Alabama’s budget structure could complicate Medicaid expansion efforts

Health care policy advocates hope new federal incentives will encourage Alabama officials to drop their long-standing opposition to Medicaid expansion and extend insurance to those in the coverage gap.

Gov. Kay Ivey, however, remains hesitant on Medicaid expansion. And Alabama’s peculiar budget structure could complicate the process. 

Alabama is one of 11 states that have not approved Medicaid expansion, which extends Medicaid benefits to people and households making up to 138% of the poverty line ($20,120 for an individual; $34,307 for a household of three.) The federal government pays at least 90% of the cost of expansion.

According to the Kaiser Family Foundation, about 12% of Alabama’s nonelderly population is uninsured. State officials in the past have cited ideological opposition to Medicaid expansion or said the state would struggle to come up with the 10% match required to expand. 

Attempts to incentivize expansion are out there. The American Rescue Plan Act, signed by President Joe Biden in 2021, included a 5% bump for states that have not expanded to cover the first two years of Medicaid expansion for previous enrollees. That would bring the federal matching rate to about 77% to help with the initial costs of expansion. Additionally, the state would receive a 90% federal matching rate indefinitely for new enrollees under expansion.

“What those five points mean are about $600 million over two years,” said Ryan Hankins, executive director of the Public Research Affairs Council of Alabama.

Gina Maiola, a spokeswoman for Ivey, said in a statement that ensuring quality health care is important for the governor. But Maiola said Ivey remains concerned about paying for Medicaid expansion long-term. 

“ARPA discussions remain ongoing, but it is important to keep in mind that these are one-time monies,” Maiola said.

Expanding Medicaid could also be complicated by how Alabama pays for state services, and how it directs its revenues, Hankins said. 

Alabama has two budgets: the General Fund and the Education Trust Fund. The Education Trust Fund mostly finances the state educational system while the General Fund covers everything else, from the Department of Public Health to the Alabama Historical Commission. 

But Alabama law limits how the money going into the budgets can be spent. The state’s income tax, for example, must go to teacher salaries. Those limits make it difficult to move funds from one budget to the other. 

That will be a challenge in expanding Medicaid, Hankins said. Previous research indicated that increased economic activity would eventually balance what the state would spend on expansion.   According to a recent PARCA study, expansion would save Alabama an average of $172.4 million in health care costs over six years. That would be more than enough to cover the cost of the program. The study estimates that spending in Alabama would go up by an average of $225 million a year over current Medicaid costs, but the state would also average nearly $400 million in savings over those same six years each year. Additionally, expansion would create an average of about 20,000 new jobs per year over the next six years and have an estimated average economic impact of nearly $2 billion per year over the next six years.

The challenge will be getting those revenues where they need to go. Tax revenue generated by expansion would go to the Education Trust Fund, but Medicaid costs would be handled by the General Fund. Past research did not take this mismatch into consideration, Hankins said.  

One way to address the budget issue would be a true trust fund for Medicaid, but it is unclear whether legislators support the idea.

“This would be a mechanism wherein the state could provide a corpus and take that $600 million over two years and use that as the initial investment in that trust fund,” Hankins said.

Alabama imposes strict limits on Medicaid eligibility. Most childless, able-bodied adults cannot receive Medicaid. For a parent to qualify for Medicaid, they must make under 18% of the federal poverty level, about $3,550 a year for a family of two. A single mother of one who made $4,000 wouldn’t qualify for Medicaid. She would also not qualify for a subsidized Marketplace plan like an individual who made over $20,000 would.

Although some have voiced concerns about the federal government withdrawing the 90% match for expansion, Hankins said that would take an act of Congress. The political will to pull back support from states that have expanded Medicaid is simply not there, he said.

Hankins also said that since expansion is voluntary, states that have opted in for expansion may reverse expansion at any time. Therefore, if the federal government did pass a new law changing the federal matching rate, Alabama can roll back expansion at any time.

Robin Rudowitz, vice president of Kaiser Family Foundation and director of its program on Medicaid and the uninsured, said many studies show that states and healthcare providers benefit financially from expanded Medicaid.

For example, some states have used state-only dollars for services like behavioral health for individuals who don’t have any insurance coverage under the adopted expansion. Rudowitz said these states have been able to leverage Medicaid and federal financing to help offset some of those state costs.

“When providers have engaged, particularly rural hospitals have been shown to have benefited fiscally from expansion,” Rudowitz said.

Dr. Donald E. Williamson, president and CEO of the Alabama Hospital Association, said that closing the coverage gap is not something they can ignore at a recent news conference.

“We have to talk about it and to be honest – will it happen? I don’t know,” he said. “If we don’t do something we’re going to have fewer hospitals. And more importantly than fewer hospitals, we’re going to have less access to health care for ourselves.”