Assessing the Fiscal Impact of Medicaid Expansion Following the American Rescue Plan Act of 2021

Manatt, Phelps & Phillips, LLP
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Editor’s Note: In a recent issue brief for the Robert Wood Johnson Foundation’s State Health and Value Strategies program, summarized below, Manatt Health describes the provision in the American Rescue Plan Act of 2021 (ARP) providing an enhanced federal matching rate to new expansion states, assesses the provision’s fiscal impact for each state using publicly available data and identifies key factors that will impact how much funding states should expect to receive. Click here to download a free copy of the full issue brief.


The Affordable Care Act (ACA) led to major advances in health insurance coverage in the United States. From 2013 to 2019, the uninsured rate fell from approximately 17 percent to 11 percent.1 A central pillar of the ACA’s coverage reforms is the Medicaid expansion, which provides states with the option to cover adults with incomes under 138 percent of the federal poverty level (FPL).2 A substantial body of evidence indicates that adopting the Medicaid expansion delivers myriad benefits to states and Medicaid enrollees—including reductions in the uninsured rate, improvements in health care access and outcomes, improved financial security among low-income individuals, and increased economic activity and state tax revenue—at a modest cost to states.3, 4, 5

Currently, 12 states have not yet taken up the ACA Medicaid expansion, leaving approximately 2.2 million adults in the so-called “coverage gap” without an affordable source of coverage.6, 7 Objections to expansion in these states have often focused on state costs as the primary reason for not going forward, with some taking the position that covering 10 percent of the cost of expansion (with the federal government covering the remaining 90 percent) is a challenge.8, 9

While the fiscal benefits of Medicaid expansion to states are strong and well documented, the recent enactment of ARP makes the fiscal case even stronger by providing states that implement expansion after the enactment of ARP with a significant increase in federal Medicaid funding.

Overview of the ARP Match Rate Increase

ARP provides states that implement a Medicaid expansion after March 11, 2021 (the date of the law’s enactment), with a two-year, 5 percentage point increase in the federal medical assistance percentage (FMAP) that applies to most non-expansion Medicaid populations and activities.10 The increased matching rate is available at any point after enactment to new expansion states and is tied to when a state begins expending Medicaid funds on the entire adult expansion group.11 Moreover, a state that begins enrolling adults in the Medicaid expansion group during the federal COVID-19 Public Health Emergency (PHE) period will receive ARP’s 5 percentage point FMAP increase on top of the 6.2 percentage point increase authorized by the Families First Coronavirus Response Act (FFCRA).12

The extra funding, while time limited, is significant, because ARP’s FMAP increase applies to most Medicaid spending (other than spending on the expansion, which already qualifies for an enhanced matching rate). As long as the underlying expenditures are eligible under ARP, the FMAP increase applies regardless of whether the expenditure is covered under the state plan or under Section 1115 waiver authority.13

By increasing the federal matching rate, the ARP FMAP increase lowers state costs for most of the Medicaid program, freeing up state dollars for other purposes. States will determine how to use these freed-up state funds, but since the funds are triggered by the adoption of the Medicaid expansion, many states will likely consider using the funds to finance the expansion during and after the expiration of the ARP FMAP increase. Using this strategy, states would be able to fully finance the non-federal share of expansion costs for multiple years.

Analytical Approach

In the issue brief, we estimate both the dollars available under the ARP FMAP provision and costs associated with Medicaid expansion in order to assess the net fiscal impact of expansion. To calculate the value of the ARP FMAP provision, we project forward non-expansion Medicaid expenditures by relying on state-reported enrollment and spending data from CMS and the Medicaid and CHIP Payment and Access Commission (MACPAC).14, 15 We also apply enrollment trends from 2020 through 2021 based on a Manatt analysis of state-specific enrollment during the pandemic.16 In 2022 and 2023, we assume that the PHE will expire and that enrollment will decline in most states before leveling off in 2024. We derive the rate of enrollment declines in 2022 and 2023 from state budget projections, relying on the midpoint of other states’ enrollment projections when we were not able to locate state-specific projections. To calculate expansion costs, we project expansion enrollment based on take-up rates observed in other expansion states. We then assume that expansion adult per capita costs will be equal to non-expansion adult per capita costs as reported by MACPAC for FY 2018.17 Additional detail on methodology is provided in the appendix to the issue brief.

We note that our analysis likely overstates the cost of expansion in many states, as it does not account for often significant sources of state savings and revenue increases associated with expansion. These include savings from currently eligible Medicaid enrollees who instead enroll through the expansion group (thus allowing states to access the enhanced federal matching rate) and savings on state-funded health care programs for the uninsured.

Key Findings

Our analysis shows that the additional federal dollars available through the ARP FMAP provision are substantial because of the breadth of Medicaid expenditures that are subject to the 5 percentage point FMAP increase. We project the ARP FMAP increase will generate approximately $21.1 billion in additional federal dollars across the remaining 12 non-expansion states (should they expand) and Missouri and Oklahoma (which have already determined to expand), freeing up an equivalent amount of state dollars.18

If dollars freed up by the ARP FMAP increase were put toward financing expansion, we estimate that they would fully cover the non-federal share of expansion costs for between 3.1 and 6.5 years depending on the state. For example, we project that Florida will receive approximately $3.9 billion in additional federal dollars from the ARP FMAP increase. We project that this will offset the non-federal share of expansion costs in 2022 and 2023—$806 million—by over $3.1 billion. If the state were to set aside these freed-up state dollars, we project that it could use them to finance the non-federal share of Medicaid expansion for a total of nearly seven years (i.e., from 2022 into 2028). See Table 1 for additional detail.

Table 1: ARP FMAP Increase vs. Non-Federal Share of Expansion Costs ($ Millions)

State Non-Federal Medicaid Expenditures Offset by ARP FMAP Increasei Non-Federal Cost of Expansion, Year 3ii Years of Expansion “Paid For”iii
Alabama $772 $182 4.8
Florida $3,942 $621 6.5
Georgia $1,468 $381 4.4
Kansas $468 $147 3.8
Mississippi $739 $205 4.2
Missouriiv $1,471 $304 5.3
North Carolina $2,075 $662 3.8
Oklahomav $786 $249 3.8
South Carolina $838 $220 4.4
South Dakota $128 $33 4.5
Tennessee $1,385 $221 6.5
Texas $5,672 $2,317 3.1
Wisconsinv $1,227 ($225)v N/Av
Wyoming $81 $26 3.8
Total $21,053 $5,342 N/A

Note: Figures do not account for the significant sources of state savings and revenue increases due to expansion (described above) that have been realized by previous Medicaid expansion states. These savings will allow states to finance expansion for longer than indicated above using dollars freed up by the 5 percentage point FMAP increase.

i. Represents additional funding for all eight quarters during which a state would be eligible for the ARP FMAP increase, regardless of the expansion start date. We assume that expansion will take effect on January 1, 2022, for all non-expansion states and July 1, 2021, in Missouri and Oklahoma.

ii. In our model, Year 3 represents the first year of full expansion ramp-up. Accordingly, projected costs are lower in years one and two. Projected costs generally grow after year 3 in most states as medical prices increase over time (we also project enrollment growth after year 3 in some, but not all, states).

iii. Inclusive of the first two years of expansion while the ARP FMAP increase is in effect.

iv. Missouri and Oklahoma were scheduled to implement Medicaid expansion prior to the passage of ARP. This analysis treats expansion costs in these states as new costs; however, these states likely already have accounted for these expenditures in budget projections.

v. We project that expanding Medicaid in Wisconsin would reduce non-federal Medicaid expenditures in the state in all years of expansion—regardless of the 5 percentage point ARP FMAP increase—by allowing the state to access the 90 percent enhanced matching rate for over 200,000 childless adults for whom the state currently receives only the state’s regular matching rate (66.08 percent in FY 2022).

Key Considerations

A number of factors affect the value of the ARP FMAP increase for states. States with high non-expansion Medicaid enrollment relative to the number of individuals in the state’s coverage gap are likely to be able to fund expansion for the longest period of time using savings from the ARP FMAP increase. This is because states with high non-expansion enrollment will have a larger number of individuals for whom they would be able to claim the ARP FMAP compared to states with fewer non-expansion Medicaid enrollees.

The size of the ARP FMAP increase will also depend on the trajectory of Medicaid enrollment during and after the PHE and the timing of the expansion. Nearly all states have seen significant growth in Medicaid enrollment during the pandemic as a result of the FFCRA continuous coverage provision.19 However, states may begin to see reductions in enrollment once the PHE expires and they resume regular redeterminations of eligibility. The extent and timing of these enrollment shifts are likely to vary across states. Accordingly, individual states will be best positioned to project the trajectory of their own enrollment following the PHE.

Additionally, as mentioned above, these estimates do not factor in offsetting savings that states will realize when they implement expansion. Those savings will mean that the ARP FMAP increase will likely finance expansion for additional years beyond the number estimated here.

Conclusion

While Medicaid expansion has always provided significant fiscal advantages for states (in addition to providing a wide range of health and other benefits), the ARP FMAP provision makes the fiscal case even stronger. States will be able to access the additional federal dollars regardless of how they finance the non-federal share of expansion (including through provider assessments, as has been done in many expansion states). States that direct the state savings toward the cost of expansion can expect to fully offset the non-federal share of expansion costs for a minimum of three years, with some states fully offsetting the costs for over six years.

1. https://www.kff.org/uninsured/issue-brief/key-facts-about-the-uninsured-population/.

2. The ACA established the Medicaid new adult group (or “expansion group”) as a mandatory eligibility category. However, in National Federation of Independent Business v. Sebelius (2012), the Supreme Court held that the Secretary of Health and Human Services (HHS) may not compel states to adopt the Medicaid expansion. This effectively rendered the group optional.

3. https://www.shvs.org/finishing-the-job-of-medicaid-expansion/.

4. http://files.kff.org/attachment/Report-The-Effects-of-Medicaid-Expansion-under-the-ACA-Updated-Findingsfrom-a-Literature-Review.pdf.

5. https://www.rwjf.org/en/library/research/2019/02/medicaid-s-impact-on-health-care-access-outcomes-andstate-economies.html.

6. This figure does not include individuals in Missouri and Oklahoma, as these states are slated to expand Medicaid this year.

7. https://www.kff.org/medicaid/issue-brief/the-coverage-gap-uninsured-poor-adults-in-states-that-do-not-expand-medicaid/.

8. https://www.newsobserver.com/news/politics-government/article235677772.html.

9. https://www.nbcnews.com/news/us-news/residents-suffer-mississippi-13-other-states-debate-medicaid-expansion-n1075661.

10. American Rescue Plan Act of 2021, Pub. L. No. 117-2, § 9814, 135 Stat. 4, 215.

11. While Missouri and Oklahoma had already formally adopted expansion at the time ARP was enacted, they will be eligible to receive the enhanced matching rate since coverage is not yet effective and the states have not yet expended funds on the expansion group. Wisconsin will also be eligible for enhanced matching funds—despite covering childless adults up to 100 percent of the FPL—because the state has not previously covered the entire expansion group.

12. The law also provides targeted increases in Medicaid funding via changes to the matching rate for Medicaid home- and community-based services (HCBS) spending, vaccine purchase and administration, community-based crisis intervention programs, and services provided through the Urban Indian Organizations and Native Hawaiian Health Care Systems.

13. Excluded expenditures include DSH payments, CHIP-financed coverage (including coverage for children enrolled in CHIP-financed Medicaid), expenditures on the family planning eligibility group (also subject to an enhanced FMAP), and expenditures in other programs that are tied to the Medicaid FMAP (e.g., child welfare).

14. https://data.medicaid.gov/Enrollment/State-Medicaid-and-CHIP-Applications-Eligibility-D/n5ce-jxme/data.

15. https://www.macpac.gov/wp-content/uploads/2015/01/EXHIBIT-22.-Medicaid-Benefit-Spending-Per-Full-Year-Equivalent-Enrollee-by-State-and-Eligibility-Group-FY-2018.pdf.

16. https://www.shvs.org/resource/tracking-medicaid-enrollment-growth-during-covid-19-databook/.

17. https://www.macpac.gov/wp-content/uploads/2015/01/EXHIBIT-22.-Medicaid-Benefit-Spending-Per-Full-Year-Equivalent-Enrollee-by-State-and-Eligibility-Group-FY-2018.pdf.

18. Missouri and Oklahoma are scheduled to implement Medicaid expansion in 2021 but will have access to the ARP FMAP increase because coverage was not yet effective at the time of the law’s enactment.

19. https://www.shvs.org/resource/tracking-medicaid-enrollment-growth-during-covid-19-databook/.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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