A GOP-proposal to shift health-care costs to the states has many governors worried that the plan would create a financial squeeze on their budgets.
Now, municipal bondholders can share those concerns.
The Republican-proposed bill to replace Obamacare would hurt the credit ratings for U.S. states, according to Moody's Investors Service, because it would shift a greater share of the cost of Medicaid to the states.
That could raise borrowing costs for states and lower the value of bonds already held by investors.
The joint state-federal Medicaid program for low-income households grew rapidly under the six-year-old Affordable Care Act (ACA), better known as Obamacare, and has been consuming a larger share of many state budgets every year.
It's far from clear that the Republicans' proposed replacement, known as the American Health Care Act, will survive in its current form. The proposal has already drawn criticism from both the conservative and moderate wings of the GOP.
States currently run the Medicaid program and pay part of the cost; Washington pays the rest based on a formula that varies from state to state, no matter how much the program costs. The new proposal would replace those reimbursements with a fixed payment.
That would leave the states on the hook for extended coverage or rising costs beyond those capped federal contributions. The change would create a greater financial burden on states, Moody's reported.
The proposal would also phase out funding for expanded Medicaid by 2020, leaving states to pick up the difference or to drop enrollees from their Medicaid programs.
It's also not clear just how hard the proposed formula would hit state budgets. The nonpartisan Congressional Budget Office (CBO) estimated the proposed health-care law would cut federal spending by $880 billion between 2017 and 2026, when spending would fall by 25 percent compared to current-law projections.
"States will face difficult decisions in this regard," Moody's reported on Friday. "If states maintain the expansion programs for non-elderly adults with incomes up to 138 percent of the federal poverty level, they will be on the hook for a larger portion of expenses related to new enrollees."
State Medicaid spending has been growing steadily, placing a financial strain on state budgets and forcing tax hikes or spending cuts to make up the difference. The state share of Medicaid spending is expected to grow to 28 percent of tax revenue by 2025, up from 24.5 percent in 2017, Moody's estimated.
The new funding formula could also reduce or eliminate coverage for millions of people. Under the existing ACA, the option to expand Medicaid was enacted by 31 states and the District of Columbia.
The reaction from state governors to the GOP proposal to cap Medicaid payments has been mixed.
Republican Gov. Gary Herbert of Utah has said he supports the GOP plan because it would give states more flexibility, but Republican Gov. Brian Sandoval of Nevada says he's concerned his state could be "punished" under the plan.
That assessment was echoed in a recent report from the Urban Institute, an economic policy think tank in Washington, which said wealthier states would likely get bigger block grants and higher spending caps, based on current levels of Medicaid spending.
"These proposals would lock in these spending differences," the report said.
The CBO has estimated that the block grant systems could cut Medicaid spending by as much as a third over the next decade.
Under the ACA, states were offered the chance in 2014 to expand eligibility to more people. Thirty-one states and Washington, D.C., took advantage of the offer and added 15.7 million people to the program, according to government data. That expanded Medicaid rolls to about 73 million people, about half of whom are children.
That expansion of Medicaid coverage, along with the overall rise in health-care costs, put a big strain on state budgets, which rely heavily on federal support to pay for Medicaid services. As of fiscal 2014, federal aid for those Medicaid costs represented about 15 percent of total state spending, according to bond rating agency Fitch.
That impact on individual state budgets varies widely. Alaska and North Dakota spend just 5 percent of their overall revenues on Medicaid spending. New York, Massachusetts, Missouri, Pennsylvania, and Rhode Island spend 20 percent or more.
No matter how much states spend on Medicaid, any cuts in federal reimbursements would force them to reduce spending on other programs or raise taxes, or both. The budget pressure could also trickle down to local governments in the form of smaller funding amounts to towns and cities, Fitch said.
That's one reason any changes to federal Medicaid funding will face widespread opposition.
Indeed, though President Trump took office with GOP control of Congress, along with Republican governors in two-thirds of the nation's statehouses, overhauling Medicaid funding won't be a legislative slam dunk.
Beyond the pressure on state budgets, cuts to Medicaid spending would hurt hospitals, drug companies, medical equipment manufacturers, doctors, and other health-care providers.
All of whom still form a powerful lobby on Capitol Hill.
—Reuters contributed to this report
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