State and federal spending under the ACA

The federal government and the states share responsibility for financing Medicaid, with the matching rate varying by state and between the new adult group and other eligibility groups. In fiscal year (FY) 2019, total Medicaid benefit spending was estimated at $594.6 billion, including $80.0 billion in spending on newly eligible adults (CMS 2020)).^[1]

Federal matching rate for newly eligible adults

Under the Patient Protection and Affordable Care Act (ACA, P.L. 111-148, as amended), 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 declined slightly each year until it reached 90 percent in 2020.

Individuals eligible to receive the 100 percent matching rate included 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.

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 (i.e., pre-ACA expansion state) could also receive a higher matching rate for childless adults. Specifically, the traditional matching rate was increased by a transition factor so that in 2020 it was 90 percent and equal to the federal matching rate for newly eligible adults.

As of March 2020, there were 15.5 million enrollees in the new adult group in the 35 expansion states (and the District of Columbia) (CMS 2021).^[2]

Medicaid spending post-ACA

Prior to the COVID-19 pandemic, growth in total Medicaid spending slowed, increasing by approximately 3 percent per year since 2017, compared to 5 percent in 2016 and 11 percent in 2015 (CMS 2020a, CMS 2020b, CMS 2019). Per enrollee benefit spending is estimated to have increased by 3.6 percent between 2016 and 2017. Growth in per enrollee benefit spending is projected to have slowed in 2018 to 0.9 percent (CMS 2020). For more on enrollment changes, see Medicaid enrollment changes following the ACA.

Spending on the adult expansion

According to the Centers for Medicare & Medicaid Services (CMS) actuary, the average estimated cost for an expansion adult was $5,669 in 2017, a 4.9 percent decrease from 2016. In the initial years after expansion, costs for expansion enrollees were higher than those for other non-disabled adults in Medicaid, which were the result of higher than anticipated capitation rates paid to managed care plans. As noted by CMS, data on the newly eligible population were 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). While the average cost per enrollee for expansion adults declined in 2016 and continued to decline in 2017, they remain slightly higher than for non-disabled adults in Medicaid. Costs for expansion adults are expected to grow at a similar rate as those for other adults in 2018 and future years (CMS 2020).

Between 2018 and 2027, spending on the adult expansion population is expected to grow from $74.2 billion in 2018 to $124.3 billion in 2027. Due to the higher federal matching rate, the vast majority (91 percent) of this spending will be paid for by the federal government (CMS 2020).

Long-term impact on spending

In 2014, high Medicaid spending growth rates nationally reflected 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 to 2017 and are projected to be even lower for 2018 (CMS 2020). This is due, in part, to the initial 2014 surge in enrollment continuing to diminish (Keehan et al. 2016).

States have reported that spending and enrollment growth continued to slow in 2018 and 2019. A strong economy, resumption of redeterminations in states that had previously delayed them due to eligibility system upgrades, and improved data matching capabilities, contributed to enrollment declines in FY 2019 (MACPAC 2019). At the same time, spending continued to grow due to higher costs for prescription drugs, long-term services and supports, and behavioral health services (Rudowitz et al. 2018, Rudowitz et al. 2019). Medicaid spending and enrollment are likely to increase in FYs 2020 and 2021 due to the COVID-19 pandemic and its effects on the economy and beneficiaries’ health needs.

Although the share of Medicaid spending borne by states has increased as states take on a larger share of the costs for the newly eligible, there is some evidence to indicate that Medicaid expansion has been beneficial for state budgets. For example, a few reports have documented state budget savings resulting from the availability of federal dollars for expenses that were previously state-funded, such as state spending on substance use disorder initiatives, health care for incarcerated individuals, and other non-Medicaid health programs (Guth et al. 2020, Ward 2020, Dorn et al. 2015). Additionally, because Medicaid expansion resulted in higher revenue for many insurers and providers, several states collected higher revenue from existing provider and insurer taxes (Ward 2020, Bachrach et al. 2016).

[1] Excludes expenditures for the U.S. territories.

[2] As of June 2019, 33 states and the District of Columbia had expanded Medicaid and were actively enrolling individuals. Excludes enrollment in the U.S. territories