The Economic and Employment Effects of Medicaid Expansion Under the American Rescue Plan

Abstract

• Issue: The American Rescue Plan offers financial incentives for 14 states to expand Medicaid eligibility for low-income adults, as all other states have done. In these states, people below the federal poverty level have no access to Medicaid or marketplace coverage. Expanding Medicaid would yield economic benefits in addition to gains in health care access.
• Goal: To analyze how states’ decisions to expand Medicaid would affect federal funding, jobs, state economies, and state and local tax revenues.
• Methods: We project each state’s increase in federal funding under Medicaid expansion and its share of expansion expenditures (2022–2024) and then use REMI’s PI+ dynamic economic model to estimate how these funding changes would impact economic outcomes.
• Key Findings and Conclusions: Expanding Medicaid would increase federal revenue to the 14 states by $49 billion in 2022; state matching costs would be $5 billion. More than 1 million jobs would be created nationwide, with largest gains in Texas (298,900), Florida (134,700), North Carolina (83,000), and Georgia (64,300). Collectively, the 14 states would expand their economies by $350 billion from 2022 to 2025. While state governments would bear some additional costs, the American Rescue Plan’s bonus incentives plus additional tax revenues would exceed state matching costs.

Introduction

The American Rescue Plan Act (ARP) encourages states to expand their Medicaid programs to cover adults — up to age 65 — with incomes at or below 138 percent of the federal poverty level ($30,305 for a family of three in 2021).¹ As of May 2021, 14 states have income limits well below that level: Alabama, Florida, Georgia, Kansas, Mississippi, Missouri, North Carolina, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Wisconsin, and Wyoming. Missouri and Oklahoma passed ballot initiatives to expand coverage but have not yet implemented expansion, and Wisconsin has a partial expansion covering adults up to 100 percent of poverty.

Under Section 3105, the ARP offers these states “bonus” federal funding if they implement the Medicaid eligibility for adults up to 138 percent of poverty authorized under the Affordable Care Act (ACA). They may earn an additional five-percentage-point federal match on their regular Medicaid expenditures for two years (not including costs for those newly eligible, disproportionate share hospital (DSH) payments, and some other expenses) to help defray state matching costs. More valuable, they will also gain the ACA’s 90 percent federal matching funds to pay for the costs of covering newly eligible adults.

This issue brief analyzes the economic and employment effects for the 14 states, and for the overall nation, if they adopt Medicaid expansion. Ballot initiatives to expand Medicaid eligibility have already passed in Oklahoma and Missouri, while the other 12 states have yet to act. Under ARP, they would gain two years of additional federal funding, effective no matter when the states expand coverage. Missouri and Oklahoma are supposed to adopt expansion by July 1, 2021, but expansion in Missouri has been thrown into question because the legislature has not authorized funding.

To make all comparisons equivalent, we assume that each state implements a Medicaid expansion effective January 1, 2022. We provide estimates of the gains that each state would have through expansion, although other states would benefit as well. For example, if Georgia expands its Medicaid program, some Florida workers or businesses (and even those in Texas or California) also would benefit, because of the interstate flow of goods and labor.

We present data for effects of expansion from 2022 through 2025, assuming all states expand starting in January 2022. This includes two years in which the states earn the ARP bonus payments (2022 and 2023), as well as two years after bonuses expire (2024 and 2025), to present longer-term effects.

We use REMI’s PI+ (Regional Economic Models, Inc., Policy Insight +) dynamic economic model to estimate these changes (see Technical Appendix for more details). Exhibit 1 illustrates the underlying “multiplier effect” principle: additional federal Medicaid revenue earned by states leads to increased health care revenue, which ultimately translates into increased employment, business, and consumer activity.

In a period of great economic and social change, any projections will come with some uncertainty. The United States has undergone an unprecedented recession triggered by the COVID-19 pandemic, although the economy is recovering thanks to numerous federal and state investments, like the ARP, and increasing COVID-19 vaccination levels.² We seek to provide reasonable and conservative estimates of how states may be affected if they decide to expand Medicaid to improve access to care for their residents. Numerous studies have already documented how Medicaid expansion bolsters access to health care, increases affordability, and improves health for low-income populations, as well as reduces racial and ethnic disparities, strengthens rural health care providers, and helps state economies.³

Findings

Changes in Insurance Coverage

Table 1 below shows current Medicaid eligibility limits for adults in the 14 states and the number of uninsured Americans in 2019 based on census data. (There are not yet definitive estimates of the current number of uninsured, although analysts recognize that Medicaid enrollment grew over the past year and the number without insurance has grown because of the pandemic.) It also shows estimates of increases in Medicaid enrollment — among both newly eligible adults and those already eligible but unenrolled — and reductions in the number of uninsured in 2022, adapted from estimates using the Urban Institute’s Health Policy Simulation Model.⁴

The 14 nonexpansion states have the most restrictive Medicaid eligibility levels in the nation; all other states cover adults with incomes up to at least 138 percent of poverty. As a result, nearly half of the nation’s uninsured (14.6 million of 29.6 million total uninsured nationwide) lived in these 14 states, according to American Community Survey data for 2019. Medicaid expansion would increase program enrollment by 6.69 million in 2022. Exhibit 2 illustrates how much Medicaid enrollment will rise in each of the 14 states if they expand Medicaid in 2022.

State Budgetary Effects

Medicaid expansion will boost federal revenues to the states and the enhanced economic activity will lead to higher state and local tax revenues. Table 2 presents the state-level budgetary consequences of Medicaid expansion.

In 2022, the ARP bonus funds will equal $8.5 billion for the 14 states, although the additional federal Medicaid matching funds that the states will earn by expanding Medicaid will be far larger, $43.8 billion. (This includes 90 percent federal matching for newly eligible adults and regular federal matching for new enrollees who were already eligible.)

We estimate that states would have to contribute $5.0 billion in state matching funds, far less than the amount of federal revenues that would flow in under expansion. It is worth noting that, unlike the other 13 states, Wisconsin would need to pay less in matching funds; it currently covers childless adults under a Medicaid Section 1115 waiver, earning the regular matching rate. By shifting to a Medicaid expansion under the ACA, Wisconsin could increase to the 90 percent matching rate for about 213,000 childless adults, thereby cutting state costs.⁵ Over the years 2022 to 2025, which includes two years with the ARP bonus payments and two years without, the 14 states would contribute $21.7 billion for Medicaid state matching but would earn $17.6 billion in ARP bonus payments plus $6.6 billion in higher state and local tax revenue, in addition to collecting $190 billion in federal matching funds. (See Technical Appendix for more details.)

These are conservative estimates. Expansion will yield other savings for states that we have not included in our estimates. For example, as Medicaid coverage rises and the number of uninsured falls, state and local governments can reduce the amount spent on charity or uncompensated care for those without insurance and for mental health and substance use services. Medicaid will be able to pay for these services instead.

Growth in Employment

If the 14 states expand their Medicaid programs starting in 2022, the additional federal revenue flowing into them will fuel economic and employment growth. Table 3 presents the estimated growth in employment in 2022, for overall employment and for several key sectors. Employment growth would be similar in 2023 and slightly smaller in 2024 and 2025 (see Technical Appendix).

Exhibit 3 illustrates the employment gains in each of the 14 remaining states in 2022 if they expand Medicaid, totaling almost 837,000 new jobs.

An additional 209,000 jobs would be created in the other 36 states and the District of Columbia as a result of increased interstate economic activity. For example, if Texas expands its Medicaid program, economic activity will ripple through to other states, since health care facilities and other businesses in Texas purchase goods and services from other states, including neighboring states like Louisiana or Oklahoma, as well as states that share commerce and labor with Texas — like New Jersey and North Carolina, which manufacture medications sold across the nation.

Expanding Medicaid in these 14 states could produce more than 1 million new jobs in 2022. This is important as the nation struggles to regain jobs and business activity lost during the COVID-19 pandemic.

While much of the employment growth will be in health care, more than half (56%) of the national job growth will occur in other sectors like construction, retail, finance and insurance, and other industries. Although Medicaid expansion directly benefits the health care sector, economic benefits will spread throughout the broader U.S. economy.

Economic Changes

Table 4 presents three important measures of state economic changes. Output is a measure of total economic activity in a state, including increased activity at the production, wholesale, and retail levels. State gross product is a standard measure of the size of states’ economies. Akin to the gross domestic product, it measures the value added in states at production, wholesale, and retail levels. Personal income (before taxes) measures how much individuals’ incomes grow in the state, particularly because of increased employment. Medicaid expansion will fuel stronger state economies because of the inflow of federal funding. These benefits do not include other possible effects, such as greater productivity because of better health.

If the 14 states expand Medicaid, from 2022 to 2025 state output will rise by more than $600 billion, state gross products will increase by $350 billion, and personal incomes will grow by $218 billion in these states. Additional improvements will accrue to the rest of the nation, too.

Conclusion

Medicaid expansion in the 14 remaining states, spurred by new funding in the American Rescue Plan, can help these states and the rest of the nation recover from the recession and harm triggered by the COVID-19 pandemic. Millions of low-income Americans in these states currently have no meaningful access to health insurance.

In addition to providing health insurance and strengthening access to affordable health care, the additional federal support could create more than 1 million new jobs if all 14 states decide to expand Medicaid by 2022. These jobs will not only occur in the health care sector but also in retail, construction, and other industries, benefiting employers, workers, and communities overall.