Politics & Policy

A Medicaid Expansion Offer the States Should Refuse

(Bhakpong Rattanasaroj/Dreamstime)
To many state officials, the feds’ contribution to Medicaid looks too good to turn down. It isn’t

In the wake of Louisiana governor John Bel Edwards’s announcement last week that his state would expand Medicaid under Obamacare, the White House rolled out a new scheme to persuade the 19 states that are still holding out to fall into line and expand their programs: throw more money at them.

The offer, which Obama will include as a legislative proposal in his 2017 budget, is that any state that expands Medicaid will get the first three years of expansion free — paid for entirely by the federal government. As written, the law says that Medicaid expansion in a given state will be paid by the feds for the first three years, beginning in 2014, and after that the state gradually picks up an increasing share of the tab until by 2020 the federal government will be paying only 90 percent. Obama is proposing to extend the three years of full federal funding to states regardless of when they expand, which means those 19 non-expansion states are still eligible for 100 percent federal funding should they follow Louisiana’s lead.

The purpose of this little twist on the Medicaid expansion deal is to give President Obama a fighting chance to claim victory for his otherwise failing health-care law. Full federal funding for three years would mean potentially billions of federal taxpayer dollars for holdout states like Texas and Florida, where large numbers of poor, uninsured adults enrolling in Medicaid would mean a revenue windfall for Medicaid providers and managed-care organizations. Those special interests, the White House no doubt realizes, will now redouble their efforts to persuade state lawmakers and governors to cave.

But these state officials should resist the temptation, for at least three reasons. First and most obvious is that expansion states have all experienced the same thing: More people signed up than expected, and it blew a hole in the states’ budgets. Jonathan Ingram and Nicholas Horton of the Foundation for Government Accountability studied this trend and found that expansion states routinely underestimated the number of people who would sign up in 2014, such that after one year of expansion, “several states have already seen more adults sign up for Medicaid welfare than they thought would ever sign up or even be eligible.”

The numbers are staggering. In Colorado, officials thought only 61,000 people would sign up in FY 2014, and an additional 100,000 by the end of FY 2015. But by March more than 210,000 people had already enrolled, and the total was more than 307,000 by year’s end. To varying degrees, the same thing happened in Arkansas, California — where 2 million enrolled in 2014, nearly three times what was projected — Illinois, Kentucky, Michigan, Ohio, Washington, West Virginia, and every other expansion state. Those extra enrollees cost states money, even with 100 percent federal funding, because many of them were “previously eligible,” meaning they aren’t part of the Medicaid expansion group and states must pay for about 43 percent, on average, of the cost of covering them. That works out to billions of state tax dollars. In Ohio, the Medicaid program went $1.5 billion over budget in the first 18 months. In Illinois, $800 million. In Kentucky, $1.8 billion. Washington State increased its biennial budget by $2.3 billion just to deal with expansion costs.

The second reason is that there’s no such thing as “free” federal dollars. The money comes with conditions, which effectively shifts policymaking from the receiving state’s legislature and governor to a distant federal bureaucracy (in this case, the Centers for Medicare & Medicaid Services), which dictates how states must spend federal Medicaid funds. The so-called “cooperative federalism” scheme under which programs like Medicaid operate is designed for one purpose: to transfer as much federal funding to states as possible in order to impose uncompetitive liberal policies in those states. Medicaid now soaks up about a quarter of most state budgets, and any increase in total Medicaid expenditures will increase that share, making state governments even more in thrall to federal bureaucrats.

The third reason is less abstract: Medicaid will harm those it’s meant to help. Often lost in the expansion debate is that Medicaid is the worst form of health coverage in the country. The people who were enrolled in Medicaid prior to the Affordable Care Act had — and still have — a hard time finding doctors who will accept it because it pays far less than either Medicare or private insurance. Nothing in Obamacare addressed this problem, aside from a temporary boost in federal reimbursement rates for primary-care physicians, which expired in 2014 — leaving states with the choice of letting rates slip back to pre-Obamacare levels or maintaining them with state funds. Not being able to find a doctor when you need one is no small thing. That’s one reason Medicaid patients use the emergency room more than the uninsured or those on private insurance. But an ER visit is no substitute for a “medical home” and a doctor who can help manage a chronic condition and prevent hospitalization. There’s a reason why Medicaid patients are more likely to die after surgery than any other group, including the uninsured: namely, that they don’t have access to routine and preventive care. There’s a difference between coverage and care, and although enrollment in Medicaid technically means a person is “covered,” something the Obama administration never tires of bragging about, it doesn’t mean he’ll be able to get health care when he needs it.

Expansion will make this problem worse. Enrolling every person with a household income of less than 133 percent of the federal poverty level (about $32,000 for a family of four) in a health-insurance program originally designed to cover specific groups like the indigent elderly, poor pregnant women and their infant children, and the disabled is a radical change to Medicaid. It means covering a huge group of people — for the most part, nondisabled and childless adults — that Medicaid simply wasn’t designed to cover. The Obamacare mandate to expand the program or lose all federal funds was so extreme that the Supreme Court in 2012 struck down that part of the law. The expansion, the Court ruled, amounted to the creation of an entirely new program to which the states never agreed when they decided to participate in Medicaid. Forcing them to expand therefore amounted to coercion — “a gun to the head,” in Chief Justice John Roberts’s memorable phrase.

Flooding Medicaid with this new group will mean more patients competing for too few providers. It will be even harder for those previously enrolled to find a doctor. And next year, when states must begin paying for part of the expansion population, the law’s perverse incentives will come into play. States on average receive about $1.32 for every dollar they spend on a traditional, pre-ACA Medicaid patient. But the expansion population, from a state’s perspective, offers a much better deal: For every dollar it spends on an expansion patient next year, it will get $19 from the feds. When it comes time, as it surely will, to make cuts to Medicaid, where do you think state lawmakers will look first?

Because expansion promises an initial flood of federal dollars into a state’s budget, it might turn out to be an offer state lawmakers and governors won’t refuse. But they can and should refuse if they care at all about their states’ long-term fiscal health and, more importantly, the health of their current Medicaid patients.

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