Tom Corbett to PA's Working Poor: "Drop Dead!"

Part 2. Medicaid Expansion is a Huge Bargain for the States

On Tuesday, PA Governor Tom Corbett stated that at this time he cannot recommend accepting $38 billion in federal funding to expand Medicaid under the Affordable Care Act, thereby denying medical assistance to more than 700,000 Pennsylvanians. This series of posts will consider the implications of that decision. Yesterday, I wrote about the evidence that Medicaid is effective in improving health and saving lives. Today, I will look at Medicaid's costs.

I have previously discussed the circumstances which caused Medicaid expansion to become a political issue. To summarize: Medicaid expansion is a critical part of the Affordable Care Act (ACA). Of the approximately 30 million people who were scheduled to be insured for the first time under the ACA, fully half of them—the poorest half—were going to be insured through Medicaid expansion.

Traditional Medicaid is jointly administered by the state and federal governments. Federal law requires that all children be covered if their family makes less than the federal poverty level. Children under six are covered up to 133% of the poverty line. The eligibility rules for adults are determined by the states. In most states, adults without children don't qualify for Medicaid no matter how poor they are. The income level at which parents with dependent children qualify for Medicaid varies from state to state. In the least generous states, parents only qualify if they make less than 40% of the federal poverty level—$4850 a year for two parents with a single child. The most generous states cover all adults making up to 133% of the poverty level. But on the whole, Medicaid is not much of a safety net for the poor. Right now the federal government pays on average 57% of the cost of traditional Medicaid—between 50% and 75% depending on state eligibility rules.

The ACA expands Medicaid by making everyone—children and adults—eligible for Medicaid if their family income is 138% of the poverty level or less. This is expensive, so the Feds agreed to pay most of the cost. In 2014, they will pay 100%. This drops to 95% in 2017, and 90% in 2020. States whose current Medicaid eligibility rules are relatively stingy stand to gain more money per capita from Medicaid expansion than states whose current eligibility rules are more generous.

The ACA required states to implement the Medicaid expansion. If they refused, the federal government threatened to withhold its contribution to traditional Medicare. The Supreme Court, in National Federation of Independent Business v. Sebelius, ruled that this was coercive, and that states may opt out of Medicaid expansion. The numbers change every day, but as of this writing 21 states have announced that they will expand Medicaid, 11 states have decided not to, and 18 are undecided. To the extent that states refuse to expand Medicaid, they will frustrate the intent of the ACA and deny medical care to many Americans who need it most.

How expensive is Medicaid? The average annual cost of Medicaid expansion for adults is $6000 per year, although the ACA hopes to implement some cost savings. Recall that the Sommers, et al study I referred to yesterday estimated that one life is saved per year for every 176 people added to the Medicaid rolls. From this we can calculate that the average cost per life saved is 176 x $6000, or slightly over $1 million. This sounds like a lot, but is actually well below what society is ordinarily willing to pay to save a life.

Most health care policy experts point out that Medicaid expansion is a huge financial windfall for the states, and that the logic of expanding Medicaid should be strong enough to overcome any resistance due to ideology. The states that do not expand Medicaid will be turning down “free money.” They will have to explain to their citizens why they can't have health care that is fully paid for by the federal government. The citizens of those states will be paying to expand Medicaid anyway through their federal taxes, their money will go to the states that have accepted the deal.

Uninsured citizens in the non-expanding states will continue to show up at hospital emergency rooms. Their care will be paid for through cost shifting. Costs are shifted in three ways.

1. Some of the cost is paid by those who have health insurance. Their premiums are higher to cover the cost of treating people without health insurance.
2. Part of the cost is paid by federal, state and local taxes, which provide emergency health care for the poor. The Urban Institute estimated that in 2008, state and local governments spent $10.6 billion providing emergency care for the uninsured. But beginning in 2014, the federal government will no longer subsidize emergency care, so the burden will fall even more heavily on state and local government. If they expand Medicare, state and local governments will have to spend very little on emergency care. This cost savings alone could be greater than the cost to states even when they are paying 10% of the cost of Medicaid expansion.
3. Finally, part of the cost is shifted to hospitals through what is called “forced charity”—uncompensated medical care for the uninsured.

Whatever Medicaid costs the federal government—and our best estimate is $6000 per recipient—this money will be added to the economies of the accepting states. Initially, it will go primarily to doctors, hospitals, pharmaceutical companies and other health care providers. Doctors and hospitals have already agreed to reduce their reimbursement rates under the ACA, in anticipation of having many more customers due to Medicaid expansion. They are also not happy about forced charity. They can be expected to lobby heavily for Medicaid expansion.

These advantages must be balanced against the costs to the states of Medicaid expansion.

1. The 5% (in 2017) to 10% (2020 and thereafter) of the cost of Medicaid expansion is not exactly pocket change. Some states also claim to be worried that the Feds will play a “bait and switch” game on them and increase their financial obligation in the future.
2. States also claim to be worried about the “woodwork effect.” Many Americans who are eligible for Medicaid in their state don't apply for it. However, the publicity surrounding the ACA and the threat of a fine for violating the individual mandate may persuade more eligible people to sign up. The states will then be responsible for whatever part of the cost they would have had to cover under traditional Medicare. However, the woodwork effect will occur anyway, even if the states do not expand Medicaid.

Health care experts such as Aaron Carroll and Austin Frakt argue that, leaving all humane considerations aside, it's in the overwhelming financial interest of states to implement Medicaid expansion. In the next part, I'll look at how these financial contigencies affect Pennsylvania and attempt to evaluate Governor Corbett's stated rationale for refusing Medicaid expansion.

You may also be interested in reading:

Tom Corbett to PA's Working Poor:  "Drop Dead!" (Part 1)

Tom Corbett to PA's Working Poor:  "Drop Dead!" (Part 3)

Tom Corbett to PA's Working Poor:  "Drop Dead!" (Part 4)