As the General Assembly sends forward its budget proposal to the Governor, BTC has taken a closer look at the broader economic impact of reductions to state spending. In particular, attention has been paid to the impact of significant cuts to Medicaid spending. This legislative budget would cut state spending on Medicaid by $753 million over the biennium. Of that amount, BTC estimates that $672 million of those cuts will result in a direct loss of $1.2 billion in Federal matching funds over the biennium.
Although the governor has warned of severe negative economic impacts to North Carolina as a result of the loss of these funds, legislative leaders have not shown much concern. This is particularly short-sighted since recent North Carolina history provides a clear lesson in what happened the last time lawmakers cut Medicaid spending during a recession.
The nine-month recession in 2001 marked the end of a ten-year period of economic expansion covering most of the 1990s.[i] North Carolina’s annual unemployment rate jumped from 3.7% in 2000 to 5.6% in 2001, and peaked at 6.6% in 2002. During the same period, Medicaid enrollment increased by 9.2% in 2000 and again by 5.9% in 2001, reflecting increased demand for health care from those most directly affected by the recession.
While spending on Medicaid increased during this time in terms of total dollars, it was considerably lower than the level required to meet projected increases in demand. In 1999 and 2000, Medicaid had been funded at the recommended level, but in 2001, legislators responded to depressed revenue forecasts by cutting state Medicaid funding by $44 million, among other measures. The 2002 continuation budget included a net cut to state Medicaid spending of $128 million, net of all enhanced Federal matching funds that were made available to the state in that year in response to the recession. These actions resulted in a total loss of approximately $483 million in Federal matching funds between 2001 and 2003.
Also in 2001, North Carolina’s rapidly growing health care sector grew by over 23,000 jobs and payroll increased by over 11% in 2001, but both measures slumped in response to economic pressures in 2002 and 2003. In fact, North Carolina’s health care sector didn’t experience equivalent growth again until later in the decade.
History shows that foregoing Federal funds vital to North Carolina’s health care sector is a poor decision particularly during a recession. Given that our current economic climate is significantly worse than it was at the height of the 2001 recession, losing billions of dollars in health care spending will undoubtedly have a negative effect on North Carolina’s economy.
 Hall et al, “The Business-Cycle Peak of March 2001,” National Bureau of Economic Research: November 26, 2001. Available online at http://www.nber.org/cycles/november2001/recessnov.html