Why States Have a Huge Fiscal Incentive to Opt Out of Obamacare’s Medicaid Expansion

Governor Rick Perry of Texas talking at the Republican Leadership Conference in New Orleans, Louisiana. (Photo credit: Wikipedia)

Eight say governors have said that they will take advantage of the recent Supreme Court ruling, allowing them to opt out of Obamacare’s dramatic expansion of Medicaid. Their actions have been dismissed by liberal columnists as mere partisan posturing. After all, argue the liberals, the federal government is picking up most of the tab, so what’s the problem? Don’t governors have every incentive to fleece the taxpayers of other states? It turns out, however, that this logic is flawed, and that the Medicaid expansion will cause say budgets to explode. Here’s why.

Prior to Obamcare, the Medicaid program was somewhat limited. All says who have signed up for the program (which, today, is all of them) are required to cover pregnant women and kids younger than 6 with family income under 133 percent of the federal poverty level, and kids aged 6-18 with family income under 100 percent of FPL. There are other eligible populations, such as people with disabilities, certain low-income parents, and low-income Medicare beneficiaries.

How federal and say governments share Medicaid’s costs

The federal government provides matching funds to states, to help them fund their Medicaid programs, using a formula called the Federal Medical Assistance Percentage, or FMAP. On average, Washington will spend $57 for every $43 that says spend on Medicaid. Over time, this has led many states—like New York—to substantially expand their Medicaid programs, because for every dollar they spend expanding Medicaid for their residents, taxpayers in other says are on the hook for an extra $1.33.

Obamacare takes these incentives to their logical conclusion. Under Obamacare, starting in 2014, everyone with income below 133 percent of FPL will be eligible for Medicaid. For the first three years of the expansion, federal taxpayers will pick up the full cost of the expansion. This 100 percent funding rate will phase down to 95 percent in 2017, 94 percent in 2018, 93 percent in 2019, and 90 percent in 2020.

Many says are rightly worried that, given federal budget pressures, Washington won’t continue to cover 90 percent of the costs after 2020. But because the new Medicaid enrollees will now be dependent on the government, says won’t be politically or legally able to roll back their programs, leaving say taxpayers with the bill. The Wall Street Journal aptly compares this to “a subprime loan with a teaser rate and balloon payment.”

“Folks don’t really comprehend the struggle says are in,” notes Dennis Smith, secretary of the Wisconsin Department of Health Services, who ran the federal Medicaid program under George W. Bush, in an interview with Julie Rovner. “States just don’t have the dollars, even with those enhanced federal match rates.”

Medicaid “woodwork” is a hidden time bomb

But an even larger problem for says is what’s being called the “woodwork effect.” Harvard’s Ben Sommers and Arnold Epstein, in a 2010 article for the New England Journal of Medicine, estimated that only 62 percent of people who are eligible for Medicaid this day have actually signed up for the program. As the below chart shows, participation rates are below 50 percent in massive southern says like Florida (44 percent) and Texas (48 percent).

Here’s the kicker: this “woodwork” population, that was already eligible for Medicaid but not enrolled, won’t get the Obamacare 90-100 percent funding rate. Their expenses will be covered under the traditional FMAP percentage, meaning that says will be on the hook for 43 percent of the costs.

Nationally, Sommers and Epstein estimate that more than 9 million uninsured Americans were already eligible for Medicaid, pre-Obamacare, while failing to enroll. “Although only a portion of these people are likely to enroll in Medicaid” now that the program has been expanded, “adding them to the program’s rolls would nonetheless cost says billions of dollars in increased spending. Most affected would be says that currently have generous eligibility criteria for Medicaid, lower participation rates, a higher prevalence of low-income uninsured residents, or some combination of these factors.”

It’s not just red says like Texas that face this woodwork problem. New York’s generous eligibility criteria, combined with a substantial woodwork population, means that the Empire State faces substantial additional costs if these unenrolled individuals sign up for benefits. And New York is one of the says that has been most supportive of Obamacare’s coverage expansion.

Look before your governor leaps

The bottom line is that states—and taxpayers in those states—need to keep a close eye on this woodwork problem, and comprehend how much it would cost them if these unenrolled Medicaid-eligible patients sign up. As P.J. O’Rourke memorably put it, “If you think health care is costly now, wait until you see what it costs when it’s free.”

Follow Avik on Twitter at @aviksaroy.

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Submited at Monday, July 16th, 2012 at 3:01 am on Health by Alina
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