Medicaid Expansion Report Calculates Modest State Costs

John Commins, for HealthLeaders Media , November 27, 2012

States that expand their Medicaid rolls under the Patient Protection and Affordable Care Act would see only modest increases in their share of the costs when compared with the windfall in federal funding that would come with it.

That’s according to a new report released Monday by the Kaiser Family Foundation that also suggests that some states could net budget savings under the expanded Medicaid rolls, as millions of poor and uninsured people gain coverage.

According to the analysis, which was written by the Urban Institute for KFF’s Commission on Medicaid and the Uninsured, if all 50 states expand their programs, state Medicaid spending nationally would increase by $76 billion from 2013 to 2022, an increase of less than 3%. For the same period the federal Medicaid match would increase by $952 billion, or 26%. With the expansion, an additional 21.3 million people could gain Medicaid coverage by 2022 and with other coverage provisions of the PPACA that would cut the uninsured by 48%.

Alan Weil, executive director of the National Academy for State Health Policy, told reporters in a KFF conference call Monday that the funding for the Medicaid expansion has to be put into its proper context.

“We are talking about healthcare and healthcare is expensive,” Weil says. “It’s fairly easy to have a little sticker shock at the potential costs of various policy options in this area. But what this report does very effectively is place the spending burden that states would face if they choose to expand Medicaid in the context of overall spending.”

“Many states will be surprised at the results showing that the cost to them of the coverage expansion in the Affordable Care Act comes largely from things they must do, and that the choice about expanding Medicaid is a very small share of the ultimate cost that states may face,” Weil says. “But that finding is also a reminder of the importance of not just looking at total cost but disaggregating where they come from. Many states, when they talk about potential costs of Medicaid expansion, are actually lumping together all costs and not just looking at the effect of the expansion.”

When the U.S. Supreme Court upheld key provisions of PPACA last June, it also struck down as overly coercive the federal government’s demands that states expand their Medicaid rolls. Resistance to expanding the rolls, particularly among Republican governors, reached a crescendo in July when Texas Gov. Rick Perry sent a letter to Health and Human Services Secretary Kathleen Sebelius. Perry, who was running for president at the time, explained that the Lone Star State stood “proudly with the growing chorus of governors who reject the PPACA power grab. … Neither a state exchange nor the expansion of Medicaid under the Orwellian-named PPACA would result in better patient protection or in more affordable care.”

President Barack Obama’s reelection may have caused some governors’ to reconsider their options. But many Republicans see the Medicaid expansion as merely throwing good money after bad to fix a dysfunctional program.

“Even President Obama has recognized Medicaid is broken,” says Mike Schrimpf, spokesman for the Republican Governors Association. “For many states, placing more individuals into a broken system would be like adding more passengers to the Titanic. And regardless of whether it’s federal dollars or state dollars, taxpayers are still on the hook.”

Weil concedes that even a 1% increase in Medicaid spending could prove difficult for a lot of states that are still recovering from the recession. “States have not fully recovered, even though the trend lines now are quite positive in the majority of states,” he says. “But it means there is a lot of deferred attention to other priorities like education, infrastructure, and public safety that have been lining up for years. So even though the relative shares are small, the absolute demands on state governments are quite substantial.”

Drew Gonshorowski, a policy analyst in the Center for Data Analysis at The Heritage Foundation, says the report is hobbled by “the uncertainty around how much savings you can expect from your uncompensated care reduction at the state level.”

“The study is assuming right away a 33% reduction in state spending on uncompensated care for the uninsured as a result of the expansion. They claim that is a lowball estimate but there isn’t any research that exists that shows that will be the case, or anywhere near the case,” he says. “So ultimately this study hinges on that being true.”

Gonshorowski says governors and state lawmakers—who unlike Congress have to balance their budgets every year—should be concerned about the long-term effects of the expansion on their budgets.

“Even in some of the more friendly state-specific estimates on the expansion, a lot of states are seeing cost even as early as 2019,” he says. “You have this case where the states see the expansion as a great deal because the federal government is picking up almost all of the bill in the early years. But when the rubber hits the road, they are going to start paying for the expansion in the long run. Then the question is, can the state actually pay for the expansion at that point?”

However, Richard “Buz” Cooper, MD, director of the Center for the Future of the Healthcare Workforce at New York Institute of Technology and a Senior Fellow in the Leonard Davis Institute of Health Economics at the University of Pennsylvania, says the assumptions in the report are “reasonable.”

“Costs at the federal level will be larger than I believe are generally being considered: $800 billion plus the costs of insuring those individuals who leave Medicaid (in states with eligibility levels above 138% of poverty) in the exchanges,” Cooper said in an email exchange with HealthLeaders Media.

“I don’t believe that those costs are in the report, and I expect they would be hard to calculate, since I don’t think that we know the premium for policies in the exchanges or the amount of federal subsidy that will be provided. This is not my area of expert knowledge, but the REAL number is Medicaid + subsidies for old Medicaid patients in exchanges + subsidies for others in exchanges. What we know now is that it’s going to be a lot more than $800 billion.”

Weil also acknowledged that governors and state legislators are justifiably concerned that a fickle Congress could go back on its promises to fund the expansion, which would leave states holding the bag.

“These estimates are built around a financing model that is in current statute, and that is the appropriate model to use. But states are very nervous about the possibility of those formulas changing,” he says. “Although it is possible that states can change their mind and adopt the Medicaid expansion at one point, and then if the federal funding becomes more limited they can reverse that position, that is a painful course of action and states really do want to be able to plan ahead. So the sooner we can come to closure on whether or not the financial arrangement in the Accountable Care Act is going to be stable, the easier it will be for states to make decisions in the long run.”

Gonshorowski says that shifting the cost of Medicaid to the federal government really isn’t much of a long-term solution. “All the expansion is going to accomplish is a massive expansion of federal spending and a shift in cost from the states to the federal government,” he says. “Even in this most recent study, you’re looking at $1 trillion in spending—$950 billion of which is federal spending. That is a massive increase in federal spending.”

In the end, however, Weil says the Medicaid expansion isn’t just about the numbers.

“We all know that this is far more than a fiscal exercise, and looking at the cost in the context of the numbers [of people] that would gain coverage is critical,” he says. “We know that being uninsured leads to excess illness burden and premature death. We know that many states for decades have been working using either their own funding or options provided by the federal government to try to reduce the numbers of people who don’t have health insurance. So while figuring out the cost of this policy is very important, there is a human dimension that needs to be part of the discussion far beyond the dollars.”