Is Medicaid Expansion Devouring State Budgets?

The policy’s costs to the federal budget have been substantial, but evidence of spiraling state costs is thin.

Opponents of Medicaid expansion under the Affordable Care Act sometimes claim that expansion has “busted budgets" and "crowded-out investments” in essential services like K-12 education and transportation. Supporters usually argue that expansion has been a boon for state budgets, costing little and in some cases even generating net savings.

Theoretically, both perspectives are defensible.

Supporters of Medicaid expansion emphasize that the federal government assumes nearly all (at least 90%) the healthcare costs of newly eligible enrollees. They also argue that expansion allows states to shift some of their existing, non-Medicaid healthcare expenditures — such as care provided in correctional facilities, drug treatment programs and payments to hospitals for uncompensated care — to the federal government, and that expansion helps hospitals stay afloat, which benefits state economies. It’s also conceivable, though more speculative, that providing health coverage to more low-income adults could have broader effects that benefit states budgets, such as increasing new enrollees’ work effort (and thus increasing state revenue from payroll and income taxes and reducing reliance on other safety-net programs) or reducing their rates of crime (and thus reducing state spending on law enforcement and incarceration).

Opponents point out that expansion often triggers a sizable “woodwork effect” of previously eligible enrollees joining the program at significantly lower federal matching rates. Moreover, if the expansion population is large or receives expensive healthcare services, even states’ 10% share of costs could be substantial as a proportion of state spending. It’s also possible that expansion could weaken work incentives among newly eligible enrollees, thereby reducing state tax revenues.

Unfortunately, most empirical work on this issue is heavy on anecdotes and light on rigor. Expansion’s detractors like to highlight Ohio, where cost overruns have been substantial and state Medicaid spending as a share of total state spending surged after the state expanded its program. Supporters of expansion like to cite Montana, where expansion appears to have delivered modest budget savings. Cherry-picking states that support one argument or the other might be an effective political strategy, but focusing on outliers is exactly the wrong approach if we want to understand the typical effect of expansion on states’ finances.

The best comprehensive study on this topic is Gruber and Sommers (2020), based on annual state expenditure reports from the National Association of State Budget Officers (NASBO). Looking at the 2010-18 period, the authors find that 1) Medicaid expansion led total spending (note: this includes funding provided by the federal government) in expansion states to rise by 6% to 9% compared to non-expansion states; 2) changes in Medicaid spending from state funding were small and not statistically significant; and 3) there is no evidence that expansion caused any reductions in spending on education, corrections, transportation or public assistance.

It’s important to acknowledge that Gruber and Sommers’ estimates related to total state spending are imprecise (see Figure 1). In 2016, 2017 and 2018, their 95% confidence intervals can’t rule out a 10% increase or a 10% decrease in total state spending associated with the expansion. Still, given the near-zero point estimates, our best guess is that expansion’s fiscal effect on states was negligible.

Figure 1: Event Study of Spending from State Funds, Before and After Medicaid Expansion. Source: Gruber and Sommers (2020) – Figure 3, Panel C

A subsequent study by the Commonwealth Fund used updated data from NASBO (primarily 2013-2019), as well as spending data from Federal Medicaid Management Reports (2012-2017) and the Medicaid Budget and Expenditure System (2013-2018) to compare spending patterns in expansion and non-expansion states. The results are consistent: Across all three datasets, the authors report either no significant effect of expansion on state Medicaid spending or small reductions.

Still, all of these analyses relied on pre-COVID data. One might wonder whether the pandemic and the temporary Medicaid measures adopted in 2020 have changed this conclusion. It’s possible that expansion blunted the state budgetary impact of the pandemic by reducing the amount of uncompensated care states paid on behalf of uninsured individuals who got sick. On the other hand, the maintenance of eligibility requirements (which prevented states from dropping ineligible Medicaid recipients) applied to a much larger population in expansion states, which might have offset the enhanced federal funding.

Figure 2 is based on the same NASBO data used in Gruber and Sommer’s and the Commonwealth Fund’s analyses, but I’ve extended the time horizon to include the pandemic years. To avoid potential complications from staggered treatment timing, I’ve limited the comparison to the 24 states that expanded Medicaid on January 1, 2014, and the 12 states that have not expanded.¹ For each year and group of states, I divided state Medicaid spending by total state spending. (Fiscal years are shown. Nearly all state fiscal years end on June 30, so most 2020 spending occurred pre-pandemic.)

Figure 2 suggests that expansion may have helped cushion state budgets during the pandemic. While non-expansion states spent about the same or more of their budgets on Medicaid in 2021 and 2022 than they had in 2019 and 2020, expansion states saw a steady decline in their Medicaid spending as a proportion of their total state spending (from 15.6% in 2019 to 13.0% in 2022).

Figure 2: State-Funded Medicaid Expenditures as a % of Total State-Funded Expenditures, FY2002 - FY2022. Source: Author’s calculations based on NASBO state expenditure reports

States’ finances represent only one side of the ledger, of course. Medicaid expansion has had an enormous fiscal impact on the federal government. The Congressional Budget Office estimated that Medicaid expansion cost the federal government $116 billion in 2022, more than one-quarter of all federal Medicaid spending. Total Medicaid spending is projected to exceed $1 trillion in 2028. The escalation of federal Medicaid costs, worsened by expansion, has contributed to deepening deficits and mounting debt. In the end, taxpayers — whether through state or federal channels — will have to reckon with Medicaid’s rapidly escalating costs. And it is possible that future reforms to entitlement spending will include a drastic cut in federal Medicaid reimbursements, leaving expansion states in a more precarious position than non-expansion states.

For now, though, the notion that Medicaid expansion has caused an explosion of state spending or forced states to scale back on other budget priorities simply isn’t supported by the data.

1. This includes South Dakota and North Carolina, which recently adopted Medicaid expansion but have yet to accept new enrollees.