Ensuring People Have the Medicaid Coverage They Need During the Economic Crisis

COVID-19 Update

Editor’s Note: In March, Congress temporarily raised the share of Medicaid costs that the federal government will pay in response to COVID-19. This short-term step granted states welcome fiscal relief, but as the depth of the economic crisis becomes clearer, so does the need for additional and more-targeted support. In a new post for The Commonwealth Fund’s To the Point blog, summarized below, Manatt Health examines Medicaid’s critical role during economic crises and details the issues policymakers will need to consider to address the economic fallout from COVID-19. Click here to read the full blog post.

Medicaid: A Countercyclical Safety Net

Medicaid plays a unique, countercyclical role during economic downturns. Recessions drive up Medicaid enrollment as people become newly eligible due to job losses and reduced earnings. However, because Medicaid costs are borne by states and the federal government, recession-related enrollment drives up states’ Medicaid spending at the same time their revenues are plummeting, putting pressure on states to raise taxes or make program cuts to balance budgets. States are not likely to raise taxes during a recession, and so, absent federal relief, they will be compelled to make deep cuts to Medicaid given the size of the program relative to state budgets.

In past recessions, Congress supported states and protected coverage by temporarily increasing the federal share of Medicaid costs. That share is set according to a state-specific rate called the Federal Medical Assistance Percentage (FMAP), which ranges from 50 percent to nearly 78 percent in normal times. Congress temporarily boosted states’ FMAP during the 2001 recession and the Great Recession of 2007 to 2009, each time conditioning the higher FMAP on states not cutting Medicaid eligibility.

Early in the COVID-19 response, Congress enacted a temporary 6.2-percentage-point boost in the FMAP. Like its predecessors, this legislation conditioned the higher FMAP on states maintaining pre-COVID-19 Medicaid eligibility standards, and added a provision that no one enrolled in Medicaid during the emergency period can lose coverage. The FMAP increase and coverage protections expire when the emergency declaration is lifted.

The Need for a Greater and More Targeted Response

Three issues will be important for policymakers to consider when they take up the next stimulus package: raising the 6.2-point FMAP increase linked to a requirement that eligibility standards stay in place; tying its duration to economic circumstances; and making an automatic trigger that adjusts the FMAP based on economic circumstances a permanent feature of Medicaid financing.

Here’s why:

First, the economic fallout of COVID-19 is on track to be worse than that of the Great Recession. The Department of Labor has announced that at least 30 million people have filed for unemployment insurance since March 15, indicating that as much as 20 percent of the labor market is currently out of work. The Congressional Budget Office forecast unemployment rates of 11.4 percent in 2020 and 10.1 percent in 2021. By comparison, unemployment peaked at 10 percent in 2009. Given the impact of job losses and sharply curtailed consumer spending on tax revenues, states are now projecting significant budget shortfalls.

The 6.2-point FMAP increase provided for COVID-19 is only about half of the relief provided during the Great Recession. The National Governors Association and the National Association of Medicaid Directors have identified a significant FMAP increase as one of their top COVID-19-related priorities. Moreover, to ensure that the higher FMAP not only results in state fiscal relief but also prevents cuts in coverage, it is essential to continue to condition extended FMAP relief on a requirement that Medicaid eligibility standards remain intact.

Second, the economic crisis is likely to be prolonged with an uneven recovery. The current FMAP increase will end when the COVID-19 emergency declaration is lifted, even though state economies will likely still be in crisis. Tying the duration of the FMAP relief to state economic conditions rather than to the end date of the emergency declaration offers a more data-driven approach to addressing state and family needs. The value of this approach is clear given the pandemic’s geographically disparate rates of infection and the different paths states are taking to reopen their economies. In fact, House Democrats introduced a state-trigger proposal in March based on a framework advanced by the Brookings Institution. Others have examined raising the FMAP automatically to respond to economic downturns or have put forth proposals for how this might be designed.

Third, without a permanent fix, there is no guarantee that timely fiscal relief and coverage protections will be in place in the next recession, which may include a downturn associated with a new surge in COVID-19 infections. A temporary FMAP boost triggered by economic downturns and tied to a maintenance of eligibility standards should be a permanent fixture of Medicaid financing to ensure that states and families receive assistance when it’s needed. Predictable and well-timed relief is crucial to the recovery of state economies and to the health of communities.

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