The Patient Protection and Affordable Care Act (Obamacare) – Medicaid Expansion Provision

What is it, and How Does it Affect State and Local Finance?

Medicaid, jointly funded by state and federal governments, requires healthcare coverage to be provided to vulnerable populations.  These populations include: low-income children, pregnant women, seniors, and some individuals with disabilities under the age of 65.  The Patient Protection and Affordable Care Act, or Obamacare, includes a provision that will expand Medicaid eligibility to people with annual incomes at or below 138% of the federally-defined poverty level.  This translates into $32,499 for a family of four, $26,357 for a family of three, and $15,417 for an individual.  This provision will go into effect on January 1, 2014. 

This provision impacts state fiscal policy by increasing the demand for medical services among vulnerable populations, and as such requires states to match the increased demand will additional revenues.  This  Infographic depicts the impact of the provision on each state’s population.  The impact varies according to the change in the number of people covered by existing state Medicaid laws to future federal requirements. 

As a result of this provision, overall spending on Medicaid (Federal and State) is projected (urban institute) to increase by $1 trillion between 2013 and 2022.  Between the years 2014 – 2017, the Federal government will provide 100% of the cost.  Between the years 2017-2020, the Federal government will decrease its share by 10%, contributing $900 billion of the total cost.  Before accounting for state and local government increases in savings and revenues, the Congressional Budget Office estimates that states will increase their Medicaid spending by 2.8 percent while providing health coverage to 17 million more low-income children and adults between 2014 and 2022.

The Urban Institute conducted a state-level analysis and found that New England and Mid-Atlantic states would reduce their Medicaid spending by about 4 percent. In contrast, states in the South Atlantic, East South Central, and West South Central regions, as well as many Mountain states, would increase spending by about 4 percent.   The remaining states, including Minnesota, would not see significant changes because the new provision does not require a large increase in those who will become eligible for Medicaid.   

Via: The Advisory Board Company  On June 28, 2012, the Supreme Court ruled that the Medicaid expansion provision was unconstitutional in its mandate to states and so adopting it is optional. If a state chooses not to expand the Medicaid program, the federal government cannot take away the Medicaid funds a state already receives. This has the effect of giving states a “carrot” of extra Medicaid funding if they implement the expansion, the Supreme Court struck down the “stick” of losing federal funding if they do not take it.

The Opposition

Some states are deciding to opt out of the provision for various reasons, chief among them being the increased cost of providing healthcare services to vulnerable populations.  These political views are supported by conservative think tanks, such as the Galen Institute , who argue that “The benefits [of increased Federal funding] are exaggerated because increased taxes shrink the economy, taking into account the ‘deadweight loss’ of taxes.”  The law will require states to come up with 10 percent matching funds for expanded benefits and 50 percent of new administrative costs. Furthermore, projected job increases are overstated.

The most vocal opponent has been Florida Governor Rick Scott (R).  The former CEO of the nation’s biggest for-profit healthcare chain, Columbia Hospital Corporation, he has made public statements against Obamacare.  However, he recently agreed to opt-in for the three years that the Federal government will be paying 100% of the cost. The House, also under Republican leadership, is not happy with his decision and has presented a different proposal.
The reasons for this disapproval are:

1.       Medicaid harms the existing health-care system by imposing poor health outcomes upon enrollees and increases the cost of private insurance through cost-shifting

2.       Future projections of Medicaid’s costs are unreliable, subjecting the state budget to considerable risk and uncertainty

3.       Medicaid’s flawed design—with no expectations for cost-sharing—increases welfare dependency, and strongly discourages poor Floridians from seeking more work and better pay.  The proposal estimates a yearly cost of about $237 million, assuming that 80 percent of eligible Floridians signed up. The Medicaid expansion, by contrast, is estimated to have yearly cost of more than $1.3 billion.

From: http://www.forbes.com/sites/aroy/2013/04/12/floridas-innovative-consumer-driven-replacement-for-obamacares-medicaid-expansion/

The Support
Some states have expressed concern that expanding Medicaid may pose fiscal challenges. However, another school of thought supported by The Urban Institute makes the argument that focusing solely on financial implications ignores the larger context of improved social welfare from increased access to health care. The Medicaid expansion will benefit state finances in the following ways:

1) Increase federal matching payments for consumers who would qualify for Medicaid even without the expansion

2) Reduce states’ non-Medicaid health care spending on poor, uninsured residents who would receive Medicaid under the expansion

3) Increase state revenues due to increased demand for healthcare services and new taxes.  

Collectively, these factors could outweigh the cost increases felt by state budgets to produce a total savings of $10.1 billion between the years 2013-2022. Thus, the increase in federal funding, state savings on uncompensated care costs, and increased demand for healthcare, could provide a solid case for adopting the Medicaid provision of the Affordable Care Act.   The Institute is projecting that each state will save money overall because expenditures on uncompensated care will decline, as the provision expands eligibility for care.  Currently, states pay about 30 percent of the cost of care that is unpaid by uninsured residents.  The argument is that these savings will offset increases in state revenues to cover more residents. 

The Oregon Case – A New Way Forward in Government Subsidized Health Care?

The state of Oregon was unable to pay for its Medicaid costs, and accepted a 1.9B loan from the Federal government to pay for its current system.  The loan has numerous clauses that will fundamentally change the system, which is supported by Governor Kitzhaber.   Most importantly, the system will focus on giving out block grants to regions within the state with the purpose of decreasing costs.  The interesting piece of this program is that it has never been implemented before and could be a new direction: controlling expenditures for healthcare by managing demand.  The Medicaid program will expand coverage while solving real issues, such as repeat ER visitors who drive up costs.  By adding behavioral specialists to the hospital among other things, they hope to decrease the rate of growth in expenditures.