Why not expand Medicaid?

Why not expand Medicaid?

Correction: I got the match rates in my example wrong because I ignored the second law which overrode the ACA on the match rates.  The text below is now accurate.  My error doesn’t change any of my substantive arguments.

Last week former Michigan Governor Jennifer Granholm (D) argued that any Governor who rejected the Affordable Care Act’s new Medicaid expansion was either stupid or evil.  This is a common refrain from the law’s defenders, that only an irrational or uncaring Governor would reject the ACA’s new Medicaid subsidies to provide health insurance to poor adults without kids.

This question is now relevant thanks to the Supreme Court’s recent ruling.  The Roberts Court ruled that the federal government may not deny the federal share of funds for a state’s existing Medicaid program if that state refuses to avail itself of the new subsidies offered for expanding program eligibility.  In the wake of this ruling several Governors have said they will not, or may not, expand their Medicaid programs, notwithstanding the ACA’s offer of generous matching federal funds.

How generous?  Under the ACA the Feds will pay all benefit costs for this new population through 2016, and then phase down to a 90 percent federal share from 2020 on.  That compares to an average federal share of 57 cents of each dollar spent on Medicaid benefits for existing populations.  The exact federal share varies by state and ranges from 50 cents federal to 78 cents federal for basic Medicaid benefits.

New Jersey Governor Chris Christie might say,  “I have to pay 50 cents of state money for each Medicaid dollar spent in New York.  If I expand my Medicaid program to these poor childless adults, I’ll have to pay ten cents of state money for each Medicaid dollar spent on them after the first few years.”  From a state’s perpective, the decision to expand Medicaid means higher state expenditures but at a drastically reduced cost in state funds per new enrollee.  Adding new people still costs you scarce state funds, but these new enrollees would be cheaper to the state than the people already in your program.

Why, then, would a Governor reject such a generous offer?  She can provide health insurance for poor residents of her state for no cost in the first two years and at an extremely reduced cost after that.  If a Governor refuses, ACA defenders argue she will be leaving enormous amounts of federal money “on the table.”  Governor Granholm points out that states already subsidize hospitals to cover some of the costs of the uncompensated care delivered to these poor uninsured people.  And since in most cases Medicaid pays providers low payment rates, adding them to Medicaid is a relatively inexpensive way to provide them with health insurance.

Charles Blahous was first to publicly explain how the Court’s decision could make the ACA’s finances untenable.  He examined the incentive the Court’s decision would have for Governors to abandon Medicaid expansions in favor of federally-funded subsidies through state exchanges.

Let’s briefly review seven additional challenges to the case made by advocates for Medicaid expansion under the ACA.  The bar is low: we don’t have to prove that a Governor should not expand Medicaid, only that one can make this decision without being irrational or evil.  Thanks to a knowledgeable friend for helping me with these.

1.  “Leaving federal money on the table” looks at the problem backwards.  The law does not offer states free money without conditions, it reduces the price to the state of covering these new people.  A state must still find the funds to cover its 10 percent of the new Medicaid costs.  While that’s a tiny fraction of the total new costs, Medicaid is a huge program and many states are already in dire financial condition.  If a state can’t afford its share it doesn’t matter how much the Feds are offering.  A Governor must look at her budget and prioritize the state resources at her disposal.  Medicaid spending is one of the two largest components of most state budgets.  It is  reasonable for a Governor to conclude she would rather use her limited resources for other needs (education, emergency services, public infrastructure) than to expand her state’s obligations for its biggest and fastest-growing entitlement.

2.  A smart Governor recognizes that a commitment to expand Medicaid eligibility is likely to be permanent, so she may be risk averse.  It is quite difficult to cut off eligibility for a group of people once it’s been granted.  Our Governor must also consider political and legislative risk from Washington.  Sure, the Feds are offering to pay all benefit costs for the first three years, and most costs after that.  But the law might be repealed in 2013.  Even if it’s not, Congress could cut federal match rates in the future to address federal spending pressures.  In his budget President Obama has proposed to “align” match rates in Medicaid and CHIP, code for cutting CHIP match rates.  A federal “Grand Bargain” fiscal negotiation would certainly consider cutting federal match rates for Medicaid and CHIP.  In any of these scenarios the state and our Governor bear the downside fiscal risk.

3.  A Governor must also worry about creeping federal requirements for this new population.  States have some flexibility designing benefit packages for their Medicaid populations and a lot of flexibility in designing insurance structures and setting payment rates.  The Feds, however, are looking at this new group of people as part of their “ACA eligibility expansions,” along with others who will buy subsidized insurance through state exchanges.  What happens, then, if the Feds want to impose new requirements on the exchanges, and then require states to do the same with their Medicaid programs?  The Feds have a history of doing this in Medicaid.

4.  There are hidden costs to this expansion.  Any time a program like Medicaid is expanded there is a woodwork effect.  Some mothers and their kids who were eligible for Medicaid before the ACA, but who had not enrolled, would be drawn to enroll with the increased publicity to enroll newly eligible poor childless adults.  If your focus is on enrolling poor people in Medicaid this is a good thing.  It is also an increased cost to the state budget, especially since these mothers and their kids are not eligible for the higher federal match rate in the ACA.  A Governor considering whether to expand her program must include these additional costs in her decision, even though they don’t directly impact the target population.  A state also bears the administrative expenses and challenges of expanding its program.

5.  Adding new people increases government spending and total spending on health care.  Yes, those who lack prepaid health insurance impose uncompensated care costs on hospitals.  Yes, the states pick up some of these costs through subsidies to those hospitals.  Both would be reduced if more people had prepaid health insurance.  But while expanded Medicaid eligibility means more and better medical care for those who were previously uninsured, it comes at an added cost to the government (Feds + States).  There is no free lunch here, only a reduced price lunch.  More people X more medical care = more spending.

6.  A Governor creates negotiating leverage with the Feds by saying no, even temporarily.  The Feds and States are constantly engaged in negotiations over funding and rules for Medicaid and CHIP.  Governors know that the Obama Administration needs them to expand their Medicaid populations for PPACA to approach its coverage goals.  Congress wrote the law with an effective mandate on states to cover these people.  The Court inverted that power dynamic, and any Governor who says no to an expansion gains leverage for more federal funds or flexibility in other areas.

7.  If it’s such a good deal why did the Feds mandate it?  There’s a parallel here with the individual mandate and accompanying subsidies.  The law’s authors knew that subsidies would encourage some individuals and some states to buy health insurance or expand their Medicaid programs.  They knew that others would not take advantage of these subsidies, so they mandated participation with penalties for noncompliance.  The individual mandate and penalty tax survived the Court challenges while those imposed on states did not.  It is reasonable to assume that, without the mandate, some states will now choose not to expand their biggest (or second-biggest) state spending program any further.

When the ACA was enacted in 2010 CBO estimated that the Medicaid expansions would result in 17 million more Medicaid enrollees by 2016.  The Supreme Court’s ruling and subsequent decisions by Governors should reduce that.  We will see by how much if the law is not repealed next year.

(photo credit: White House photo by Pete Souza)

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