State Medicaid Costs Will Increase When the Public Health Emergency Ends

States have received over $100 billion of additional aid from an increase in the federal Medicaid match rate — that could soon end.

According to the Kaiser Family Foundation (KFF)’s new state Medicaid budget survey, officials expect the COVID-19 public health emergency (PHE) will end during fiscal year 2023 (before June 30, 2023). This will end the flow of additional federal aid to states to cover program costs that have been in place since January 2020.

An end to the PHE declaration is expected to result in Medicaid enrollment declines, slower Medicaid spending growth, and a sharp rise in state Medicaid spending.

Increasing Medicaid funding to states came early in 2020. Provisions in the Families First Coronavirus Response Act (FFCRA) provided an across the board 6.2-percentage point increase in every state’s Federal Medical Assistance Percentages (FMAP) if they met certain “maintenance of eligibility” (MOE) requirements. Among these MOE requirements was a prohibition on creating new Medicaid eligibility restrictions and terminating people’s coverage (a “continuous coverage” requirement) during the PHE.

When the PHE’s MOE provisions end, states will again process Medicaid eligibility redetermination and renewals that will likely result in enrollment declines. As enrollment declines this will decrease total spending growth. However, eliminating the enhanced FMAP will also require states to pick-up more of the Medicaid spending total for the first time in three years.

We look at how the PHE’s MOE requirements has affected state Medicaid programs and what the elimination of the PHE enhanced FMAP means for state budgets.

Medicaid is Countercyclical, and an Enhanced FMAP is Not New

Medicaid enrollment and spending increase countercyclically: during an economic downturn more people qualify for Medicaid due to rising unemployment, leading to a growth in the low-income population eligible for benefits. The increased costs for states to provide funding occurs at a time when they are also likely to experience cost increases in other social services and declines in revenue sources.

Providing a temporary FMAP increase to states was not unique to the COVID-19 induced recession. During the past two recessions Congress authorized increased Medicaid funding for states.

• The Jobs and Growth Tax Relief Reconciliation Act of 2003 during the 2001 recession provided a 2.95-percentage point FMAP increase for the last two quarters of FY 2003 and the first three quarters of FY 2004.
• The American Recovery and Reinvestment Act (ARRA) of 2009 increased FMAP 6.2-percentage points starting in the first quarter of FY 2009 and lasting through the first quarter of FY2011. The increase phased down to 3.2 and 1.2-percentage points for the second and third quarters of FY2011, respectively.

To help states get ready for when the PHE is over, the Centers for Medicare & Medicaid Services (CMS) has released multiple guidance documents. States will have up to 12 months to return to normal eligibility and enrollment operations when the continuous coverage requirement expires.

For more information on the “Impact of the Recession on Medicaid,” see this Congressional Research Service Report.

States’ Medicaid Budgets and the Enhanced FMAP

In a May 2022 report, KFF estimated:

Over the three-year period from FY 2020 through FY 2022, we estimate that states will have received approximately $100.4 billion in fiscal relief due to the enhanced FMAP.

Still, even when this extra Medicaid funding ends, states should be well positioned. The National Association of State Budget Officers (NASBO) reported that Medicaid “program enhancements far outweigh program containment for fiscal 2022 and fiscal 2023.” In fiscal 2022 40 states increased payments to providers along with 36 states in fiscal 2023. Among the program enhancements were expanding behavioral health services, expanding or restoring benefits, and telehealth.

Despite the expected rise in costs when the PHE ends, and potential for another economic downturn, states are well positioned for any revenue declines.

According to analysts at Moody’s Analytics after their recent state stress test, “States have never been in a better position to make it through a recession” — a record 43 states have the necessary reserves to weather an economic downturns without having to make severe spending cuts or tax increases.

But every state is different, and those with larger Medicaid programs or economies that have been slower to recover since March 2020 may face greater challenges. For the past decade New York state has struggled with growth in its Medicaid spending and has placed a statutory “Global Cap” on annual state-funded Medicaid expenditures, indexed to the Medical component of the Consumer Price Index (CPI).

2023 Medicaid Spending Outlook

If the PHE ends, state Medicaid outlays might grow 16.3% in fiscal 2023 according to a KFF report. One research article noted that health care use is expected to normalize through 2024 after the declines observed in 2020 and health insurance enrollments are assumed to move toward their pre-pandemic distributions. However, the largest driver of state Medicaid spending increases is the removal of federal support. In KFF’s Medicaid directors survey, nearly two-thirds of respondents assumed the enhanced FMAP would end December 31, 2022 while the other third assumed it might end earlier.

Although state fiscal conditions have improved since March 2020, concerns and uncertainty are increasing. Nearly all states have adopted fiscal 2023 budgets with strong revenue projections. While New York state revised its revenue projections lower, Iowa recently revised theirs upward. How issues affecting the economic outlook impact future state budgeting is uncertain.

One state Medicaid director noted:

How these issues will impact future state budgeting is uncertain. Medicaid plays a significant role in state budgets as both a spending and revenue source and has played a key role in the COVID-19 response and recovery across states. Unlike the federal government, states must meet balanced budget requirements, so dealing with macroeconomic uncertainties make it difficult for states to develop broader revenue and spending projections.

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