It's been rare that state credit ratings have been driven by Medicaid budgets, but that could be changing.
The 25 states expanding Medicaid eligibility and the 25 rejecting the option are all making tradeoffs that, combined with other factors, may end up swaying their long-term fiscal outlooks, said Gabriel J Petek, a credit analyst, in a Standard & Poor's report.
The 25 states expanding eligibility could see what amount to small healthcare stimulus projects covered mostly by the federal government, Petek argued. In an economy that's alternatively deemed recovering or in a prolonged slump, that could be a big source of growth for state economies, continuing healthcare hiring booms in some places, increasing demand in others and relieving the problem of uncompensated care.
By some measures, Medicaid expansion could help states "bounce back from recession faster," with increased growth and state tax revenue. But if that doesn't happen, Petek wrote, "the additional fiscal burden associated with expansion, despite being a small part of the overall costs, may outweigh its economic benefits from a credit standpoint."
For many states, Medicaid is the single largest expense item in their budget, consuming on average 19 percent of their general funds in fiscal 2013. States like Florida, Ohio and New York spend close to one-third of their general fund budgets on the program.
Even with new federal matching rates--100 percent of the new population for three years, then 90/10--states are still dealing with growing Medicaid spending and many Medicaid directors think that a volatile Congress could very well rescind funding for the new population. Plus, there are likely thousands of people in each state who were previously eligible for Medicaid and end up enrolling in the new outreach campaign; their costs will be covered by the traditional federal state matching rate, running from 50 to 75 percent.
"So although Medicaid may serve a helpful economic function for the states during recessions," Petek wrote, "it may be outweighed from a credit perspective by their fiscal responsibilities related to the program at these times."
Petek argues that the new expansion population, earning up to 133 percent of the federal poverty level ($15,282 for a single adult), "is likely to be more sensitive" to economic up and down cycles, and that "the obligation to fund even a small share of their Medicaid costs" could be a huge pressure to states during those downturns
Still, it "may not be until the next recession hits that the implications of Medicaid expansion in state credit profiles is more fully understood"--if the recession is of the traditional sort. Some economists argue that the economy is in a "prolonged slump rather than just cyclically soft," with "structural unemployment," Petek said. If that's the case, demand for social services would remain high, including in states that opt not to expand Medicaid but particularly in those that do.
There could also be another factor to consider: due largely to state politics, the bulk of the new federal funding from Medicaid expansion will be going to will be going to the richer states with larger economies--a reverse of the historic trends in how states subsidize each other through federal spending.
"Whether this matters from a credit perspective really depends upon which effect from Medicaid expansion--the potential economic boost or the additional fiscal obligation--winds up having the most influence," Petek wrote.