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Government Report: Health Care Costs Expected to Erase State, Local Budget Improvements

Effect of Affordable Care Act is uncertain (Apr. 29)

According to a new report from the U.S. Government Accountability Office (GAO), the “fiscal position” of state and local governments will steadily decline through 2060 if no policy changes or interventions are instituted. In the long term, this decline will be driven primarily by the rising health-related costs of state and local expenditures on Medicaid and the cost of health care compensation for state and local government employees and retirees, the report warns.

Health care expenditures are projected to grow more than the gross domestic product (GDP). The GAO estimates that state and local health-related costs will be about 3.8% of the GDP in 2013 and 7.2% of the GDP in 2060. In contrast, other types of state and local government expenditures — such as the wages and salaries of state and local workers —are expected to decline as a percentage of the GDP. The agency predicts that the sector’s non–health-related costs will be about 10.5% of the GDP in 2013 and about 7.7% of the GDP in 2060.

To close the impending “fiscal gap,” state and local governments would have to cut spending by 14.2% each year over the next 50 years, or raise annual taxes at an equivalent rate. The GAO foresees state and local governments using a combination of both approaches.

According to the report, the effect of the Patient Protection and Affordable Care Act (PPACA) on the long-term state and local fiscal outlook is uncertain and may depend on the states’ implementation of the act and on the future growth rate of health care costs. Under the PPACA, states are encouraged to expand Medicaid coverage for millions of lower-income individuals and to create health insurance exchanges, where eligible individuals can qualify for federal subsidies to purchase private health insurance coverage by January 1, 2014. However, after the U.S. Supreme Court’s ruling on the Medicaid expansion requirements of the law, states have the option of deciding whether they want to increase Medicaid coverage. Given that there are both financial incentives and disincentives to states participating in the Medicaid expansion, what states will decide to do regarding the expansion under the PPACA is highly uncertain, the report says.

Moreover, the GAO notes that although the federal government will cover a large share of the costs of the Medicaid expansion, states would ultimately have to bear some of the costs during a period when their budgets are already under pressure. While some of the uncertainty surrounding the PPACA is related to the implementation of the act, there is also uncertainty about the future underlying rate of growth of health care costs, the report states. Future enrollment patterns for Medicaid and qualified health plans are also less clear because of the uncertainty about future policy changes as well as other factors, such as income growth, that affect individuals’ eligibility.

Source: GAO; April 2013.

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