Medicaid to Play Key Role in Response to Coronavirus

As the global coronavirus outbreak and its economic fallout tighten their grip on the United States, all signs point to a spike in demand for Medicaid, the health care program for low-income Americans that is jointly funded by states and the federal government.

Anticipating a surge in Medicaid costs for states at a time when they can least afford it, Congress chose the program as one of the earliest targets for relief dollars in its multi-bill stimulus package to resuscitate the ailing U.S. economy. Lawmakers’ decision to single out Medicaid isn’t surprising. They used the program to funnel money to states in each of the past two recessions; Medicaid is uniquely positioned to assist states with the pandemic’s threats to both public health and government budgets.

The stimulus aid temporarily boosts the federal government’s share of Medicaid costs by 6.2 percentage points for the duration of the public health emergency, providing an estimated $50 billion extra to states if the declaration remains in place through March 2021. The estimate, however, is based on the percentage point increase and does not account for greater demand for health care from current Medicaid enrollees or a rise in enrollment—both of which are likely to result from the pandemic. So, actual federal Medicaid aid to states could be substantially higher than the estimate.

The new federal aid means that states with the minimum federal matching rate of 50% can now be reimbursed for 56.2% of Medicaid costs. In Mississippi, which has the highest federal matching rate at 77%, the federal government can cover 83.2% of costs.

The federal injection of enhanced Medicaid aid is one of several lifelines for state and local governments in the stimulus bills passed so far. Here are three reasons Medicaid stimulus dollars matter for states as they deal with both the public health threat and the acute budget problems caused by the pandemic:

Medicaid is a quick and effective way to get dollars to states

The first round of enhanced federal aid was scheduled to be delivered to states by March 25, just a few days after President Donald Trump signed the bill into law, and the Centers for Medicare & Medicaid Services aimed to provide the second round of payments in early April. This quick turnaround is possible because the money flows through existing funding channels. Getting federal aid to states quickly lessens the need for them to make spending cuts or enact tax increases, which could be counterproductive at a time of economic stress. Although these state fiscal policy actions may be necessary to meet balanced budget requirements, they can reduce national economic growth.

“There is no faster, effective, or efficient way to flow money from the federal government to state and local governments than Medicaid,” said Matt Salo, executive director of the National Association of Medicaid Directors.

In response to the two previous recessions, the federal government sent extra Medicaid dollars to states: $10 billion in the wake of the 2001 downturn and $99 billion during the Great Recession, which ran from December 2007 through June 2009.

The extra federal aid will help states cover medical services for enrollees and payments to hospitals that serve a disproportionate share of Medicaid and uninsured patients. This year’s aid was made retroactive to Jan. 1 and will be available for the duration of the public health emergency with no pre-set dollar limit.

State Medicaid costs are expected to spike

Not only will some of Medicaid’s 74.6 million recipients require more medical care if they are infected by the coronavirus, but the economic fallout also is expected to swell the number of people eligible for the public health insurance program as people lose jobs or income. As a result of the 2001 and 2007-09 recessions, enrollment spiked by 17.4% over two years and 16.7% over three years, respectively, compared with the last full budget period before each downturn.

Because Medicaid is an entitlement program, states must provide federally required benefits to any eligible enrollee, making growth in state costs harder for policymakers to control than in other areas of spending. However, the higher federal match in the stimulus package does not apply to those Medicaid enrollees who became eligible since 2014 under the Affordable Care Act. For those recipients, the federal government already covers 90% of costs.

Extra Medicaid funds soften the overall blow to state budgets

Additional federal dollars for Medicaid free up state dollars that can be used to meet spending demands and plug holes elsewhere in the budget. This matters because Medicaid in fiscal year 2019 accounted for 19.7% of states’ collective general fund budgets, which also pay for core services such as education, transportation, and public safety. Medicaid was second only to K-12 education, which accounted for 35.6% collectively. In some states, however, such as New Hampshire and Vermont, Medicaid consumed more than 35% of the general fund budget. And rising costs were an issue for many states even before the pandemic.

Of all the new federal funds available to states in the stimulus package, the enhanced Medicaid aid “provides the broadest budgetary benefit,” according to the California Legislative Analyst’s Office.

During the Great Recession, the share of states’ own dollars spent on Medicaid actually fell from 14.5% in fiscal 2008 to 13.3% in fiscal 2009 as increased federal dollars flowed to these governments and many shrank benefits to control costs.

Governors have stated that the latest federal Medicaid aid isn’t as generous as during the Great Recession and have asked Congress for a more robust increase, as well as $500 billion in other support to help with anticipated revenue shortfalls.

As in the last recession, the aid comes with strings attached—such as restrictions on states’ powers to change their Medicaid programs during the public health emergency—that could lessen its budgetary relief. For example, New York Governor Andrew Cuomo threatened to turn down his state’s share of the Medicaid stimulus funds because that could preclude some proposed restructuring of the state program that he says would save more than New York would receive in enhanced aid. The state ultimately adopted most of the proposed Medicaid changes but delayed others so that it could receive the extra federal money.

Barb Rosewicz is a project director and Justin Theal is an officer with The Pew Charitable Trusts’ state fiscal health project.