The Corner

Medicaid Expansion Is Proving to Be the Budget Buster We Predicted

It’s amazing how many lawmakers still fall (or pretend to fall) for the myth that if you create a new government program or expand an existing one, it will cost taxpayers nothing. Medicaid expansion is obviously the latest example of that deception.

If you listened to many governors who wished to expand Medicaid, expansion would sound like a win-win for the state as it would cost nothing. In fact, not expanding would mean leaving money on the table since the state would pass on the giant federal subsidy, or so they claimed. Of course, many of us noted that it was easier to believe in unicorns than to believe in the free-lunch theory because of the many hidden costs to Medicaid expansion. Assuming the federal government could even stick to its promise to fund 90 percent of the cost of the expansion after 2020, the states would have to foot at least 10 percent of the cost plus administrative costs (which can be hefty).

Also omitted from these governors’ cost estimates is the fact that, among the new enrollees in Medicaid, many were previously eligible but simply never enrolled. For these people, the old and much less generous formula applies. I wrote about the case of Kansas a while ago and I found that in the state the pre-ACA Federal Medical Assistance Percentage (FMAP) rate for regular Medicaid enrollees is 56.5 percent (for 2013) and will likely remain at this level for a while. That means that under the Medicaid expansion, the adults already eligible for Medicaid but not yet enrolled will be induced to enroll into the program, but the Kansas state general fund will have to cover 43.5 percent of their Medicaid health-service costs.

The example of Kansas isn’t much different than what will happen in other states. Unfortunately, these arguments didn’t convince everyone. Thirty states and the District of Columbia decided to take the bait of “free money” in exchange for expanding Medicaid.

So how are the states that expanded faring? For the most part, the expansion is proving to be a massive budget buster. Writing for the Wall Street Journal, Americans For Prosperity’s Evelyn Everton and Chris Hudson lay out some of the evidence:

The AP says that California expected 800,000 new enrollees after the state’s 2013 Medicaid expansion, but wound up with 2.3 million. Enrollment outstripped estimates in New Mexico by 44%, Oregon by 73%, and Washington state by more than 100%.

This has blown holes in state budgets. Illinois once projected that its Medicaid expansion would cost the state $573 million for 2017 through 2020. Yet 200,000 more people have enrolled than were expected, and the state has increased its estimated cost for covering each. The new price tag? About $2 billion, according to the Chicago Tribune.

Enrollment overruns in Kentucky forced officials to more than double the anticipated cost of the state’s Medicaid expansion for 2017, the AP reports, to $74 million from $33 million. That figure could rise to $363 million a year by 2021.

In Rhode Island, where one-quarter of the state’s population is now on Medicaid, the program consumes roughly 30% of all state spending, the Providence Journal reports. To plug this growing hole, Rhode Island has levied a 3.5% tax on insurance policies sold through the state’s ObamaCare exchange.

Even Ohio, whose Republican Gov. John Kasich is running for president on a platform of fiscal responsibility, finds itself in a Medicaid bind. State spending on the program has grown by $5.8 billion since 2011. The Ohio Department of Medicaid projects that by 2017 spending will total $28.2 billion—a 59% increase during Mr. Kasich’s tenure.

As expected, in states with a balanced-budget requirement, these additional expenses have very real opportunity costs to the state budget. When states can’t raise taxes to pay for the new funding, spending somewhere else in the budget will have to be cut. And education and infrastructure spending are always prime targets for cuts.

This is is a shame — especially considering that Medicaid has a miserable track record of providing adequate care for poor Americans. As American Enterprise Institute scholar and practicing physician Dr. Scott Gottlieb points out:

There’s now a voluminous body of clinical literature showing that access to Medicaid alone doesn’t improve (and can worsen) medical outcomes. Boosters of Medicaid dismiss much of this literature, arguing that the research can’t control for all the socioeconomic factors that contribute to bad medical outcomes among the poor. But the sheer volume of literature is becoming hard to ignore.

In other words, expanding Medicaid is neither good for the state budget nor for Medicaid’s new beneficiaries.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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