Blog Post

We predicted big cuts to Medicaid payments after Covid-19. Here's why we've changed our minds.

By Yulan Egan

March 3, 2021

    Last spring, as the Covid-19 pandemic gained steam, our research team took a look at how the pandemic would impact the major U.S. purchasers of health care services: employers, health plans, Medicaid, and Medicare. Despite the upheaval in health care delivery, our analysis predicted relative financial stability for payers. Declines in utilization meant that health care was poised to be a relative bright spot in employer budgets for the year. Health plans similarly expected costs to go down, and most of the big national plans were confident that they were diversified enough to weather potential shifts in payer mix. And while the federal government was spending billions of dollars on Covid-19 relief, its ability to engage in deficit spending meant Medicare could likely remain untouched.

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    The outlook for Medicaid was different. Like other payers, we expected Medicaid programs to see temporary declines in spending due to canceled or delayed procedures. But on the flipside, we thought Medicaid enrollment growth (due to employment losses) would drive costs up. We also expected states to take a big hit on the revenue side of the equation due to their reliance on tax revenues. Unlike the federal government, most states are constitutionally obligated to balance their budgets, meaning they don't have the flexibility to finance deficits like the federal government.

    For all those reasons, we believed states would face immediate and unavoidable pressure to cut Medicaid spending—and that pressure would drive most states to resort to provider rate cuts. We also felt on firm footing in making that prediction because we had a historical proxy: the 2008-09 recession. In the aftermath of that economic decline, most states either cut or froze provider reimbursement rates.

    Most states cut provider rates during last recession

    States reporting at least one provider rate cut or freeze

    Provider_Rates

    Source: Snyder L, "Trends in State Medicaid Programs," Kaiser Family Foundation, June 2016.

    As is often the case in health care, it will be a while yet before we have a clear and comprehensive data set to understand exactly what Medicaid programs did across 2020 and into 2021. But we increasingly believe our original projection painted far too negative a picture.

    Why—and how—has our perspective shifted?

    There's clearly been economic fallout from the pandemic, but the nature of that fallout has played out in some surprising ways. While there is considerable variability state by state, here's what we've observed, on average, when it comes to some of the most common sources of state revenue:

    1. Income taxes: Smaller-than-expected decline

      The revenue from income taxes has decreased. But the concentration of job losses in lower-wage workers—and the relatively rapid return of (some) employment—has made this decline smaller than originally expected. A strong stock market has also sustained tax revenue associated with capital gains.

    2. Sales taxes: Smaller-than-expected decline

      State revenue from sales taxes dipped sharply in the early stages of the pandemic. But 2020's strong start before the pandemic and a rebound later in the year due to online sales meant that overall declines for the year were smaller than anticipated.

    3. Property taxes: Relatively stable

      Most state governments rely less heavily on property tax revenue than local governments. But those states that do largely saw stable—if not increased—revenues due the surprising strength of the housing market nationwide.

    4. Corporate taxes: Significant decline, as expected
    5. Businesses—particularly small ones—struggled significantly during the pandemic. Unsurprisingly, corporate tax revenues declined substantially. But those revenues make up a relatively small portion of state and local revenues in comparison to income, sales, and property taxes.

    So, on average, states experienced smaller revenue declines than we originally expected. States also received aid from the federal government, including enhanced funding for Medicaid in the form of enhanced Federal Medical Assistance Percentages (FMAP). Overall, we expect the effect on Medicaid programs to be smaller than we originally feared. And with Congress poised (as of this writing) to funnel more support to states for 2021 and the Biden administration reportedly planning to maintain the Public Health Emergency (and the associated FMAP bump) for the duration of this year as well, we are cautiously optimistic that we're on track for a similar story in 2021.

    Let's be clear: we're not saying that the outlook for Medicaid is rosy. States have long struggled to balance their budgets. And as a growing share of the budget in many states, Medicaid is a clear target for cuts. However, the Covid-19 pandemic hasn't been a cataclysmic event for Medicaid in the way we originally feared.

    We should also note that there is significant state-by-state variability in the dynamics described above. Some states experienced much sharper declines in income and sales tax revenues than others. But we believe pressure to constrain Medicaid spending in most states is a medium- to long-term pressure, not a near-term one. And that has important implications for how states will approach Medicaid across the next year or two.

    What should we expect from Medicaid moving forward?

    Here's what we're watching:

    1. Enrollment growth. The Covid-19 pandemic has led to natural growth in Medicaid enrollment due to loss of employment (according to the Kaiser Family Foundation, enrollment nationwide grew by over 6 million between February and September of 2020). And Democrats wants to use their unified control of the federal government to expand enrollment even further. The latest Covid-19 relief package making its way through Congress currently includes financial incentives designed to encourage expansion among the 12 states that have yet to expand Medicaid under the Affordable Care Act. The Biden administration has also taken action to review Trump-era policies that might constrain Medicaid enrollment growth, such as work requirements.
    2. Spending control. As Medicaid enrollment grows, so too does the pressure to constrain spending growth. However, states that are not in dire financial straits are less likely to rely on surefire strategies to generate immediate savings, like cutting rates. Instead, they're more likely to experiment with strategies like value-based care, innovative drug pricing models, or strategies targeted at long-term care spending (a huge source of spending for most Medicaid programs).

    A parting thought

    Since the outset of the Covid-19 pandemic, the temptation—and in many cases, inclination—to rely on the 2008-09 recession as a proxy has been strong and pervasive. Industry analysts have used the last recession to model everything from the pandemic's potential impact on payer mix shifts to utilization trends to the financial outlook for various players across the industry. But with nearly a year's worth of learning under our belts, we increasingly believe that the last recession is a poor proxy for modeling much of anything having to do with the Covid-19 pandemic. This crisis has been markedly different in almost every way. And as we continue to make predictions about the future, we should be cautious about how much we rely on historical proxy for a crisis as unique as this one. We'll go deeper on that argument (and the risks associated with getting this wrong) in a future piece.

    Kirsta Hackmeier and Darby Sullivan contributed to this post.

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