Savings differ not only by state, but also by area of government

States have the potential to save significantly under the Patient Protection and Affordable Care Act (PPACA), according to a new analysis of its fiscal impact. Although the federal legislation will require states to increase their spending on Medicaid coverage for low-income adults, those costs will be greatly outweighed by potential state savings in several areas, according to researchers at the Urban Institute in Washington, DC in their December 2010 study, Net Effects of the Affordable Care Act on State Budgets.

The researchers considered savings that will come from shifting some of today's higher-income Medicaid adults into the health insurance exchange, where the federal government will pay for all of their subsidies. They also looked at the savings from substituting newly available federal Medicaid dollars for current state and local spending on uncompensated care, as well as mental health services provided to low-income residents.

According to the analysis of these three areas, state savings during 2014 to 2019 will exceed state costs by $40.6 billion under a worst-case scenario, and $131.9 billion under a best-case scenario.

States can come out ahead

"There are a lot of reports that states have done that look only at the cost of health care reform," says Stan Dorn, the study's lead author and a senior fellow at the Urban Institute in Washington, DC. "And there is no question, health care reform will impose a lot of costs on states."

Some additional people who are currently eligible will enroll, and states will have to pay their normal share, notes Mr. Dorn. After 2016, the federal government will stop paying for all the costs of newly eligible adults.

"But on the other hand, states have opportunities to achieve fiscal gains," says Mr. Dorn. "The reports that look at both sides of the ledger find that on balance, states can come out ahead."

The researchers, says Mr. Dorn, "used pretty conservative assumptions, and we found that just in the three areas that we looked at, states can achieve savings that vastly outweigh costs."

However, Mr. Dorn acknowledges that this may not be the case for all states, or for Medicaid programs in particular. He says that this brings to mind the saying, "where you stand depends on where you sit."

"Sometimes the cost hits one part of state government, and the savings hit a different part," says Mr. Dorn. "The question is, who gains?"

Medicaid may face increased costs and a big increase in the number of enrollees, while a mental health program may receive significantly more federal reimbursement, says Mr. Dorn. Local programs that pay for indigent hospital care also stand to benefit disproportionately, says Mr. Dorn. "In California and Texas, for example, a lot of uncompensated care is paid for by local tax dollars," he says. "The state may be worried that it will see increased Medicaid dollars, but the localities may be thrilled because of the increased revenue that is coming their way."

Some states vigorous

If an uninsured person gets coverage through his or her state Medicaid program and avoids being hospitalized because he or she has better access to care, Medicaid is still spending more than if that person had remained uninsured, notes Mr. Dorn. On the other hand, he adds, the cost of uncompensated care is going to go down in this scenario.

"We've seen differences in states when coverage through Medicaid and CHIP [the Children's Health Insurance Program] became much more generous to kids than adults in the late 1990s," says Mr. Dorn.

Some states were "very vigorous" in maximizing their pursuit of federal Medicaid dollars to substitute for previous state and local spending on children, recalls Mr. Dorn. He predicts we will see the same pattern occur with adults under the PPACA.

"Some states will invest time, effort, and creativity in figuring out how to get the best possible deal for their taxpayers; others will be left behind," says Mr. Dorn. "We know how this is going to play out."

Some states will come up with clever ideas and "push the envelope," says Mr. Dorn, and other states will follow suit. "People in the federal government will crack down and prevent further expansion, while 'grandfathering in' the trailblazing states," he says. "The other states left out of the party will never be able to join in and get what their colleagues received. We've seen this play out time and again."

Low- and moderate-income uninsured adults are going to have health coverage through Medicaid, in many cases with 90% to 100% federal funding, notes Mr. Dorn, or in some cases through federal subsidies in the health insurance exchange.

"States have been spending a lot of money providing health care services to adults who are now going to get coverage," he says. "There are a lot of opportunities, fiscally, for state budgets."

One possible obstacle, says Mr. Dorn, is the current scarcity of administrative resources.

"Obviously, states have experienced terrible budget cuts, layoffs, and furloughs. There is not a huge amount of staff sitting around with plenty of free time," says Mr. Dorn. "States have had difficulty just applying for federal grants, much less putting together creative strategies for maximizing their fiscal gains under the legislation."

States are struggling to answer many pressing questions, says Mr. Dorn, such as what to do with mental health services, how much more Medicaid revenue is going to come in, and whether to choose the "Basic Health" option under federal law, which might let states tailor federally funded benefits to have a bigger impact on the bottom line.

"These are not necessarily such easy questions. It takes time and effort, which ultimately means money, to figure these things out," says Mr. Dorn. "And not all states have that ability."