PPACA--A Poison Pill for State Budgets?

For many states, the fastest increasing budget item is Medicaid. In states like Utah, Medicaid in a matter of years will become the largest single budget item, surpassing education which for decades has been the state’s largest expenditure.  Other states are in a similar position. At a recent meeting of the National Governors Association, CNN reported that Governors have proposed spending $15.9 billion more in fiscal 2012 on Medicaid than in fiscal 2011 and at the same time are slashing higher education by $5 billion and K-12 education by $2.5 billion.

PPACA dramatically expands Medicaid eligibility requiring coverage of individuals in households with incomes below 133% of the federal poverty level.  A RAND study estimates that the increase in Medicaid enrollment and state expenditures in 2016 (the year in which the full impact of PPACA will be felt) will be 58% in California ($2 billion), 31% in Connecticut ($300 million), 49% in Illinois ($700 million), 51% in Montana ($10 million), and 80% in Texas ($600 million). These numbers as projected by RAND increase substantially through 2020. RAND selected these state for a representative study because they provide good geographical distribution and size range.

In addition to the budgetary strain caused by Medicaid, under PPACA, states are required to develop and run health care exchanges.  The McKinsey Quarterly recently stated that the health care reform law will lead to 30% of employers “definitely to probably” discontinuing employee health insurance plans. The employees who will no longer have employer based coverage will to look to exchanges for health care coverage. As a result, state exchange programs will likely become large departments with many employees with all the accompanying budgetary costs. Further, PPACA’s mandatory coverage elements apply to state and local government employees resulting in increased health benefits costs in some state and local governments. 

 Consider the above in light of (i) the massive federal deficit which can only be reduced by restructuring entitlement programs including Medicaid and (ii) the precarious financial condition of many state and local governments. Additionally, if the US continues on its current spending trajectory, it is only a matter of time before it becomes another Greece, Spain or Portugal. It seems likely, that in addition to scheduled PPACA reductions in federal funding for Medicaid, further cuts will be necessary.

There are ominous indications that PPACA could be incredibly destructive to the financial health of state governments. To believe that the federal government will have either the means or the will to pay for the burden it is shifting to the states is naïve at best.

Is anyone in Congress really trying to understand what PPACA’s consequences (both intended and unintended) will be, for state governments, many of which are already in dire financial straits?

-- Jeffrey N. Clayton
Callister, Nebeker & McCullough
Salt Lake City, Utah