Currently several Republican governors are threatening not to take part in the Medicaid expansion, which has become an optional part of the Affordable Care Act. Even if you share the optimism of people like Peter Orzag, who claims all states will eventual adopt the expansion because federal funding will end up being too good of a deal to refuse, that will not change the fact that, long term, having states manage and fund a large part of Medicaid will become a larger and larger problem.
Before the possible expansion, Medicaid already was one of the largest expenses on state budgets. Currently roughly 13 percent of state budgets are spent on health care programs. That is only going to increase in the future because of raising health care costs and the expansion of Medicaid.
Even though in the first few years the ACA covers 100 percent of the cost of the newly eligible, it only covers those who were previously eligible but not enrolled at the pre-ACA matching fund rates. After the first few years the federal government’s share for the newly eligible declines to 90 percent matching. There is also no guarantee that deficit mania won’t cause Congress to trim the federal contribution back in the future.
It’s conceivable that most states could cover a growing Medicaid obligation in normal times. But it’s a more difficult problem during economic downturns, when Medicaid requires increased (counter-cyclical) spending. As a true social safety net program, Medicaid spending needs to go up significantly during economic downturns when people are losing their jobs — including employer-provided insurance — and unable to afford insurance on their own. But that’s exactly when state revenues are plummeting. Medicaid is thus unique among big state budget items in this respect.
Traditionally this problem has been dealt with by states just slashing Medicaid eligibility, benefits and enrollment during the economic downturns when it is needed most. That is not going to be possible in the future if we want Medicaid to be part of a total system to produce near universal coverage. To make it work, spending on Medicaid most go up significantly when unemployment rises.
As Medicaid becomes a bigger part of state budgets, the shock it will cause to state budgets during economic downturns is going to become more significant, forcing larger and larger cuts elsewhere. The destructive anti-Keynesian nature of having the states cover much of the program’s funding will only get worse unless serious changes are made. Since a balanced budget requirement is not required and makes no sense for the federal government, the solution will be having the feds directly or indirectly take over the funding to deal with this serious and growing problem.