Medicaid Expansion: Beware of Obamacare 'Gifts'

If it sounds too good to be true ...

Michigan Gov. Rick Snyder is recommending that the state undertake a huge expansion of Medicaid, something originally mandated by Obamacare but made optional by the Supreme Court's ruling on the law last June.

Medicaid is a government welfare program that reimburses medical costs incurred by people below the poverty line, and is paid for by a combination of state and federal money.

If Michigan expands the program, the feds will pick up 100 percent of the cost for the first three years, and then gradually reduce this until the state is on the hook for 10 percent starting in 2020. The state would also be able to offload some spending now covered by Michigan taxpayers onto federal taxpayers.

If Michigan does not expand the program, families with incomes between 100 percent and 133 percent of the poverty level would be able to get regular insurance policies essentially at no cost to themselves through the Obamacare "exchange" the feds will set up here. Unlike Medicaid, this entire cost comes out of the federal budget.* Families below the poverty line would still be eligible for Medicaid, as they are currently.

Most policymakers are treating the decision as a simple arithmetic problem in which all the variables are known, and the answer comes from just adding them up. Here’s what that equation looks like:

State's share of the Medicaid expansion costs
x  Number of new individuals enrolled
x  Cost-per-individual                                   
= $Y

As long as "Y" is less than the amount the state can save by offloading some current health-related spending onto the feds, then state spending goes down,** freeing up dollars that Lansing politicians can spend somewhere else.

The flaw in this arithmetic approach is that the equation's variables are subject to great uncertainty, and if anything are likely to move in the wrong direction for state budget purposes.

For example, Gov. Snyder is relying on projections that 470,000 people eventually will be covered by the expansion. If the figure is much higher, then Michigan's budget takes a hit — potentially a very large hit.

And there's good reason to suspect this is exactly what will happen. A 2011 study by Boston University scholars projects "high rates of crowdout for Medicaid expansions aimed at working adults (82%), suggesting that the Medicaid expansion provisions of PPACA will shift workers and their families from private to public insurance without reducing the number of uninsured very much."

The government bureaucrats responsible for that 470,000 new enrollees estimate almost certainly have not adequately factored this crowdout effect into their calculations. That's because they tend to rely on static analyses, which assume individuals and employers won't behave much differently after the implementation of a massive new social welfare program.

Legislators should carefully consider the validity of this assumption.

They should also be highly suspicious of federal promises to cover 90 percent of the expansion's cost after the first few years. This isn't mere speculation — President Obama has already signaled that increasing states' Medicaid share is in the administration's playbook. He did so by recommending a lower Medicaid "blended rate" in his last two annual budget recommendations.

The details are complicated, but the center-left Center for Budget and Policy Priorities summed it up by saying the change "would reduce federal Medicaid expenditures by reducing the federal share of Medicaid and CHIP costs, shifting costs to states…"

Yet these factors are almost completely absent from the discussions in Lansing and media reports. This may be because practically all the information being shared with Michigan policymakers and the public on the issue comes from two sources with strong incentives for wanting the expansion regardless of its impact on future state budgets.

The first are state and federal government bureaucrats, who naturally look favorably upon a massive expansion of the program they run. The other are hospitals and their lobbyists, who covet the huge increase in taxpayer dollars heading their way if the states choose the expansion.

Legislators should be extremely skeptical about the guesstimates both groups are representing as solid projections. They should also be cautious of the short-term spending bias of many of their (term-limited) colleagues on the appropriations committees, who may care more about the spending opportunities created by shifting some costs to the feds in the short term, and less about the longer-term consequences for state taxpayers after they have left office.

The long-gone lawmakers who authorized Michigan's original entry into the Medicaid program had no idea they were creating a monster that would consume state budgets for decades to come. It's unlikely many current legislators would be willing to bet their own money that history won't repeat itself this time around.

Expanding Medicaid is optional, and nothing in the federal health care law prevents Michigan from waiting a few years to decide. In contrast, no one disputes the political reality that once the expansion happens there's no going back.

The prudent course for Michigan legislators is still to "just say no" to the expansion, at least until we see how the Obamacare implementation plays out over the next year.

*Lansing politicians don’t talk about the extra money we and our descendants must send to Washington to cover all this extra spending. In contrast, many of their constituents are deeply concerned about this. Those citizens will be interested to learn that the Congressional Budget Office estimates that the states which have elected not to expand Medicaid will reduce the deficit by $84 billion.

**If the state does not expand Medicaid, this creates a “donut hole” of childless adults with incomes below 100 percent of the poverty level: They aren’t eligible for “exchange” subsidies, and aren’t eligible for Medicaid unless the state goes along with the expansion. Shifting current state  mental health spending on this population to the feds accounts for much of the “savings” that would accrue from the Medicaid expansion.