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Cassidy-Graham Would Hit State Budgets Hard, Restrict State Flexibility

Senators Bill Cassidy and Lindsey Graham’s bill to repeal and replace the Affordable Care Act (ACA) would annually shift tens and then hundreds of billions in health care costs to the states and also make it harder for states to raise their own share of Medicaid funds — despite Cassidy and Graham’s statements about respecting state flexibility. This one-two punch would severely strain state budgets at a time when states already face problems in meeting their residents’ needs.

The bill would harm state budgets in several ways:

First, it would eliminate the ACA’s Medicaid expansion and marketplace subsidies in 2020 and replace them with an inadequate block grant, which would disappear entirely in 2027. The block grant would be too small to allow Medicaid expansion states to provide ACA-levels of health coverage without new, state-created sources of revenue. And if a recession hit, boosting the number of uninsured people, states wouldn’t get any increased funding to meet the increased need.

When the block grant disappeared in 2027, those already tough problems would get much worse. If states wanted to keep providing people with coverage, they’d have to cut funding for schools or other non-Medicaid services or raise taxes significantly. They’d likelier end up cutting Medicaid eligibility, benefits, or provider payments to compensate for the funding loss. The loss of funding, for instance, to replace the Medicaid expansion would cost Arizona about $4.6 billion in federal funds in 2027 alone. It would cost Senator Cassidy’s home state of Louisiana about $4.2 billion that year.

Second, the bill would cut and cap federal Medicaid funding in all states, forcing states to either cut Medicaid services or raise their own revenue to cover the loss of federal funding. These additional cuts would equal about $44 billion nationally in 2027 and grow steadily larger thereafter. States would be left holding the bag, forced to reduce services for their residents or raise taxes significantly. Under the cap, Senator Graham’s home state of South Carolina would lose about $597 million in federal Medicaid funding in 2027.

States can’t afford cuts of this size. Cassidy-Graham’s Medicaid funding cuts equal 16 percent of projected state budgets in 2027. That’s more than what states provide for higher education. States that expanded Medicaid would face especially harsh cuts, and all states’ budgets would be squeezed by shrinking federal funding.

Third, the bill would make it harder for states to raise their own share of the funds to sustain Medicaid — by sharply restricting state taxes on health care providers, which every state but Alaska uses to help finance Medicaid, as my colleague Jessica Schubel pointed out yesterday. This provision would interfere with states’ ability to make their own decisions on Medicaid financing.

Most state budgets already are strained, making it hard to absorb large additional costs. More states faced budget shortfalls this past fiscal year than in any year since 2010 (in the aftermath of the Great Recession). In the average state, funding for higher education is still down 16 percent compared to a decade ago, and in some states funding for K-12 schools remains more than 10 percent below pre-recession levels. And increasingly harmful structural problems in state revenue systems make it increasingly hard for states to keep up with rising needs.

In short, Cassidy-Graham would weaken states’ basic financial standing and undercut their ability to invest in the future. Indeed, the bond rating agency Fitch Ratings notes that bills like Cassidy-Graham that sharply reduce federal Medicaid funding “could have implications for states’ credit quality and for the credit quality of related public finance entities that depend on state funding. . . . In a time of already muted revenue growth, spending cuts could affect K-12 and higher education the most, as those are the other largest areas of state spending outside of Medicaid.”