Beware Medicaid Bearing Gifts

by Douglas Holtz-Eakin

“The Medicaid expansion is too good to pass up.” This line of argument appears increasingly in public discussions of the impact of the Supreme Court decision on the future of Obamacare (see, e.g., here). Curiously, at the same time 15 states have already announced that they will likely forgo the expansion.

What exactly are governors considering?

Obamacare included a provision requiring that states expand Medicaid to cover everyone up to 133 percent of the poverty line. States that refused would lose all federal funding for the state’s program. The Supreme Court ruled that this was an unconstitutional federal coercion of the states, a decision that mirrors the fiscal reality. Instead of states’ losing all Medicaid funding if they refuse to comply, the Court restricted the federal government to withholding only the federal funding for a state’s expansion. In short, the expansion is now voluntary.

The question that immediately arises is: “If this is such a good deal, why did Obamacare have to mandate it in the first place and enforce it with a draconian penalty?” Common sense suggests that if the expansion were such a good idea, then it would have been voluntary to begin with. 

The second question is: “What are the pros and cons of an expansion?” Here the arithmetic is fairly straightforward. Any individual who is above the poverty line is eligible for the federal subsidies in the state-based exchanges. Individual insurance is better than Medicaid, so a state has zero incentive to expand its program on the basis of this population. Individuals will simply get their insurance at the federal taxpayer’s expense (and this is expensive — as much as $3,000 more expensive per person than Medicaid). This is the budget cost that drove the drafters of Obamacare to change course and jam millions of Americans into the broken Medicaid system in the first place. 

#more#Even more striking, for those states that have already expanded coverage above the federal poverty line, Obamacare’s “maintenance of effort” requirements expire in 2014. Accordingly, a state could cut back any expansion of its Medicaid program and shift the cost to the federal taxpayer — a pure win for the state. This would include essentially every child age 19 or younger, every pregnant woman, and many adults in large states like California, New York, Illinois, Massachusetts, and more. 

For those individuals under the federal poverty line, the calculus is a bit more complicated. The cost of the federal expansion is the states’ administrative burden of a larger Medicaid population — a non-trivial issue in difficult fiscal times — plus its share of the new benefits. Advocates of the law point out that the federal government initially picks up 100 percent of the cost, and commits to 90 percent of the cost at the end of ten years. For a state, that is attractive but far from a guarantee, so it has to figure into the calculation the probability that a cash-strapped federal government will choose in the future to shift costs to the states. A third cost is the fact that the individuals between 100 and 133 percent of the poverty line must be excluded from the exchange and condemned to an inferior program. No governor can salivate at that prospect.

Balancing those costs is the coverage of individuals below the poverty line as part of the expansion. It is a serious calculation, but far from “too good to pass up.”

More important, it is not the only choice a state has. A superior option would be the flexibility to address the needs of the sub-poverty populations on a state-by-state basis in ways consistent with each state’s norms.

The Supreme Court has handed states new options. It is far from obvious that the federal bribe will be enough to induce states to pass over a chance for better coverage for some residents, improved state budget flexibility, and the opportunity for real reform to its Medicaid program in favor of condemning its low-income residents to life in a broken health system.

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