Since the Supreme Court’s decision on the Affordable Care Act (ACA) allowing states to opt out of the Medicaid expansion, many states confront a difficult question: In a time of limited resources and escalating health care costs, how much of a state’s budget should be allocated to its Medicaid program, in the context of overall state spending?  What are the tradeoffs for stakeholders in health care and other areas—education, transportation, employment security and others—also vying for a share of the state budget pie? 

The proposed ACA Medicaid expansion would extend coverage to all people earning up to 133 percent of the federal poverty level (FPL), including adults without children – a group excluded under most state Medicaid programs. The expansion would extend Medicaid coverage to an additional 17 million individuals nationwide. The federal government is slated to pay the majority of the costs: Through 2022, an estimated $931 billion to expand Medicaid coverage, leaving states to pony up $73 billion—a bargain for some, a burden for others.

One month after the ruling on Medicaid expansion, however, deep political fissures and uncertainty mark its future: Eight governors announced that their states would not participate in the expansion; 13 governors announced they intended to participate, and a majority of states are still examining their options.

Costs of the proposed expansion (in addition to politics) have emerged as a principal reason for opting out, especially in states struggling to keep up with current Medicaid spending and growth. According to the National Governors Association (NGA), Medicaid is the single largest portion of total state spending accounting for an estimated 24 percent of total state spending in fiscal 2011. Due primarily to the expiration of federal matching increases implemented with the American Reinvestment and Recovery Act, state spending on Medicaid will increase by 20.9 percent in 2011 and by 23.4 percent in 2012. Over the past 10 years, state spending on Medicaid has grown twice as much as growth of education spending, and faster than all other categories of spending.

Recent NGA analyses report what most of us already know: state economies continue on a slow path to recovery. Overall, state revenues have not increased to meet demand for services and spending over the past two years, leaving a combined budget gap of $146.3 billion in fiscal 2011 and 2012. Competing demands for priorities in education, transportation, corrections, public assistance, public health and human services rest compelling cases for need and funding before legislators and the public. By example, the state of Florida will spend $21 billion, or 30 percent of the state’s budget, on Medicaid this year. It is also struggling to maintain adequate funding for public schools at spending levels of $17.2 billion, or 25 percent of the state budget. What—and how—to choose?

The decisions and tradeoffs are not clearcut, but states are already taking action to reshape existing benefits to control costs. Thirteen states have identified cuts for Medicaid beneficiaries that will be implemented before the end of the year. State governments are looking to cut payments to providers and hospitals—Alabama is reducing payments to doctors while Florida is cutting payments to hospitals; Wisconsin would increase the premiums paid for coverage for some beneficiaries; finally, a number of states have devoted cuts to specific programs such as prescription drugs and dental services. Proponents of cuts argue that the pace of cuts has decelerated since the economic crisis and care options for individuals may actually improve due to federal funding for other care options.

There is certainly a case to be made for recalibrating benefit packages in an economic downturn; for expanding coverage to the uninsured; for exercising fiscal restraint and living within our means. But it’s hard to ignore the “elephant in the room:” When we consider Medicaid expansion, just what is it we are expanding? Where is the value? How does it stack up against other, equally pressing priorities? How do we know the intended and unintended consequences of these changes, and do states plan to assess these impacts?

These are the real questions of Medicaid expansion, of health care reform, as it plays out in the states—where hard choices are made and solutions found.