An Analysis of the Proposed Medicaid Expansion in Michigan

Michigan lawmakers are currently deciding whether to expand the state's Medicaid program to cover people newly eligible for federal Medicaid subsidies under the Affordable Care Act of 2010, commonly known as "Obamacare." A target population for Medicaid subsidies are the uninsured and those with incomes between 100 and 138 percent of the federal poverty level. The authors estimate that in 2014, approximately 177,000 uninsured Michiganders will fall into this category. Assuming 70 percent sign up for Medicaid, the authors estimate the additional taxpayer cost will be $475 million to state taxpayers, and $7 billion to federal taxpayers. 

The study considers several factors, including potential enrollees that are not considered in typical enrollment projections: uninsured people who are already eligible for Medicaid but have not yet enrolled, low-income, privately insured individuals who would switch to Medicaid, and childless adults and others who live below the poverty line and who would now qualify based on the broader definitions of the expansion. 

The study determines that a Medicaid expansion would likely shift many insurance costs to state taxpayers, while other studies have found that as many as 50 percent or 60 percent of new enrollees following Medicaid expansions dropped existing private insurance to do so. Further, both local and federal studies have indicated that Medicaid often delivers substandard health outcomes and access to medical services. Therefore, lawmakers should think twice before widening the program's scope. 

Executive Summary

Michigan policymakers must decide whether to expand the state’s Medicaid program to cover people newly eligible for federal Medicaid subsidies under the federal Affordable Care Act of 2010. Federal Medicaid funding would now extend to people earning up to 138 percent of the federal poverty level, even if they are adults without children.

Under the proposed state Medicaid expansion, the number of potential new enrollees is high. In 2010-2011, approximately 1.2 million nonelderly people in Michigan had incomes of 138 percent or less of the federal poverty level and did not receive Medicaid. Of these 1.2 million, an estimated 647,700 were uninsured. Many of the low-income individuals in both groups would be eligible for Medicaid under an expansion.

The size of the scheduled federal Medicaid subsidies for the newly eligible is also high. Congress is slated to pay 100 percent of the cost of these enrollees’ Medicaid coverage from 2014 through 2016, with the percentage slowly declining to 90 percent by 2020.

The potential magnitude of these payments does not mean accepting them is the best policy, however. For example, consider one target population of the expansion: people who are uninsured and have incomes between 100 percent and 138 percent of the federal poverty level. The authors estimate that in 2014, approximately 177,000 uninsured Michiganders will fall into this category. Assuming that about 70 percent — around 124,000 — of these newly eligible sign up for Medicaid, the authors estimate that the additional cost during the following decade would be $475 million to state taxpayers and nearly $7 billion to federal taxpayers.

These figures represent the costs for just one post-expansion population, but they are illustrative. The $475 million cost for state taxpayers over a decade is an estimated $144 million more expensive than it would be for the state to purchase 10 years of basic private insurance for these roughly 124,000 individuals on the federally subsidized state health exchange. Indeed, because the out-of-pocket cost of such basic exchange insurance is legally limited to just 3 percent of income or less for individuals in this income group, the insurance is a feasible alternative for these individuals without an added state subsidy.

Notably, the partial enrollment projections above do not include three other significant groups of possible post-expansion enrollees: uninsured people who are already eligible for Medicaid but have not yet enrolled; low-income, privately insured individuals who would switch to Medicaid; and childless adults and others who live below the poverty line and would now qualify for Medicaid under the broader definitions of the expansion.

Many of these individuals would apply for Medicaid, too. Supporters of the expansion have suggested it would produce 450,000 new Medicaid beneficiaries in Michigan.The Washington, D.C.-based Heritage Foundation projects that the net cost of the proposed expansion to Michigan taxpayers would be $1.3 billion through 2022.

The state’s costs for post-expansion enrollees could rise quickly if Congress chooses to reduce the currently scheduled federal Medicaid subsidies of 90 percent and more. Costs are also likely to exceed estimates due to the difficulties of determining someone’s Medicaid eligibility under the Affordable Care Act.

A Medicaid expansion would likely shift many insurance costs being borne by the private sector to state taxpayers. Studies have found that as many as 50 percent or 60 percent of new enrollees following Medicaid expansions actually dropped their existing private insurance in order to enroll. A conservative estimate is that 29 percent of new enrollees under a state Medicaid expansion would be people relinquishing their private insurance.

A significant number of low-income Michiganders have private insurance. In 2010-2011, an estimated 512,000 Michigan residents with incomes of 138 percent or less of the federal poverty level were privately insured — about half of the 1.1 million Michiganders in this income group who were covered by Medicaid that year. When a portion of these privately insured individuals drop their insurance for Medicaid, they will be switching to a program that generally provides much smaller reimbursements to health care providers — one reason a Medicaid expansion is unlikely to have the positive economic impact that the expansion’s supporters predict.

On paper, Medicaid appears to provide attractive coverage, but the program often delivers substandard health outcomes and access to medical services. Studies have found that Medicaid patients have worse surgical results and more late-stage breast cancer and melanoma diagnoses than the uninsured. A 2008-2009 survey of metropolitan Detroit medical specialists found Medicaid patients were not accepted by 33 percent of dermatologists, 41 percent of family practitioners, 50 percent of obstetrics-gynecology specialists and 67 percent of orthopedic surgeons.

Presented with federal Medicaid-expansion subsidies, state policymakers may find it easy to underestimate both Medicaid’s drawbacks  and the availability of viable alternatives. Medicaid’s problems, its current burden on state taxpayers and the high and unpredictable costs of a Medicaid expansion under the Affordable Care Act suggest policymakers should be wary of widening the program’s scope.

Introduction: The Medicaid Choice

In June 2012, the U.S. Supreme Court ruled unconstitutional key provisions of the federal Affordable Care Act of 2010.[1] These portions of the ACA would have denied federal matching Medicaid funds to states that chose not to extend Medicaid eligibility to people with incomes of up to 133 percent — practically speaking, 138 percent — of the federal poverty level.[*] Prior to passage of the ACA, most state Medicaid programs limited eligibility primarily to children and their parents, and only a few states enrolled childless adults earning above 100 percent of the federal poverty level.[2] As a result of the court’s decision, Michigan and other states now have the opportunity to compare the costs and benefits of expanding Medicaid eligibility without the threat of losing substantial federal monies.

Graphic 1: 2013 Federal Poverty Levels

Source: U.S. Department of Health and Human Services.

The ACA was initially expected to provide coverage for 32 million uninsured individuals and families when fully implemented.[†] About half of the newly covered were expected to obtain private coverage, while the other half would enroll in an expanded Medicaid program.[3] The ACA contains financial incentives designed to strongly encourage states to expand Medicaid eligibility.[4] The Obama administration and advocates of the plan have touted the benefits of expanding Medicaid. In addition to providing health coverage and improved access to care for low-income uninsured individuals, the federal government promises to pay most of the cost.[5]

Michigan has an important choice to make. A thorough discussion of the Medicaid expansion must involve costs, obstacles and potential pitfalls.

Effect of the ACA on Michigan Medicaid Enrollment and Cost Sharing

As suggested above, the Medicaid expansion envisioned under the ACA is designed to provide coverage to the uninsured. This uninsured population is composed predominantly of people up to age 64, since most people become eligible for Medicare at age 65.[*] Thus, while Medicaid does provide significant coverage to some financially stressed seniors, the primary population of interest in the ACA’s proposed Medicaid expansion is the nonelderly uninsured.[†]

In 2010-2011, there were more than 2.3 million nonelderly individuals in Michigan with incomes at 138 percent or less of the federal poverty level, according to the most recent statistics from The Henry J. Kaiser Family Foundation.[‡] Of these individuals, 1.1 million nonelderly were already enrolled in Medicaid.[6] Of the remaining 1.2 million, 361,900 had employer coverage;[7] about 221,600 were covered by individual coverage or some type of public health insurance other than Medicaid;[8] and an estimated 647,700 were uninsured.[9]

Depending on their circumstances, many of these 1.2 million low-income nonelderly — at least theoretically — would be newly eligible under an expanded Medicaid program. For example, a person with an income up to $15,856 or a family of four with an income of up to $32,499 would be eligible for benefits.[§] However, most of the newly eligible would be adults, whereas most children in families at this income level are already eligible.

The ACA contains large financial incentives to encourage states to expand Medicaid eligibility. Under the Health Care and Education Reconciliation Act of 2010, the federal government is scheduled to pay 100 percent of the cost of benefits for newly eligible enrollees from 2014 through 2016.[10] The enhanced federal match will drop to 95 percent of costs in 2017, 94 percent in 2018, 93 percent in 2019, and 90 percent in 2020 and thereafter.[11]

The federal government will also pay 100 percent of the cost of boosting low Medicaid reimbursements for primary care providers to the same level as Medicare physician fees, but it will do so only for the years 2013 and 2014.[12] The federal government did not include provisions to boost Medicaid reimbursements to medical specialists to improve access to specialty care for Medicaid enrollees. After 2014, the cost of any continued effort to elevate Medicaid primary care provider fees would presumably fall to the states, as would any cost of boosting Medicaid fees to specialists.[¶]

Despite these limits, the federal Medicaid-expansion subsidies, at least as currently scheduled, are significant. It does not automatically follow that accepting them is the best policy option, however.

Consider, for instance, a key population targeted by the expansion: people who are uninsured and have incomes between 100 percent and 138 percent of the federal poverty level. Extrapolating from Kaiser Family Foundation figures, we project that this population in Michigan will number 177,516 people in 2014, the first year of the proposed Medicaid expansion.[13] Assuming that about 70 percent of this newly eligible population enrolled under an expanded state Medicaid program,[**] we estimate the number of people added to Medicaid would be 124,261 in 2014 at a cost of $4,686 per enrollee in federal and state spending.[††] Adjusting annually for population growth and increases in the program costs over the 10-year period, we estimate enrollment in this category to reach 125,137 in 2023 at a cost of $7,438 per enrollee in federal and state spending. Over the 10-year period, these costs would amount to nearly $7 billion in federal money and $475 million in state money (nominal dollars).

Several things should be noted about these figures. First, these numbers represent projected costs for only one of the target populations of the proposed Medicaid expansion. The figures do not include cost estimates for three significant populations of potential new Medicaid enrollees: uninsured people who are already eligible for Medicaid, but would apply only after the expansion; people who are currently insured under a private plan, but would switch to Medicaid;[‡‡] and people who are below 100 percent of the federal poverty line, but would become eligible for Medicaid only under the ACA’s provisions for a Medicaid expansion.[§§]

Proponents of the Medicaid expansion have forecast the enrollment of an additional 450,000 people[14] — considerably more than the roughly 125,000 in the single Medicaid-expansion target group we described above. A full cost estimate would yield much higher figures. The Washington, D.C.-based Heritage Foundation, for instance, has projected that a Medicaid expansion would have a net cost to Michigan taxpayers of $1.3 billion through 2022.[***]

Second, note that these estimates are based on the assumption that the federal government will provide the Medicaid subsidy levels currently stipulated in federal legislation. Future Congresses, however, have the right to renew, alter or cancel the initiatives of past Congresses. Thus, federal Medicaid matching rates could be substantially reduced if rising federal deficits prompt budget cuts in future years.[†††] Such a retrenchment in federal Medicaid spending could force Michigan taxpayers to bear significantly higher costs to maintain the Medicaid expansion.

Third, state policymakers should also recognize that even with generous federal Medicaid subsidies, the cost to the state is substantial. Indeed, this cost even exceeds what the state would spend to ensure that these roughly 125,000 potential new Medicaid enrollees paid nothing to obtain private health insurance on the ACA’s health insurance exchanges. Such private insurance could be valued at $12,500 per year.[‡‡‡]

To see why, policymakers should recall that under the ACA, starting in 2014, qualifying individuals can purchase federally subsidized individual health insurance in a state-based health insurance exchange if they have no access to Medicaid, Medicare, an employer-provided health plan or other forms of “minimum essential coverage” as defined under the ACA.[§§§] Federal exchange subsidies ensure that exchange enrollees who earn 100 percent to 133 percent of the poverty level pay no more than 2 percent of their incomes for their insurance premiums, and these subsidies likewise ensure that exchange enrollees earning 138 percent of the federal poverty level pay no more than 3 percent of incomes for their insurance premiums.[****] We estimate the average cost of a state subsidy for these percentages of the premiums for each of the approximately 125,000 potential enrollees at about $265 per year, yielding a total cost to the state of approximately $33 million annually, or roughly $331 million over 10 years (in nominal dollars).[††††] From 2014 through 2023, this considerable exchange subsidy would still be about $144 million less than the state Medicaid subsidy projected above.

This exercise points in turn to another important policy observation. The estimate in the previous paragraph is based on the cost of the exchange’s so-called “silver plan,” which has an actuarial value that pays on average 70 percent of all medical costs.[15] The premiums for this plan for individuals with incomes in the range of 100 percent to 138 percent of poverty level are, as noted above, on the order of 2 percent to 3 percent of income. While such premiums are not inconsequential for low-income families, they are not impossibly high, either. In addition, low-income individuals who opt for the less generous “bronze plans,” which have an actuarial value of 60 percent, may have to pay almost nothing for their coverage.[‡‡‡‡] The health insurance exchange therefore provides a feasible financial alternative for many members of the population targeted by the proposed Medicaid expansion.

Effect of the ACA on Michigan’s Physician Supply

As in other states, Michigan’s physician supply is relatively “inelastic,” meaning the number of physicians cannot increase quickly to accommodate a rising demand for medical services created by an influx of newly insured Medicaid enrollees. Michigan physicians have little if any capacity to expand the number of patients they treat. A survey by the Michigan Department of Community Health and Public Sector Consultants found that about 30,400 physicians were actively practicing in Michigan in 2011.[16] According to the Michigan Department of Community Health:

• Less than two-thirds (65 percent) of Michigan’s licensed physicians are actively caring for patients.[17]


• Less than one in five active Michigan physicians (19 percent) are under 45 years of age, and more than half (60 percent) are either approaching or past retirement age.[18]


• More than half (54 percent) reported plans to retire no later than 2021.[19]


• Less than one in five (17 percent) plan to continue to work more than 20 years.[20]


• More than two-thirds (71 percent) of Michigan’s active physicians reported planning to retire by 2026. [*]

Yet the demand for health care continues to rise. A number of economic studies indicate the newly insured will nearly double their consumption of medical care.[†] Furthermore, an aging population will require more medical care.

Lower Medicaid Provider Fees

Low reimbursement rates are generally one of several factors contributing to the shortage of physicians willing to treat Medicaid enrollees.[21] On average, Michigan pays physicians participating in the fee-for-service state Medicaid program only about half (51 percent) as much as Medicare pays for the same service — in other words, physicians treating Medicare patients get paid twice as much for the same services.[*] For primary care, Michigan Medicaid fee-for-service pays less than half (46 percent) as much as Medicare.[22] Compared to commercial insurers, the authors estimate that Michigan’s Medicaid fee-for-service program pays physicians about two-fifths (41 percent) as much as a private insurer does.[†]

It should be noted, however, that in Michigan a majority of Medicaid enrollees participate in Medicaid managed care plans, rather than Medicaid’s fee-for-service program.[23] Proponents of these plans say they provide better access to health care providers than standard fee-for-service Medicaid.[24] There is considerable disagreement, however, about whether Medicaid spending is lower under managed care than fee-for-service programs.[25] To the extent that managed care saves money, managed care payment rates are unlikely to greatly exceed fee-for-service rates.

Poor Access to Care Under Medicaid

Nationally, about one-third of physicians do not accept new Medicaid patients.[26] This is nearly double the proportion of doctors who have closed their practices to new Medicare patients (17 percent) and to new privately insured patients (18 percent).[27] Physicians are four times as likely to turn away new Medicaid patients as they are to refuse the uninsured who pay out-of-pocket (31 percent versus 8 percent).[28] Studies show it is harder for Medicaid enrollees to make doctors’ appointments than it is for uninsured patients who say they’ll pay out of pocket.[29]

In a 2011 survey of Michigan physicians, nearly one in six said they refused to treat any Medicaid patients.[30] This figure may not fully reflect the access problems for Michigan’s Medicaid enrollees. Some physicians will accept some — but not all — new Medicaid-enrolled patients who enquire about an office visit. In addition, some physicians will treat their current Medicaid patients, but will not accept new Medicaid patients. For instance, in the same survey of Michigan physicians, more than one-quarter (28 percent) said they were not accepting new Medicaid patients into their practice.[31] Indeed, a 2008-2009 survey found that many specialists in metropolitan Detroit did not accept Medicaid patients (see Graphic 2).[32] These specialists included:

• 33 percent of dermatologists;[33]
• 41 percent of family practitioners;[34]
• 50 percent of obstetrics-gynecology specialists;[35] and
• 67 percent of orthopedic surgeons.[36]

The exception to this pattern was cardiology; all cardiologists surveyed in 2009 said they accepted Medicaid.[37]

Graphic 2: Percentage of Physicians Not Accepting Medicaid in Metro Detroit, 2009

Source: “2009 Survey of Physician Appointment Wait Times,” (Merritt Hawkins & Associates, 2009), 4-8, http://goo.gl/Zytko (accessed May 16, 2013).

Medicaid and Displacement of Private Insurance

Many Americans incorrectly believe that none of the poor has private health insurance. However, at least some of the new Medicaid enrollees would be those who previously had private coverage.

“Crowd-out” (or substitution) occurs when people who are already covered by employer-paid or individual insurance drop that coverage to take advantage of a public insurance option. Estimates of crowd-out are controversial among analysts. Some researchers find a high rate of Medicaid substitution for private coverage, while others believe it is negligible. Estimates of crowd-out for diverse populations vary.

Nevertheless, crowd-out is likely to be a significant problem for states that expand Medicaid eligibility to adults who are not disabled. For instance, analysis of past Medicaid expansions to mothers and children in the early 1990s by David Cutler and Jonathan Gruber, economists who have since served as Obama administration advisers, found that when Medicaid eligibility was expanded to children and pregnant women, about 50 percent of the newly enrolled had dropped private coverage.[38] A recent analysis by Gruber and Kosali Simon estimated that crowd-out for the Children’s Health Insurance Program averaged about 60 percent.[*]

Working adults are the target of Medicaid expansion under the ACA. The likely effect of crowd-out on working adults was analyzed for the Veterans Health Administration by academic researchers Steven Pizer, Austin Frakt and Lisa Iezzoni. They found crowd-out could reach 82 percent.[39]

A conservative estimate is that Medicaid rolls might have to rise by 1.4 people in order to reduce the uninsured by 1 person — a crowd-out rate of about 29 percent.[†] Medicaid, after all, will cost less money for many low-income people who are privately insured and provide, on paper at least, much better coverage.

According to the Kaiser Family Foundation, more than one in five nonelderly people with incomes of 138 percent or less of the poverty level in Michigan in 2011 were covered by private insurance.[40] This is about 512,000 people[41] — nearly half the 1.1 million nonelderly people in Michigan who are already enrolled in Medicaid and earning 138 percent or less of the poverty level.[42]

Approximately 685,526 Michigan residents were enrolled in Michigan degree-granting colleges and universities in the fall of 2010, according to the National Center for Education Statistics.[43] Many college students would be eligible for Medicaid under expansion rules, though many of them are likely eligible for coverage under their parents’ private insurance plans.

A decade ago, an estimated 29 percent of adults ages 25 to 64 with incomes below the poverty line purchased private health insurance.[44] Among individuals with family incomes less than 1.5 times the federal poverty level, an estimated 36 percent of individuals — more than one-third — had private insurance.[45] These are probably conservative projections of the percentage of people who would qualify under an expanded Medicaid program and who currently have private insurance. The definition of poverty in the ACA differs substantially from the official one. As a result, a preliminary analysis by staff from the U.S. Treasury Department found the Current Population Survey data could significantly underestimate the number that will be newly eligible for Medicaid, potentially driving up the financial burden on the public and increasing the crowd-out of the private insurance market.[46]

Crowd-out is an important concern. Substituting public coverage for private insurance shifts costs being borne by the private sector to taxpayers without boosting health coverage.

Difficulty of Determining Medicaid Eligibility Under the ACA

Determining who qualifies for Medicaid if it is expanded is likely to be difficult. Federal law relies heavily on tax and wage data. However, an estimated 13 million people in the U.S. do not file federal income tax forms.[47] Nonfilers are likely to be concentrated in the low-income population who are in turn eligible for expanded Medicaid.[*] Moreover, past filings do not necessarily reflect current income.

Under the Affordable Care Act, states are not allowed to request additional information from applicants unless electronic information from the Internal Revenue Service is either not available or not “reasonably compatible” with what an applicant reports.[48] Medicaid does not define “reasonably compatible,” and some experts believe that forms requesting additional information could require federal approval.[49]

The only other form of income verification readily available to states — quarterly wage data from state unemployment insurance programs — does not include income earned out of state and does not include self-employment income. A review of a recent sample of Oregon’s Medicaid and Children’s Health Insurance Program applicants revealed that current income in the Medicaid database failed to match state employment data for 38 percent of Medicaid recipients “usually due to out-of-date employment data, self-employment income, off-the-books income, or out-of-state income.”[50]

States are also expected to determine whether affordable employer coverage or another public health care assistance program is available to potential Medicaid enrollees using a streamlined application process to determine eligibility.[51] It is not clear how state governments will do this. With the federal law’s emphasis on streamlining the eligibility process, it seems likely that fraud will be a problem, especially since states may face greater caseloads than expected under an expanded Medicaid program.[52] Activists will engage in outreach programs to educate potential Medicaid candidates on how to enroll. The ACA requires a “simplification” of the process used to determine eligibility and enrollment,[53] and this mandate will likely lead to a longer period of enrollment between eligibility checks. More people will remain on Medicaid even if their rising income means they no longer technically qualify. Indeed, up to half of adults earning less than 200 percent of the federal poverty level are projected to migrate between potential Medicaid eligibility and health exchange eligibility in any given year because their incomes will fluctuate.[54]

Health Outcomes and Medicaid

Medicaid coverage, with its lower cost-sharing and unlimited benefits, appears on paper to be far better than what most Americans enjoy.[55] But by almost all measures, Medicaid enrollees fare worse than privately insured patients with similar medical conditions.[56] Indeed, various academic researchers have found that Medicaid enrollees often fare worse than not only patients with private insurance, but also patients with no insurance, even when controlling for a variety of factors, including income, education and health status.[57] For example:

Medicaid patients are almost twice as likely to die after surgery as privately insured patients and about 13 percent more likely to die than the uninsured, according to a University of Virginia study.[*]

Medicaid patients are more likely to be diagnosed with cancers at a less treatable, late stage than both the uninsured and privately insured: They were nearly one-quarter (23 percent) more likely to be diagnosed with late-stage breast cancer and 45 percent more likely to be diagnosed with late-stage melanoma than the uninsured, according to a study of Florida in the Journal of the National Cancer Institute.[†]

Medicaid patients undergoing surgery for colon cancer were three times as likely to die as the privately insured and more than one-fourth more likely to die than the uninsured, according to a study in the journal Cancer[58] (though survival rates for Medicaid patients with late-stage colon cancer were higher than for the uninsured).

Does Medicaid Boost the Economy?

Interest groups often tout the “economic benefits” that additional federal Medicaid funds might create within states.[*] Yet economists find it difficult to calculate the actual value of economic activities that are generally assumed to have beneficial spillover effects in industries far removed from the initial spending. For instance, a macroeconomic study published by the National Bureau of Economic Research indicates that since 1950, government defense spending has actually reduced national economic output below what it would have been otherwise.[59] Such results suggest that the net effect of the new health law will be that the national gross domestic product declines as the federal government consumes a larger share of national income to fund its programs. Basically, people will cut their other consumption to pay the increased tax burden.

State officials should keep in mind that models that predict large economic increases from reallocated federal spending generally ignore the fact that the money must come from somewhere. The ACA includes substantial tax increases that potentially reduce federal and state revenues needed to finance both existing Medicaid and any Medicaid expansion. For many years, Michigan has paid more in federal taxes than it has received in federal spending, suggesting that Michigan might end up paying more for any national program than it receives in benefits.[†] According to the RAND Corporation, most states can expect a net transfer of state resources to the federal government under the ACA.[60] RAND noted that only lower-income states will benefit.[61]

Nor would Medicaid expansion bring only new dollars to Michigan’s health care sector. As discussed earlier under “Medicaid and Displacement of Private Insurance,” an estimated 29 percent of those enrolling in a Medicaid expansion would be dropping their current private insurance. Private insurance reimbursements are generally higher, however, and they typically provide more income per patient to the state’s health care sector.[‡] Medicaid expansion would produce less of this higher rate of spending, reducing the benefits that the expansion might have otherwise been expected to generate for the health care sector.

The costs in taxes and redirected health care spending suggest why a Medicaid expansion, like many other forms of targeted spending, could easily fail to generate a net benefit for the state’s economy, even if it did provide new cash for some segments of the state’s health care sector.

Is Federal Spending Sustainable?

Michigan may not be able to rely on the federal government to provide indefinitely the same level of Medicaid funding promised in the ACA. In addition to promises made to the states, the federal government has unfunded obligations for other entitlement programs.

Medicaid Spending

Federal and state governments spent $389 billion on Medicaid in 2010, according to the Kaiser Family Foundation.[*] Medicaid is the largest expense in most state budgets — and it is growing at unsustainable rates. For instance:

• According to the federal Centers for Medicare and Medicaid Services, state and local governments’ Medicaid spending was only $84 billion in 2000,62 but as of January 2011, was projected to reach $357 billion by 2020[†] — a quadrupling (in nominal terms) in just two decades, in part as a result of the anticipated Medicaid expansion.


• Similarly, federal spending on Medicaid was about one-quarter of a trillion dollars in 2009, but was projected to reach $574 billion in 2020[63] — more than doubling (in nominal terms) in just a little over a decade.

The primary reason behind the rapid growth in Medicaid expenditure is that the federal government encourages states to spend by providing a federal matching rate for all state spending on approved Medicaid services. In economic terms, this is referred to as subsidizing at the margin — for instance, each marginal dollar of pre-ACA Medicaid spending costs New York state just 50 cents, Florida just 42 cents and Mississippi just 27 cents, according to 2011 federal government calculations for fiscal 2013.[64] The federal medical assistance percentage contribution of nearly 66 cents coupled with Michigan’s share of spending (about 34 cents) encourages unnecessary Medicaid spending.[65] If the federal government is paying 66 cents of each dollar Michigan spends on its Medicaid program, program administrators have only a fraction of the incentive to root out waste, fraud and abuse that they would if the state had to pay for the entire Medicaid dollar itself.

This situation will only grow worse as the federal government pays 90 cents or more of each new Medicaid dollar from 2014 to 2020. States will be tempted to apply for the matching funds even when they doubt the value of the spending.

Non-Medicaid Spending

Medicaid isn’t the only commitment the federal government has to fund into the future. At the federal level, the growth in health care expenditures is our most serious domestic policy problem, and Medicare is the most challenging component.[66] For decades, annual Medicare spending has increased slightly more than 2 percentage points faster than gross domestic product.[67] If we continue to consume products whose costs are growing faster than national income, that consumption will eventually crowd out every other thing we are consuming. For instance, the Congressional Budget Office found that if federal income tax rates were raised to allow the government to continue its current level of activity and balance its budget:[68]

• The lowest marginal income tax rate — 10 percent — would have to rise to 26 percent.[69]


• The 25 percent marginal tax rate — the tax bracket many two-income families — would have to rise to 66 percent.[70]


• The highest marginal income tax rate — 35 percent — would have to rise to 92 percent.[71]

If such marginal tax hikes were realized, the federal government’s ability to raise sufficient tax revenue for its spending commitments would diminish as the rates rose and people lost the incentive to work.

Conclusion

As Mackinac Center analysts have noted elsewhere, Medicaid comprises nearly one of every three dollars spent by the state of Michigan — 30 percent of the state budget — and is growing at an unsustainable rate.[72] If Medicaid eligibility is expanded, an estimated 29 percent of new Medicaid enrollees will be individuals who previously had private insurance and dropped it to enroll in public coverage. Thus, Medicaid is an inefficient way to reduce the number of uninsured.

Limited provider participation in Medicaid creates a significant barrier to health care access for Medicaid enrollees. As a result, although Medicaid seemingly offers a generous benefit package, coverage does not guarantee access to needed services. A substantial body of research shows that Medicaid patients are more likely to rely on hospital emergency departments to obtain the care they need.[73] Without access to appropriate primary and specialty care, Medicaid patients often experience worse health outcomes compared to people with private insurance.

Many potential Medicaid enrollees targeted by the proposed Medicaid expansion will have access to federally subsidized health insurance options on the ACA’s health insurance exchange. The cost of insurance premiums to the participants would be a small fraction of their income, and in some cases (as with the bronze plan), the premiums might even be fully subsidized, limiting participants’ costs to the health care spending not paid for by the plan they selected. In either case, the participants would be in a situation similar to that of many Michigan residents already covered under private insurance.

For at least some of the low-income uninsured, Medicaid is not the only insurance option. But faced with large potential federal subsidies for Medicaid expansion, state policymakers may easily underestimate Medicaid’s downsides on the one hand and the availability of practicable alternatives on the other. Indeed, given Medicaid’s current share of the state budget, its shortcomings in serving its present population, and its significant, unpredictable costs under the proposed expansion, policymakers have sound reasons to be wary of enlarging the program.

Endnotes

1   National Federation of Independent Business et al., v. Sebelius, Secretary of Health And Human Services, et al., (Supreme Court of the United States, 2012), 1, 45-58, http://goo.gl/w5WSG (accessed May 14, 2013).

2   Ibid., 10.

3   Elmendorf, “CBO’s Analysis of the Major Health Care Legislation Enacted in March 2010,” (Congressional Budget Office, 2011), http://goo.gl/87zua (accessed May 15, 2013).

4   “Affordable Care Act,” (Centers for Medicare & Medicaid Services), http://goo.gl/aEJcg (accessed May 15, 2013).

5   “Health Care and Education Reconciliation Act of 2010 (Public Law 111–152),” (United States Government Printing Office, 2010), 1051, http://goo.gl/AjQn2 (accessed May 16, 2013).

6   “Health Insurance Coverage of the Nonelderly (0-64) with Incomes up to 139% Federal Poverty Level (FPL)(Number),” (The Henry J. Kaiser Family Foundation), http://goo.gl/RgRJc (accessed May 15, 2013).

7   Ibid.

8   Authors’ calculations based on ibid.

9   Ibid.

10 “Health Care and Education Reconciliation Act of 2010 (Public Law 111–152),” (United States Government Printing Office, 2010), 1051, http://goo.gl/AjQn2 (accessed May 16, 2013); “The Patient Protection and Affordable Care Act (Public Law 111-148),” (Government Printing Office, 2010), 271, http://goo.gl/ipNH3 (accessed May 16, 2013).

11 “Health Care and Education Reconciliation Act of 2010 (Public Law 111–152),” (United States Government Printing Office, 2010), 1051, http://goo.gl/AjQn2 (accessed May 16, 2013); “The Patient Protection and Affordable Care Act (Public Law 111-148),” (Government Printing Office, 2010), 271, http://goo.gl/ipNH3 (accessed May 16, 2013).

12 “Federal Register, RIN 0938-AQ63 (Final Rule on the ‘Medicaid Parity’ provision),” (Centers for Medicare & Medicaid Services, Nov. 16, 2012), http://goo.gl/aFqGt.

13 Authors’ calculations based on “Distribution of the Nonelderly Uninsured by Federal Poverty Level (FPL)(Number),” (The Henry J. Kaiser Family Foundation), Number, http://goo.gl/9roLX (accessed May 21, 2013).

14 Garry Faja, Ora Pescovitz and Jean Meyer, “Health system CEOs: Support Gov. Snyder’s decision to expand Medicaid,” (Detroit Free Press, June 5, 2013), http://goo.gl/UlqA0 (accessed June 10, 2013); Tim Martin, “Gov. Rick Snyder: Medicaid expansion ‘makes sense for the physical and fiscal health of Michigan’,” (MLive, Feb. 6, 2013), http://goo.gl/LiOwX (accessed June 11, 2013).

15 Douglas W. Elmendorf, “Letter to Senator Olympia Snowe,” (Congressional Budget Office, 2010), 1-2, http://goo.gl/Ii7fo (accessed May 20, 2013).

16 Authors’ calculations based on “Michigan Department of Community Health Survey of Physicians,” (Public Sector Consultants Inc. and Michigan Department of Community Health, 2011), 1-2, http://goo.gl/G2XeM (accessed May 16, 2013).

17 Ibid., 2.

18 Ibid., 12.

19 Ibid., 7.

20 Ibid., 6.

21 Peter J. Cunningham and Len M. Nichols, “The Effects of Medicaid Reimbursement on the Access to Care of Medicaid Enrollees: A Community Perspective,” Medical Care Research and Review 62, no. 6 (2005).

22 “2012 Medicaid-to-Medicare Fee Index,” (The Henry J. Kaiser Family Foundation), http://goo.gl/ZVuWb (accessed May 16, 2013).

23 Authors’ calculations based on Rick Murdock, “Overview of Medicaid and Medicaid Managed Care (Testimony to the Michigan House of Representatives Committee on Competitiveness on House Bill 4714, May 14, 2013),” (Michigan House of Representatives, 2013), 2,5, http://goo.gl/RJ8RB (accessed May 21, 2013).

24 Ibid., 4.

25 “Medicaid Managed Care: Key Data, Trends, and Issues,” (Kaiser Commission on Medicaid and the Uninsured, 2012), 4, http://goo.gl/ 4ZNCn (accessed June 2, 2013).

26 Sandra L. Decker, “In 2011 Nearly One-Third Of Physicians Said They Would Not Accept New Medicaid Patients, But Rising Fees May Help,” Health Affairs vol. 31, no. 8 (2012), http://goo.gl/fKsM0 (accessed May 16, 2013).

27 Ibid.

28 Ibid., 1675.

29 Brent R. Asplin et al., “Insurance Status and Access to Urgent Ambulatory Care Follow-up Appointments,” Journal of the American Medical Association vol. 294, no. 10 (2005): 1248, 50, http://goo.gl/ Yfdac (accessed May 16, 2013).

30 “Michigan Department of Community Health Survey of Physicians,” (Public Sector Consultants Inc. and Michigan Department of Community Health, 2011), 6, http://goo.gl/G2XeM (accessed May 16, 2013).

31 Ibid., 5, 6, 23.

32 “2009 Survey of Physician Appointment Wait Times,” (Merritt Hawkins & Associates, 2009), 2-3, http://goo.gl/Zytko (accessed May 16, 2013).

33 Ibid., 5.

34 Ibid., 8.

35 Ibid., 6.

36 Ibid., 7.

37 Ibid., 4.

38 David Cutler and Jonathan Gruber, “Does Public Insurance Crowd Out Private Insurance?,” Quarterly Journal of Economics vol. 111, no. 2 (1996) http://goo.gl/wy5Ug (accessed June 10, 2013).

39 Steven D. Pizer, Austin Frakt and Lisa Iezzoni, “The Effect of Health Reform on Public and Private Insurance in the Long Run,” (Health Care Financing & Economics, 2011), http://goo.gl/PhZuY (accessed May 16, 2013).

40 Authors’ calculations based on “Health Insurance Coverage of the Nonelderly (0-64) with Incomes up to 139% Federal Poverty Level (FPL)(Percent),” (The Henry J. Kaiser Family Foundation), http://goo.gl/RgRJc (accessed May 15, 2013).

41 Authors’ calculations based on “Health Insurance Coverage of the Nonelderly (0-64) with Incomes up to 139% Federal Poverty Level (FPL)(Number),” (The Henry J. Kaiser Family Foundation), http://goo.gl/RgRJc (accessed May 15, 2013).

42 Ibid.

43 “Table 242: Total fall enrollment in degree-granting institutions, by state or jurisdiction: Selected years, 1970 through 2011,” (National Center for Education Statistics, 2012), Digest of Education Statistics, http://goo.gl/O4pzO (accessed June 2, 2013).

44 M. Kate Bundorf and Mark V. Pauly, “Is Health Insurance Affordable for the Uninsured?,” (National Bureau of Economic Research, 2002), 41, http://goo.gl/RCxFs (accessed May 17, 2013).

45 Ibid., 25.

46 Ithai Z. Lurie and James Pearce, “The Effects of ACA on Income Eligibility for Medicaid and Subsidized Private Insurance Coverage: Income Definitions and Thresholds across CPS and Administrative Data,” (U.S. Department of Treasury, 2012), http://goo.gl/BtDoV (accessed May 17, 2013).

47 William McBride, “At least 90 percent of Americans Have a Lower Income Tax Rate than Romney,” in The Tax Policy Blog, ed. Tax Foundation (2012), http://goo.gl/YxGo0, (accessed June 7, 2013)

48 For example, see “Reasonable Compatibility Scenarios,” (Centers for Medicare & Medicaid Services), http://goo.gl/HsEju (accessed May 17, 2013).

49 Robert G. Williams, “Eligibility Primer for Affordable Care Act Programs,” (State Reforum, 2012), 8-9, http://goo.gl/lI2vp (accessed May 17, 2013).

50 Ibid., 10; Steve Novick, “The New World of Exchanges,” (CMS Eligibility Conference, 2011), 4, http://goo.gl/20HML (accessed May 17, 2013).

51 Williams, “Eligibility Primer for Affordable Care Act Programs,” (State Reforum, 2012), 3, 8-9, http://goo.gl/lI2vp (accessed May 17, 2013).

52 “The Patient Protection and Affordable Care Act (Public Law 111-148),” (Government Printing Office, 2010), Sec. 2201, http://goo.gl/ ipNH3 (accessed May 16, 2013). Also see Williams, “Eligibility Primer for Affordable Care Act Programs,” (State Reforum, 2012), http://goo.gl/lI2vp (accessed May 17, 2013).

53 “Compilation of Patient Protection and Affordable Care Act [As Amended Through May 1, 2010] including Patient Protection and Affordable Care Act Health-Related Portions of the Health Care and Education Reconciliation Act of 2010,” (Office of the Legislative Counsel, 2010), 198-200 (Sec. 2201), http://goo.gl/PxFe5 (accessed June 12, 2013).

54 Margaret Murray and Kathryn Kuhmerker, “The Medicaid Expansion: A One-Step Plan to Improve Coverage and Care,” (Georgetown University Health Policy Institute, 2013), http://goo.gl/ P8Rqp (accessed May 17, 2013); Benjamin D. Sommers and Sara Rosenbaum, “Issues In Health Reform: How Changes In Eligibility May Move Millions Back And Forth Between Medicaid And Insurance Exchanges,” Health Affairs vol. 30, no. 2 (2011) http://goo.gl/fJMej (accessed June 8, 2013).

55 For a detailed comparison, see Evelyne P. Baumrucker and Bernadette Fernandez, “Comparing Medicaid and Exchanges: Benefits and Costs for Individuals and Families,” (Congressional Research Service, 2013), http://goo.gl/XJryb (accessed May 17, 2013).

56 Kevin Dayaratna, “Studies Show: Medicaid Patients Have Worse Access and Outcomes than the Privately Insured,” (The Heritage Foundation, 2012), http://goo.gl/wHjrb (accessed May 20, 2013).

57 For example, see the discussion Avik Roy, “UVa Study: Surgical Patients on Medicaid Are 13% More Likely To Die Than Those Without Insurance,” (The Apothecary, 2012), http://goo.gl/QNRL1 (accessed May 20, 2013).

58 Authors’ calculations based on Rachel Rapaport Kelz et al., “Morbidity and Mortality of Colorectal Carcinoma Surgery Differs by Insurance Status,” Cancer vol. 101, no. 10 (2004): 2191 http://goo.gl/ 9a9h0 (accessed June 9, 2013).

59 Robert J. Barro and Charles J. Redlick, “Macroeconomic Effects from Government Purchases and Taxes,” (National Bureau of Economic Research, 2009), http://www.nber.org/papers/w15369 (accessed May 20, 2013).

60 Carter C. Price and Evan Saltzman, “The Economic Impact of the Affordable Care Act on Arkansas,” (The RAND Corporation, 2013), 9, http://goo.gl/wdhze (accessed May 20, 2013).

61 Ibid.

62 “NHE Tables,” (Centers for Medicare & Medicaid Services, 2012), 4, http://goo.gl/x4LR3 (accessed June 7, 2013).

63 “National Health Expenditure Projections 2010-2020,” (Centers for Medicare & Medicaid Services, 2011), 21, Table 16, http://goo.gl/ fvsTs (accessed June 7, 2012).

64 Authors’ calculations based on “Federal Register, Vol. 76, No. 230, Wednesday, November 30, 2011, Notices,” (Government Printing Office, 2011), 74062-63, Table 1, http://goo.gl/Bfp0Z (accessed May 21, 2013).

65 Ibid.

66 For a discussion, see John C. Goodman, “A Framework for Medicare Reform,” (National Center for Policy Analysis, 2008), http://www.ncpa.org/pdfs/st315.pdf (accessed May 21, 2013).

67 “The 2012 Long-Term Budget Outlook,” (Congressional Budget Office, 2012), 53, Table 3-1, http://goo.gl/OORzO (accessed June 7, 2013).

68 Congressional Budget Office Director Peter Orszag, “Letter to Senator Judd Gregg,” (Congressional Budget Office, 2007), http://goo.gl/GI44d (accessed May 21, 2013).

69 Ibid., 8.

70 Ibid.

71 Ibid.

72 For a discussion of the impact of Medicaid spending on the Michigan state budget, see Josiah Kollmeyer and Jack McHugh, “Medicaid - The Monster that Ate Michigan’s Budget,” (Mackinac Center for Public Policy, 2011), http://www.michigancapitol confidential.com/15512 (accessed May 21, 2013).

73 See, for instance, Tamyra Carroll Garcia, Amy B. Bernstein, and Mary Ann Bush, “Emergency Department Visitors and Visits: Who Used the Emergency Room in 2007?,” (U.S. Department of Health and Human Services, 2010), 2-3, http://goo.gl/QxsrD (accessed June 9, 2013); Eduardo LaCalle and Elaine Rabin, “Frequent Users of Emergency Departments: The Myths, the Data, and the Policy Implications,” (Annals of Emergency Medicine, 2010), 3, http://goo.gl/m4PjP (accessed June 10, 2013).