ACA: Bad News for State Government Finances

Posted On: October 3, 2016 | By: Abigail Cutler

With the impending collapse of the Affordable Care Act’s state exchanges and the belief that Medicaid or some other form of government-sponsored plan will replace private insurance now used in the exchanges, the outlook for state finances appears to be grim.

Since the end of the Great Recession, most states have benefited from economic growth and improved employment numbers.   As a result, state treasury coffers have been filled with increased state income and sales tax revenue.  But any bliss appears to be short-lived.

At the same time, there is a serious drag on state budget prospects. State Pensions and Medicaid along with mandated employment-related expenses have increased from 28% to 35% of the annual state budgets.  It is predicted that by 2020, that number will approach 40%.  Current increased tax revenue simply can’t keep up with this expansion.

Illinois is perhaps the best example of what happens when mandated employee benefits and services crush the state economy.

With the exit of Humana, United HealthCare, and Aetna from many state exchanges and the demise of ACA-backed health care co-ops (17 of 23 have folded), states will have to find an alternative to insure those dropped policyholders, or they will find their way on to another state entitlement plan such as public health facilities largely supported by state payments or simply added to the roles of Medicaid.

In the end, there will be a call by state governments to increase taxes. Politically speaking, increasing taxes will be very unpopular, as the middle class has seen over the last 15 years an actual decrease in real wages.  With politicians not having the will to reduce popular entitlement plans, look for most states to continue to go deeper in debt.