The Corner

Blahous on Conflicting Medicaid-Expansion Incentives

Following the Supreme Court ruling last year that made the Affordable Care Act (ACA)’s Medicaid expansion basically optional, states around the country are in the process of deciding whether they will expand the program or not. The Economist has a summary of what the expansion will mean:

Historically Washington has required (and subsidised) states to cover only subsets of the poor, such as pregnant women. Obamacare changed that. From 2014, states would have to cover all adults with incomes of up to 138% of the federal poverty level ($15,415 for an individual in 2012; $31,809 for a family of four). If states complied, Washington would pay for 100% of the expansion from 2014 until 2016 and at least 90% thereafter. But if the states refused, federal aid for their existing Medicaid programmes would be slashed. The Supreme Court deemed this ultimatum too harsh. States should be allowed to make a free choice whether to expand Medicaid or not. Many Republicans said they wouldn’t. But since Mr Obama’s re-election, some have changed their minds.

According to Cato Institute’s Michael Cannon, while the law says the federal government will pay for 100 percent of the cost of claims for newly eligible adults for the first three years, states will still be responsible “for much of the administrative costs of covering those adults,” as well as “other costs related to other parts of the expansion.” Further, after the three years are over, states would shoulder 10 percent of the cost of newly eligible adults (plus the administrative costs).

While, on paper, it sounds like an almost-free lunch (one that Republican governors Christie of New Jersey and Rick Scott of Florida couldn’t resist), many states are still hesitating. My Mercatus Center colleague Chuck Blahous just released an excellent paper that lays out the conflicting incentives that states face in regarding the expansion, showing why it’s hardly an easy decision for many governors around the country. As he shows, states face different financial situations and different budgetary circumstances; their populations makve different value judgments; and they deal with very different populations. Thus, it’s only natural that we should see varying responses from the state. 

What’s more, over the last decade, Medicaid has progressively become one of the biggest programs in most states’ budgets, and it’s still growing. While each new beneficiary added under the expansion won’t cost nearly as much to the states, it will still add to the cost of an already unsustainable situation. As Blahous notes in a piece over at e21 summarizing his results:

States face substantial Medicaid cost increases even before budgeting for the optional coverage expansion. …Though under some estimates average state Medicaid costs would further increase by only 3–4% if they expand, this would be layered on top of a huge previously-projected increase. The latest CMS Medicaid report projects state Medicaid costs to grow by 158% cumulatively over the next decade, assuming all states opt for expansion.

In addition, states can’t be sure that the federal government will stick to shouldering the extra costs of the Medicaid expansion in the future. The federal government is facing serious fiscal problems of its own, and it is very possible that future fiscal constraints at the federal level will leave the states footing the bill for the expansion. Blahous writes:

Future federal cost-shifting to states is virtually certain though the amount is unknown. Given the current state of federal finances, it is unrealistic to assume that the federal government will make all future Medicaid payments now scheduled under law. To return federal spending to historically sustainable norms would require across-the-board spending cuts of roughly 15 percent relative to current levels, and 25 percent relative to projected future levels, to avoid all cuts in the growth of Medicaid and the ACA’s new health exchanges.

Every serious bipartisan budget discussion in recent years has envisioned reductions in future federal Medicaid outlays. The bare minimum of required savings appears to be $100 billion over the next ten years, with much evidence suggesting that the savings required will be closer to $200 billion. I do not agree with those who assert that every dollar cut from federal Medicaid expenditures is a dollar of costs necessarily shifted to states. Nevertheless, if states absorb even half of the effects of federal belt-tightening, they will face further additional costs of the same order of magnitude as the Medicaid expansion.

States should be wary of the impact the expansion will have on their state budgets when the expansion is perceived as permanent, but the federal aid turns out to be temporary.

Either way, the Blahous paper is a good road map to the difficult decisions and trade-offs faced by governors in their Medicaid-expansion decisions. The whole study is here


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