State and federal spending under the ACA

Medicaid and the Affordable Care Act

The federal government and the states share responsibility for financing Medicaid, although the matching rate is higher for adults eligible under the Medicaid expansion. In fiscal year (FY) 2016, total Medicaid spending was estimated at $592.2 billion, with spending on the newly eligible adults accounting for approximately 11.2 percent of total spending (CMS 2018).[1]

Federal matching rate for newly eligible adults

Historically, the federal share of Medicaid has averaged about 57 percent; however, under the ACA, the matching rate is higher for adults newly covered under the program. The federal government paid  100 percent of state Medicaid costs for certain newly eligible individuals through the end of 2016. Starting in 2017, the matching rate declines slightly each year until it reaches 90 percent in 2020 and remains there (see table below).

Individuals eligible to receive the 100 percent matching rate include those who would not have been eligible for Medicaid in the state as of December 1, 2009, or who were eligible under a waiver but not enrolled because of limits or caps on waiver enrollment. As of December 2016, there were 14.9 million enrollees in the new group, and of these, approximately four-fifths (80 percent) in the 24 reporting expansion states were eligible for full federal financing (CMS 2017).[2]

States that expanded Medicaid eligibility to 100 percent of the federal poverty level (FPL) for parents and adults without dependent children prior to the ACA can also receive a higher matching rate for childless adults. Specifically, the traditional matching rate is increased by a transition factor so that in 2020 it is equal to the federal matching rate for newly eligible adults (see table below).

Federal Matching Rate in Expansion and Pre-ACA Expansion States

Year Newly eligible adults
(parents and childless adults)

Childless adults in pre-ACA expansion states
regular FMAP + [(newly eligible enhanced match rate – regular FMAP) x transition percentage]

Transition percentage Example:
state with 50% regular FMAP
Example:
state with 60% regular FMAP
2014 100% 50% 75% 80%
2015 100 60 80 84
2016 100 70 85 88
2017 95 80 86 88
2018 94 90 89.6 90.6
2019 93 100 93 93
2020 on 90 100 90 90
Note: ACA is Patient Protection and Affordable Care Act (P.L. 111-148, as amended).
Source: Rudowitz, R. Financing Medicaid coverage under health reform: What is the law and the new FMAP rules. Washington, DC: Kaiser Commission on Medicaid and the Uninsured. http://kff.org/health-reform/issue-brief/financing-medicaid-coverage-under-health-reform-the-role-of-the-federal-government-and-states/

Medicaid spending post-ACA

Total Medicaid spending slowed in 2016, increasingby 5.2 percent, compared to 11.4 percent in 2015. Per enrollee spending is estimated to have increased by 1.9 percent between 2015 and 2016. Growth in per enrollee costs is projected to have slowed further in 2017 to 0.8 percent ( CMS 2018). For more on enrollment changes, see Medicaid enrollment changes following the ACA.

Spending on newly eligible adults

According to the Centers for Medicare & Medicaid Services (CMS) actuary, the average estimated cost for a newly eligible adult was $5,813 in 2016, a 2.5 percent decrease from 2015. While the average cost per enrollee for newly eligible adults remained about 10 percent greater than for other non-disabled adults in Medicaid, newly eligible costs are expected to continue to decrease and be less than other non-disabled adults by 2018. The higher costs in the initial years of expansion were the result of higher than anticipated capitation rates paid to managed care plans. As noted by CMS, data on the newly eligible population currently are limited and some states may have set initial managed care rates for the new adult group at a higher level in part due to the uncertainty about what the group’s actual costs and service use would be (CMS 2018).

An Avalere Health study examining membership and claims data across nine state and plan combinations found that costs for the expansion population steadily increased over time, even after adjusting for factors such as age and gender–suggesting that expansion enrollees may have complex or chronic conditions. Some of this may be due to the fact that the population that maintained Medicaid was older. In addition, declining average costs during the second half of 2014 suggests some initial pent-up demand among certain groups for services. (Avalere Health 2018). However, other studies of those potentially eligible suggest that they have comparable or better physical and mental health than those enrolled prior to the ACA and that chronic conditions are less widespread (Hill et al. 2014). Additionally, a 2017 study examining 2012–2014 Medical Expenditure Panel Survey data found that average monthly expenditures for newly eligible enrollees were $180 compared to $228 for previously eligible enrollees, a difference of 21 percent (Jacobs et al. 2017). As such, it may be the case that as insurers and states gain more experience in covering the new adult group, managed care rates and spending may decrease.

Over the next decade (2017–2026), spending on the newly eligible is expected to total $938 billion. Due to the higher federal matching rate, the vast majority (91 percent) of this spending will be paid for by the federal government (CMS 2018).

Long-term impact on spending

In 2014, high Medicaid spending growth rates nationally reflect the combined effects of increased enrollment as well as increased spending per enrollee. Along with new high-cost drugs and a required increase in primary care payments, expanded coverage for adults was a key driver of spending growth rates. However, spending growth rates were lower for 2015 and 2016, and are projected to be even lower for 2017 (CMS 2018). This is due, in part, to the initial 2014 surge in enrollment continuing to diminish (Keehan et al. 2016).

States also reported increased spending in FY 2015 due in large part to increased enrollment. Specifically, more than half of states expanding Medicaid reported that faster-than-expected enrollment increases, although two-thirds reported that per member per month costs for the expansion population were at or below projections. Non-expansion states also reported increased spending, due primarily to enrollment growth among previously eligible children and parents. However, states report that spending and enrollment growth has slowed since the large increases in 2015. They expect that for FY 2018 and beyond, enrollment growth will continue to slow, but spending growth will increase slightly as expansion states take on a larger share of the costs for the newly eligible (Rudowitz and Valentine 2017). For more information, see Medicaid enrollment changes following the ACA.

Additionally, states that chose to expand Medicaid were able to offset increased costs even with higher participation among individuals who were previously eligible but not enrolled. For example, states may secure savings from the availability of federal dollars for expenses that were previously state-funded. A few reports have documented state budget savings and revenue gains in expansion states. For example:

  • A study in Health Affairs found that expansion led to an 11.7 percent increase in overall Medicaid spending, as well as a 12.2 percent increase in federal spending. It found no significant increases in overall state spending on Medicaid, no significant decreases in state spending on other programs, and that state spending was, in the aggregate, in line with projections (Sommers and Gruber 2017).
  • A 2014 analysis of three states, Connecticut, New Mexico, and Washington, by the Kaiser Commission on Medicaid and the Uninsured reported state savings both within the Medicaid program from the enhanced matching rate and in other areas of the state budget, such as behavioral health and corrections (Dorn et al. 2015).
  • An issue brief from the State Health Reform Assistance Network looking at 11 expansion states indicated that as a result of Medicaid expansion, states may achieve savings from the enhanced matching rate as well as from replacing general funds with Medicaid funds, such as for services for the uninsured (Bachrach et al. 2016).

Learn more about Medicaid spending:

 

[1] Excludes expenditures for the U.S. territories.
[2] As of November 2016, 31 states and the District of Columbia had expanded Medicaid and were actively enrolling individuals. Five of these states, California, Colorado, Nevada, New Jersey, and North Dakota, did not report their total or new group enrollment. Excludes enrollment in the U.S. territories.