Medicaid coercion—In your heart you know the states are right: Health care fact of the week

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Michael Greve is a first-rate constitutional scholar, so I take on his argument that “the states will lose on Medicaid” with some trepidation. I’m no lawyer, so I’m in no position to quarrel with his legal argument. But I do know a thing or two about the Medicaid program and my analysis of the Affordable Care Act (ACA) leads to a very different conclusion. In my simple man-on-the-street view, states face a relatively simple (albeit stark) choice when it comes to Medicaid. They can either accept the new Medicaid spending required under the ACA or they can reject the “deal” offered by Congress, in which case they must forego all federal funding of Medicaid. This includes not only the very generous federal funding of some of the eligibility expansions (90 percent in perpetuity after 2020) but also whatever federal matching funds they had come to rely on for traditional Medicaid prior to ACA. No matter how we measure the burden of Medicaid for the average state, ACA increases the burden compared to what would have happened under the status quo (before ACA Medicaid expansions begin). But to reject Medicaid would impose obligations that are astronomically higher (figure 5.5c).

I have provided estimates for the three best measures of the Medicaid burden facing each state. All the changes shown are relative to a 2011 baseline, which are the latest official figures available through the National Association of State Budget Officers. The first commonly used metric (reported by NASBO itself in its annual state budget reports) is Medicaid as a percentage of the entire state budget inclusive of federal funds. In 2011, that average burden was 23.6 percent of state spending. Without ACA, I estimate that by the year 2019 the burden would increase by more than one-quarter simply because Medicaid spending routinely grows faster than state expenditures in general. With the ACA however, the increase in that burden would be more than 45 percent. If states reject the ACA, the increase would be just under 30 percent since states thereby avoid all the costs associated with increasing eligibility levels to 133 percent of poverty. In that regard, this metric does not accurately convey the enormous leverage Congress has attempted to wield to get states to do its bidding.

A better metric for that purpose is state Medicaid revenues as a percentage of own source state revenue. According to NASBO, federal funds currently make up more than one third of the typical state’s budget and more than three-fifths of Medicaid. Own source revenues consists of all the other non-federal dollars in a state’s budget, whether these be obtained through general revenues, user or excise taxes, or even intergovernmental transfers from local governments to state government. These are revenues that for the most part have to be raised from a state’s own citizens. Currently, state revenues for Medicaid constitute 13.4 percent of all own-source revenues. Under the status quo, however, this share will rise by 44 percent between 2011 and 2019, while under the ACA, it will rise by 52 percent. Thus, ACA is essentially forcing states to swallow an increase in their Medicaid burden that will be about one fifth larger than it would have been under the status quo (i.e., 8.2 percentage points above the 44.7 percentage point increase states would have expected to accept under the current rules of the road). Here the consequences of rejecting Medicaid become more stark: this burden would increase 247 percent for the average state electing not to accept the conditions laid out in the ACA. Perhaps the analogy is a bad one, but in my non-lawyer’s view of the world, this is roughly equivalent to the neighborhood kid asking for a $20 “donation” by threatening to inflict $250 damage on your property if you decline. Is such a donation voluntary or coerced?

The choices look even more bleak when we consider the last measure of Medicaid burden: State Medicaid revenues per resident. Leaving aside the federal tax dollars shipped to the U.S. Treasury to bankroll Uncle Sam’s matching contributions, the average state collected $477 per capita to pay for the state share of Medicaid. Under the status quo, that will grow to nearly $930 by 2019, a 95 percent increase; under the ACA, it will more than double. But what happens to the average state electing to reject ACA? State Medicaid revenues per resident will balloon by 371 percent! Imagine you had a mortgage and were expecting to pay $9,500 a year for 30 years. The bank advises you that it would like to change the terms of your loan and charge you $10,600 instead; if you refuse, you have come up with a balloon payment of $37,000 to avoid losing your house. Would you feel that acceding to these new terms was voluntary?

These figures are state averages. For curiousity, I looked at the lowest income state, Mississippi, and a very high income state, New York, discovering that their state Medicaid revenues per residents would climb 654 percent and 523 percent respectively were they to reject ACA. I do not pretend to know the precise dividing line between coercion and a voluntary agreement. But thinking about this in the context of everyday life, if this is not coercion, what is?

One could argue that states long ago put themselves in this bind by agreeing to Medicaid in the first place. That may be true, but the Medicare actuary states that “in terms of the magnitude of changes to the program’s projected expenditures and enrollment, it is likely that the Affordable Care Act will be the largest legislative change to Medicaid since the program’s inception.” In that regard, the incremental magnitude of the increased expenditures expected of states is different than under previous Medicaid expansions. Moreover, having observed the policy process over decades, I can report repeated instances in which Medicaid expansion always was the default option in any state discussions of how to cover the uninsured. Medicaid rules notwithstanding, it was a no-brainer to opt for a coverage vehicle in which Uncle Sam would pick up 60 percent or more of the tab for whatever expansion was under discussion. This perverse incentive works at the federal level as well. Given that the states would always be on the hook for roughly half of the projected cost, it was always less expensive for Congress to generously expand Medicaid eligibility by ratcheting up the mandatory eligibility or benefits required under Medicaid than to contemplate any sort of subsidized coverage program fully financed from federal tax coffers. Thus, both sides of the federalism divide have been jointly culpable in slowly but surely ratcheting up Medicaid’s share of GDP sevenfold between its inception in 1966 and 2019, when ACA is fully implemented.

The problem with salami tactics like those encouraged through federal matching programs such as Medicaid is that eventually we will run out of salami. It’s very generous for the federal government to offer 90 percent matching in perpetuity for those newly eligible under the ACA. But it is not at all clear Uncle Sam is in a position to fund this promise, especially in light of the fiscal tsunami posed by Medicare in the decades ahead. And even Michael Greve would concede that the federal government is absolutely under no legal or constitutional obligation to honor the commitment codified in the ACA. Should Uncle Sam renege on this promise, the burden on states will be even more onerous than I have already described. In that context, perhaps the Supreme Court will do everyone a favor by halting this charade before Uncle Sam is forced by fiscal pressures to admit to the states a promise was made that federal taxpayers cannot afford.

Christopher J. Conover is a research scholar at Duke University’s Center for Health Policy and Inequalities Research and an adjunct scholar at AEI. The charts shown are from his new book American Health Economy Illustrated, to be released in January 2012 by AEI Press. See PowerPoint version of Figure 5.5c and Excel spreadsheet containing the estimated impact of the Affordable Care Act on state Medicaid expenditures for data, sources and methods.

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