5 Insights Into States’ Transition Away From Federal COVID-19 Aid

Phaseout of added Medicaid dollars underway now marks a key milestone

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5 Insights Into States’ Transition Away From Federal COVID-19 Aid
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The federal government took many historic actions in its response to the dual economic and public health crises spurred by the coronavirus pandemic, including providing hundreds of billions of dollars in added fiscal support directly to state governments.

This aid to states was unprecedented in scale, speed, and flexibility. As a result, the support proved highly effective in helping to combat the public health crisis and easing state-level budgetary strains in the face of tremendous fiscal and economic uncertainties. But as the impact of COVID-19 winds down, the national public health emergency is set to expire on May 11, 2023. Going forward, states face a transition away from the one-time funds—a challenging undertaking given the size and complexity of the aid.

A confluence of fiscal and economic factors may also complicate states’ transition from federal pandemic aid—and necessitate careful fiscal planning. Policymakers must navigate slowing revenue gains related to moderating economic growth and recently enacted tax cuts, as well as spending pressures caused by persistently high inflation and new ongoing commitments.

The insights below highlight the important role that federal pandemic aid has played in states’ finances and what policymakers and stakeholders can expect as aid diminishes in the months and years ahead.

1. States will soon lose added federal Medicaid funds, a core form of pandemic aid.

The federal government provided one of its largest forms of pandemic aid through Medicaid, the health care program for low-income qualifying people that is jointly funded by states and the federal government.

Anticipating a surge in Medicaid costs for states at a time when they could least afford it, Congress chose the program as an early target for relief dollars in its multi-bill stimulus package to resuscitate the ailing U.S. economy. The stimulus aid temporarily boosted the federal government’s share of Medicaid costs, known as the federal medical assistance percentage (FMAP), by 6.2 percentage points for the duration of the public health emergency. As of the end of fiscal year 2022, states had received an estimated $100.4 billion in additional federal funding as a result of the enhanced FMAP rate, according to an analysis by the Kaiser Family Foundation.

The end date for the full enhanced federal matching rate was changed late last year to April 1, 2023, and modified to include a gradual phaseout over the remainder of the calendar year. Specifically, the 6.2 percentage-point increase in aid fell to a 5% increase on April 1 and will decline to 2.5% and 1.5% on July 1 and Oct. 1, respectively.

The federal government’s decision to boost funding for the program through an enhanced Medicaid matching rate early in the pandemic made sense. Medicaid is most states’ biggest expense after K-12 education and related costs tend to surge during economic downturns in response to growing unemployment. State contributions to Medicaid make up a substantial share of total state spending, so increasing federal support for the program has proved to be a straightforward mechanism through which the federal government helps relieve state budget pressures during such emergencies. Indeed, Congress also acted to expand the federal share for Medicaid in response to both the 2001 recession and the Great Recession of 2007-09.

2. The end of the public health emergency will reduce federal funding for other state programs.

As the public health emergency expires, so will federal funding for some pandemic-related programs. Although added federal Medicaid funds are no longer linked to the emergency declaration, several other programs and funding streams also will expire soon. Programs such as the Supplemental Nutrition Assistance Program, which provided supplementary support to families through the pandemic, will see additional benefit cuts as temporary pandemic-related benefits are phased out.

In addition, temporary public health initiatives and pandemic-related data sharing will end. For example, vaccines and boosters previously purchased by the federal government may ultimately be costly for uninsured or underinsured consumers, and the program providing COVID-19 tests free through the U.S. Postal Service will cease.   

3. The expiration of some federal pandemic aid creates vast administrative challenges.

On April 1, a federal requirement for states to provide continuous health care coverage during the pandemic ended and states began the complex process of redetermining Medicaid eligibility for some individuals. Although states have experience navigating the fiscal challenges of declining federal Medicaid aid following the last two recessions, the policy strings attached to this latest round—along with the sheer volume of Medicaid beneficiaries—creates novel challenges for state policymakers.

Provisions in the Families First Coronavirus Response Act and the Coronavirus Aid, Relief and Economic Security Act passed in early 2020 required that states maintain continued enrollment for all Medicaid participants—regardless of their eligibility status—until the end of the public health emergency in order to qualify for the enhanced FMAP. Medicaid enrollment, as a result, has grown to all-time highs while the level of individuals without health care insurance had declined to record lows.

As the continuous coverage requirement came to an end, states began the redetermination process for tens of millions of Medicaid enrollees. States must now complete the process of terminating ineligible recipients by May 31, 2024, and are taking a variety of approaches with guidance from the Centers for Medicare and Medicaid Services. For example:

  • Michigan and Washington are maintaining a timeline-based approach for conducting benefit renewal reviews by sticking with traditional renewal months for beneficiaries.
  • New Jersey will adopt a similar time-based renewal strategy but is also designating certain population cases to be considered evenly over 12 months. That includes people eligible to receive services through the Division of Developmental Disabilities or who previously qualified for care because of blindness or disability.
  • Oklahoma is reviewing each enrollee and categorizing them as low or high risk. High-risk beneficiaries, including parents with children under 5 and individuals with chronic health conditions, will then enter the benefit renewal process later in the unwinding period and thus remain covered for a longer period of time.

States will be able to rely on the gradual decrease of the added federal Medicaid aid through the end of 2023 to ease some of the financial costs of these daunting processes.

4. Elevated Medicaid enrollment and reduced federal support will weigh on state budgets, but how much is an open question.

State budgets will face pressure from higher-than-usual enrollment for their own programs after federal support for Medicaid returns to normal levels. Medicaid enrollment spiked during the pandemic because of economic conditions and policy requirements tied to enhanced federal support, reaching a record 92.3 million individuals as of December 2022, according to Pew analysis of data from the Kaiser Family Foundation. That reflects a 30% increase since February 2020. Although states’ redetermination processes have already resulted in coverage losses, enrollment is expected to meet or exceed pre-pandemic levels in most states, according to analysis by Moody’s Analytics.

Because Medicaid is an entitlement program, states must provide federally required benefits to any eligible enrollee. That makes growth in state costs more difficult for policymakers to control than in other areas of spending. The additional federal Medicaid dollars since early 2020 also proved crucial in helping states free up dollars that could be used to meet spending demands or plug holes elsewhere in state budgets.

States have some experience in what happens when federal support winds down. When enhanced federal aid in response to the Great Recession tapered off between December 2010 and June 2011, states’ share of the costs spiked while their tax revenue was still recovering.

5. The next milestone in states’ transition from federal pandemic funds will come in 2024.

The next milestone in states’ transition away from federal pandemic aid will be the expiration of funds provided within the American Rescue Plan Act, which included $193.5 billion in flexible State and Local Fiscal Relief Funds and even more dollars designated for specific policy areas such as K-12 education. These funds must be obligated by the end of 2024 and spent no later than Dec. 31, 2026, or they will be rescinded by the U.S. Treasury Department.

This round of temporary aid ranges in scale from about 5% of annual spending in Oregon and Wisconsin to more than 20% in South Dakota and Wyoming, and can be used for a wide range of priorities. Among these are replacing lost revenue, preventing spending cuts, and making new investments in broadband and water and sewer infrastructure.

Rebecca Thiess is a manager and Justin Theal is an officer with The Pew Charitable Trusts’ state fiscal policy project.

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