Should States Participate in the Medicaid Expansion?

Medicaid expansion, a critical element of ObamaCare, is expected to increase the number of low-income Americans enrolled in the program by 11 million by the end of the decade.  That number is down significantly from earlier CBO estimates because of last summer’s Supreme Court ruling that states are not required to adopt the new eligibility requirements.  To date only 18 states have decided to expand the program to meet the federal standards.  So the question for the rest looms forebodingly: Should we participate in the expansion?  Is expansion the only rational choice for states?  Or was your mother right in warning you that when something sounds too good to be true, it probably is? 

Proponents argue that in the long run state treasuries are only responsible for $1 of every $10 in new spending.  Furthermore, providing coverage to low-income patients will eliminate the need for hospitals to shift costs from those who don’t pay for their care to those with insurance (more on that later).  And to top it off, the stimulus provided by the federal spending will increase economic activity in the state enough to increase state tax revenue by more than the state’s required contribution for the expansion itself.   This may be something that will actually pay for itself. 

There are at least 2 important considerations that are largely ignored by proponents of the proposed Medicaid expansion.  The first is the formula for calculating the federal medical assistance percentage (FMAP) for a state.  Under the current formula the federal share of Medicaid spending ranges from 50-75% with states picking up the remainder.  The income threshold for eligibility is a state decision and varies from 25-200% of the federal poverty level (FPL). The Medicaid expansion is designed to cover all families with incomes less than 138% of the FPL and for the years 2014-16 the federal government will cover the total cost of the expansion.  Beyond 2016 the federal share will settle at 90% of the expansion cost with the state paying the other 10%.   Will the federal money be available at this rate forever?  The concern is whether the federal government will continue to spend money that it doesn’t have.  The time will come and is coming soon when Congress must address the problem of excess spending.  With entitlements responsible for a large share of the deficit, reform of the FMAP formula is likely.  Maintaining programs will require the states to absorb a larger share of the financing. 

The second consideration is the expansion’s effect on the existing Medicaid program.  The adult take-up rate in the current program is 65-70%, indicating that a large fraction of the eligible population does not participate at all.   Policy makers expect that the take-up rate will rise to 85% with the expansion.  Currently in Texas only 800,000 of the 1.23 million eligible adults are enrolled.  If the state expands Medicaid eligibility, not only will we see an additional 1.5 million newly eligible enrollees, but an estimated 365,000 of those currently eligible will emerge out of the “woodwork” and enroll.  The state will be responsible for 40% of the cost of their health care, effectively doubling the state’s share of the overall expansion costs. 

Taking a more practical approach to the argument, proponents claim that if the state refuses the federal funding to expand Medicaid that our tax dollars will simply flow to some other state.  That logic is flawed.  Medicaid spending is determined by the number of eligible enrollees in a state.  The only way that California gets more of the Medicaid expansion money is for otherwise eligible residents in Texas to move to California to receive benefits.

Estimates showing the economic benefits of these kinds of policy changes are often based on simulations using a category of economic models called regional input-output models.  The accuracy of these models depends critically on the basic assumptions buried in its estimating equations.  These models are notoriously sensitive to the assumptions made and when used improperly can easily be manipulated to provide just about any answer you want.  Input-output models are demand-side oriented and ignore supply-side constraints and the opportunity cost of resource investments.   These limitations result in overall estimates for job growth that do not consider whether the economy can attract the workforce to support the market expansion.   The Texas estimate of an additional 988,000 jobs in the health care sector begs the question: How will the state be able to attract an additional 988,000 workers?  Remember, every other state that is expanding with these federal dollars is trying to attract the same workers. 

The argument for accepting the federal money and expanding the Medicaid program is grounded in assumption that private insurance spending pays for the free care provided to the indigent population via the mechanism called “cost shifting.”  Cost shifting assumes that medical providers are able to offer free care to some patients knowing that they can pass the excess costs on to privately-insured patients.   The cost-shift theory is used in policy arguments because of its intuitive appeal, but like much of the conventional wisdom in health care, it is unfounded. 

The fact that Medicare and Medicaid pay only 90% of cost while private insurance pays almost 135% does not prove cost shifting.  It simply shows price discrimination across categories of payers.  And price discrimination does not prove cost shifting.  It merely reflects differences in relative bargaining power in local markets between payers and providers.  Research indicates that there may have been a time in the late 1980s when providers had the power to increase prices to private payers when Medicare and Medicaid lowered payments.  The reason that hospitals could do that was they had not fully exploited their market power and were able to practice cost shifting. 

By the 1990s the expanded use of managed care principles and the increase in the number of for-profit hospitals brought an end to that era.  With the elimination of indemnity insurance plans, the expansion of PPOs, and introduction of consumer directed health plans, coupled with expanded provider networks, payers are better able to resist price increases.  The only response left for hospitals when government payers cut payments is to reduce costs.    

Furthermore, Obamacare provides incentives to consolidate systems (evidenced by the recent agreement between Baylor Health Care System and Scott & White).  Consolidations will increase market power and enhance the ability to price discriminate among payers based on the number of covered lives they bring to the bargaining table.  Thinking that expanding Medicaid coverage will reduce or eliminate the price differences between private and public payers is not warranted by the evidence.    Some will blame the price increases on cost shifting, but they will be wrong. 

Where does that leave us?  If the state does not expand Medicaid what do we do?  If we do nothing, an additional 420,000 of the 1.75 million adults with incomes between 100 and 133% of FPL will be eligible for subsidies through the new exchange (set up by the federal government) at a premium cost of 2% of income, or about $40 per month. 

So what about the other 1.33 million who remain uninsured because the state did not expand Medicaid?  Why not expand the Texas Federally Qualified Health Center (FQHC) program with the money the state would spend expanding Medicaid?  The program is currently funded for $5 million per year.  Five new clinics began operation in 2012 bringing the state total to 69.  The state’s share of an expanded Medicaid program would cost at least $2 billion per year.  How many new FQHCs could be started with that kind of money?  I believe it was Albert Einstein who said “the definition of insanity is doing the same thing over and over again and expecting different results.”  Pumping more money into a flawed Medicaid program is not the way to make the program better; it may even be insane.


Remember when Nancy Pelosi said, “But we have to pass the [health care] bill so that you can find out what is in it.”  Well, they passed it.   We’re finding out what’s in it.  And there’s a lot not to like.  This sentiment is not based on my ideological stance against big government.  This legislation is flawed and Republican opposition or not, it needs to be fixed if there is any chance of a successful outcome.  It is understandable that there are problems.  The bill was cobbled together in the first place to ensure the required votes for passage (220-215 in the House without a single Republican vote).  The House had to accept the Senate version in its entirety because of the loss of the Massachusetts seat to the Republicans.  What we have is a document with 8 glaring problems that will be its undoing unless they are addressed. 

  1. Weak individual mandate.  The tax penalty is small relative to the premiums.  The mandate lacks a strong enforcement mechanism: no garnishing of wages, no attaching assets, no jail time.  The only hammer is a lien on over-withholding.  The lesson here is don’t expect refund if you don’t have insurance.  If you plan to forego insurance, make sure you withhold only what you will owe in taxes.   The result is an incentive to game the system.  In other words, don’t buy insurance until you absolutely need coverage and then drop it when you don’t.  This will create adverse selection in insurance pools with only sick people purchasing insurance and premiums will continue their upward march. 
  2. Disruptive employer mandate.   Firms with more than 50 full-time workers (defined as those who work more than 30 hours per week) are required to provide affordable insurance for their employees.  Those that don’t are subject to a $2,000 fine per worker.  The incentive exists to reduce current workers to part-time status, and only hire part-timers in the future.  Fully, one-third of the restaurant and hospitality industry (with unskilled, low wage employees) will make the shift to part-time labor.  Papa John’s, Carl’s Jr, Olive Garden, Red Lobster, Kroger, Hampton Inn, Sheraton, Holiday Inn, and even the College of Allegheny County have already announced their intentions to limit worker hours.  Welcome to the era of the 28-hour workweek. 
  3. Ambitious Medicaid expansion.  The legislation makes Medicaid eligibility uniform across the country at 138% of the federal poverty level (approximately $30,000 for a family of four).  Because establishing eligibility standards has historically been a state’s responsibility, they vary wildly from a low of 17% of FPL in Arkansas to as much as 285% in Minnesota.   The impact of the expansion would have relatively little impact in some states and result in significant increases in state spending in others.  Texas, for example, would see about a billion dollar per year increase in state obligations to the program.  The Supreme Court ruled that the expansion was voluntary, so as many as 17 states may choose to forego expansion.  Instead of covering an additional 18 million nationwide, the expansion will add only about 11 million. 
  4. Complex insurance exchange rules.  States were expected to set up and finance their own insurance exchanges to provide coverage for uninsured residents.  These exchanges require a massive amount of information to verify user identity, certify health plans, and provide a platform for individuals to shop and purchase plans.  The systems must be able to access employment information and IRS files to determine an individual’s eligibility for subsidies.  The complexity is enormous and states do not have to comply.  They can simply sit back and let the federal government do it for them.  Sixteen have already said that they will follow that route.  There is a potential problem if the states don’t act.  The subsidy is clearly available if insurance is purchased from a state-level exchange.  Any mention of subsidies in federal exchanges is glaringly omitted from the legislation.  Expect litigation. 
  5. Medicare spending cuts.  The Congressional Budget Office (CBO) reports that the law will cut Medicare spending by $741 billion over the next ten years.  This “savings” will be used to fund the Medicaid expansion and the state-level exchange subsidies.  CBO scoring of the law indicates that these same dollars will also be used to shore up the Medicare Trust Fund.  But as any first year economics student knows, every dollar has an opportunity cost.  If spent on Medicaid coverage, it can’t be spent to save the Medicare Trust Fund.  In other words there is no “savings.”  The result will be that by the end of the decade, 1 in 7 hospitals will drop Medicare and more physicians will refuse to take new Medicare patients (already 1 in 3 do not). 
  6. Spending continues to rise.  A bill that was promised to “bend the cost curve” falls woefully short.  Currently, health care spending at 17.6% of GDP will approach 20% by the end of the decade.  Premiums will continue to rise, especially for the young who will be pooled with their elders and pay substantially more for their insurance than is actuarially fair.  Many will opt out, choosing not to buy insurance, but rather pay the tax penalty (or not), and insurance premiums for everyone who does buy insurance will be higher. 
  7. Not universal coverage.  The CBO estimates that at least 30 million will not have insurance coverage, about 10% of the non-elderly population.  States opting out of Medicaid, the problems with subsidies in the federal exchanges, and widespread gaming are likely to drive that number up substantially. 
  8. Does not improve access.  Nothing in the legislation addresses the current and future physician shortage.  Basic economics tells us that when you increase demand and do nothing to supply, prices go up or if they don’t, availability lags.  The law has a backup plan for Medicare when this happens.  It’s the Independent Payment Advisory Board (IPAB).  With Medicare price controls as their only tool, seniors can expect at best bottlenecks in their access to care.  At worst, the low hanging fruit is end-of-life care.  (If you want to read more on this topic go to 

ObamaCare is a flawed document.  The Democrats were in such a hurry to pass it that they forgot the fundamental tenant of medical care: First, do no harm.  Well, we’re stuck with it, so what do we do?  The current makeup of body of lawmakers does not bode well for compromise.  All too often with the leadership we have, it’s either “my way or the highway.”  They say that we deserve the leaders we elect.  If that’s true, I’m fearful for the Republic. 

The opinions expressed in this blog post are mine alone, and do not reflect the opinions of Baylor University.   Baylor is not responsible for the accuracy of any of the information provided in this post.

States May Still Have The Last Say In The Matter of Healthcare Reform

In an interview with ABC’s Diane Sawyer, House Speaker John Boehner seemed a bit confused on what his stance on the GOP’s promise to repeal ObamaCare in the new session.  The transcript of the interview shows his indecision. 

SAWYER: A couple of other questions about the agenda now. You have said next year that you would repeal the health care vote. That’s still your mission?

BOEHNER: Well, I think the election changes that. It’s pretty clear that the president was reelected, ObamaCare — is the law of the land. I think there are parts — of — the healthcare law that — are going to be very difficult to implement. And very expensive.  And as — the time when we’re trying to find a way to create a path — toward a balanced budget — everything has to be on the table.

SAWYER: But you won’t be spending the time next year trying to repeal ObamaCare?

BOEHNER: There certainly may be parts of it that we believe — need to be changed. We may do that. No decisions at this point.

A Boehner spokesperson quickly responded to the comments saying, “While ObamaCare is the law of the land, it is costing us jobs and threatening our health care.  Speaker Boehner and House Republicans remain committed to repealing the law.”

Should we be expecting a drawn out battle over ObamaCare, or should the GOP simply get over it? 

Let’s examine reality.  Regardless of what Congress does, the battle over ObamaCare is far from over.  The next step in the reform process is just beginning, implementation.  The two most important pieces of the new law are the creation of the insurance exchanges and the expansion of Medicaid, both state responsibilities. 

Beginning January 1, 2013, there are 30 states with Republican governors who are in no mood to cow tow to federal pressure to stand in line and play nice.  States are not obligated to either set up their own exchanges or expand Medicaid.  The law made it clear that if states refused to set up exchanges, the federal government would.  At this time these Republican governors do not seem to be in any hurry to spend their states’ tax dollars to set up their own exchanges.  It’s not just Republican governors either.  Only 17 states met the November 16 deadline to declare their intentions to establish their own exchanges; so few that the government has extended the deadline by 4 weeks to give them more time to reconsider. 

The federal government faces a multitude of problems in this situation.  The law does not provide appropriations for the federal government to establish exchanges and appropriations’ bills must originate in the Republican controlled House.  Additionally, there is some question whether the subsidies making insurance affordable for many American families is legal in the federal exchanges.  The law did not provide for subsidies in the section outlining how federal exchanges would work.  The IRS has ruled that subsidies are legal in federal exchanges.  Expect litigation. 

The Supreme Court in its rewriting of the legislation provided states with an option in the case of Medicaid expansion.  Ignore it completely.  Many of the Republican governors have already said that they will not expand Medicaid. 

State-level action is just one roadblock to successful implementation of ObamaCare.   There are also several design flaws in the law that must be corrected for it to have any chance of success.  I’ll discuss the flaws in my next blog entry. 

The opinions expressed in this blog post are mine alone, and do not reflect the opinions of Baylor University.   Baylor is not responsible for the accuracy of any of the information provided in this post.