These 7 states are most at risk from rising health-care costs

High and growing health-care costs are a problem for everyone — but especially so for state and local governments.

And states with lower credit ratings are especially susceptible because they have less financial flexibility, according to a new report from credit ratings and research firm Fitch Ratings.

Those states include California, Connecticut, Illinois, Kentucky, Louisiana, New Jersey and Pennsylvania, all of which are rated AA- and below by Fitch. (California, Kentucky, Louisiana and Pennsylvania is rated AA-, while Connecticut is rated A+, New Jersey is rated A, and Illinois is rated BBB.)

Most states are staring down stagnating revenues, and federal funding for programs like Medicaid and Medicare looks increasingly at-risk.

But states with lower credit ratings will likely find it hard to raise taxes, and be more affected by changes in population, individuals’ incomes and investment returns, the report found.

Related: Doctor’s offices are a hot investment — what does that mean for profit vs. patient care?

U.S. state and local governments spent 30.7% of their budgets on health care and social services in 2015, an increase from 27.6% in 2005. That burden is expected to increase to 38.3% of their budgets by the end of 2025.

As a result, rising health-care costs are likely to endanger funding for other state spending areas, including education and transportation, according to the Fitch report. States pay for the costs of various health care programs, including Medicare and Medicaid.

See: 5 ways to lower health care costs in the U.S.

Fitch’s AA rating denotes high credit quality, and most U.S. states are rated AA and above. But for the seven states rated AA- and below, Fitch estimates that their aggregated state and local budgets spent slightly more on health care and other services than the U.S. at large in 2015, a gap that it expects to grow by 2025.

Those expense buckets were more equal back in 2005, according to Fitch’s estimates.

State and local budgets for states rated AA- and below spent more on health care and other services in 2015 than the U.S., at 40.8% to the U.S.’s 38.5%. That gap is expected to increase by 2025.

Increasing health-care costs have been a big driver of the change, but so have higher pension contributions and cuts to other kinds of spending, according to Fitch.

Meanwhile, states rated AAA, Fitch’s highest marker of credit quality, typically have stronger pension systems, reducing the need for catch-up contributions going forward. For lower-rated states, expected pension contribution increases should be more manageable, though, the report found.

Health care, social services, public pensions and debt service are considered less flexible governmental expenses than those like education, transportation, housing, public safety and environmental programs.

The Health Care Select Sector SPDR XLV, +0.11%  has surged 1.5% over the last three months, compared with a 0.8% rise in the S&P 500 SPX, -0.08%  and a 1.2% rise in the Dow Jones Industrial Average DJIA, -0.10%  .

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