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U.S. State Medicaid Transition: Stable Condition Near Term, With Outyears Demanding Care

Why This Matters

One year after the expiration of Medicaid continuous coverage and the 6.2% increase in the emergency Federal Medical Assistance Percentage (eFMAP) from the pandemic, many U.S. states have budgeted higher Medicaid expenditure growth within their fiscal 2024 budgets. In general, S&P Global Ratings considers Medicaid expenditures to be a nondiscretionary fixed cost for most states, given that state-level Medicaid changes must remain compliant with all federal requirements, barring a waiver or allowance to modify Medicaid. This shift in funding responsibilities could introduce downside credit risks for states if absorbing higher Medicaid costs strains their financial capacity, or if it is compounded by other structural budget pressures.

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Through the first 12 months of post-pandemic redeterminations, often referred to as the "unwinding" period, the Kaiser Family Foundation (KFF) reports that states have removed approximately 20.3 million individuals who were added to Medicaid rolls during the pandemic, though there has been a wide disparity in disenrollment rates among states. Even as the Medicaid population has declined, the state share of Medicaid spending might not drop to pre-pandemic levels for many because health care costs have risen through mechanisms adopted to address health funding gaps. Examples include rises in uncompensated care for uninsured individuals, disproportionate share hospital payments, and increasing Medicaid reimbursement rates for health care providers. These factors, among others, will drive costs higher than states' budget projections in fiscal 2025 and beyond, even as the end of the enrollment unwinding period nears.

What We Think And Why

We believe most states can absorb near-term Medicaid cost increases, and that this expenditure alone will not tip state budgets out of balance.   The budgeted state share of Medicaid spending accelerated through fiscal 2024 (approximately 17.2%), but we expect it will return to a more managable growth rate of approximately 2.5% for fiscal 2025. The stepped-down phase-out of federal eFMAP reimbursements over nine months gave states additional time to plan and smooth Medicaid costs back into their budgets and make headway on eligibility redeterminations. In addition, a sturdy U.S. economic growth picture has reduced the potential that a recession-driven surge in health and social services caseloads will pressure state Medicaid budgets. For more information on S&P Global Ratings' economic outlook, see "Economic Outlook U.S. Q2 2024: Heading For An Encore," published March 26, 2024, on RatingsDirect.

Barring the presence of other structural pressures, such as softening revenue or inflation that simultaneously cause other operational, labor, materials, and postretirement benefit expenditures to swell across state departments and agencies, we view most states as being well-positioned to absorb near-term Medicaid spending pressures.

Considerable state expenditure flexibility and record high reserves and liquidity amassed over the past three fiscal years could serve as near-term buffers. States have demonstrated substantial resilience and increased savings for economic and fiscal uncertainties in the wake of the pandemic. Certain states, such as Indiana, Ohio, Oklahoma, Tennessee, and Utah have set aside resources through specified Medicaid stabilization or trust funds from accumulated excess savings to further cushion state finances during this transitionary period.

What We're Watching

We believe long-term, state-share Medicaid costs will be uneven.   Efforts continue to expand the scope of covered services or Medicaid eligibility, implement initiatives to address health disparities, or enhance payment rates to help bolster access to care under Medicaid. Several states--including Oklahoma and Missouri (2020), South Dakota (2022), and North Carolina (2023)--approved Medicaid expansion during the pandemic, providing health access to a larger share of their populations. Recently, other states have sought federal Medicaid funding waivers or allowances to use Medicaid funding to expand covered services and address public health challenges exacerbated by the pandemic. However, we believe states possess good latitude to implement changes to their Medicaid programs as long as they meet overarching federal requirements, which could help them manage expenditures.

Health care inflation has historically outpaced the broader Consumer Price Index, which we think an aging population will intensify.   This could continue to bend the Medicaid fixed-cost curve upward (projected at 4.9% annually), according to the Congressional Budget Office's (CBO) long-term estimates (2024-2034), consuming more of state budgets and limiting a state's discretionary ability to control expenditures.

Federal-level changes could alter the trajectory of Medicaid funding for states.  While we do not anticipate federal changes in 2024, we are monitoring proposals and potential credit implications if substantial additional costs shift to states from the federal government. Changes in congressional representation and the presidency following the 2024 U.S. election could shape the future of federal-level health policy and have implications for the disbursements of Medicaid grants in aid to states, with far-reaching impacts for eligibility and enrollment.

Reform proposals to move to a fixed block grant with annual adjustments tied only to population growth--from the current percentage-based formula funding (adjusted based on inflation, demographics, and average per-capita income factors)--could cap federal Medicaid funding to states. This could reduce federal expenditures, but could also potentially raise Medicaid costs for states or reduce benefits, while masking other economic, enrollment, or health factors that necessitate funding adjustments under the current formula. Other proposals include limiting or eliminating states' levying of provider taxes, a substantial funding mechanism for 47 states (according to KFF) to cover a portion of their Medicaid expenses, which could reduce their ability to raise sufficient revenue from alternative streams to finance their full share of the costs to maximize available federal dollars. We believe any of these changes could result in significant costs for state budgets to absorb.

Medicaid enrollment growth reached more than 94 million during the pandemic

Under the continuous coverage provisions, Medicaid enrollment rose by 23.6 million (or nearly 33%) across the 50 states, peaking at 94.4 million, or nearly one in four Americans. Chart 1 (first column) shows the extraordinary growth across the 50 states over the continuous enrollment period. The 10 leading states in enrollment growth accounted for 52% of national growth, with several states reporting more than 1 million additional enrollees between February 2020 and March 2023 (California, with 2.75 million individuals, Texas with 1.75 million, New York with 1.56 million, Florida with 1.41 million, and Illinois with 1.01 million.

Chart 1

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Chart 1 (second column) shows five states--Oklahoma (86.6%), Missouri (74.8%), Nebraska (60.4%), Utah (55.8%), Wyoming (52.1%)--that experienced at least a 50% cumulative growth rate in Medicaid enrollment compared with their pre-pandemic level, with only New Mexico (19.2%) having experienced a cumulative enrollment growth rate of less than 20%. The first four states mentioned above approved Medicaid expansion shortly before or during the pandemic period, likely contributing to a higher rate of enrollment over this period compared with that of other states.

Chart 2

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Chart 3 illustrates the nominal change in the Medicaid and CHIP enrollment, with Texas and Florida experiencing the largest declines in enrollment over this period. New Mexico, Oregon, and Washington State have received a waiver from Centers for Medicare & Medicaid Services (CMS) to provide continuous eligibility for children under age 6, and recently approved federal regulations have streamlined the Medicaid eligibility process. This could increase enrollment by 1.3 million by 2028 and keep enrollment higher for longer in these states.

Chart 3

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Based on our analysis of CMS data (through Dec. 1, 2023), enrollment trends vary widely among states. In Chart 4, six states had enrollment declines of more than 20%--Montana (25.1%), Idaho (24.0%), Oklahoma (22.6%), Texas (22.4%), Arkansas (22.3%), and Utah (22.0%). And two states, Oregon (3.7%) and Hawaii (1.0%), have experienced enrollment gains since the unwinding period began.

Chart 4

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State Of Pay: The Federal Medicaid Funding Lifeline Was Significant For States

Under the current federal-state financial partnership, the federal government pays a fixed percentage of states' Medicaid costs, with automatic stabilizers in place to preserve this fixed percentage during economic downturns. Combined state and federal Medicaid expenditures swelled during the pandemic, totaling approximately $659.1 billion in state fiscal year (SFY) 2020, $718.8 billion in SFY 2021, $825.7 billion in SFY 2022, and $918.4 billion in SFY 2023, with most of these year-over-year increases derived from federal sources.

Chart 5 highlights the total and average quarterly eFMAP disbursements, respectively, made to states over the course of the Public Health Emergency (January 2020-March 2023), showing the scale of federal support that alleviated state fiscal pressures over this period.

Chart 5

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We don't anticipate a dollar-for-dollar shift in costs for states given ongoing redeterminations and disenrollments, but believe that costs are likely to remain above pre-pandemic levels for many. Chart 6 illustrates where states ranked in fiscal 2023, both as a share of state spending to total Medicaid spending and as a share of state Medicaid spending relative to adjusted total state expenditures (net of federal funds). Although states have latitude to adjust reimbursements to health providers for specific spending categories, pressure is likely to come from both the shift in eFMAP reimbursement and from health providers' pushing for improved Medicaid reimbursement rates to help them transition over the next few years. In light of higher costs and shifting demands, we believe states continue to assess options that balance health care actions for quality and efficiency, while reducing administrative and programmatic costs to curb Medicaid spending. In our opinion, this has also made continuous budget monitoring and forecasting critical tools during this transition period.

Chart 6

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Several states have had to take additional budget measures to increase supplemental appropriations to close potential funding gaps for their Medicaid agencies (see sidebar).

The unwinding of Medicaid coverage has reignited an expansion push in some states

Ten states that have not expanded Medicaid eligibility to conform to provisions enacted under the Affordable Care Act (ACA). However, the unwinding of pandemic-related Medicaid enrollment and the potential for a rising proportion of uninsured individuals have sparked debate within state legislatures to consider expanding Medicaid.

A Strong Federal-State Medicaid Partnership Remains Critical To State Credit Quality

Federal government fiscal interventions were an integral funding mechanism that helped close an otherwise substantial Medicaid funding gap during the pandemic and provided expenditure flexibility for many state budgets in recent fiscal years. While this has been the practice to help stabilize state budgets in recent downturns, we can't be certain of the same level of federal cooperation and partnership in the next recession.

A weaker federal response to future Medicaid program needs--because of reduced fiscal capacity, structural program and funding changes, or an unwillingness on the part of policymakers--could result in future strain on a state's economic and revenue conditions. Furthermore, any limiting or elimination of states' levying of provider taxes, which is a substantial funding mechanism for 47 states (according to KFF) to cover a portion of their Medicaid expenses, could reduce states' ability to raise sufficient revenue from these alternative streams to finance their full share of the costs and allow them to maximize available federal dollars.

Chart 7 illustrates state and federal shares of Medicaid and CHIP program costs, assuming the 4.9% inflation rate CBO estimates, which could nearly double state Medicaid spending to $536 billion over the next decade, compared with $285 billion in fiscal 2023.

Chart 7

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Although many states are well-positioned financially to manage higher health costs in fiscal years 2024 and 2025, we are monitoring how they manage the remaining determinations of Medicaid eligibility, look for new efficiencies and innovative ways to control expenditure growth, and adjust higher state-share spending following the phase-out of federal spending. We believe that effective forecasting and long-term planning will be integral tools to prepare for shifting economic and demographic conditions, social services and Medicaid caseloads, and inflationary effects on costs that could help states better-position themselves to mitigate expenditure shocks in future budgets and preserve credit quality.

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Thomas J Zemetis, New York + 1 (212) 4381172;
thomas.zemetis@spglobal.com
Secondary Contacts:Quinn Rees, New York 2124382526;
quinn.rees@spglobal.com
Sussan S Corson, New York + 1 (212) 438 2014;
sussan.corson@spglobal.com
Geoffrey E Buswick, Boston + 1 (617) 530 8311;
geoffrey.buswick@spglobal.com
Additional Contacts:Anne E Cosgrove, New York + 1 (212) 438 8202;
anne.cosgrove@spglobal.com
Savannah Gilmore, Englewood + 1 (303) 721 4132;
savannah.gilmore2@spglobal.com
Rob M Marker, Englewood + 1 (303) 721 4264;
Rob.Marker@spglobal.com
Ladunni M Okolo, Dallas + 1 (212) 438 1208;
ladunni.okolo@spglobal.com
Oscar Padilla, Dallas + 1 (214) 871 1405;
oscar.padilla@spglobal.com
Joseph J Pezzimenti, New York + 1 (212) 438 2038;
joseph.pezzimenti@spglobal.com

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