The Effect of Medicaid Expansion on Local Government Finances

Local governments are critical stakeholders in public health systems. For instance, despite the fact that the combined local public expenditures was just 83% of total state expenditures in FY13, local governments outspent states about $3-to-$2 on hospitals and in the aggregate were about equal on public health service expenditures. Both proponents and researchers of the Affordable Care Act (ACA) have highlighted the prospects for fiscal relief to state governments through a number of mechanisms, but no attention has been paid to local governments. This paper remedies this oversight by exploring local government fiscal indicators plausibly affected by these fiscal relief mechanisms. Using data from the Census of Governments from 2006 to 2015, we employ a difference-in-difference framework to study the effect of the state decision to expand Medicaid on their local governments’ fiscal indicators. We find evidence that Medicaid expansion increased local revenues stemming from hospital charges, tax revenues, and supporting transfer payments from other local governments for health and hospital services. We also find a compositional swap in the source of intergovernmental transfers with decreases in federal revenues matched by increases in state support, but the degree of offset was greater for smaller local governments (e.g. rural counties and small cities). Across the board, ACA expansions increased local government expenditures, both in total and direct expenditure programs.