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This study was prepared by the staffs of the Human Resources and Community Development Division and the Budget Analysis Division of the Congressional Budget Office, under the supervision of Nancy M. Gordon, Assistant Director for Human Resources and Community Development Division and Chuck Seagrave, Chief, Human Resources Cost Estimate Unit, Budget Analysis Division. Questions regarding the analysis may be addressed to Patricia Ruggles or Janice Peskin.
 
 

In his State of the Union address, the President proposed that the states assume full responsibility for two major income support programs, Aid to Families with Dependent Children (AFDC) and food stamps, which are now partially or fully funded by the federal government. In exchange, the federal government would pick up the full cost of the Medicaid program, which is now partially funded by the states. This memorandum examines some of the effects of such an exchange.

The full effects of the proposed swap cannot be estimated at this time, however, for several reasons. First, several aspects of the proposed plan have not yet been made public. The Administration has announced that further cuts will be proposed in all three programs before the exchange would take place. In addition, a federal takeover of the Medicaid program could involve the institution of more uniform eligibility criteria and covered services, but just what these would be is as yet unknown.

Second, state responses to the proposed exchange are hard to predict. States could either lower or raise spending levels in AFDC and food stamps if they were fully responsible for these programs. In addition, if federal assumption of the Medicaid program changed the distribution of Medicaid benefits across states, individual states could raise or lower their spending on other health care programs in response.

Finally, while data are available on the current distribution of expenditures in these three programs by state, it is difficult to predict for each state the effects of changes in population, economic circumstances and state policies that could affect total spending. As a result of these effects, state-by-state spending distributions could be quite different from the current pattern by 1984, even without major changes in federal spending policies.

For these reasons, the findings presented below should be interpreted with some caution. They are based on projections of spending at the level necessary to provide current services in each of the three programs under the CBO's baseline economic assumptions. They do not take into account any further cuts in spending or other policy changes, or any shifts in relative expenditure levels across states.

The major findings of this study are:

• If the proposed exchange were carried out in 1984 on the three programs as they are now, the financial responsibilities of the federal government and of the states as a whole would not change a great deal. The federal government would be responsible for $1.5 billion less in benefit payments in 1984 for the three programs than under current law. Over time, however, this gain would decline, since Medicaid costs are expected to rise faster than food stamp and AFDC costs.
  
  
• In 1984, 38 states would lose under the exchange, whereas 12 states and the District of Columbia would gain, if all states maintained current services. The impacts would vary considerably among states, however, with some states experiencing gains or losses that were very large relative to their total expenditures in these three programs, and other states experiencing almost no change.
  
  
• States with relatively generous Medicaid programs and high AFDC payment standards would be most likely to gain. Such states have relatively more people who are eligible for Medicaid and thus higher Medicaid costs, which would be shifted to the federal government. Food stamp costs would be relatively low for states with high AFDC standards since income from AFDC is taken into account in determining food stamp benefits. AFDC costs would increase more for these states than for states with low payment standards, but this relative increase would generally not outweigh the food stamp and Medicaid effects.

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