Can Medicaid handle another recession?

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Medicaid is still feeling the pain of the Great Recession. The next recession could put a lot of pressure on the program.

State spending on Medicaid is still stubbornly high, with no sign of ebbing, even though we are in the midst of the longest period of economic recovery in recent memory.

That was one of the remarkable findings in a forthcoming analysis from the Pew Charitable Trusts, which documents a “lost decade” for state finances after the Great Recession. In 2016, Medicaid accounted for 17.1 percent of state budgets, up from 14.3 percent in 2007, and that share has been rising, not falling, since the recovery began.

This is not how it’s supposed to work. It makes sense that Medicaid enrollment grew during the recession — a worse economy means people making less money and thereby qualifying for public assistance. The federal government helped blunt the impact on state finances in the 2009 stimulus package, which included a temporary boost in federal matching funds for Medicaid.

But once the federal aid expired, state Medicaid spending shot up — and hasn’t slowed down, even as the economy improved. Because states are required to cover their share of Medicaid funding, that left them less money for higher and K-12 education, infrastructure, and other priorities over the past 10 years. A lost decade, in other words.

The question now is whether this is a new normal. For the states that expanded Medicaid under Obamacare, they have to kick in 10 percent of the money to cover the expansion from now on, which will make it even more difficult for them to reduce their Medicaid costs. And with this new higher level of Medicaid spending, if a new recession comes along and we see another uptick in enrollment, state budgets could be squeezed even harder to make up the difference. As Vox’s Emily Stewart has reported, another recession has become a real worry for some people who follow this stuff closely.

“One risk is that if these levels of spending for Medicaid and other areas stay where they are,” Pew’s Barb Rosewicz explained to me, “then states will have less flexibility in dealing with another recession.”

I spoke with Rosewicz, who runs Pew’s state finances program, about the new study (you can read the whole thing here when it’s released Tuesday morning) and what it teaches us about Medicaid. Our interview is below, edited for clarity and length.

Dylan Scott

How would you describe the change we’ve seen with state budgets and with Medicaid specifically?

Barb Rosewicz

Even though the Great Recession seems far off, its legacy is still relevant in many of the challenges states face today. In fact, many states are still emerging from what can be called a lost decade for state finances. States are still dealing with consequences of decisions they had to make to survive the deepest recession since World War II. We find that on a 50-state basis, state support was still lower than before the recession for K-12 education, higher education, aid to local governments, and infrastructure. State workforces are smaller than they were before the recession.

Then at the same time, we look at instances where costs to states are higher than [they were] a decade ago. This is where Medicaid casts a big footprint. Unlike these other areas, this is one in which it’s harder for states to control the costs. When we compare where states were before the recession and where they are now, we take a look at how much of their own state revenue they are spending on Medicaid. Even though the federal government and states share it, we look at only the share states are spending from state-generated dollars. And what we find is Medicaid has taken up a larger share of state dollars since the recession.

Dylan Scott

For Medicaid, it seems like there were countervailing factors. Initially, as you would expect during a recession, enrollment in a means-tested program like Medicaid started to increase because more people were eligible. Then you had an offsetting factor of the stimulus bill and the federal government kicking in matching funds to help states deal with the influx of Medicaid enrollees.

But state spending really ascends rapidly when that stimulus funding starts to run out and it doesn’t seem as though demand for Medicaid had necessarily dissipated. There was still enough demand that the state share of spending kept rising even in those three, four, five years after the recession.

Barb Rosewicz

Yes, exactly. It wasn’t until at least three years that states felt the fiscal blow of all the people who enrolled in Medicaid after the recession. As people lost jobs and income, more people became eligible. They applied, and because it’s an entitlement program, they were enrolled.

The federal aid from the American Recovery and Reinvestment Act helped states through the worst of it, but when that money fell off, that was when the share of revenue for states that they spend on Medicaid jumped up. And through 2016, which is the last year for which we have 50-state data, it had not yet fallen on a 50-state basis.

Dylan Scott

It seems surprising to me that state Medicaid spending hits this peak in 2012 and 2013, which, again, is several years after the recession has ended, and yet it doesn’t seem like we saw any drop-off. We had the upswing, as the federal support expired, but we don’t see any kind of downslope even through 2016.

That seems unusual, because you would expect that in 2014, 2015, several years out from the recession, you would see some of the burden on Medicaid start to soften a little bit. But we don’t. What explains the fact we didn’t see any decrease even five years out from the recession?

Barb Rosewicz

I’ve been intrigued by that very same issue. We have been watching what was going to happen, with the expectation that as the economy improved, you would see the big surge in enrollment start to fall off. Of course, you did have the woodwork effect of people who applied for health insurance under the Affordable Care Act and found out they were eligible for Medicaid. Through 2016, it is important to note this doesn’t include any state spending for Medicaid expansion because the federal government was 100 percent covering the cost of the expanded population.

We have looked at some preliminary figures that indicate while the dollars spent on Medicaid increased in 2017 and 2018, enrollment growth was beginning to slow. We actually are going to update our information in the next month or so. But I don’t think the complete picture is out.

Dylan Scott

So is this a new normal, especially once you consider a bunch of states expanded Medicaid and have to account for those costs going forward? Going forward into the future, do states just have to accept that Medicaid will take up a bigger chunk of their budgets than it had before? Or do we expect at some point that we’ll start to see a decline?

It almost seems hard to imagine at this point, because we’re in a long-running recovery with low unemployment and yet Medicaid spending is still high.

Barb Rosewicz

One of the risks we point out for Medicaid and these other indicators of spending is that if another recession hits before states have gone back to their pre-recession levels, it could cement in place these levels of spending.

Dylan Scott

So if we hit another recession before Medicaid spending falls back, the pressure on budgets will be significant? Is that one way to think about it?

Barb Rosewicz

One risk is that if these levels of spending for Medicaid and other areas stay where they are — and we found lower support for certain areas of spending and higher costs for other areas like Medicaid — then states will have less flexibility in dealing with another recession.

[Disclosure: My wife Lauren works for Pew Charitable Trusts, though she is not involved with the state fiscal program or this report.]

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