States will likely face rising costs due to federal health care reform over the long term, Moody’s Investors Service said in a report released this week.

The new law’s key effect on states will be an expansion of the Medicaid program starting in 2014. Medicaid already makes up 20% of states’ budgets, and the expansion could mean that some states will face higher costs, Moody’s said.

In a separate report, Moody’s said first-quarter upgrades outpaced downgrades in the nonprofit hospital sector for the first time in 16 quarters. But analysts warned the momentum is unlikely to continue, due in part to health care reform.

Most states have already seen their Medicaid costs rise during the recent recession as residents lost jobs and insurance, Moody’s said. The federal government temporarily increased its match to help states cover their shortfalls, and states are depending on the federal matches again as they craft their 2011 budgets.

For the long term, most states are still trying to get a handle on what the new law means for their budgets.

Michigan’s independent Senate Fiscal Agency, for example, released a report last week saying that the Medicaid expansion could cost an additional $200 million annually starting in 2020 — an expense that could be offset by other cost-cutting provisions of the new law.

Indiana Gov. Mitch Daniels warned the Medicaid expansion would mean ­higher taxes for Hoosiers. Indiana is one of 18 states that sued over the new law, saying it violates constitutional rights by forcing Americans to buy insurance, and that the new Medicaid standards will force states to spend billions in additional dollars.

The expansion, which will cover all people with incomes under 133% of the federal poverty level and childless adults, will take effect in 2014. At first it is not expected to have much effect on state budgets, as the federal government will cover 100% of the costs for the first two years. Starting in 2017, however, states will be required to start chipping in, starting at 5% and reaching 10% by 2020.

“Everybody is in the early stages of trying to quantify the numbers,” said Nicole Johnson, the Moody’s analyst who wrote the report titled “Healthcare Reform Expected to Create Longer Term Financial Pressure for States.”

“It will have a different impact on ­different states, depending on where they start,” she said. “If the economy does ­improve, states will be in a better position to handle the costs. If the recovery is weak or delayed, it could be tougher to handle.”

In addition to Medicaid, states could be forced to spend more money on administrative, regulatory, and enforcement of the new reform rules.

On the positive side, states are expected to see a big drop in the amount of charity-care funding they provide as the number of insured residents rises after the mandatory insurance provision starts in 2014.

Meanwhile, nonprofit hospitals have enjoyed a small flurry of upgrades during the first quarter of 2010. For the first time in 16 straight quarters, Moody’s upgraded more health care providers than it downgraded, it said in a report released Monday. Thirteen of the 15 upgrades during the first quarter resulted from improved performance, stronger balance sheets, and improvements to overall debt structure, Moody’s said.

But don’t expect the good times to continue, analysts warned. Providers will continue to face challenges from a weak economy, and the new health care law will also pose challenges, Moody’s said.

“Health care reform will further temper not-for-profit hospital revenue growth with reimbursement pressures coming from the commercial payers, resulting in lower payment per procedure,” analyst Sarah Vennekotter wrote in the report.

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