and 39 states have passed and/or enacted their Medicaid programs under the Affordable Care Act (ACA). Most recently, South Dakota voters approved Medicaid expansion via ballot measure in November 2022. But a recent look at the numbers shows that the other 11 states should beware of efforts to enact expansion.

Both enrollment and spending have far exceeded projections in expansion states. A 2018 study by the Foundation for Government Accountability shows that states that have expanded Medicaid have signed up more than twice as many able-bodied adults as anticipated. Medicaid expansion per-person costs exceed original estimates by 76%, and these two factors have led to cost overruns of an average of 157%.

Examining spending data shows that Medicaid expansion meant increases in federal funds over the long term, but state Medicaid spending as a percent of total state spending also spikes in years following Medicaid expansion. Medicaid is eating up a third of some state budgets, and a Pew research study found that Medicaid spending as a percentage of state budgets increased by 39% from 2000-2017. The growth in state Medicaid spending is more than double the growth in spending on education for the last decade. It is a trajectory that most states cannot afford without massive cuts to core services. Some states may be tempted to impose or economically devastating tax increases.

Under the Affordable Care Act, federal funding was at 100% for the expanded population until 2017 when it decreased to 95% and continued to drop. This year it is at 90%. However, as state policymakers debate Medicaid expansion, they should consider that there is no guarantee the federal funding will stay at that level. If it does not, then states will be left holding the bag.

Expansion has also led to $100 billion in waste, fraud and improper spending. Most of this is due to failure to verify eligibility. This is an even more of an issue since the public health emergency (PHE) went into effect in 2020. The current PHE prevents states from removing enrollees from Medicaid regardless of their eligibility status. The PHE has been extended several times—most recently through April 2023.

Additionally, the data is mixed on whether expanding Medicaid translates to better health outcomes. A recent National Bureau of Economic Research (NBER) study casts doubt on the claim many proponents make about Medicaid expansion saving lives. Regardless, many Americans have reported longer wait times, provider shortages and delayed care in states that have expanded their programs.

Overall, states should be wary of the actual cost of Medicaid expansion. The federal government cannot continue to run massive deficits forever. States will likely be on the hook for a lot more than they bargained for. There are alternatives to increase health care coverage—direct primary care, health care sharing and farm bureau style plans just to name a few. They will leave state budgets much better off in the long run.

In Depth: State Budgets

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