ACA and State Governments: Consider Savings as Well as Costs

State Governments Would Spend at Least $90 Billion Less With the ACA than Without It from 2014 to 2019

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Posted to Web: July 13, 2011
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This report finds that state governments are likely to spend $92-129 billion less from 2014 to 2019 with implementation of the Affordable Care Act, thanks to provisions reducing the uninsured population and increasing federal support for health care previously financed by states. The authors find that, overall, the federal government would spend $704 to $743 billion more under reform from 2014 to 2019. Even after 2019, when the federal government's share of Medicaid costs declines to its permanent level, states will still come out ahead, realizing net savings in 2020 alone of $12 to $19 billion.

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National health reform will result in additional spending by both federal and state governments as more Americans gain access to affordable health care, typically because of publicly funded subsidies. But there will also be important sources of savings for state and local governments. In this paper, we use the Health Insurance Policy Simulation Model (HIPSM) to produce a consistent set of estimates for important spending and savings items. In addition to national estimates, we present state-level estimates for all increased costs included in the national estimates, as well as some of the savings. We find that:

  • Total state savings would exceed states' new costs, as federal dollars substitute for projected state and local spending without the ACA, and as states eliminate current Medicaid eligibility for adults who qualify for federal subsidies in the exchange. Overall, the federal government would spend $704 billion to $743 billion more under health reform than without it. The states, on the other hand, would spend $92 to $129 billion less under the ACA than without it over the same time period, between 2014 and 2019 (Figure 2).
  • If states leave current Medicaid eligibility unchanged, the Medicaid expansion would lead to $526 billion in additional federal and $14 billion in additional state spending from 2014 to 2019. These figures, both of which are included in the above totals, are made up of two components. State spending on additional enrollees, both among those who qualify today and those who are newly eligible, will rise by $80 billion. However, these costs are offset by $66 billion in new federal spending on existing enrollees under the Affordable Care Act (ACA), as such enrollees move into eligibility categories that qualify for higher levels of federal support (Figure 1). The federal government would also spend $345 billion on premium and cost-sharing subsidies in the new health benefit exchanges.
  • There would be considerable state and regional variation in these costs and savings, reflecting differences in factors such as current Medicaid eligibility rules and the characteristics of the pre-reform uninsured.
  • Elimination of Medicaid eligibility for certain adults with incomes above 138 percent of the Federal Poverty Level (FPL) will be one source of state savings included in the above totals. Between 2014 and 2019, states will save $69 billion, while the federal government saves $89 billion. Part of this maintenance of effort savings will come from discontinued eligibility through Section 1115 waivers and Social Security Act Section 1931, accounting for $11.6 billion and $10.3 billion in federal and collective state savings, respectively. A portion of these federal savings will be offset by federal spending on premium and cost-sharing subsidies, as these low-income adults are likely to move into the exchange when they lose Medicaid eligibility.
  • By significantly reducing the uninsured population, the ACA will roughly halve spending on uncompensated care. If states and the federal government reduce their total spending on uncompensated care by 12.5 percent to 25 percent, the federal government will save between $39 billion and $78 billion while states collectively save $26 billion to $52 billion, which is included in the above estimates.
  • States will also reduce spending on individuals with mental illness. Currently, state and local governments use general fund dollars to pay for a large portion of state mental health costs. The ACA will extend Medicaid to many low-income people with mental illness who previously were uninsured, increasing state mental health programs' federal funding. Using 25 to 50 percent of these federal dollars to substitute for state and local spending, states could collectively save between $11 billion and $22 billion dollars from 2014-2019, which is part of our totals.
  • From 2020 onwards, federal match rates for new Medicaid eligibles would be 90 percent, lower than during the period from 2014 to 2019. States would thus spend more on new Medicaid enrollees than previously. States would nevertheless achieve net savings under the ACA because savings would continue to exceed increased costs. Net annual state savings would be $12 billion to $19 billion for the year 2020, with similar amounts in later years.

Because of limitations in state-level data, we could not translate all of the above savings into state-specific numbers. Accordingly, our state estimates show a less favorable fiscal picture for states and localities than is indicated by our national estimates, which themselves probably undercount net state fiscal gains under the ACA.

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