Extending Medicaid and CHIP Coverage for Children: Long-Run Budgetary Effects of the President’s 2025 Budget Proposal

The President’s budget request for fiscal year 2025 includes a proposal that would allow states to let all children who qualify for health care coverage through Medicaid or the Children’s Health Insurance Program (CHIP) remain in the program for three years regardless of changes to their family’s circumstances that might affect their eligibility. Such a policy is referred to as continuous eligibility. States would also have the option to provide continuous eligibility to qualifying children from birth through age 5.

In this report, the Congressional Budget Office describes how the impact of that proposed policy on children’s health insurance coverage during the fiscal year 2025–2034 period would affect the U.S. economy and the federal budget over the long run (through 2099). CBO projects that increases in children’s enrollment in Medicaid and CHIP would result in better health for those children and higher average earnings when they became adults, along with other effects on the economy.

Changes in the federal budget that result from a policy’s economic effects are known as budgetary feedback. This report focuses on the economic effects and budgetary feedback that are estimated to accrue through 2099 because of the additional enrollment in Medicaid and CHIP (relative to projected enrollment under current law) that would occur during the fiscal year 2025–2034 period under the policy.

CBO compared the present value of those long-run effects with the policy’s initial direct costs during the fiscal year 2025–2034 period, as based on CBO’s cost estimate for the policy (which does not include economic effects and budgetary feedback). The results are sensitive to many parameter values used in the estimate, most notably the discount rates used to calculate the present value of future costs and savings and the method of financing the continuous eligibility policy:

• If the policy was financed in a deficit-neutral way, by reducing other federal noninvestment spending, the budgetary feedback effects associated with increases in the adult earnings of affected children and related economic changes could offset 15 percent to 86 percent of the proposal’s initial direct costs on a present-value basis, CBO estimates. That range of estimates reflects different discount rates.
• If the policy was financed through additional federal borrowing, its net long-term budgetary feedback effects would be negative rather than positive. On a present-value basis, those effects would increase the budget deficit by an additional 34 percent to 130 percent of the initial direct costs of the policy.

This analysis differs in three important ways from an analysis of a similar illustrative policy that CBO published in 2023. First, for the policy’s initial direct costs, this analysis uses the total net cost instead of average outlays for Medicaid. The total net cost incorporates offsets in federal costs for children who would have other sources of health insurance in the absence of the policy.

Second, CBO refined its estimates of the distribution of family income for children affected by the policy. Specifically, CBO incorporated the expectation that the average family income of affected children would be higher than that of Medicaid enrollees under current law, because the policy would keep children enrolled regardless of changes in income. As a result, the children who would be affected by the President’s policy are projected to have higher family income than the distribution used in CBO’s previous analysis. The estimated size of the effect on future earnings decreases with family income, so the updated income distribution reduces the budgetary feedback effects of the policy relative to the effects estimated in the previous analysis.

Third, CBO revised its method for estimating the overall economic impact of changes in affected children’s earnings as adults. The revised method better reflects how changes to their earnings would alter the income of other people, national savings, and investment behavior.