Health Care Reform: Unfunded Mandate?

One of the frequently stated criticisms of the federal health care legislation passed in March is that it is an unfunded mandate. The assumption is that states, already struggling to meet funding obligations under current Medicaid eligibility criteria, will unable to afford the Medicaid expansions called for under the new bill. There are two significant problems with this assumption. Number one, the vast majority of the legislation's tab is picked up by the federal government (making the unfunded part of unfunded mandate criticism difficult to fathom). Number two, state health care spending was projected to increase dramatically with or without federal health care reform. Although it is very possible that under the new health care system states will be unable to meet health care spending obligations, for many states the federal health care reform has made that scenario less likely, not more.



The most important element of the federal health care reform legislation is that it expands Medicaid eligibility to include all legal residents making under 133% of federal poverty guideline. This includes childless adults who are currently ineligible for Medicaid. The Congressional Budget Office (CBO) estimates that 16 million people will become eligible for Medicaid over the next decade under the legislation (there are currently 58.7 million -- 20% of total population -- enrolled in Medicare.) (CBO, Final Cost Estimate) The 16 million person expansion is projected to cost $454 billion between 2010 - 2019, with the federal government bearing $434 billion, or 96% of the burden. Under this projection, the states pick up the remaining $20 billion, or 4%. (CBO, Final Cost Estimate) To put this in perspective, with or without reform, the states were projected to spend $1.6 trillion to cover Medicaid eligible individuals during that 10 year time period. (Center for Government and Politics) The additional $20 billion represents a 1.25% increase in state Medicaid related expenses.

Admittedly, the state/federal breakdown of financial burden is not the source of much of the criticism of the Medicaid expansion. Rather, the criticism is motivated primarily by a sense of misplaced federal priories -- the idea that more should have been done to cut government costs rather than expand coverage. Although federal health care reform reduces the deficit by raising more revenue than it spends, the legislation authorizes an additional $794 billion in total federal health care expenditures 2010-2019. (CBO, Final Cost Estimate) Since Medicaid spending is normally distributed on a 57% federal / 43% state match basis, increased federal health care spending potentially puts pressure on states to follow suit, raising additional revenue to match additional federal funding available. This pressure is not reflected in the 10-year state additional expenditure estimate cited above due to the 96% federal / 4% state match on newly eligible enrollees, but this ratio is likely to change after 2019, resulting in some federal to state cost shifting.

That said, the potential of increased Medicaid costs for states in ten years must be weighed against the immediate crisis that is facing state run health care programs across the country. According to the Kaiser Foundation, 46.3 million Americans (15.4% of the population) were uninsured in 2008. (Kaiser Foundation) This is a .2 percentage point increase from 2007, which means that the ranks of the uninsured grew by over 600,000 in one year. With health care costs increasing rapidly (nearly 7% a year from 1991 to 2004), unemployment high, and wages stagnant or falling, most states will be forced to deal with growing uninsured populations in the near future. Under the old Medicaid eligibility criteria, states would be forced to provide programs funded solely with state revenues or suffer the consequences of having large uninsured populations. Minnesota is one of many states that in the past has decided to raise revenue in order to ensure broader access to health care but has recently considered eliminating or significantly downsizing health care programs in order to save money.

More than anything, the federal health care legislation provides states a short reprieve from the very difficult decisions surrounding what to do about the uninsured. Starting in 2014 (when the expanded Medicare eligibility criteria goes into effect) and continuing until 2019, the federal government will essentially take care of it. This provides states with an important opportunity to do the thing that critics accuse the federal government of avoiding -- namely, find a way to provide health care more cheaply. If past trends continue unabated, then by 2020 state health care programs would be in serious trouble no matter what the federal government did with Medicaid eligibility. As Governor Pawlenty is learning, even now cut-only approaches to health spending generate extremely high levels of political opposition. This is likely to be even more true in 10 years when there are millions of additional working Americans who have been priced out of the insurance market.