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What's really at stake in the Medicaid spending debate

The $834 billion cut in federal Medicaid spending in the American Health Care Act would kick off budget battles in the states that go way beyond Medicaid. We could see cuts to higher education, school funding, corrections, environmental protection or other state priorities — or new taxes, depending on the state.

Data: HMA, based on CMS 2017 projections, CBO Medicaid Baseline and CBO letter to House Speaker Ryan; Chart: Andrew Witherspoon / Axios

The bottom line: What began as a Medicaid spending reduction in Congress will end up as a battle of budget priorities.

A new analysis from long time state Medicaid expert Vern Smith at HMA suggests why. To offset the $834 billion in reductions in federal Medicaid spending in the AHCA, states would need to increase their own general fund spending by an average of one third beginning in 2022, and 37% in 2026. States will have to decide whether to eat the reductions and cut their Medicaid programs, raise taxes, or cut spending for other state priorities, or to do some combination of these things.

In the short term, most of the reductions come from curtailing the ACA's Medicaid expansion, and the 31 states plus the District of Columbia that have expanded will be the most affected.

The problem: It's possible that with more flexibility, states could absorb some of the reductions by operating their Medicaid programs more efficiently, but only at the margins.

Medicaid spending is already growing more slowly than Medicare and private insurance on a per capita basis. Virtually all states have already picked the low hanging fruit to rein in their Medicaid costs, and most have already deployed the full spectrum of delivery and payment reforms currently in the arsenal to control spending growth.

Cutting payments to providers is always the Medicaid cut of first resort, but payments to providers are already too low in many states to cut them further.

What to watch: The need to absorb large reductions in Medicaid will pit cabinet agencies, legislative committees and interest groups against one another in some states. Nothing receives more attention from governors, legislators and interest groups than the size of the annual increase in the state general fund and how the increase is divided each year.

The amount of the annual increase that goes to Medicaid is already a sore point in state budgets. Now the annual budget dance will start with a big hole to fill in Medicaid.

It does not seem to have dawned on folks with an interest in state funding for higher education, or corrections, or schools, or environmental protection that the debate about Medicaid could soon become a debate about their issues. But Medicaid is the largest source of federal revenues states receive, and once the proposed reductions trickle down to state budgets, it won't only be a Medicaid debate any longer.

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