What's the Medicaid Expansion Worth to a State?

by | March 14, 2013

The Affordable Care Act (ACA) based a significant piece of its goal of universal health care on expanding the Medicaid base. It was "mandatory" until a June 2012 ruling by the Supreme Court essentially said it wasn't -- that states could choose free of penalty whether or not to expand Medicaid to include Americans with an income below 138 percent of the federal poverty line. To date, 26 states and the District of Columbia are planning to expand, 17 have said they will not and seven are still weighing their options, according to the Kaiser Family Foundation.

There are inherent costs, of course, to the states if they expand their programs, but fiscal analyses in several states -- such as New Mexico, Ohio and Oregon -- suggest that there are also financial losses if states don't expand. As Stan Dorn, a 25-year veteran health-care analyst, put it "From a purely pragmatic standpoint, how can you turn it down?" Dorn, a senior fellow at the Urban Institute, made the comment at a UI briefing on state and local revenue, where he divided his fiscal argument into three buckets: costs, savings and revenue. I caught up with him recently to further discuss those buckets and why some states are resisting expansion. I have summarized his arguments below:

"There are costs whether or not a state opts to expand Medicaid."

All states will find their Medicaid costs increasing. That's because, with the ACA's mandate that all individuals carry health insurance, people will "come out of the woodwork" to apply for health insurance. A proportion of them will find their incomes are low enough -- below 61 percent of the poverty line -- to qualify for unexpanded Medicaid and that is where states will see costs grow. The federal match for these beneficiaries is closer to 50 percent -- not the 90 to 100 percent promised if states expand Medicaid to cover those with incomes below 138 percent of the poverty line. Dorn calls the appearance of these newcomers, the "welcome mat phenomenon." "We saw it happen in Massachusetts," he says.

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In the Ohio study mentioned above, analysts found that the increased state costs for Ohio from additional Medicaid enrollment would be between $2.4 billion and $2.5 billion during a nine-year period starting in 2014.

"There are significant savings from cost shifting."

Before the ACA, the federal government would not pay for needy people who were childless or empty nesters. "With scotch tape and chicken wire, states put together coverage of these groups of people," Dorn says. "Under the Medicaid expansion, states can now stand down. The same goes for state mental health and substance abuse programs for the uninsured poor. Most of that will be picked up by the federal government, so a state can cut back on these programs without losing care." Another area where the federal government will pick up the tab for states: prison health care delivered off prison grounds. In fact, many prisoners would be covered by Medicaid under the expansion.

In the Oregon analysis, researchers found that state employee and retiree health insurance would become cheaper. The reason: fewer uninsured people means less uncompensated care. When hospitals have less uncompensated care, they don't have to make up for that care by padding bills for private insurance. Oregon assumed a very low, conservative estimate that 1.6 percent of health insurance premiums comes from cost shifting. Under Medicaid expansion, that 1.6 percent share goes down. If the average premium to cover a single person is $5,615 a year, 1.6 percent is $90 in savings per premium -- though public employee plans are more generous so maybe it's $100 a premium. If you reduce the amount of uncompensated care by 30 percent you have a cost shift of $70.

Taking all the state savings together, the Ohio study pegged the total benefit to the state over nine years at $1.6 billion.

"The expansion means revenue for the state."

With the expansion bringing in more federal money to purchase health care, it means that doctors, hospitals and other providers will buy more goods. It's the equivalent of several military bases, which means thousands of jobs and more general revenue for the state.

Over and beyond that, many states have sector-specific taxes, such as managed care premium taxes. With the expansion, more people will be in managed care and the Medicaid program will pay the state the tax on that managed care premium. Ohio, for instance, has a 1 percent health insurance tax plus a 5 percent sales tax that apply. For every new capitated care premium, the state makes $5.50 in revenue. Some states also have taxes on hospital revenue. Under expansion, formerly uninsured people who go to the hospital will have insurance to pay for their care. That means more hospital revenue. If a hospital gets $2 million more in revenue because of the expansion and the state taxes 2 percent on revenue, that's $4,000 more in revenue from that hospital. There will also be revenue from prescription drug rebates.

When the Ohio study totaled the revenue gains, it figured nearly $2.7 billion over nine years. Netting out costs against savings and revenue, the bottom line was $1.8 billion in the state's favor between 2014 and 2022.

"How can you turn it down?"

Some states fear the federal government will run out of money. They feel the federal government can't be trusted. Historically though, the federal government has always followed through on its Medicaid promises. After 2017, once the Obama Administration is out of office, we could see something we have never seen before: The federal government cutting back on its financial commitment to Medicaid. But states can protect themselves. In Ohio, the expansion automatically ends the minute federal funding gets cut. In Florida, Gov. Rick Scott is proposing that the state's expansion would end after three years unless the legislature steps forward and revives it.

"This is not like other Medicaid expansions in that it will help state budgets -- not hurt them," Dorn concludes. "Once state leaders understand that, it may change how they feel."

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