The Patient Protection and Affordable Care Act (ACA) was passed by Congress and signed into law by President Barack Obama on March 23, 2010. The Act includes many changes to the way Americans receive and pay for health care coverage. Specifically, the ACA mandates that:

  • All individuals purchase health insurance.
  • Employers with 50 or more employees offer affordable insurance coverage.
  • Medicaid is expanded to cover all citizens within 138% of the poverty level.
  • Dependent children up to age 26 can remain on their parents’ health insurance plan.
  • States create health insurance exchanges.
  • Pre-existing condition clauses no longer discriminate against insurance coverage.
  • Consumers have the right to appeal insurance decisions.
  • Lifetime and dollar amount limits for coverage are lifted.

While some elements of the legislation are already in place, the Act is set to go into full effect by 2014.

In the interview that follows, Chris Mier, CFA, Managing Director of Loop Capital Markets Analytical Services Division, explains that the Act has the potential to significantly impact state economic growth and credit quality. It also raises concerns over the future of the cost-sharing equation.

MuniNet: Why is the Affordable Care Act sometimes considered a controversial piece of legislation?

Mier: The Patient Protection and Affordable Care Act (ACA) is sweeping legislation that fundamentally changes the playing field for the American health care system. As a nation, we haven’t seen anything this large in scope affecting health care since the introduction of Medicaid and Medicare in the 1960s. It is controversial in that the public is divided in its opinion, with strong advocates both for and against its implementation. Many governors have expressed concern over what it means for their state’s long-term budget exposure. When the Medicaid expansion program commences, the federal government will cover 100 percent of the costs, but over time, that cost will incrementally shift to the states, falling to 90% where it will stay.

MuniNet: Are all states obligated to carry out all elements of the ACA?

Mier: When it was passed in 2010, the original law made compliance with the ACA mandatory, but a large number of governors questioned the constitutionality of the individual mandate as well as the expansion of Medicaid, filing a federal law suit. The Supreme Court heard the case in 2012, deciding that states could opt out of their participation in portions of the program, particularly the part that relates to Medicaid expansion. At this time, states are divided among those that have chosen to move forward with Medicaid expansion, those that have chosen not to move forward, and a handful of states still debating the decision.

MuniNet: How might health care reform ultimately impact a state’s credit quality?

Mier: There is no crystal ball that can predict which states will fare best after full-scale implementation of the ACA. However, states with strong finances and low existing Medicaid costs will likely fare best. The key is the extent to which the particular state has the capacity to make adjustments to deal with unanticipated Medicaid costs that were not budgeted for. If the state in question has significant reserves, has a history of running a financially balanced Medicaid program, and has the capacity for financial flexibility should tough times arise; then that state is likely to be able to weather most problems arising from the implementation of the much larger ACA program. On the other hand, states without adequate reserves and lacking financial flexibility may fare poorly if their expanded program unexpectedly results in a greater cost burden. The size of the existing program plus the expansion relative to the overall size of the budget gives a rough indication of the potential scope of any unforeseen problems.

MuniNet: Are certain states more vulnerable to risk if they opt in to the Medicaid expansion program?

Mier: The risk can really swing in either direction. States that opt in face the possibility of increased Medicaid costs as a result of greater enrollment, as well as uncertainty over how long federal assistance will help defray those costs. On the flip side, states that opt out run the risk of unfavorable political backlash and perhaps even economic repercussions. If a state (e.g., Texas) says “no” to coverage, while a neighboring state (e.g., New Mexico) says “yes,” it may experience increased pressure from residents to adopt the reform once the program is in place.

It is also important to consider the delicate balance between the costs of Medicaid expansion versus the costs associated with uncompensated care, which could generate significantly greater financial burdens over time.

Furthermore, economic consultants that have been hired to study the fiscal implications of the program have come to the conclusion that it actually has the potential to grow state’s economy and increase employment. Medicaid expansion brings with it a large group of people demanding more health services, therefore an increased demand for health care professionals – more nurses, doctors, and medical administrative services. These professionals then spend their salaries by living in the community; spending, shopping, dining, etc.; thereby stimulating state and local economies.

MuniNet: What about a state that is already in precarious financial straits?  Can it afford to opt in?

Mier: Obviously, there is greater concern over a state currently experiencing financial problems, huge unfunded pension liabilities, and/or credit uncertainty than a state on more solid fiscal footing when it comes to its long-term ability to support an expanded Medicaid program. In assessing risk, however, it makes sense to recognize that even those states with a large uninsured population could benefit from the federal assistance that is guaranteed for the first several years of the program. While I wouldn’t minimize concerns over cost, it is rarely a good idea to turn away free federal funding.

It is also important to consider the delicate balance between the costs of Medicaid expansion versus the costs associated with uncompensated care, which could generate significantly greater financial burdens over time.

MuniNet: What can the nation learn from Massachusetts health care reform legislation enacted in 2006?

Mier: Massachusetts was a trailblazer in health care reform, when then-Governor Mitt Romney signed into law comprehensive health care reform legislation. The law was primarily aimed at reducing the number of uninsured individuals by offering a state health insurance exchange program, expanding Medicaid and the Children’s Health Insurance Program (CHIP), implementing insurance market reforms, and mandating employer contributions to health insurance coverage for businesses with eleven or more employees.

What have we learned from Massachusetts?  At minimum, participation in health care reform is not likely to yield negative results, and may, in fact, provide a welcome boost to the state economy.

Over the past five-plus years, the level of uninsured individuals has, indeed, decreased. At the same time, the rate of job growth Massachusetts has been relatively unchanged. Participation in the program has not caused an increase need for businesses to lay off employees; in fact, employment has remained relatively stable in the state, adjusting for general economic conditions. The program has effectively resolved “job lock,” where pre-existing conditions kept people frozen in their jobs for fear of losing healthcare coverage if they were to retire before Medicare eligibility or switch employers. The Massachusetts economy is booming, showing no negative impact on businesses that have been required to contribute to their employees’ health coverage. What have we learned from Massachusetts? At minimum, participation in health care reform is not likely to yield negative results, and may, in fact, provide a welcome boost to the state economy.

MuniNet: What is the likelihood that health care reform legislation could ultimately raise health care costs?

Mier: Because of the way it was structured, health care reform in Massachusetts effectively postponed cost-savings efforts to increase coverage. As a result, Massachusetts continues to struggle with rising health care costs and boasts the highest per capita spending on health care. I think the truthful answer is that no one will know for sure what will happen to health care costs until a few years after full implementation of the ACA. There is cause for optimism in that health care inflation has slowed dramatically during the course of the recession. This is partly due to the weakness in the economy, but there is some suggestion that other factors may be working towards lowering the rate of growth in costs. The ACA will be implemented under better circumstances than it could have otherwise.

On the other side of the ledger, many people, including many municipal finance professionals, are wondering “If the federal government can allow sequestration to occur, cutting into the Build America Bond coupon subsidies, why couldn’t they decide to reduce Medicaid reimbursements after many states have created a new expanded program?” This is a completely valid point and a source of significant concern.

For a complete copy of “The Patient Protection and Affordable Care Act and the Impact on State Economic Growth and Credit,” please contact Loop Capital Markets Analytical Services Division at

Disclaimer: The opinions and statements expressed in this column are solely those of the expert quoted in this interview. This column does not reflect the position or views of RICIC, LLC or MuniNetGuide.

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