Policy watchers are divided on whether states could make up the lost federal money and some doubt such cuts at the federal level will ever happen.

May 26— States could respond in a variety of ways—including new funding of their own—if the federal government cuts $834 billion in Medicaid funding over the next decade.

On May 24, the Congressional Budget Office (CBO) estimated the version of the American Health Care Act (AHCA) that passed the House of Representatives in April would reduce Medicaid funding enough to cut 14 million beneficiaries who otherwise would be enrolled by 2026.

State Medicaid expenditures comprised nearly one-quarter of total state tax revenues in 2016, and would rise to 28.1 percent by 2025 if federal funding is unchanged, according to a new report by Moody’s Investors Service.

But if states had to cover just one-third of the $146 billion federal spending cuts previously identified by CBO, state Medicaid spending would reach 31.8 percent of state tax revenues by 2025, the Moody’s report found. The report points out that some states are more vulnerable to federal cuts because a larger share of state residents are enrolled or the federal government funds a larger portion of their Medicaid program.

Although all states have at least 10 percent of their residents enrolled in Medicaid, New Mexico has the highest participation rate at 41.1 percent of residents.

Among the states most vulnerable to federal Medicaid cuts are those that expanded Medicaid eligibility under the Affordable Care Act (ACA), with Arizona, Arkansas, Kentucky, Louisiana, New Mexico, Ohio, Oregon and West Virginia at greatest risk, according to the report.

Nicholas Samuels, vice president for states at Moody’s, said the ratings firm is not predicting states will make up for the lost federal Medicaid revenue.

“In this report we’re scoping out how painful doing that could be,” Samuels said in an interview. “It is politically difficult to make changes that would reduce benefits significantly or put people out of the program, considering that nearly one in five Americans is on Medicaid.”

Prior to the ACA, states like Massachusetts covered the ACA-eligible Medicaid population with their own money, he said.

“The challenge in state capitals now is for states to decide what they can afford to do,” Samuels said. “Many states signed up for the Medicaid expansion because of the extra federal money and now will be unable to pay for that themselves.”

Dan Steingart, vice president for not-for-profit healthcare at Moody’s, predicted that the federal Medicaid expansion cuts will “invariably affect hospitals in the form of lower reimbursement rates, tighter eligibility requirements, and less coverage for their poorer patients.”

How will hospitals respond to that revenue loss?

“Hospitals will reduce costs to meet lower revenues, but will still provide charity and uncompensated care. It’s not going to be easy to deal with,” Steingart said.

Combined state-federal Medicaid spending in FY16 was $553 billion, with the federal government match averaging 63 percent, according to a Kaiser Family Foundation tracker.

Drew Gonshorowski, a senior policy analyst for simulations and a healthcare economist for the Heritage Foundation, said there is great uncertainty now about how states will replace the federal Medicaid money cuts.

“Historically, there has been only one [state too undertake] Medicaid disenrollment of enrollees,” said Gonshorowski in an interview. “Whether states decide to pick up the tab, either by increasing taxes or taking money from elsewhere in their budgets, is unknown now. But it’s hard to believe they would disenroll folks when the program hasn’t done that in the past.”

Gonshorowski said that replacing the money with provider taxes would return states to a longstanding, complex process in which states leverage money gleaned from provider taxes to obtain higher federal matches.

“The caps imposed by the [AHCA] take away some of those shenanigans, so states will have to figure out new financing methods once again,” he said.

Gonshorowski said the 31 expansion states will have to figure out how they were funding similar programs pre-ACA, either through general revenue or cutting other spending.

Hospitals Targeted?

Deborah Bachrach, a partner with Manatt Health Systems and a former director of the New York Medicaid program, said “with few exceptions, the vast majority did not cover childless adults prior to the ACA.”

Under the AHCA, the enhanced federal funding continues only for those enrolled before Jan. 1, 2020.

“If someone loses coverage for 30 days for whatever reason, the state doesn’t receive matching rates for that person,” Bachrach said in an interview. “It will be very difficult for all states to find the additional federal dollars to cover expansion adults.”

She said many states have hit their limits on property and income taxes with many other priorities competing for state general revenue funds.

“I don’t know how one plans for a known crisis of this magnitude, where so many people in a few short years will lose coverage,” Bachrach said. “Hospitals could face revenue losses of 5 percent to 10 percent.”

Reversal Possible

Ari Gottlieb, director of PwC Advisory's Health Industries Payer Strategy, is skeptical that states would “kick people off Medicaid in a wholesale fashion and put them back into ranks of uninsured. That scenario is hard to believe.”

Gottlieb advised hospital leaders to be patient.

“Much of this doesn’t kick in until 2020 and there is a chance a new administration will reverse this,” Gottlieb said in an interview.

Gottlieb pointed to Massachusetts, a state with a Republican governor who proposed to reinstate an employer insurance mandate that was put on hold with the ACA.

“We could see something similar in California to preserve continuity of coverage, perhaps funded by general tax increases,” Gottlieb said “Texas didn’t do the Medicaid expansion, but Medicaid in Texas has grown by 800,000.”

Katherine Hempstead, a researcher and senior advisor with the Robert Wood Johnson Foundation, said few states could replace the lost federal revenue.

“It depends on how large the state expansion was and what the federal match rate is,” Hempstead said in an interview. “The bigger those numbers are, the bigger the gap they must fill. There’s not a lot of wiggle room. Medicaid provider rates are already low and states don’t have much ability to cut deeper.”

Hospitals will see a shift to more uncompensated care, she said.

“It’s going to be a challenging environment for providers, which is why every major group of providers is opposed to the AHCA,” Hempstead said.

Value-Based Increase?

Kip Piper, a healthcare policy consultant, said states will face pressure in controlling costs within the caps for each population group—elderly, disabled, and children—at an annual pace in growth at or below general inflation. 

“States would likely intensify efforts in value-based payment reform, care delivery reform, and program integrity, while further modernizing state data system and analytics,” said Piper said in an e mail.

He predicted that provider risk payment systems relying on global payments or capitation would likely increase.

James Verdier, a senior fellow at Mathematica Policy Research and Indiana’s former Medicaid director, doubts that the cuts imposed in the AHCA will ever happen.

“There is no constituency for cutting Medicaid funding in the abstract,” said Verdier in an interview. “It is a program that is covering a lot of people who even the most conservative Republicans think are deserving. Once the human face is put on these people I think you’ll start to see a change.”

Hospitals, physicians and, nursing homes have powerful voices and substantial lobbying clout, both within states and nationally, Verdier said.  

Verdier advised hospital executives to continue “explaining to their congressional leaders the real benefits Medicaid offers to real people in their states and districts.”

Mark Taylor is a freelance writer based in Chicago. 

Publication Date: Friday, May 26, 2017