The New Health Law Will Affect States’ Budgets

Last month, Arizona did something no state had ever done – or is likely to ever do in the future. As part of its effort to close a $2.6 billion budget gap, Arizona became the first state to eliminate funding for its Children’s Health Insurance Program. Lawmakers decided to make deep cuts in Medicaid as well, kicking 300,000 adults off the rolls as of January.

At least, that was the plan. But five days after Republican Gov. Jan Brewer signed it into law, President Obama signed the new health law. That had the effect of voiding Arizona’s effort. The federal health care act bars states from lowering eligibility requirements for either CHIP or Medicaid over the next several years. Otherwise, they risk losing Medicaid funding altogether.

Because Arizona’s cuts hadn’t officially taken effect, state lawmakers now have to cancel them to comply with federal requirements. That will leave a $400 million hole in their new budget. All told, Arizona officials estimate the federal law will cost the state $11.6 billion over the next 10 years.

Brewer calls that “financially devastating.” She signed a bill Thursday that gives her the authority to sue the federal government over the law, even though the state’s attorney general has refused to do so.

Many other states – nearly all of which are facing budget shortfalls – are similarly concerned about how much the health law will end up costing them. States that have traditionally offered lower levels of coverage, such as Arizona, will no longer have the option of cutting health spending much in tough times.

And, because states will operate major portions of the federal expansion, they face other challenges. California predicts that the cost of administering the new programs alone will run the state $2 billion to $3 billion.

“There’s no way, in my view, that this is not going to cost states,” says Scott Pattison, executive director of the National Association of State Budget Officers.

Putting The Pieces Together

State-run exchanges are one of the cornerstones of the new law. These will be marketplaces where individuals and small businesses sign up for private insurance plans. The idea is that they’ll work like travel Web sites such as Orbitz and Expedia, giving individuals and human resource managers their pick among several competing plans.

But the exchanges aren’t simply one-stop shopping tools. They will also determine how much government assistance each person is entitled to. The federal government will subsidize private insurance for individuals who earn up to 400 percent of the poverty level, on a sliding scale. The exchanges will determine how much help each person should get.

The exchanges also will figure out whether an individual, even though she may be applying for private coverage, actually meets the requirements for CHIP or Medicaid. That means states need to get often outmoded database systems talking to each other.

States that have tried to synchronize applications across various assistance programs have found it rough going, even on a much smaller scale, says Jeff Smith, a health consultant with the Lewin Group in Virginia. Under the health law, states will collectively process income and eligibility information for up to 30 million families, he says.

“It’s very, very difficult to bring all the disparate pieces into one system and make them work together,” he says. “I don’t think states fully understand the magnitude of what’s involved here.”

Experience Matters

It can be done. After passing a similar individual-mandate law in 2006, Massachusetts got its exchange up and running within six months. Under the federal law, other states have until 2014. (Utah is the only other state with an existing exchange.)

But Massachusetts started out with many advantages. Its uninsured population was relatively small and the state boasts the nation’s largest number of physicians per capita.

States that have already expanded coverage in recent years, including Massachusetts and Maine, have learned how to reach out to working populations and negotiate with private insurers.

Not all states have that experience. States such as Arizona and Alabama, which historically haven’t provided broad coverage, have reason to worry about how they’re going to bring their administrative and health system capacity up to speed – and how they’re going to pay for it.

“If you’ve been running a fairly basic program and you imagine a major influx of people coming into Medicaid, you’re wondering who is going to provide care to those people and how are we even going to sign them up,” says Alan Weil, executive director of the National Academy for State Health Policy. “The magnitude of the task is definitely greater in the states that have not taken those steps, to learn a lot of lessons about expanding coverage.”

Learning New Tricks

Leaving aside constitutional challenges brought by 14 state attorneys general, this is the real fault line dividing opinion about the new federal law among states. Some states are confident they have the ability and expertise to meet its challenges, while others remain wary. Some are having to shift gears entirely, from making big program cuts to preparing for vast expansions.

Cindy Mann, who oversees Medicaid and CHIP for the federal government, recognizes that states will have additional costs under the law, but she points out that states will receive help on implementing – and paying for – their new coverage responsibilities. The feds will not only pick up the tab for newly eligible Medicaid recipients but devote more dollars to CHIP as well. “This helps states avoid other costs they would bear if the Medicaid program wasn’t there,” Mann says, such as underwriting care for the uninsured at community health centers.

But Carol Steckel, Alabama’s Medicaid commissioner, says her state can barely afford its share of Medicaid costs now. She predicts the new law will bring 400,000 more people into her state’s Medicaid system by 2014 – doubling its size. That means even greater costs for the state down the road, despite increased federal subsidies for Medicaid.

“I’m going through my mourning period of how much work there’s going to be,” she says. “We’re for bleepin’ sure going to have to think outside the box.”