Medicaid: The state budget crusher

June 7, 2013

Under the Affordable Care Act, all 50 states will have exchanges where individuals can buy healthcare insurance. But the second leg of the ACA, whether and how much to expand Medicaid, is every state’s choice. The Supreme Court gave states this right when it ruled on the Affordable Care Act last June.

The Center on Policy and Budget Priorities is mapping states’ decisions to expand their Medicaid program (as of June 4).

Many commentators presume that it is an ideological choice for governors to extend or not extend public support for the uninsured through the ACA. Pat Garofalo of US News writes:

But this has never been about health care or cost for [Texas Governor Rick] Perry and the other governors, including South Carolina’s Nikki Haley, Oklahoma’s Mary Fallin or Pennsylvania’s Tom Corbett. Instead, they are using the opportunity to score political points with a conservative base that wants nothing to do with anything that looks, smells or feels like Obamacare.

Garofalo cites conclusions from a Rand Corporation study that says states would pay substantially more in uncompensated health costs if they were to opt out of the ACA extensions for Medicaid. States that expand Medicaid will save more than they currently pay for uncompensated care. Rand uses this calculation to say that it is economically justified, indeed fiscally imperative, that all states expand Medicaid. However, Rand’s findings have significant flaws, according to Daniel White of Moody’s Analytics, who wrote in a report published in February:

While it is true that states opting into the expansion will benefit from decreased uncompensated care payments to providers, it is unlikely in some states with the largest cost increases that these savings will be enough to fully offset the increased spending. Furthermore, these impacts are only aggregated over the first 10 years of the expansion. Six of those years have a higher federal matching percentage than the long-term rate. Thus, the 10-year period after 2023 will see a much higher net cost to states.

Moody’s Analytics offers a more nuanced picture for states evaluating Medicaid expansion:

Costs on a state by state basis, however, vary depending on the size of a state’s existing Medicaid program. In general, states with smaller Medicaid programs before the expansion should see a greater increase in the number of enrollees, and thus a larger proportional increase in long-run costs. This holds true in preliminary estimates performed by Moody’s Analytics and in other studies as well.

From a budgetary standpoint, the choice of whether to opt in is an automatic one for only a small number of states. For designated “expansion” states, those that have already expanded their Medicaid eligibility requirements to mirror or approach those laid out in the new law, opting into the expansion will allow them to significantly lower their existing Medicaid costs.

This is a key point of the Medicaid expansion. Some states’ generous Medicaid systems will have lower expenses because costs to support some qualifying Medicaid recipients will be shifted to the federal government. Back to Moody’s:

Expansion states will be able to transfer these new enrollees to a higher level of federal support beginning in 2014. This means that compared with their current baselines, these states—Arizona, Delaware, Hawaii, Massachusetts, Maine, New York and Vermont— could actually see their Medicaid costs decline beginning in 2014.

But a state with lower Medicaid costs could mean more room for education and infrastructure spending. Now Moody’s delivers the bad news:

For the remaining states though, predominantly the ones with relatively small existing Medicaid programs, the cost increases associated with the expansion will be significant. Florida and Georgia, for example, could see state Medicaid spending increase as much as 4 percent annually above their current baselines.

That could be scary for some state budgets, as Medicaid is already consuming about 24 percent of state revenues.

Here is another chart that has likely caused some governors to decide against Medicaid expansion:

Medicaid expansion costs for the program are projected to grow 6-8 percent annually for states, while state revenues are projected to grow only 5 percent on average. This means that Medicaid will continue to be a budget-crusher for states. This, more than political ideology, is more likely the reason that many states have not embraced Medicaid expansion.

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