Leading Credit Rating Agencies Warn That Changes to Medicaid Hurt State Budgets

The House Republican bill to replace the Affordable Care Act (ACA) goes way beyond repealing the ACA and includes provisions that would radically restructure all of Medicaid, capping and cutting program funding, in addition to repealing the ACA’s Medicaid expansion. Lawmakers should heed the recent statements by two top industry research and credit ratings agencies—Fitch and Moody’s—warning that changes to Medicaid’s funding structure could destabilize state budgets.

Capping and cutting Medicaid would result in massive federal Medicaid cuts. The Congressional Budget Office (CBO) reviewed the House plan that was being considered the first two weeks of March and found that it would cut $880 billion out of Medicaid in 10 years—leaving states with 25 percent less federal funding in 2026 than under current law. That’s $880 billion that states would otherwise have to provide health care to low-income kids and people with disabilities, long-term care to seniors, and health care to low-wage working families.

Moody’s and Fitch warned that Republican changes to Medicaid funding would “significantly” challenge state budgets

Federal funding losses of that magnitude will put states in a bind. One that will hit state finances hard, forcing them to make tough choices about what, and whose, health care to cut. It could hurt states finances more broadly, too.

Moody’s Investor Service, a leading provider of credit ratings and risk analysis, looked at the magnitude of Medicaid cuts projected by CBO and commented that the cuts would be a credit negative for states, because of the amount of Medicaid costs they would have to pick up.  They commented that “states will face difficult decisions…” referring to the fact that they will either have to pick up significantly higher Medicaid costs or cut funding for large numbers of residents.

Moody’s comments echo those expressed in a February release from Fitch Ratings. Fitch is one of the three major bond rating agencies, along with Moody’s and Standard & Poor’s. Fitch’s comments were based on an earlier version of the House bill, but one that also cut the Medicaid expansion and capped and cut federal funding. Fitch commented that the Medicaid changes in the bill would significantly challenge state budgets.

Fitch affirms that states already have flexibility in Medicaid and further changes would be counterproductive

Fitch went on to comment about something else, as well—Republican contentions that, with the cuts, states will get a lot more “flexibility” to manage their Medicaid programs. (In their plans to restructure and deeply cut Medicaid, Republicans used the carrot of “greater flexibility” as a way states can magically make up for big funding losses).

On the issue of “flexibility,” Fitch noted:

“. . . . current law already offers states discretion to implement Medicaid within federal statutes and rules, and also creates a waiver process for additional flexibility. . . .it is unclear that any additional flexibility provided by the federal government would be sufficient to offset the funding cuts.” (emphasis added)

What is clear is that big federal Medicaid cuts, the kind of cuts that are inherent in capping and cutting the program and, of course, ending the Medicaid expansion, shift a lot of costs to states—cost shifts large enough to get the attention of two of the major bond rating agencies.

And their comments matter.  Those agencies assign scores to states that take into account a state’s ability to pay debts.  The scores affect states’ cost of borrowing—how much it costs a state to borrow money to invest in things like building projects, infrastructure, or financing state university systems. That affects state budgets and overall economic growth.

Fitch promises to closely monitor proposals to change Medicaid

The comments of the rating agencies should raise some serious red flags. In its comments, Fitch states that it would closely monitor federal proposals for Medicaid, saying that if they pass a lot of costs on to states, they could have “implications for states’ credit quality.”

That’s something governors and other state decision makers should keep in mind as they weigh Medicaid’s current guaranteed funding structure against capped and cut funding with an illusion of flexibility. Because all proposals to cap and cut the program or end the Medicaid expansion pass a lot of costs on to states.

Learn more about our campaign to defend the progress we’ve made under the ACA and Medicaid by visiting our Protect Our Care Initiative page.