How Medicaid Cuts Could Hurt Education and Lead to Middle-Class Tax Hikes

The following article by Harry Stein and Sundus Alfi was posted on the Center for American Progress website June 6, 2017:

The House of Representatives recently passed the American Health Care Act (AHCA), which would repeal the Affordable Care Act (ACA) and cut Medicaid by $834 billion over 10 years.¹ Due to cuts in Medicaid, as well as other changes, the Congressional Budget Office (CBO) estimates that the AHCA would take health insurance from 23 million Americans by 2025.²President Donald Trump supports this legislation despite pledging not to cut Medicaid.³

The AHCA is only the beginning. President Trump’s budget calls for $610 billion in additional Medicaid cuts over 10 years on top of the cuts in the AHCA.⁴ And previous budgets from House Republican leaders also recommended Medicaid cuts that exceed the cuts in the AHCA.⁵ The most significant impact of these Medicaid cuts would be the disruption of health care services for working families, seniors, children, and people with disabilities.⁶

States that want to avoid deep cuts in health programs would have to either raise taxes or cut other programs. This could lead to funding cuts for public schools and ultimately increase the tax burden for low- and middle-income families. In addition, federal Medicaid funding provides a significant boost to overall state economies.⁷ A weaker economy could lead to further cuts in education or other programs, as well as additional tax increases, as states strive to balance their budgets.

Federal Medicaid cuts could take the form of block grants or per capita allotments. Under a block grant system, a predetermined amount of federal funding would be granted to states for their Medicaid programs. A per capita allotment would cap the federal funding given per enrollee.⁸ Fundamentally, both policies simply cut Medicaid since federal funding is generally reduced in either scenario.

Recent analysis by the Center for American Progress found that Medicaid caps, such as those in the AHCA, could have caused 28 states to lose a combined $17.8 billion in federal Medicaid funding in 2011 if the AHCA’s per capita caps had been set in 2000.⁹ Ohio would have lost $848 million in federal funds, and Arizona would have lost $1.7 billion.¹⁰ Axios published CAP’s analysis for all states based on several different proposals for Medicaid per capita caps.¹¹

Unlike the current formula for federal Medicaid grants to states, block grants or per capita allotments do not protect states from unpredictable events such as public health emergencies like disease outbreaks, increased health costs, or changes in technology—all of which could significantly increase program costs.¹² The buzzword used by advocates of Medicaid block grants and per capita allotments is “flexibility,” but this really means that states would be on their own as the federal government shifts more Medicaid costs onto state budgets.¹³

States may cut education to close budget shortfalls caused by federal Medicaid cuts

In state fiscal year 2015, federal Medicaid dollars accounted for 17.2 percent of total state expenditures.¹⁴ Federal funding for state Medicaid programs makes up a substantial share of state budgets, and states depend on this funding to adequately provide important health care services. States could respond to reduced federal Medicaid funds by cutting other important services, such as education, to compensate. States often cut their education spending—particularly higher education—to close budget shortfalls, which is what happened when the Great Recession placed a tremendous strain on state budgets.

A CAP analysis of state higher education spending found that “29 of 50 [state] governments lowered their total level of direct support to public institutions between fiscal years 2008 and 2012.”¹⁵ Disinvesting in higher education has led to increases in tuition that primarily burden low- and middle-income students and families: In states with the highest levels of disinvestment, low-income students pay 18 percent more for community college and 14 percent more for public universities compared with the national average. For middle-income students in those states, community colleges cost 6 percent more than the national average, while public universities cost 4 percent more.¹⁶ Higher prices for education mean greater borrowing, higher debts, or students choosing not to go to college.

Higher education cuts had a severe impact on students. From 2009 to 2011, Florida universities saw a tuition increase of 32 percent.¹⁷ Meanwhile, in Minnesota, 9,400 students lost their financial aid grants, and aid for the rest of the recipients was cut by 19 percent.¹⁸

Most states also cut K-12 education. As a result of the Great Recession, by the end of 2011, 34 states and the District of Columbia enacted cuts to K-12 education. In 2011 alone, Georgia cut $403 million in state funding for K-12 education, and Virginia’s biennial budget included a $700 million cut in K-12 education funding.¹⁹ Virginia’s budget also made permanent a $500 million cut in funding for 13,000 school staff members, affecting janitors, nurses, and psychologists.²⁰

The aftermath of the Great Recession showed how state budget shortfalls can lead to education cuts, and it also illustrated how some changes in federal Medicaid funding can affect other sectors of state budgets, including education. During the Great Recession, the American Recovery and Reinvestment Act of 2009 (ARRA) provided a temporary increase in federal Medicaid funds to help mitigate state budget shortfalls caused by the economic downturn. The expiration of this boost in federal Medicaid funding provided a test case for what can happen to education spending when federal Medicaid funding declines and creates budget shortfalls.

ARRA allocated an additional $87 billion for states’ Medicaid programs by adjusting the formula used to calculate how much Medicaid funding is provided to states.²¹ This was meant to prevent severe Medicaid cuts and alleviate states’ ongoing fiscal crisis due to the Great Recession. Originally set to expire at the end of 2010, enhanced Medicaid funding was eventually extended to June 30, 2011, relieving states of the budgetary shortfalls they were still facing.²²

Before Congress officially passed the extension, many states based their budgets on the assumption that the enhanced Medicaid assistance would be extended. Some states even passed budget contingency plans for scenarios in which the extension was or was not granted.²³ Mississippi, for example, developed a contingency plan that would undo $100 million in cuts to K-12 and higher education if Congress extended the increase in federal Medicaid funding.²⁴

Noting the importance of extending the enhanced Medicaid funds, 219 members of Congress wrote a letter to House leaders urging the passage of the extension, claiming that “without this funding … the ensuing budget shortfall would have grave consequences for school funding.”²⁵ While Congress eventually granted states the six-month enhanced Medicaid funds, the extension was still $1.74 billion less than what 24 states had included in their budgets for FY 2011.²⁶ Pennsylvania received $250 million less than it anticipated, leading to a $50 million cut in education spending.²⁷

State budget cuts were particularly deep in 2012 after the enhanced Medicaid funding expired.²⁸ These cuts had lasting consequences for education. During the 2015-16 school year, 46 states spent less per student on higher education than they did before the recession.²⁹ And in the 2017 school year, 23 states are spending less on K-12 education than they did in 2008.³⁰

Public schools cannot afford another cut to their budgets when they are still in the process of recovering. Oklahoma, for example, is currently mired in a severe budget crisis that is causing some school districts to switch to four-day work weeks.³¹ The Medicaid per capita caps in the AHCA would have caused Oklahoma to lose $310 million in federal Medicaid funding had those caps been implemented starting in 2000.³²

The impact of Medicaid block grants or per capita allotments would be permanent and severe. Block grants or per capita allotments would not respond to changing circumstances as the Medicaid formula currently does. When states face budget shortfalls due to inadequate federal Medicaid funding, education may suffer along with health care.

Medicaid cuts would defund education and community-based services for children with disabilities

In addition to causing budget shortfalls that could lead to education cuts, federal Medicaid cuts directly remove funding from public schools and community-based programs that help children with disabilities.

The Individuals with Disabilities Education Act (IDEA) requires public schools to provide a free, appropriate public education, including special education and related services, to children with disabilities.³³ Under the IDEA, the federal government provides nearly $13 billion to school districts to support children with disabilities.³⁴ Medicaid is also a major contributor to special education services, providing roughly $3 billion to $4 billion to reimburse schools for many of the services they provide for students with disabilities, including school nurses, therapists, and others.³⁵

Large Medicaid cuts would make it harder for schools to provide these services and reduce the overall amount of funding for public education. And under the health care legislation recently passed by the House of Representatives, states could choose to exclude schools from the set of providers eligible for Medicaid reimbursements.³⁶

Cutting Medicaid would not just harm students with disabilities—it would affect all students, regardless of their disability status. Since the IDEA services are mandated by law, a cut in funding could lead to encroachment, in which general education dollars that fund services for all students would instead be redirected to required services for students with disabilities.³⁷ Ultimately, reducing funds for Medicaid would harm education by denying schools the resources they need to educate and provide services to all the children they are supposed to serve.

Community-based services for children with disabilities may also be particularly vulnerable to cuts when states have less resources for Medicaid. One significant example is the Katie Beckett program, which provides services to children with significant disabilities and severe illnesses so they can remain with their families instead of being institutionalized.³⁸ The Katie Beckett program extends Medicaid coverage to children from middle-class families that would not otherwise qualify for Medicaid but may not be able to afford necessary specialized care.³⁹

The Katie Beckett program does not currently allow participating states to have waiting lists.⁴⁰ This means that participating states must accept all eligible children, but this could change if Medicaid is converted into block grants or per capita allotments and states are given more flexibility to change eligibility. If funding is not sufficient to cover everyone in need after large Medicaid cuts, children benefiting from the Katie Beckett program could be some of the first to lose coverage.⁴¹ The Katie Beckett program is particularly vulnerable to cuts because it provides children with disabilities long-term services and supports that tend to be especially costly.⁴² These services are incredibly important for the health and well-being of children with disabilities, allowing them to live comfortably at home rather than being isolated in costly institutions.⁴³

States may increase taxes after federal Medicaid cuts

States have another option for closing budget shortfalls: tax increases. Unlike federal taxes, however, state taxes tend to disproportionately burden low- and middle-income households.⁴⁴

When states faced budget shortfalls during the Great Recession, more than 30 states raised personal income, business, sales, or excise taxes.⁴⁵ From 2008 to 2009, nearly 57 percent of the net increase in new revenue was from sales taxes, excise taxes, and other taxes and fees, which tend to be particularly burdensome for low- and middle-income households.⁴⁶

When increased Medicaid funding provided by ARRA ended, some states raised taxes to close their budget shortfalls. According to the Center on Budget and Policy Priorities, Nevada “extended $620 million in tax measures that were scheduled to expire,” including a higher sales tax rate, while Maryland increased motor vehicle fees and alcohol taxes by a total of $149 million.⁴⁷

In addition to addressing the budget shortfalls caused by federal Medicaid cuts, states would also have to compensate for a loss of economic activity fueled by Medicaid. Federal Medicaid funding increases state economic output and tax revenue.⁴⁸ One clear example of this is the Medicaid expansion included in the ACA. In the case of North Carolina, for example, Regional Economic Models Inc. found that Medicaid expansion would create and sustain 18,000 jobs; increase economic output by up to $1.7 billion; and boost state tax receipts by $60.7 million in state fiscal year 2021.⁴⁹

Much like Medicaid expansion helps states create jobs that generate state tax revenue, a Medicaid cut would eliminate existing jobs supported by Medicaid and thereby diminish states’ tax revenue. Looking at all 50 states and the District of Columbia, one study found that repealing the ACA Medicaid expansion would reduce total gross state product by $891 billion from 2019 to 2023.⁵⁰ As a result of these economic losses, repealing the ACA Medicaid expansion would also reduce state and local tax revenues by $28.7 billion over this period.⁵¹

To maintain the same overall level of revenues, states could increase taxes to compensate for lower revenue collections caused by large Medicaid cuts at the federal level. And even after this tax increase, states would still have major budget shortfalls that must be addressed by reducing Medicaid enrollment and services, cutting other programs such as education, or increasing taxes. States would still have to figure out how to make up for the loss of federal Medicaid dollars that support health care in addition to addressing the impacts that this Medicaid cut would have on tax revenue and economic output.

The bottom line is that when states face budget shortfalls, low- and middle-income Americans often pay the price in the form of cuts to important services, such as education, or higher taxes. And states would face large budget shortfalls in the wake of a large cut to federal spending for Medicaid.

Long-term impacts of Medicaid cuts

A prosperous future for the United States depends on the health of today’s children. Medicaid provides children with the essential resources they need to be successful in school and grow into healthy adults. A healthier population also means a more productive workforce, which in turn drives economic growth for the United States.⁵²

Children make up 43 percent of Medicaid enrollment, and Medicaid delivers a multitude of long-term benefits.⁵³ Studies have established that Medicaid improves the health of children and has long-lasting educational and economic benefits.⁵⁴

One study found that a 15 percentage point increase in Medicaid eligibility between 1984 and 1992 was associated with a 5 percent decline in overall child mortality.⁵⁵ This Medicaid expansion also reduced the child mortality rate from diseases by 8 percent.⁵⁶ Another study found that a 10 percentage point increase in Medicaid eligibility for individuals up to age 17 decreased the high school dropout rate by 4 percent to 6 percent and increased bachelor’s degree completion by 2 percent to 3 percent.⁵⁷

Healthier children who do better in school experience more economic benefits, and these benefits translate directly into higher tax receipts. A study by experts at the U.S. Department of the Treasury and Yale University looked at adults who were covered under Medicaid expansions when they were children in the 1980s and 1990s and found that they “paid more in cumulative taxes by age 28” and that “the women had higher cumulative wages by age 28.”⁵⁸

While an effective Medicaid program does not eliminate the need for programs that support other basic living standards, it does reduce the extent to which struggling Americans need to turn to these programs over the long term. In fact, one study found that the government receives 56 cents back for every dollar invested in Medicaid for children.⁵⁹ In contrast, cutting Medicaid would result in a less healthy population and a shrinking tax base, which means that states might need to raise tax rates in order to maintain the same level of revenues.

Ensuring that children get the health care they need is not only beneficial for their health and futures; it is also vital for the prosperity of the United States.

Conclusion

Federal Medicaid funding is an essential tool for states to meet the health care needs of their citizens. States voluntarily exceed federal Medicaid requirements, and this is made possible by federal assistance that allows more people to be covered by health insurance.⁶⁰

Cutting Medicaid assistance from the federal government would shock state budgets and place states in a position where they would have to decide whether to reduce coverage for working families, seniors, children, and people with disabilities; cut spending in other crucial areas, such as education; or increase taxes. In any case, pitting Medicaid against public education and other crucial services is a lose-lose for working families and the overall economy, since both are critical for economic security and long-term growth.

Endnotes