Budget Cuts More Risky to States Than Healthcare Law

(Reuters) Aug 21 - When it comes to healthcare, Congressional attempts to reduce the federal budget deficit pose a greater risk to U.S. states' finances than an expansion of Medicaid, the insurance program for the poor, Moody's Investors Service said on Tuesday.

In June, the Supreme Court struck down part of the 2009 healthcare reform law compelling states to cover more people with Medicaid, and many conservative governors embraced the decision as a way to opt out of the expansion.

Medicaid, which states administer with partial federal reimbursements, can consume up to a third of a state's budget. The healthcare law provides for states to receive reimbursements of 100% for the costs of new enrollees, but the amount tapers off to about 90% in future years.

"States that opt into the expansion of Medicaid under the new law will have greater exposure to the potential risks that will come with efforts to trim federal spending," said Moody's Senior Vice President Kenneth Kurtz in a statement. "The extent of any effects on ratings will depend on how states respond to underlying cost drivers, including any new federal actions."

Ultimately, a state's decision to opt in or out of the expansion will likely not affect its ratings, Moody's said.

Last summer, the U.S. Congress and President Barack Obama agreed to reduce the budget deficit through a series of automatic spending cuts known as sequestration. The cuts are spread across all areas of government, including defense and domestic programs. Recently, pressure has mounted to exclude the military from sequestration.

According to Moody's, though, if the federal government avoids making changes in spending "in other areas, including, for example the avoidance of significant changes in military spending," then it will have to make steeper cuts in programs such as Medicaid.

That could increase pressure on U.S. states, which are already stressed from growing demand for the program.

"Rising healthcare costs and an aging population will continue to increase Medicaid's costs and challenge states' finances, regardless of how federal healthcare reform is ultimately implemented," said Kurtz.

He noted that from 1997 to 2010 total U.S. healthcare expenditures per capita increased at an average annual rate of 5.5%, compared to an average annual increase of Medicaid costs per enrollee of 3.1%.

Nonetheless, states are concerned that healthcare costs will devour their budgets. Recent reports from the National Governors Association, the National Association of Budget Officers and the Government Accountability Office all identified healthcare as the greatest hazard to future state finances.