Should states expand Medicaid?

My home state of North Carolina, like many other states, is debating whether to expand Medicaid as part of the Affordable Care Act. One consulting firm's analysis shows that expansion of the program would increase employment by about 23,000. A blue ribbon group, the N.C. Institute of Medicine, claims the state would save $65.4 million over eight years if Medicaid were expanded as much as Obamacare allows.

Seems like a slam-dunk, doesn't it? Why wouldn't North Carolina expand Medicaid to the max? Not so fast. Things are not nearly as simple or clear-cut as they might seem.

In fact, the Advisory Board research firm reports that as of February 4, only 19 states and District of Columbia had agreed to undertake the Medicaid expansion; 10 states have definitely said they will not, five are leaning against participation, and five are leaning in favor, with 11 non-committal. About one-third of those potentially eligible for this expansion live in states that have committed to doing it. This decision is hugely consequential.

For states willing to raise their eligibility standards to cover everyone below 138 percent of poverty, the federal government will cover 100 percent of added costs for the newly eligible population for the first three years. After that, federal cost-sharing will decline slightly, but still will remain at 90 percent from 2020 forward (although states would be on the hook for half of any additional administrative costs).

Proponents of Obamacare think this is a slam dunk.[1] After all, with a 90 percent discount (paid for largely by taxpayers in other states), who wouldn't want to buy as much Medicaid expansion as the feds will allow?

Here's where things start to get complicated.

First, a distinction must be drawn between those below 100 percent of poverty and those with incomes between 100-138 percent of poverty. The law clearly allows those in the latter group to obtain very generously subsidized private health insurance coverage through the new exchanges, but not the former. Indeed, a dirty little secret of Obamacare is that the dollar amount of subsidies per person for people in this income group who obtain coverage on the exchange would be greater than if they enrolled in Medicaid.[2]

That may sound upside down, but it's clear that Congress wrote the law fully expecting all states to leap at the chance to pick everyone else's pockets by paying only a dime on the dollar for the Medicaid expansion. Lawmakers literally did not anticipate the prospect that states would leave anyone below poverty without coverage, hence exchange subsidies below this income level were completely superfluous.[3] Thus, both from the perspective of taxpayers and Medicaid beneficiaries, a governor wishing to minimize economic burdens might well elect to expand Medicaid to 100 percent of poverty and let exchanges cover everyone else. So far, the Obama administration has ruled out this strategy, but there are some indications this hard line posture may be softening. [4]

Second, as if this were not complicated enough, The Hill's Elise Viebeck reports:

Comprehensive immigration reform could make millions of people suddenly eligible for assistance under President Obama's healthcare law, assuming a final deal paves the way for undocumented immigrants to receive papers.

Such individuals presumably would be covered by the 90 percent match, but in border states in particular, the added burden of even a 10 percent match might be considerable.

Third, states already are going to be on the hook for much higher Medicaid costs due to the "woodwork effect"- where people who currently are eligible but not currently participating in the program come out of the woodwork to enroll. Studies vary on the magnitude; however, on average anywhere from 20 to 50 percent of those eligible for Medicaid nationally do not participate (how's that for a vote of confidence in "free" health care?).[5] States will not get enhanced federal matching to cover these additional individuals on grounds that their existing Medicaid programs already should have been covering them. Thus, states will be hard-pressed to be able to afford the flood of new Medicaid eligible expected even if they elect not to expand eligibility. In that context, even a 90 percent discount may not seem attractive.

Finally, there's also a huge question of whether Uncle Sam can guarantee this 90 percent matching rate in perpetuity. Admittedly, White House senior economic advisor Gene Sperling has said: "We are not willing to accept even the Medicaid savings that we had once put on the table ... Medicaid savings, Medicaid cuts, for this administration, are not on the table." But even governors who accept this commitment as ironclad recognize that after 2016, all bets are off the table. Would any responsible governor bank his state's fiscal future on a country whose entitlement promises its own Department of Treasury has declared "unsustainable"?

If the decision to expand Medicaid rested solely on the foregoing calculus, I can understand why some states might decide to proceed, while others would decide the opposite, based on disparate judgments about the "known unknowns" involved. However, there's not just an economic question in play. There's a moral one too.

To illustrate the difference, Thomas Jefferson calculated that he made 4 percent a year on the birth of black children at Monticello. Thus, his decision to keep his slaves rather than free him as other plantations of the time did, may well have made economic sense. But it was morally wrong. And the sharp disconnect between Jefferson's high-minded ideals, expressed in the Declaration of Independence, and his own self-interested (actually, exploitative) behavior has rightly tarnished his reputation.

I won't argue that the moral case against Medicaid expansion is as compelling as the case against slavery. My point is that any governor would be foolish to focus narrowly on the question of dollars and cents. Much, much more is at stake. Taking a hard look at the moral calculus involved in this decision is an issue we'll explore later this week.

Footnotes

[1] See, for example, Point-Counterpoint: Austin B. Frakt and Aaron E. Carroll, Sound Policy Trumps Politics: States Should Expand Medicaid. Journal of Health Politics, Policy and Law (2013) 38(1): 165-178. Sadly, this mentality also has been exhibited by former opponents of Obamacare, such as Arizona governor Jan Brewer, who alluded to "a return on investment of more than 10-to-1" in announcing her recent decision to accept the expansion.

[2] Specifically, the CBO reported last summer: "For the average person who does not enroll in Medicaid as a result of the Court's decision and enrolls in an exchange instead, estimated federal spending will rise by roughly $3,000 in 2022-the difference between estimated additional exchange subsidies of about $9,000 and estimated Medicaid savings of roughly $6,000."

That said, the CBO estimated that on balance, the federal government would spend less as a consequence of selected states opting out of Medicaid than would have been true otherwise. In contrast, based on an analysis of 6 states, the American Action Forum calculated that were these states to refuse Medicaid expansion entirely, the federal government would spend 63 percent more on exchange subsidies for those between 100-138 percent of poverty than it would have spent on expanding Medicaid to the entire population below 138 percent of poverty.

[3] When enacted, ACA actually was structured to coerce states to accept the Medicaid expansion. That is, states that chose not to expand would have lost their ENTIRE Federal Medicaid matching funds (including the match for their current program!). SCOTUS recognized the coerciveness of this and said that states could not be held hostage in this fashion. But the point is that when the law was drafted, it was inconceivable that any state would elect not to expand Medicaid (since the financial penalty not to do so would have been so severe), hence there was no "back-up plan" to provide Exchange subsidies to those below poverty.

[4] In Monday's announcement that Ohio would expand Medicaid, Politico reported (subscription needed) that Governor John Kasich alluded to a possible deal to allow those above poverty to enroll in Exchanges rather than Medicaid.

[5] Participation varies greatly by state. Fellow Forbes contributor Avik Roy provides a nice up-to-date chart illustrating this huge variation

 

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Christopher J.
Conover

What's new on AEI

Defeating ISIS: AEI experts weigh-in before the president’s address on Wednesday
image Degrading, defeating, and destroying the Islamic State
image Wealth Building Home Loan: Building wealth through homeownership and retirement savings
image The $3 iPhone
AEI on Facebook
Events Calendar
  • 15
    MON
  • 16
    TUE
  • 17
    WED
  • 18
    THU
  • 19
    FRI
Tuesday, September 16, 2014 | 5:00 p.m. – 6:00 p.m.
The Constitution as political theory

Please join us for the third-annual Walter Berns Constitution Day Lecture as James Ceasar, Harry F. Byrd Professor of Politics at the University of Virginia, explores some of the Constitution’s most significant contributions to political theory, focusing on themes that have been largely unexamined in current scholarship.

Wednesday, September 17, 2014 | 8:10 a.m. – Thursday, September 18, 2014 | 1:30 p.m.
Third international conference on housing risk: New risk measures and their applications

We invite you to join us for this year’s international conference on housing risk — cosponsored by the Collateral Risk Network and AEI International Center on Housing Risk — which will focus on new mortgage and collateral risk measures and their applications.

Event Registration is Closed
Thursday, September 18, 2014 | 2:15 p.m. – 3:00 p.m.
Speaker of the House John Boehner on resetting America’s economic foundation

Please join us as Speaker John Boehner (R-OH) delivers his five-point policy vision to reset America’s economy.

Event Registration is Closed
Friday, September 19, 2014 | 9:15 a.m. – 11:00 a.m.
Reforming Medicare: What does the public think?

Please join us as a panel of distinguished experts explore the implications of the report and the consumer role in shaping the future of Medicare.

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.