There is a large and growing body of research demonstrating the long-term benefits of Medicaid coverage during childhood and during pregnancy. This includes better health and lower incidence of disability in adulthood, higher educational attainment, and greater earnings and intergenerational mobility. Now, in a new working paper, the Congressional Budget Office (CBO) has conducted an analysis estimating the long-term fiscal impact of one additional year of Medicaid coverage in childhood via an illustrative policy of mandatory 12-months continuous eligibility for children. (This requirement for all states was enacted as part of the Consolidated Appropriations Act, 2023 and takes effect on January 1, 2024. The Centers of Medicare and Medicaid Services has issued guidance related to state implementation of 12-months continuous eligibility for children, which we have analyzed here and here).
Here are some of the key findings from the CBO analysis:
- An additional year of Medicaid coverage in childhood under the illustrative continuous eligibility policy would improve labor outcomes in adulthood (ages 20-65) including higher earnings, hours worked, and labor productivity. This would also increase the returns on capital investment. That all would boost gross domestic product (GDP) and produce positive long-term fiscal effects (i.e. higher federal revenues and lower transfer spending related to federal means-tested safety net programs).
- Children who gain a year of Medicaid coverage would earn an estimated 0.5 percent more annually as adults, relative to what they would have earned in the absence of that Medicaid coverage. The earnings effects would be largest among the youngest children and those in families with the lowest incomes. For example, Medicaid coverage of infants in families in the bottom income quintile would increase their earnings in adulthood by 0.79 percent annually.
- Depending on the discount factor used to compare current and future income or payments — either Treasury rate or fair-value — the positive fiscal effects of an additional year of Medicaid coverage in childhood would equal between half and double the initial cost. Specifically, CBO estimates that the cost of an additional year of Medicaid coverage would initially equal $1,700 per child. This would increase GDP by between $3,700 and $14,900 over the long-run and have positive long-term fiscal effects of between $800 (49% of the initial cost) and $3,400 (197% of the initial cost). These estimates assume that the initial spending related to an additional year of Medicaid coverage was offset by other reductions in federal spending (which was the case with the 12-months continuous eligibility provision included in the Consolidated Appropriations Act). CBO, however, notes that if the initial spending had been solely deficit-financed, the resulting borrowing costs would substantially lower the long-term positive fiscal effects.
CBO also examines the negative long-term fiscal effects (i.e. lower federal revenues and higher transfer spending) of a loss of one year of Medicaid coverage. Specifically, CBO estimates the fiscal impact of two illustrative Medicaid block grant policies.
In contrast to the current federal-state financial partnership, under which the federal government picks up a fixed percentage of states’ Medicaid costs, under a block grant, the federal government would only provide a fixed amount of federal Medicaid funding for states, irrespective of states’ actual costs. Block grants are intended to produce federal savings by reducing Medicaid funding to states over time, relative to current law, and CBO similarly assumes the block grant funding levels under the two illustrative policies would fall below CBO’s Medicaid baseline spending projections.
- Under the first illustrative block grant policy (Version A), the block grant would lead to cuts that reduce child Medicaid enrollment — such as states making the enrollment process more difficult, checking eligibility criteria more often and charging higher premiums and copayments — but such cuts would be limited to children ages 1 and older. CBO estimates that a loss of one year of Medicaid coverage in childhood under such a policy would initially cut federal Medicaid spending by $1,700. It would also reduce GDP by between $3,900 and $15,600 over the long-run and have negative long-term fiscal effects of between $900 (51% of the initial spending reductions) and $3,600 (206% of the initial spending reductions).
- Under the second illustrative block grant policy (Version B), the block grant’s enrollment cuts would affect all children, including infants, as well as pregnant people. CBO estimates that a loss of one year of Medicaid coverage in childhood or during pregnancy would again initially cut federal Medicaid spending by $1,700. It would also reduce GDP by between $4,500 and $20,100 over the long-run and have negative long-term fiscal effects of between $1,000 (60% of the initial spending reductions) and $4,600 (266% of the initial spending reductions).
- CBO also finds the loss of a year of Medicaid coverage during pregnancy would have an even larger, negative effect on earnings in adulthood among those with the lowest incomes (bottom quintile), compared to infants and other children. Income in adulthood for a child whose mother was not covered by Medicaid would be 2.18 percent lower under the second illustrative block grant policy.
The CBO analysis is another important contribution to the research literature about the long-term benefits of Medicaid coverage during childhood and pregnancy. It finds substantial, positive fiscal effects over the long run from an additional year of Medicaid coverage provided through mandatory 12-months continuous eligibility, which will apply to all states starting January 1, 2024. Because the CBO analysis shows even larger positive fiscal effects for an additional year of Medicaid coverage among the youngest children, it also demonstrates the benefits of providing multi-year continuous eligibility, which Oregon and Washington are implementing and which a number of other states are also advancing. The CBO analysis, however, also demonstrates the dangers of Medicaid block grants, which would likely lead to damaging cuts that cause children and pregnant people to lose their Medicaid coverage and end up uninsured. That, in turn, would lead to poorer labor outcomes in adulthood, reduced economic activity over the long run, and long-term negative federal fiscal effects (e.g. lower revenues and higher transfer payments).