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Because federal funding has been pegged to state dollars, cuts—much less large-scale reforms —have been almost impossible. What politician wants to give up two dollars of constituent benefits—especially health benefits—to achieve one dollar in budget cuts?
A massive medical overhaul may have been an opportunity to address Medicaid’s structural problems. Yet rather than reform the struggling program, ObamaCare’s authors decided to double down on it. Starting in 2014, all states will have to expand Medicaid eligibility, allowing into the program any individual who makes less than 133 percent of the federal poverty line. That’s 16 million new enrollees, or half of the total number of newly insured, according to Congressional Budget Office estimates. The largest group will be nonelderly, nondisabled adults without dependent children.
To cajole state lawmakers into expanding a program that was already straining their budgets, ObamaCare’s authors offered them a classic salesman’s deal: no money down and no payments for the first three years. From 2014 through 2016, the federal government will pick up the full cost of the mandatory coverage expansion. For the four years afterward, states will pick up a rising share of the tab, leveling off at 10 percent in 2020. It’s essentially a federal-match teaser rate, designed to grease the wheels for political acceptance by delaying the pain.
Given the fact that even in the long term the federal government will still be covering 90 percent of the total bill, you might think the states would welcome an easy cash infusion. But the burden of Medicaid is already so high, and state budgets—most of which are constrained by balanced budget requirements and thus cannot rely on deficit spending—are in such dismal shape, that any additional expenses represent a significant fiscal burden. Florida, for example, is already spending $18 billion a year on Medicaid. ObamaCare will add another $1 billion to the tab by 2019. In Arizona the program is seen as fiscally toxic. Monica Coury, a senior staffer at the Arizona bureaucracy that oversees the state’s Medicaid program, told The Wall Street Journal in July: “We have federal partners talking about expansion of this program. And at the state level, we’re looking at a program that we can’t sustain.” Overall, paying for the added benefits will cost states $21.5 billion by 2020.
Moreover, like so many sales pitches, this one comes with hidden costs; the initial “free” years aren’t actually free. For starters, the law prohibits states from tightening Medicaid eligibility requirements—a typical way to save money during a budget crunch. ObamaCare also fails to cover the administrative costs associated with implementing and running the Medicaid expansion. Heritage’s Haislmaier and his colleague Brian Blase estimate that the extra overhead alone will add nearly $12 billion to the total tab between 2014 and 2020, putting the total additional state burden up to $33.5 billion over the next decade.
Nor does the law cover the cost of expanding coverage to those who qualified for Medicaid prior to 2014 but failed to sign up. Nationwide, the Kaiser Family Foundation estimates, nearly 11 million individuals are currently eligible for Medicaid but aren’t enrolled. Many of those individuals are likely to claim their new benefits thanks to what health care experts call the “woodwork effect,” in which people who were hiding out from the previous system suddenly appear when new goodies get added. Most benefit programs fail to capture all eligible individuals, but the greater the benefits offered, the more people show up to take them. And given that individuals who remain uninsured face a yearly penalty, the incentive to collect will likely be stronger than usual.
The law also creates the potential for significant future fiscal headaches by funding temporary pay boosts for doctors who see Medicaid patients. In 2013 and 2014, the law jacks up Medicaid reimbursement rates, which typically run far lower than what health care providers normally charge, to match Medicare rates. But temporary funding is rarely temporary, especially when it comes to health care, where both state and federal politicians, not to mention health care providers, are loathe to accept even long-planned cuts. Each year since 2003, for example, Congress has declined to allow legally mandated cuts to doctors’ Medicare payments, choosing to hike spending “temporarily” instead. And in June, several states launched a panicked last-minute lobbying spree when Congress threatened to end a temporary boost in Medicaid funding provided by last year’s stimulus bill. In many states, then, it’s likely that ObamaCare’s two-year Medicaid reimbursement hike will become an ongoing unfunded mandate.
In response to the bill’s passage, twenty states, led by Florida Attorney General Bill McCollum, have filed suit against ObamaCare, charging that both its individual insurance mandate and its mountain-sized Medicaid burden are unconstitutional. And Virginia, which prior to Obama-Care’s passage put a law on its books banning health insurance purchase requirements—one of ObamaCare’s key provisions—has filed a separate suit. If successful, the lawsuits could effectively dismantle ObamaCare, but nearly all constitutional scholars, even those supportive of the states, believe the challenges face long odds.
Another option might be for states to ignore federal insurance market guidelines and develop noncompliant exchanges. The idea would be to set up an insurance market that meets local needs, disregarding Washington’s rules, then dare the administration to tinker with an effective locally designed exchange. Doing so, argue Haislmaier and Blase, would “make it politically more difficult for federal officials to implement provisions of the new federal legislation…that will drive up premiums and reduce coverage choices.”
The problem with this plan is that setting up an effective exchange isn’t as easy as it sounds. Massachusetts built an exchange in 2006. But since then, the state has had to deal with constant premium hikes, provider shortages, and legal battles between insurers and state officials. And even if a state built a better system, there’s no guarantee that the administration wouldn’t simply force state officials to comply with the federal regs. In the end, the existence of a government-designed insurance infrastructure, even one crafted to local specifications, makes it significantly easier for the federal government to assert control.
At any rate, neither of those responses would pay off for years. In the meantime, states will have to consider their own bottom lines. Given the heavy burden that ObamaCare places on many states’ finances, some policy experts now believe that the best way to protect budgets may be to drop out of Medicaid entirely. This step would not only rid states of the duty to expand Medicaid; it would free them from what is now their biggest single budgetary obligation.
Politically, this may be a tough sell, but legally there’s little to stop a state from killing the program. Despite the perception that Medicaid is an established part of the entitlement firmament, the program is technically voluntary. Any state willing to give up the federal contribution could close down its program. And thanks to ObamaCare, if a state dropped out after 2014, its poor residents wouldn’t lose access to health coverage; instead, low-income individuals would qualify for subsidized health insurance through the new exchanges, which would still be set up even if a state stopped participating in Medicaid. Indeed, such a system may prove more beneficial for the poor. Medicaid recipients have some of the worst health outcomes in the country; their cancer survival rates, for example, are no better than those of the uninsured. And because of the program’s low reimbursement rates, many health care providers won’t take Medicaid patients. Subsidized private insurance could expand health care options for low-income individuals, improving their health outcomes. That makes it difficult to argue that dropping out of Medicaid would hurt the poor.
State budgets would almost certainly be healthier if they did, at least when judged as independent entities. According to a 2009 report coauthored by Heritage’s Haislmaier and former Medicaid chief Dennis Smith, the collective savings would add up to $725 billion by 2019, based on extrapolations from historical Medicaid spending data. California would save $13.7 billion in the first year alone. Indeed, nearly every state would benefit: By Haislmaier’s most recent estimates, which rely on a combination of Census data and estimates from the Centers for Medicare and Medicaid Services, which administrates Medicaid, 40 states and the District of Columbia would be better off shifting their Medicaid recipients off of their books and onto subsidized federal insurance rolls.
“A lot of states might find this very attractive,” says John Goodman, a frequent contributor to the journal Health Affairs and the CEO of the National Center for Policy Analysis, a Texas-based free market think tank. “They get to get rid of a program that was going to cost them lots of money.” But he cautions that if every state did it, the total taxpayer burden associated with ObamaCare would increase significantly, perhaps even double.