Don't Look to States to Torpedo Obamacare

The program's incentives are perverse and irresistible

Lingering hopes that state resistance would yet derail Obamacare were recently dealt a major and possibly fatal blow. Unable to withstand the law's powerful and perverse incentives, six Republican governors dropped their opposition and agreed to cram more people into Medicaid. Unless the law collapses under the weight of its own internal contradictions, or the country collapses under it, it might well be a fait accompli.

Medicaid, the joint state-federal program for the poor, has been devouring state budgets for decades. Indeed, a December survey by the National Council of State Legislatures found that state budget experts overwhelmingly named Medicaid as their top budgetary challenge for 2013. This is no surprise, given that Medicaid is the single biggest item in virtually every state—ahead of transportation, K-12, and higher education. It consumes up to one of every four tax dollars. Some states, like Arizona, were so strapped that they started refusing organ transplants for poor patients until they got an infusion of stimulus dollars.

None of this, however, deterred Obamacare from requiring states to extend Medicaid to residents below 133 percent of the poverty limit—roughly 18 million additional people—or risk losing all federal funding, even for existing Medicaid patients.

States challenged this blackmail in the Supreme Court, and won. Yet now the conservative governors of North Dakota, New Mexico, Arizona, Nevada, Ohio, and Michigan—some of whom were even party to the lawsuit—are voluntarily signing up for this provision.

The conventional wisdom is that they are doing so because of the irresistible lure of "free" federal money. Obamacare is offering to pick up 100 percent of the tab for new enrollees for the first two years and then 90 percent until 2020. But that's not all. Extending Medicaid will mean Michigan, for example, will be able to offload what it spends on the mental care of some uninsured residents onto the federal government, saving the state $2 billion over 10 years—more than enough to cover its share. In effect, as Michigan Gov. Rick Snyder put it, the state will be able to insure 470,000 more people without having to spend a dime till about 2024—by which time he'll be safely out of office, of course.

But a 2011 Congressional Budget Office report projected that by 2025, every penny of revenue in the federal budget will go toward servicing the national debt and entitlements: Medicare, Medicaid, and Social Security. This will inevitably force Uncle Sam to pare back its promised payments to states, leaving them holding the bag, one big reason why state Medicaid budgets are in such a mess to begin with.

Snyder is a former accountant and a fiscal conservative. He understands full well that he is putting Michigan on the path to fiscal ruin—as do the other conservative governors. So why are they doing this?

The reason is this: Under Obamacare, uninsured residents up to 400 percent of the poverty level will get subsidies from insurance exchanges set up by the states, or by Uncle Sam when states refuse. Employers will have to pay a $2,000 penalty for every uninsured employee who receives subsidies from the exchanges.

Extending Medicaid to cover these workers would protect employers—especially small businesses that don't offer health insurance. Conversely, resisting Medicaid expansion would effectively impose an employment tax on small businesses with low-income workers, putting states that do so at a competitive disadvantage with states that comply.

In other words, noncompliant states face a double whammy—lose federal money and expose their businesses to additional taxes.

Forcing states to put the short-term health of businesses ahead of the long-term interest of taxpayers is the very essence of crony capitalism. But such is the perverse logic of Obamacare. Some Republican governors, such as Louisiana's Bobby Jindal and Wisconsin's Scott Walker, are valiantly refusing to get caught in this trap. But it is hard to imagine that they'll be able stand firm if their businesses start shrinking and throwing people out of work—in which case they'll end up on the Medicaid rolls anyway.

Obamacare has states in a vise that they will only escape if Obamacare goes broke—or if Congress or courts find a way to throw out this monstrosity.

This article originally appeared in the Washington Examiner