State coffers to take a hit with the end of extra federal Medicaid funding

Much of the attention on Medicaid these days is focused on how many people are losing their health care coverage, as states for the first time since the beginning of the pandemic and the end of the public health emergency go about reevaluating eligibility for the roughly 93 million people on the program.

But garnering less attention is the impact Medicaid will have on state coffers, notes a new study by the health care policy think tank KFF.  

During the pandemic, states received more than $117 billion in additional federal Medicaid funding in return for states pausing disenrollments. That increased funding will be gradually going away over the next few months. And even though millions are expected to be removed from the rolls, the cost to states is still likely to be higher without the extra federal funds.

How much higher? It will vary state to state and depend on a number of factors, said Elizabeth Williams, senior policy analyst for KFF’s Medicaid and the Uninsured Program.

“There's a lot of uncertainty during the unwinding period,” she said. “Like many changes, total spending depends on a lot of different things. How many people will be disenrolled? How many new people will come onto Medicaid? There's also rules and reporting requirements that states have to meet in order to receive enhanced federal funding through the end of the year. And so if they don't meet those reporting requirements, potentially they could lose the match.”

The potential financial impact on states' budgets stems from emergency measures Congress took in the early days of the pandemic. In 2020, it enacted the Families First Coronavirus Response Act that barred states from removing people from Medicaid until the public health emergency was over. Because of the so-called continuous enrollment provision, Medicaid grew by about 23 million people and Congress agreed to pick up the extra cost of running the program by increasing what’s known as the Federal Medical Assistance Percentage, or FMAP, by 6.2%.

As a result, states have been spending less on Medicaid than they were before the pandemic, even as enrollment grew. In 2019, according to the study, states spent $231 billion on Medicaid. The next year, states spent just $214 billion. The decrease was because the federal government picked up nearly $50 billion more of the cost. States continued to spend less in fiscal years 2021 and 2022, $211 billion and $224 billion respectively, as the federal government paid the rest of the bill.

Under the omnibus spending bill Congress passed in December, Medicaid funding was extended. Instead of coming to a screeching halt with the end of the public health emergency, Congress opted to slowly wind down FMAP to 5% in April, then 2.5% in June and finally 1.5% in October. 

Phasing out the money, Williams said, “was designed to provide continued financial support to states during the unwinding process, and sort of help mitigate sharp increases in state Medicaid spending.”

It's difficult to tell how much of a role losing the additional federal dollars is playing in the unwinding process, according to Williams.

KFF has been tracking how many people are being removed from Medicaid, and as of Tuesday, at least 1.3 million people have lost coverage in 22 states.

Five states began reviewing eligibility as soon as the public health emergency ended on April 1, while 14 waited until May and another 22 until June. Nine states will begin in July, while Oregon is waiting until August.

One thing that’s significant for states, noted Robin Rudowitz, vice president and director of KFF’s Medicaid and the Uninsured Program, is that Congress gave the Centers for Medicare & Medicaid Services the ability to stop giving states the additional funding if they don’t follow some rules like making a “good faith effort” to reach people, including reaching out in a way other than by mail to let them know they have to reapply before kicking them off of Medicaid. 

If states do not make a good faith effort to notify recipients of the need to reenroll, the U.S. Department of Health and Human Services can require states to submit a plan to come into compliance. If a state does not submit a plan, the department can forbid them from removing people from Medicaid and can fine them $100,000 for every day they are not in compliance.

In a letter to governors last week, HHS Secretary Xavier Becerra raised concerns that states are removing too many people without doing enough to let people know they have to reapply for Medicaid and reminded them their funding could be on the line.

Those on Medicaid “must be afforded the due process to which they are entitled in order for states to continue to receive enhanced federal funding,” Becerra said. “We take our oversight responsibilities extremely seriously, and while we know that states are working hard to meet the federal requirements, we will not hesitate to use the compliance authority provided by Congress, including requesting that states pause procedural terminations.”