State Budget Cuts to Medicaid Means Reduced Federal Funding, Larger Total Cuts

A recent Politico article indicates that states are beginning to consider cuts to their Medicaid program as they face severe budget deficits resulting from the COVID-19 related economic crisis.  The Families First Coronavirus Response Act bars states from cutting Medicaid eligibility, making it harder to enroll and disenrolling beneficiaries for the duration of the public health emergency as a condition of a temporary increase in the federal Medicaid matching rate (FMAP).  But states may still cut Medicaid in other harmful ways even though Medicaid will be the key coverage source for the millions of Americans who have lost their jobs and health insurance.

Such cuts, for example, could include slashing Medicaid reimbursement rates to hospitals, physicians, nursing homes and other providers even though these providers are already seriously financially stressed due to higher COVID-19 related testing and treatment costs and/or sharply reduced revenues.  In turn, that would significantly reduce access to needed care if providers are unable to continue to furnish the same level of services to Medicaid beneficiaries, no longer take Medicaid beneficiaries or cease operations entirely.

It’s always important to remember that Medicaid is a federal-state financial partnership, under which the federal government picks up a fixed percentage of states’ Medicaid costs by “matching” state Medicaid funds with federal funding.  This also means that for every $1 cut in its Medicaid spending a state makes to help close its budget deficit, it also loses federal funding as well.  As a result, the actual total cut to a state’s Medicaid program is significantly larger and its harmful impact would be greater.  The negative effect of these Medicaid cuts on the state’s economy would also be considerably larger, which would both deepen and prolong the economic downturn, lead to bigger and continued state budget deficits, and necessitate further damaging Medicaid cuts.

After accounting for the Families First FMAP increase of 6.2 percentage points, for every $1 in reduced state spending, federal Medicaid funding in the states would also be cut by between $1.28 and $4.95 in fiscal year 2020, depending on each state’s FMAP.  Put another way, if a state like Colorado wants to cut $1 in its spending on Medicaid, it would have to make a total Medicaid cut of $2.28.  If a state like Mississippi wants to cut $1 in its spending on Medicaid, it would have to make a total Medicaid cut of $5.95.  (This is for Medicaid spending subject to the regular FMAP.  For example, for the Medicaid expansion, which has a 90% matching rate, federal funding would be cut by $9 for every $1 in state cuts and necessitate a total cut of $10.  For most administrative costs, which have a 50% matching rate, federal funding would be cut by $1 for every $1 in state cuts and require a total cut of $2.)  The attached Tables include the state- and territory-specific reduction in federal Medicaid funding for every $1 cut in state spending for both fiscal year 2020 and fiscal year 2021, assuming the Families First FMAP increase remains in effect.

It is critical to avert state budget cuts to Medicaid due to their harmful health and economic effects.  As I have explained, the FMAP increase provided by the Families First Act, while helpful, is clearly insufficient to address the sharply higher state Medicaid costs and overall budget deficits states will be experiencing.  Congress should therefore provide a further, large FMAP increase, with the duration tied to the length of the economic and fiscal crisis, as measured by economic indicators such as state unemployment rates.  That is because the economic impact of COVID-19 is likely to continue to be severe and last well beyond the end of the public health emergency.

Edwin Park is a Research Professor at the Georgetown University McCourt School of Public Policy’s Center for Children and Families.