Medicaid expansion could come at a big cost to states

A Heritage Foundation report outlines scenarios under which states would incur significant cost increases if the federal matching rate were reduced.

By — Posted Sept. 17, 2012

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Expanding Medicaid may be a costly venture for states in light of recent budget proposals that call for the reduction of the federal match for this Affordable Care Act provision, a Heritage Foundation report estimated.

States that expand Medicaid up to an effective rate of 138% of poverty will receive full assistance from the federal government to pay for the additional coverage for the first three years of the expansion starting in 2014, with the states taking on a relatively small percentage of the costs thereafter.

“This structure is designed to be attractive to the states, since it appears to increase health coverage at little or no state-level cost,” said Drew Gonshorowski, the report’s author and a policy analyst with the Heritage Foundation, a conservative research institution in Washington.

But according to his findings, states could face significant cost increases under the health system reform law, in addition to other potential scenarios that would reduce the federal match even more during the expansion. Gonshorowski estimated that the Medicaid expansion would start stressing state budgets “as early as 2019.” A state like Georgia, for example, could see spending increase by $200 million in the expansion’s first five years and then by $500 million by 2022 under this scenario, based on data from the Congressional Budget Office.

Ohio’s budget would incur spending increases of up to $450 million in the first five years under the ACA provisions, but other scenarios that reduce the federal match might prove to be even more costly. In the event that a flat 90% federal matching rate were implemented, Ohio would see its costs increase by about $1.3 billion in the initial five years of the expansion and by up to $2.5 billion if a “blended rate” took effect.

The blended rate, which President Obama proposed in his fiscal year 2013 budget, was cited by Heritage as the most costly scenario for states in terms of reduced federal assistance. The formula essentially is the “average of a state’s current Medicaid match, its enhanced match rate for the Children’s Health Insurance Program, and the expansion match rate,” the analysis stated.

Costs for Illinois could jump by $6.7 billion in the first five years if the blended rate were implemented, the report estimated.

There’s no disputing that states will have to pay more if federal matching rates are reduced, said Edwin Park, vice president for health policy with the liberal Center on Budget and Policy Priorities in Washington. But the Heritage estimate on the blended rate scenario shows only one side of the equation, he said.

Averaging all of the matching rates for these three programs means that the matching rate for the expansion will go down while the rate for the rest of Medicaid will go up, he said. The Heritage analysis projects a roughly $120 billion increase in state costs under the blended rate. “We’re not sure how they’re deriving those numbers, but it seems like they’re only showing the effects on the expansion” and not the gains to states through the regular Medicaid program, Park said.

The CBO has estimated that the administration’s blended rate formula would result in $17.8 billion in savings over 10 years, Park said.

A handful of states already have said they won’t participate in the Medicaid expansion after the U.S. Supreme Court’s June 28 decision that allowed states to opt out. Florida Gov. Rick Scott has referred to the expansion as a new entitlement that would cost his state nearly $2 billion more in taxpayer dollars. Maine has gone so far as to issue a legal challenge asserting that the high court’s decision allows it to ratchet back its current Medicaid eligibility.

Some physicians also have questioned the merits of expanding a program that they say already has access problems and doesn’t pay doctors well. “Expanding Medicaid will give a false sense to some people that they now have insurance,” said Gary Floyd, MD, immediate past chair of the Texas Medical Assn.’s Council on Legislation, as quoted in the September issue of the association’s monthly magazine, Texas Medicine. A recent TMA survey found that only a third of the state’s doctors were accepting new Medicaid patients, dropping from 42% in 2010.

Other recent reports have highlighted the potential negative consequences of not covering these additional individuals. In August, the Urban Institute and the Robert Wood Johnson Foundation reported that state fiscal concerns about expanding Medicaid don’t take into consideration the numerous financial and social benefits of providing affordable coverage to millions of low-income, uninsured individuals.

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