The Office of the Actuary at the Centers for Medicare and Medicaid Services (CMS) just updated national health spending projections as a result of the Patient Protection and Affordable Care Act (PPACA). While many of its estimates are disconcerting, one estimate in particular is eye-popping and will be unwelcome news to the states: CMS projects that state and local spending on Medicaid will increase 41.4 percent between 2010 and 2011. No, that is not a typo.

Medicaid spending now represents on average about 21 percent of the typical state budget. If state Medicaid spending increases by 41 percent as projected by CMS, then by next year Medicaid could end up consuming nearly 30 percent of the average state budget. Medicaid would greatly exceed all other state priorities, including education, which tops state budgets at about 22 percent. In fact, state spending on education would experience certain cuts next year.

Presumably, the state spending increase is so high because the enhancement of the federal Medicaid match will expire at the end of 2010. CMS projects that federal spending on Medicaid and the Children’s Health Insurance Program will decrease 7.1 percent between 2010 and 2011. The loss of federal funds will drive most of the increase in state Medicaid obligations.

Unfortunately, states have lost considerable flexibility to reduce Medicaid’s burden on their budgets. As a condition for receiving the additional federal dollars, both the stimulus bill and PPACA contain maintenance-of-effort (MOE) provisions that prohibit states from changing eligibility levels. States have resorted to slashing provider reimbursement rates and benefit packages to cope with rising Medicaid expenses and reduced revenue attributed to the recession. Forty-one states and the District of Columbia cut provider reimbursement rates in 2009 or 2010, and 29 states and the District did so in both years. Additionally, 39 states and the District cut Medicaid pharmacy benefits, and 22 states cut Medicaid medical benefits over the past two years.

The most important problem states must tackle next year will be handling these extraordinary budgetary pressures. Most states can’t reduce provider reimbursement rates further because Medicaid patients won’t be able to find doctors willing to see them. If Medicaid cannot be controlled, states will have to reduce spending in other areas (such as education or transportation), significantly raise state taxes, or, worse yet, look for a bailout from federal taxpayers.

Beyond the enormous increase in state obligations for Medicaid next year, more trouble lies ahead. The new law includes a massive Medicaid expansion. CMS estimates that by 2014, 85.2 million Americans will be enrolled in Medicaid—an increase of 23.3 million individuals from the projections under prior law.

This is the second study in a week that provides unwelcome news to states. Indiana reports that the cost of Medicaid expansion will cost its state $3.6 billion over 10 years. Texas estimated its 10-year cost at $27 billion. The situation could be even worse. State estimates are subject to great uncertainty, especially with assumptions about the take-up rate (the number of people who actually sign up) among both the newly eligible (the federal government reimburses state spending at a rate of 90 percent after 2020) and the previously eligible (the federal government reimburses at the state’s standard match rate).

The huge Medicaid expansion in Obamacare must be undone. Not only is it going to be expensive for taxpayers—with an estimated six-year price tag (2014 through 2019) of between $400 billion and $500 billion—but the quality of care Medicaid recipients receive appears worse than the care privately insured individuals receive and is plausibly worse than the care the uninsured receive. A study of nearly 900,000 major operations in the U.S. found that surgical patients on Medicaid were 13 percent more likely to suffer in-hospital mortality than uninsured individuals. The apparent inferiority of Medicaid suggests that national enrollment should not be increased by a third.

In the long run, the impact that PPACA on the states will be significant, but there are some steps states can take to help cope with the new law. In the short term, however, the best solution is to remove the MOE requirements and give the states greater flexibility to manage the cost of their programs.