Some State Legislators Think They Can Spend the ‘Savings’ from Medicaid Expansion (That Don’t Exist)

by Veronique de Rugy

States continue to consider whether or not to expand Medicaid under Obamacare, and some are trying to shut the door on it — tightly. The Kansas legislature, for instance, has indefinitely barred the governor from expanding Medicaid; it’ll take the legislature affirmatively voting for the expansion at some point to reverse this.

But its next-door neighbor, the state Missouri, seems to be heading in another direction. Governor Jay Nixon argues that not expanding Medicaid means the state is losing millions of dollars – as in, by not increasing the number of Medicaid recipients, which will cost the state money, the state is losing out. Yes, at first the federal government will cover 100 percent of the cost of the expansion (though the state would still have to foot the bill for administrative costs). But after three years, the federal government will reduce its subsidy to 90 percent of costs — assuming it keeps its commitment over time in the face of its own financial problems. Some Missouri politicians are so convinced this actually involves spending less that Republican state senator Ryan Silvey proposed a “Missouri Solution” that explains what to do with the money “saved” by the expansion.

I have bad news for the state politicians thinking like Silvey: First, there are no free lunches. The money for the Medicaid expansion comes with strings attached — mandates and rules dictating how the states should spend their money, what services they should provide, and how they should provide them.

State officials should know that already, because that’s pretty always how the federal government operates. In a 2012 article from Governing, George Mason University professor Paul Posner explains that “there are more than 950 federal grants that provide the vehicle for most federal mandates, rules and regulations affecting the states.” In fact, he explains, “They . . . are the principal constitutional vehicle that allows Congress to adopt policies beyond its enumerated powers in such areas as education, law enforcement, community development and social services.”

If the funding is temporary — as it may be if the federal government’s current spending trajectory continues — but the requirement is permanent, this “aid” becomes even more expensive. Using data from 50 states over a 13-year period, a 2010 paper by economists Russell Sobel and George Crowley found that every dollar in temporary grants from the federal government to state and local governments caused the latter to increase their own future taxes by between 33 and 42 cents.

Medicaid expansion, in other words, is not a free lunch (some costs have to be shouldered by the states from the get-go), and it could turn into a very expansive feast. 

What should states be doing instead? Thinking about reforming their current Medicaid program so it can serve better the truly poor in their states. Most states already have huge Medicaid budgets: Economist Nina Owcharenko has a chapter in the new book published by the Mercatus Center on the Economics of Medicaid, in which she explains that Medicaid spending (including the federal contributions) represented 23.7 percent of state spending in FY 2011. The program is often the single largest item in a state budget.

As Owcharenko explains, the long-term fiscal costs of Medicaid are already on an upward trajectory. A GAO reports she cites found that state and local expenditures on Medicaid, if added to the cost of of health care for state and local employees and retirees, will grow much faster than GDP. Unfortunately, she reminds us, the incentives for reforms are very weak, because the current federal funding formulas do manager to lure the states into increasing their own spending on the program and ignoring its fiscal problems. (Remember State Senator Silvey.)

She ends her chapter with this warning:

As the GAO report on the state and local fiscal outlook found: “The state and local govern­ment sector continues to face near-term and long-term fiscal chal­lenges which add to the nation’s overall fiscal challenges.”54 Such warnings suggest that policy changes at the federal and state levels will be needed to address the long-term viability of the program. In the meantime, it is likely that the pressure to control Medicaid spending will continue to fall on the states, which in turn will push states to continue to explore new ways to address the fiscal chal­lenges in Medicaid. 

Again, there is no free lunch. Her chapter is here.

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