State Budget Woes? Blame Medicaid.


When states complain that ObamaCare's Medicaid expansion will cost too much, the health law's defenders often point out that the federal government will pick up much of the tab. And it's true that the law calls for the federal government to pay for 100 percent of the cost of the newly eligible initially, winding down to 90 percent by the end of the decade. If enacted, the law will also  increase the overall percentage of Medicaid spending paid for at the federal level. Washington pays for a little more than half of all Medicaid spending right now; that figure would rise to as much as 63 percent after ObamaCare's coverage expansion kicks in.

But as Pew's Stateline news service notes, the Government Accountability Office's latest report on state budget health indicates that states are likely to run into problems paying for the program anyway:

Even so, states will continue to see shortfalls in the revenues needed to cover basic Medicaid program costs, the GAO predicts. That's because states' remaining share of Medicaid will grow faster than any other state and local expense and faster than the nation's gross domestic product (GDP), according to the report.

"There's going to have to be some changes in Medicaid policy," says Thomas McCool, one of the report's authors. "Without that, current policy gets states into trouble," he says.

Current Medicaid spending represents nearly a quarter of state budgets, surpassing K-12 education expenditures when federal funds are included. In fiscal year 2011, Medicaid outlays increased on average by 7 percent across all states, according to the Kaiser Family Foundation. In this year's state budgets, lawmakers approved average spending growth of only 2 percent, one of the lowest growth rates on record, according to Kaiser's most recent 50-state Medicaid budget survey.

GAO's remedy for states' short- and long-term fiscal gaps is to cut current spending by an average 13 percent and maintain that lower spending level for the foreseeable future. The alternative, the report suggests, is to raise taxes by the same percentage or some combination of the two.

This helps explain why a majority of the states have argued that the ObamaCare's Medicaid expansion is unconstitutionally coercive

It also highlights the biggest issue for state finances. The GAO's report is blunt about the primary cause of state budget woes: "In the long term, the decline in the sector's operating balance is primarily driven by the rising health-related costs of state and local expenditures on Medicaid and the cost of health care compensation for state and local government employees and retirees."

It's not exactly analogous to the federal fiscal situation, but there are definitely parallels. At the state and federal level, the budgeting ball game is all about health care spending. Nothing else comes close.