The Myth of Free Medicaid Money

Advocates are pitching Medicaid expansion as another painless free lunch.

To hear the advocates of expanding Medicaid tell the tale, Virginia and other states would be dumber than a sack of hammers to turn the idea down. It is, proponents say, a win-win situation: The state gets to increase insurance coverage for tens of thousands of people—and hand the bill to the federal government. Throw in the savings from the economic stimulus from all that new money, along with offsetting cuts elsewhere, and the state comes out a clear winner.

But it's a rare coin indeed that has only one side. Flip this one over, and expanding Medicaid doesn't look quite so wonderful. Here are three reasons why.

First, there's the myth of free money. In Virginia, officials estimate expanding Medicaid would cost the state $137.5 million over nine years, while the state would receive $23 billion from Washington.

Other states report similar figures. California expects to enroll up to 910,000 residents for a cost beginning at only $46 million a year, while collecting $44 billion in federal funds over a six-year period. An Illinois study estimates that state would spend about $2 billion on expanded Medicaid over the next decade, while reaping $22 billion in federal funds. According to Danielle Holohan, who is in charge of New York's insurance exchange, Medicaid expansion "actually works out to be an enormous savings" for the Empire State. And so on.

This all sounds great—if you are a state official. But if you are a lowly taxpayer, it leaves out one rather significant point: Where is all that federal money coming from?

No great mystery: Most of that money would come from taxpayers who live in the very states that are looking forward to these supposed windfalls. According to the Kaiser Family Foundation, if every state signed up for Medicaid expansion, then the federal government would spend nearly $1 trillion over the next nine years—paid for by you.

So you don't have to wait for Medicaid expansion to reap this sort of "windfall." Just take 5 bucks out of your left pocket and put it in your right. As far as your right pocket is concerned, you're 5 bucks richer. It's free money!

No wonder Congress wanted to make Medicaid expansion mandatory.

This brings up the second concern: implausibly aggressive predictions of economic stimulus. Expanding Medicaid in Virginia "pays for itself," says Jill Hanken of the Virginia Poverty Law Center, ostensibly because it would bring $4 billion a year in economic benefits, including 30,000 jobs.

Those figures come from a study paid for by the hospital industry, which has a huge financial stake in the debate outcome. Progressives, who are deeply skeptical of studies funded by the oil or tobacco industries, should be equally skeptical of this one. So should conservatives, who scoff at the stimulative effects of government spending in every other realm (except defense—but that's another column).

Third, Virginia—like many states—predicates its projected gains from Medicaid expansion partly on the assumption that cuts in other programs would soon follow. For instance, state officials predict Virginia would save more than $637 million on charity care for the poor and indigent who sign up for Medicaid.

But this is another left-pocket/right-pocket switcheroo. Federal Medicaid gets its money from the same source as state appropriations for indigent care: the taxpayers. In any event, experience elsewhere suggests the prediction of big savings could be too optimistic.

In 2009, Colorado expanded Medicaid, with a federal match. The Denver Post reports that since then, uncompensated treatment for the poor has fallen $214 million—"but still surpasses $1 billion annually." Or take Massachusetts, where Obamacare's precursor, Romneycare, also was supposed to reduce charity care by expanding insurance coverage. But hospitals successfully lobbied for $200 million in continued charity-care payments, and a report by the National Association of Public Hospitals and Health Systems says experience there "raises the question of whether statewide health care costs have been contained or merely shifted."

None of this means expanding Medicaid is not worth doing. That's a judgment call about how much social-welfare spending government should provide, and how it should balance the moral imperative of caring for the poor with its other obligations. No, the problem is this: Advocates are pitching Medicaid expansion as a painless way for everyone to eat another free lunch on Uncle Sam's dime—when Uncle Sam doesn't have a penny to his name. And that's what got America into such a deep fiscal hole in the first place.