Dive Brief:
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Rising Medicaid costs are already causing problems for state budgets, and Fitch Ratings predicts in a new report that issue will only get worse over the coming decade.
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The share of state and local budgets allocated to healthcare and pension costs will rise by 800 basis points by 2025, Fitch estimates.
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This trend will likely cause state and local communities to reduce spending and cuts costs or make changes in other programs, such as education, transportation, public safety, housing and environment, according to the report.
Dive Insight:
Medicaid covers more than 76.1 million people and Medicaid expansion gave health insurance to more than 15.1 million people, many of whom weren't covered previously. The program’s growth has also meant states are struggling to continue to fund the federal/state program at the same level.
Fitch Ratings said healthcare was the largest driver of state and local budget expense growth between 2005 and 2015. In that time, healthcare costs rose from $586 billion to $929 billion annually.
Couple that fact with aging baby boomers hitting retirement and the associated pension costs, and it's easy to see why states are looking for ways to balance budgets. That’s only going to get harder in coming years as healthcare costs rise and retirement liabilities grow.
Fitch predicted the share of state budgets dedicated to healthcare and social services will rise from 30.7% in 2015 to 38.3% in 2025. Most of that increase will come from direct healthcare costs.
The dilemma will be worst for the states with the lowest ratings, such as California, Connecticut, Illinois, Kentucky, Louisiana, New Jersey and Pennsylvania. Fitch said those states have less financial flexibility, above average-spending pressures and in some cases high tax rates.
One of those states is already working on ways to cut Medicaid spending. Kentucky became the first state given the OK to implement a work requirement for Medicaid beneficiaries. Three other states have since received a similar go-ahead and more are likely to follow suit as they seek ways to bend the Medicaid cost curve.
In addition to work requirements, states are seeking Medicaid waivers to reduce retroactive coverage, mandate premiums and impose lifetime limits in an effort to cut their rolls. The Trump administration hasn't fully embraced all of these measures, but is generally supportive of their intents.
For its report Fitch created a 10-year scenario analysis of aggregate state and local budget allocations to figure out how healthcare and pension costs may affect budgets over the next seven years. The report predicted that by 2025 the increased share of state and local budgets spent on healthcare and pensions would require states to raise taxes or cut spending on Medicaid or other programs.
Rather than cut Medicaid, some states will likely look to cut elsewhere. Fitch said public education and transportation may feel the brunt of cuts if states don’t raise taxes or reduce Medicaid costs. This could further affect credit ratings of lower-rated states over the long term. Plus, higher tax rates could create political controversies.