New Incentive for States to Adopt the ACA Medicaid Expansion: Implications for State Spending

New Incentive for States to Adopt the ACA Medicaid Expansion: Implications for State Spending

As of February 2021, 12 states have not adopted the Affordable Care Act (ACA) provision to expand Medicaid to adults with incomes through 138% of poverty. Millions of people in these states remain without an affordable coverage option. Currently, the federal government covers 90% of the cost of Medicaid coverage for adults covered through the ACA expansion, a higher share than it does for other Medicaid enrollees. The House Energy and Commerce Committee reconciliation proposal as part of the COVID relief package aims to encourage non-expansion states to take up the expansion by providing an additional temporary fiscal incentive for states to newly implement the ACA Medicaid expansion. This brief provides illustrative estimates of the net fiscal benefit to states from these incentives relative to state costs under the expansion. We review the methods underlying these estimates in the Methods section at the end of the brief.
How Does the Fiscal Incentive Work?
Under the proposal, states would receive the 90% ACA match for the expansion population. Under the ACA, states currently receive a 90% federal matching rate (FMAP) for adults covered through the ACA expansion (this amount was 100% in 2014 and phased down to 90% over time). In states that have not expanded to date, adults who could be covered under expansion include about 4 million uninsured people (2.2 million with incomes under poverty in the “coverage gap” and 1.8 million currently eligible for marketplace coverage because their incomes are between 100% and 138% of poverty level). In addition, individuals with incomes 100-138% of the federal poverty level (FPL) who are currently enrolled in marketplace coverage would become eligible for Medicaid.
Under the proposal, states that do not have expansion in place when the bill is enacted would be eligible for a 5 percentage point increase in the state’s regular, or traditional, match rate (FMAP) for two years if they implement the expansion. The traditional FMAP applies to most services for non-expansion groups, including children, non-expansion adults, seniors, and people with disabilities. Even in states that have already adopted the expansion, the traditional Medicaid program is much larger – representing 79% of Medicaid spending overall in these states – and per enrollee costs are relatively higher than the expansion group. So, under this new incentive, states could draw down additional funds for a large share of their Medicaid population and spending if they newly expand. In addition to the 12 states that have not adopted the expansion, the increase in the match rate could also apply to Missouri and Oklahoma if the bill is enacted before they implement the expansion (these states are expected to implement in July 2021). Further, if states newly adopt the expansion in the near term, the new 5 percentage point increase would be in addition to the current 6.2 percentage point increase in the match rate provided under the Families First Coronavirus Response Act (FFCRA) that is tied to the Public Health Emergency (PHE). Based on a January 2021 letter from the Biden Administration to Governors, the 6.2 percentage point increase in the match will be in place at least through March 2022, halfway through federal FY 2023. While the enhanced match would be in place for two years after a state implements the Medicaid expansion, states can take advantage of this new option any time in the next ten years.
What Is the Estimated Effect on State Spending?
We estimate that the increase in the traditional match rate would more than offset the increased state costs of the expansion in every state. Nationally, the increase in federal support from the 5 percentage point increase in the traditional match rate to the 12 non-expansion states could total $16.4 billion over two years if all states implemented the expansion starting in FY 2022. These new federal funds to states would be offset by new state costs tied to the 10% share of expansion. We estimate that new state costs for expansion could be $6.8 billion over two years across current non-expansion states, assuming all eligible people enroll. The result would be an estimated fiscal benefit to states of $9.6 billion over the two year period (Figure 1). Put another way, new federal funds under the 5 percentage point bump are more than two times larger than new state expansion costs; this ratio varies slightly across states, from more than one a half times larger in Texas to over four times larger in South Carolina (Table 1).
Figure 1: New Financial Incentive for States To Implement the Expansion Would More Than Offset New Costs
After the two years, states would continue to receive the 90% match for the expansion group and the traditional match without the 5 percentage point increase for the traditional population. These estimates do not include additional federal funds that states would draw down through the 90% federal match on expansion spending, which would continue as long as the expansion is in place. States would continue to fund the 10% share of expansion and would lose the added fiscal incentive after two years. Research shows there are often savings in other state programs related to expanding Medicaid as well as revenue increases due to the infusion of federal funds associated with the 90% match on expansion spending. In addition, states could fund these ongoing costs with funds from the temporary enhanced FMAP that exceeded the cost of expansion; however, as states generally balance their budgets annually and may use the additional funds for other purposes, applying these funds to a later year may be difficult in practice.
These are illustrative estimates and subject to uncertainty. For example, the estimate of increased federal support from the enhanced match rate could be low if traditional Medicaid enrollment grows faster than our estimates assume, which may be possible given the pandemic and economic effects. In addition, the estimates of costs for new coverage could be high as we do not model take up but rather estimate costs for all eligible people; alternatively, the estimate for expansion could be low as it is based on national survey data that typically undercounts lower income people. Even with some uncertainty in the estimates, the magnitude clearly shows that the federal support would significantly outweigh the new costs of expansion while the temporary expansion incentive is in place. These estimates are not comparable to estimates from the Congressional Budget Office (CBO) that are capturing changes in federal spending over the next 10 years and incorporating behavioral responses that assume not all states would adopt the new option. The CBO estimates account for increased federal spending and reduced costs for federal subsidies in the Marketplace for states that adopt the expansion. CBO assumes that the option could increase federal spending by a net of $15.5 billion over the 2021-2030 period.
Medicaid expansion in the remaining 12 non-expansion states has the potential to reach millions of people. A comprehensive literature review of Medicaid expansion studies shows that expansion helps to expand coverage and reduce the uninsured, improve access to and utilization of care, reduce uncompensated care costs, improve affordability of care and reduce racial and ethnic disparities in coverage. The proposed provisions would also provide substantial fiscal incentives for states to expand, which could be attractive given recent state revenue declines. However, given that the expansion incentive would be temporary, its effect may be limited.

Increased Federal Funds from FMAP Increase on Traditional Populations
New State Cost Due to ACA Medicaid Expansion
Net Effect for State Spending

Total*
$16,410
-$6,830
$9,590

Alabama
740
-200
540

Florida
3,080
-1,260
1,810

Georgia
1,360
-640
710

Kansas
450
-210
250

Mississippi
690
-290
400

North Carolina
1,700
-490
1,210

South Carolina
790
-190
600

South Dakota
110
-50
60

Tennessee
1,260
-360
900

Texas
5,020
-3,090
1,930

Wisconsin**
1,140
**
1,140

Wyoming
70
-40
30

Adopted Expansion but Not Implemented

Missouri*
1,150
*
1,150

Oklahoma*
520
*
520

NOTES: Figures may not sum to total due to rounding. *Total excludes OK and MO because these states were scheduled to implement the expansion in July 2021 and thus do not face new state costs under the policy change. **We do not calculate new state costs for expansion for WI because the state currently provides Medicaid eligibility to childless adults earning up to the poverty level under a state waiver, at the regular FMAP; thus, even with additional costs due to covering currently marketplace-eligible people, the state would likely see fiscal gain under expansion by moving waiver enrollees from the regular state match to the 90% expansion match.
SOURCE: KFF estimates and analysis.

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