How States Are Managing the COVID-19 Recession and the Implications for State Health Programs

Sally Mabon, Marissa Korn and Heather Howard

COVID-19 cases are on the rise in many states and localities and new variants are spreading, pushing the U.S. health care system to its limits. In addition, as the public health crisis continues, it perpetuates an economic crisis that in turn has led to state fiscal crises.

In the early spring of 2020, as the economy shut down to curb the spread of the virus, states experienced sharp declines in revenues while contending with an unemployment calamity. States were faced with significant budget shortfalls and great uncertainty as to what final revenue collections for the fiscal year would be, given the extension of tax filing deadlines to July 15 and the continued unknown of whether the public health crisis would require additional measures–such as closure of businesses–to curb the spread. For most states, the fiscal year begins on July 1, and in June 2020, as states approached their new fiscal years, they  proved resilient, addressing budget shortfalls to meet constitutional and statutory requirements to balance their budgets in time for the start of fiscal year (FY) 2021, with some states opting to pass short-term spending legislation and finalizing their budgets for FY 2021 in the early fall.

But as the pandemic continues, states face new fiscal challenges in crafting their budgets for FY 2022 amid significant uncertainty with regard to the trajectory of the virus and the promise of more federal relief. This expert perspective provides an updated view of the current state budget landscape, examining in greater detail the health care implications of choices states made to address deficits and balance their budgets in the face of the severe budget shortfalls they confronted for FY 2021. As states prepare their budgets (or in the case of states with biennial budgets, update them) for FY 2022, this review of the choices states made regarding funding for health programs provides some insight into what we might expect to see in Governors’ budget announcements.

States Continue to Navigate an Uncertain Fiscal Landscape

States are contending with uncertainty at the federal level. States are in a holding pattern as they wait to see what actions the new Biden administration will take to address the economic fallout of the pandemic for states. The infusion of federal dollars into state budgets through the Coronavirus Aid, Relief and Economic Security (CARES) Act has been a crucial balm to address state financial strain. The Families First Coronavirus Response Act’s temporary increase to the Federal Medical Assistance Percentage (FMAP) has also provided an important fiscal lifeline to state governments, helping states avoid deep cuts to programs. The COVID-19 relief package passed by Congress in the last week of December 2020 did not include direct aid for states and localities, but did provide funding for states to distribute the vaccine and for COVID-19 testing. State leaders and budget officers were left to develop projections to inform their governors’ FY 2022 budgets without a clear understanding of what form future fiscal relief could take.

In addition to federal uncertainty, states must navigate unknowns driven by the Coronavirus itself. The U.S. is in the midst of a significant surge of COVID-19 cases threatening the modest economic progress experienced in the early summer. Indeed, December employment numbers from the Department of Labor show employment growth tapering off, suggesting the country’s recovery could be losing steam. Additionally, new highly infectious strains could prompt the need for lockdowns like the one imposed in England recently. And while the Food and Drug Administration granted emergency approval to two vaccines, rollout has been slower than hoped for and it is not clear how quickly vaccines will be disseminated to a majority of Americans and whether the speed will be sufficient to effectively turn the tide against the pandemic.

States are also grappling with the unpredictable nature of Medicaid enrollment in the context of the pandemic. As a result of the maintenance of effort (MOE) requirements tied to the enhanced FMAP, states have not experienced the typical churn in enrollees and in many states, Medicaid enrollment and spending are on the rise. While CMS released guidance on resuming normal operations after the Public Health Emergency (PHE), and the PHE has been extended until April 20, 2021, keeping in place the MOE requirements, the Biden administration has signaled that it intends to continue the PHE through the entirety of 2021. Some states are reporting growth in their enrollment above and beyond enrollees remaining on the rolls as a result of the MOE requirements, demonstrating the import of the Medicaid program as a crucial safety net. Given that Medicaid is a counter cyclical program, such that during economic downturns spending on the program increases as incomes fall and more people become eligible for the safety net program, enrollment is likely to continue to grow. For example, in New Mexico, a state that expanded Medicaid under the Affordable Care Act (ACA), enrollment has increased by 52,000 people, the largest surge in the rolls since the state expanded Medicaid in 2014. Florida, which has not expanded Medicaid, has seen a 16 percent increase in Medicaid enrollment since March. Irrespective of the drivers of growth in enrollment, it is placing a strain on state budgets obligated to finance their state share and balance their budgets.

The Revenue Picture for States Is Mixed 

Before the onset of the pandemic, states had forecast their general fund revenues to increase 2.9 percent in FY 2020 and 3.0 percent in FY 2021. Compared to pre-COVID projections, preliminary actual fiscal 2020 general fund collections decreased 3.8 percent. Some states have been hit particularly hard by the recent recession, especially those dependent on tourism and the energy sector. Hawaii, whose economy is largely dependent on tourism, has seen significant drops in revenue. In September, the state updated its revenue forecast to fall by 11 percent for FY 2021 and revised downward its projection for revenue growth in FY 2022 from 12 percent to 8.5 percent. States heavily reliant on energy taxes for revenue have also been hit particularly hard, as oil prices have declined, including Wyoming, Alaska and North Dakota.

Revenue projections in several states improved compared to their early estimates of the impact of COVID-19. Vermont collected higher-than-anticipated revenues in FY 2020, collecting an additional $110 million more than expected. Combined with a prior year surplus and the addition of federal aid, the state was able to avoid budget cuts in FY 2021. In its September 2020 revenue report, Oregon references several drivers of an improved revenue outlook, including increases in economic activity in the early summer, and the stratified nature of the recession and resulting implications for tax revenues. Nevada, a state whose economy was hit hard by the pandemic given its reliance on tourism, held a special session in July 2020 and made significant cuts to the FY 2021 budget. However, updated revenue projections released in December were better than projected and the Governor has proposed restoring the six percent rate reduction for Medicaid providers. While revenue projections for the fiscal year appear to be improving, revenue growth is still far off from pre-COVID projections and many states were forced to make many hard choices to close deficits for FY 2021. Some of those hard choices included reductions to funding for health programs.

Many States Have Been Forced to Make Cuts to Health Care Spending

To address budget shortfalls, states extracted savings from health care programs through agency budget reductions, curtailed health benefits and eligibility, increased cost-sharing, and provider rate cuts.

A number of states heavily reliant on energy-based revenue profoundly curtailed spending on health care programs in FY 2021. Using his line item veto power, the Governor of Alaska cut $31 million in funding for the state’s Medicaid program for FY 2021. Wyoming also cut health care spending to address significant revenue shortfalls; during a second round of COVID-19 reductions at the end of August, 2020 the state reduced the Department of Health’s budget by $116 million.

Other budget savings strategies will have direct and immediate impacts on health care consumers, particularly related to benefits, eligibility, and cost-sharing. Colorado addressed its budget challenges by increasing emergency room visit co-pays for Medicaid enrollees to the federal permitted maximum, while also rolling back a scheduled increase to maximum dental benefits. Tennessee passed a revised spending plan for FY 2021 in late June of 2020 that eliminated $6.6 million in funding for a pilot program that would have expanded postpartum Medicaid coverage for low-income mothers from two months to a full year after giving birth. Utah rolled back its plan to provide a year of continuous Medicaid eligibility to children up to six years of age.

Some States Preserved Funding for Health Care   

While some states avoided health care cuts in FY 2021 as a result of higher-than-projected revenues and infusions of federal funds, others reduced spending elsewhere in their budgets in order to preserve health care funding. For instance, Michigan’s FY 2021 budget, which began October 1, shielded health care programs from cuts. The state even allocated $12.6 million for a new program, Healthy Moms, Healthy Babies, which aims to reduce racial disparities in maternal and infant health by expanding Medicaid eligibility for new mothers from sixty days to one year, increasing access to behavioral and reproductive health services, and expanding access to home health visits for at-risk families.

States have also dipped into other funding streams to preserve health care funding. The Governor of Massachusetts, for instance, released a revised budget for the current fiscal year in October that avoids tax increases and spending cuts by using federal relief aid and drawing from the state’s rainy day savings fund. The state has also prioritized health spending: while all other state government spending is capped at a 0.9 percent increase, Massachusetts’ budget increases spending for the state’s Medicaid program by 2.8 percent.

In the Face of Budget Shortfalls, Health Care Programs Themselves Have Yielded Savings

States have also looked to health programs for savings. For instance, in light of reduced health care utilization due to social distancing, states have leveraged their re-negotiation process with Medicaid managed care organizations to reduce payment rates and extract savings. The state of Ohio did just this, generating savings from the Medicaid program by paying lower capitation rates to managed care organizations in the state.

Other states have also recouped money due to lower health care utilization. While Colorado realized savings due to lower utilization as a fee-for-service state, New Jersey re-captured an estimated $157 million in Medicaid spending by implementing a risk corridor amid significant declines in the utilization of discretionary health care services. Without this action, these savings would have instead flowed to managed care organizations’ bottom lines rather than to the state’s coffers.

The State Budget Landscape Remains Uncertain as States Work Diligently to Provide Crucial Public Services Under Constrained Resources

A scan of the past eight months highlights the difficult choices state policymakers have faced as they have grappled with how to provide crucial public services, while facing unprecedented budget shortfalls created by the pandemic-induced recession. While there are glimmers of hope for state budget officials in terms of higher-than expected revenues and the acceleration of a vaccine rollout, state policymakers will nonetheless continue to struggle with uncertain economic conditions, perhaps most significantly whether there will be additional federal fiscal relief to offset declines in state revenues, and the continued threat of surging COVID-19 cases. As Governors begin to present their FY 2022 budgets with updated revenue forecasts, we will gain insights into what lies ahead for state health programs.