Will Expanding Medicaid Save States Money?

by Edmund F. Haislmaier

It’s not just the political Left that’s pressuring states to adopt the costly Obamacare Medicaid expansion. Hospitals and clinics, too, are leaning on state lawmakers to expand the rolls. Indeed, there have even been recent studies in some states purporting to show that adopting the Medicaid expansion would be a fiscal positive for the state’s budget, supposedly because it would increase state tax revenues and allow cuts to other state health spending.

My colleague Drew Gonshorowski and I have published a short guide for state lawmakers that deconstructs some of the key assumptions underlying projected fiscal benefits.

One of the biggest — and most dubious — assumptions offered up is that expanding Medicaid will let states save money on “supplemental” payments now made to hospitals and clinics for treating the uninsured.

Such savings are doubtful. Hospitals and clinics have a long track record of successfully lobbying to preserve or restore state “supplemental” funding. For example, the 2006 Massachusetts health-reform legislation, which transformed supplemental payments going to “safety net hospitals” into premium support for the low-income uninsured, achieved near-universal coverage. Yet despite that, Massachusetts’s safety-net hospitals successfully lobbied to continue receiving over $200 million a year in supplemental payments from state taxpayers.

Under Obamacare, it is even more implausible to assume states would be able to cut funding for uncompensated care. That’s because any state payment cuts would have to be imposed on top of Obamacare’s federal payment cuts. Obamacare cuts federal Medicaid “Disproportionate Share Hospital” (DSH) funding by $18.1 billion and Medicare DSH funding by $22.1 billion over the years 2014–2020.

Consequently, governors and state legislators should expect their state’s hospitals and clinics to lobby them for more—not less—state funding to replace cuts in federal DSH payments. State lawmakers who want to learn what their state is already spending—in addition to DSH—on supplemental payments should start by consulting a July GAO report entitled Medicaid: States Reported Billions More in Supplemental Payments in Recent Years. They should then dig into their own state budget documents to find out exactly who is getting exactly how much.

State lawmakers who are offered “rosy scenario” fiscal projections for expanding Medicaid would be well advised to think twice.

Edmund F. Haislmaier is a Senior Research Fellow in the Heritage Foundation’s Center for Health Policy Studies.