Implications of Medicaid Financing Reform for State Government Budgets

Abstract

Strain, and the participants of the Harrington Symposium on Health Economics at the University of Texas at Austin for helpful feedback. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Medicaid and fiscal federalism during the COVID‐19 pandemic

“…For example, the American Reinvestment and Recovery Act of 2009 included a similar FMAP enhancement that was in effect from October of 2008 through June of 2011. This increased federal spending by roughly $100 billion (Clemens & Ippolito, 2018;Kaiser Family Foundation, 2011), 8 which represented a substantial portion of the total $232 billion in grants-in-aid that was transferred to states through the ARRA (United States Bureau of Economic Analysis, 2020b). In the current context, the gross transfers triggered by the Medicaid provisions in the FFCRA exceed the $150 billion allocated to state and local governments through the Coronavirus Relief Fund in the CARES Act.…”

“…We now consider the extent to which federal aid has been targeted toward states in which Medicaid enrollments have risen the most dramatically. The biggest source of relief targeted to the needs generated by enrollment shocks is the matching structure of Medicaid itself, which triggers additional federal funds when spending rises to finance enrollment increases (Clemens & Ippolito, 2018). As Medicaid spending rises, the federal match automatically reduces states' exposure.…”

Implications of the Covid-19 Pandemic for State Government Tax Revenues

“…This need could largely be avoided by converting existing federal transfers to states, which have exceeded 3% of GDP in recent years, into grants that adjust counter-cyclically. Possibilities along these lines have been discussed in the context of Medicaid financing reforms (Clemens and Ippolito, 2018;Fiedler, Furman, and Powell, 2020) as well as general intergovernmental support (Bartik, 2020). In each case, the key adjustment is to link federal transfers to states' unemployment rates (or to other measures of macroeconomic well-being).…”

Fiscal Federalism and the Budget Impacts of the Affordable Care Act's Medicaid Expansion

“…Given that this latter index typically grows at a rate significantly below Medicaid costs (Park, 2019), states pursuing this proposal would likely experience significantly greater demands on state revenues over time to support the current scope of their Medicaid programs. 8 Moreover, if the caps are not adjusted during economic downturns, states may be further exposed to budgetary risk due to their inability to use debt financing (Clemens & Ippolito, 2017). Thus, this policy may produce some of the hypothesized negative effects on state budgets -crowd-out of non-health care spending and budget shortfalls -that some predicted would occur under Medicaid expansion, but that have not occurred.…”