June 14, 2018
Dive
Brief:
- 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.
- The share
of state and local budgets allocated to healthcare and pension costs will
rise by 800 basis points by 2025, Fitch estimates.
- 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.
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