Medicaid Expansion Under the Affordable Care Act: States Refusing to Cover Newly Eligible Risk Losing New Federal Funding

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January Angeles, interviewed by Steven Roll and Deborah Swann  

January Angeles is a Senior Policy Analyst at the Center on Budget and Policy Priorities. She focuses on eligibility and enrollment for health care subsidy programs, and can be reached at Steven Roll is assistant managing editor for state tax with Bloomberg BNA. Deborah Swann is an editor for Bloomberg BNA's state tax.

In National Federation of Independent Business et al. v. Sebelius, Secretary of Health and Human Services, et al.,1 the U.S. Supreme Court ruled on the constitutionality of the Patient Protection and Affordable Care Act of 2010, upholding the law's individual mandate as a valid exercise of Congress's taxing power.2 In addition, the Court struck down, as unconstitutional, that part of the Medicaid expansion provision, which withdraws existing Medicaid funding to states that choose not to participate in the new program expanding health care to citizens whose incomes fall below certain threshholds.


BLOOMBERG BNA: How does the Supreme Court ruling affect health reform's Medicaid expansion?

ANGELES: As enacted, and before the U.S. Supreme Court ruling, the Affordable Care Act (the ACA) required states to expand Medicaid to most residents with incomes up to 133 percent of the federal poverty line (roughly $25,000 for a family of three).

The current Medicaid program requires states to cover only certain discrete categories of needy individuals: needy families, pregnant women, children, the blind, the elderly, and the disabled. There is no mandatory coverage for most childless adults, and the states have considerable flexibility with respect to coverage levels for parents of needy families.


Right now, most states offer Medicaid only to parents with incomes that are much lower than 133 percent of the federal poverty line. In the median state, working parents can only qualify for Medicaid if they earn less than 63 percent of the federal poverty line, and non-working parents would have to make less than 37 percent of the poverty line. Also, only a handful of states provide coverage to low-income adults without dependent children, regardless of how far below the federal poverty line they fall.


Under the ACA's Medicaid expansion, 17 million more people would have gained health insurance coverage through Medicaid by 2022. The U.S. Supreme Court has upheld the constitutionality of the ACA in June 2012, but it struck down the part of the Medicaid expansion provision which withholds federal funds for a state's existing Medicaid program if the state did not expand coverage. This means that it is now up to the states to decide whether or not to expand their Medicaid programs to cover low-income parents and other low-income adults whose incomes fall below 133 percent of the federal poverty line, but who are above the coverage levels provided in the states' existing Medicaid programs.


BLOOMBERG BNA: Who pays for the Medicaid expansion and how much will it cost?

ANGELES: The Medicaid expansion is a great deal for the states. The federal government will pay 100 percent of the costs of covering people who will be “newly eligible” for Medicaid for years 2014 through 2016. These are persons who would not be eligible under their states' current programs. After 2016, states will start paying some of these costs, but the federal government will always cover at least 90 percent.


ANGELES: The 90 percent that the federal government will pay to cover newly eligible beneficiaries is not time limited--this is what the federal government's share of the costs will be on a permanent basis. States that are worried about whether the federal government will uphold its end of the deal should look at the history of the Medicaid program and how much federal funding states have received. The federal contributions to Medicaid have been fairly steady since the program began in 1966. Even when the U.S. experienced budget crises, the federal government maintained Medicaid funding to the states. There is no reason to think that this trend will not continue and that federal funding for newly eligible beneficiaries under the Medicaid expansion would go below 90 percent in the future.

Furthermore, the federal government will continue to cover the same share of the costs associated with the populations that are eligible to be covered under existing state programs--on average about 57 percent, though it varies by state.


BLOOMBERG BNA: How much does the federal government pay for Medicaid expansion?

ANGELES: The federal government pays the bulk of the cost of expanding Medicaid. If states choose to expand their Medicaid programs in 2014 to cover most individuals under the age of 65 with incomes below 133 percent of the federal poverty line, the cost to the federal government would be $931 billion, and the states' share would only be $73 billion during the first nine years (2014 through 2022).

BLOOMBERG BNA: Does the $73 billion that states would shoulder include the cost of the administrative resources necessary to support the expansion?

ANGELES: No. This figure represents the dollars states would pay to increase coverage. It does not include the cost of administrative resources. However, the $73 billion in additional state costs does not take into account offsetting savings, such as the reduction in costs that a state or county would otherwise incur paying for medical care provided to the uninsured.

BLOOMBERG BNA: Which states are likely to benefit the most from the Medicaid expansion?

ANGELES: States that traditionally have had the stingiest Medicaid programs and have not expanded them very much, such as Florida and Alabama, have the most to gain from the Medicaid expansion.

Texas, for example, has a very large number of people without insurance. Five million Texans have no health insurance today, about a quarter of the state's population. If Texas expands Medicaid, nearly 1.8 million low-income adults (most of whom are uninsured today) will get insurance coverage through Medicaid, according to a study by the Urban Institute and Kaiser Family Foundation.3



Texas would increase its Medicaid spending by $2.6 billion in the first six years to cover an additional 1.8 million low-income adults, which is 3 percent more than the state is projected to spend on Medicaid without the expansion.  


To cover this many additional people, the state would have to increase its spending on Medicaid by about $2.6 billion in the first six years. That sounds like a lot of money, but in reality it is just 3 percent more than what the state is projected to spend on Medicaid even without the expansion. Also, that $2.6 billion in state spending will bring $52.5 billion in federal dollars to Texas. That is a significant benefit to the state economy. And, Texas would save money in other ways, especially by reducing the money it spends providing health care in emergency rooms and health clinics to people without insurance.


Uninsured people also receive services that are state or county funded, such as mental health and substance abuse treatment, and some public health services. Some of these services could be covered by Medicaid, and therefore largely covered by the federal government rather than the state or county.


BLOOMBERG BNA: The Washington Post on Monday, Aug. 27, 2012 ran an article that counties in Texas may buck the state and join the Medicaid expansion. Would you care to comment on this article?

ANGELES: The Washington Post article is a good illustration of how much states and counties are spending on care for the uninsured today, and how they would benefit from expanding Medicaid. It also shows that there are many stakeholders who are affected by the state's decision on the Medicaid expansion. States shouldn't just focus on costs and savings to the state, but should also consider the impact on counties and other entities that shoulder the cost of care for the uninsured.

BLOOMBERG BNA: What could be some of the consequences of a state's decision not to expand Medicaid?

ANGELES: A state's decision to reject the Medicaid expansion would leave its poorest adults--primarily parents and other adults working for low wages--out in the cold. That's because the Affordable Care Act's federal subsidies to help people buy coverage in the newly established health insurance marketplaces, called exchanges, will be available only to people with incomes between 100 percent and 400 percent of the federal poverty line. People with incomes below the poverty line will not be eligible for the subsidies, in part because the Affordable Care Act envisioned that these persons would be covered by the Medicaid expansion.

The U.S. Supreme Court's ruling that basically makes the expansion optional means that, in a state that does not expand Medicaid, a person could have income that is too high to qualify for Medicaid (under the state's existing Medicaid program) but too low to qualify for exchange subsidies. There will essentially be a “donut hole” in coverage for low-income people, and these people are likely to remain uninsured without the assistance that Medicaid or the exchange subsidies provide.



A good cost-benefit analysis looks at both the costs and the savings that would result from expanding Medicaid.  


When people don't have insurance, they are worse off and so is the state's economy. People with Medicaid are much more likely to have a regular source of health care and to have seen a doctor in the last six months than people without insurance. They have financial security when a catastrophic illness hits. And, a new study tells us that when states expanded Medicaid in the past, mortality rates fell. Medicaid literally saves lives. In turn, a strong, healthy workforce is a key building block for a strong state economy.


Finally, states will still end up paying the large and growing costs of caring for people without insurance. So if a state rejects the expansion it would miss out on the chance to reduce those costs.


BLOOMBERG BNA: If a state were to do a cost-benefit analysis of expanding Medicaid, what would be the key factors to consider?

ANGELES: A really good analysis looks at the complete picture: both the costs and the savings that would result from expanding Medicaid. Many just look at the costs. If expanding Medicaid will cost the state a certain amount of money, but that spending would result in reduced spending on other areas in the state budget - for example, because more people will be covered and the state will spend less on services for the uninsured -- then those savings should be part of the equation.

Analyses should also make realistic assumptions about how many people will participate and how much it will cost, on average, to cover them. For example, it is inappropriate to assume that all people who would be eligible for Medicaid will enroll. History tells us that just doesn't happen, in Medicaid or in other programs. Similarly, analyses should not assume that the people who will newly enroll into Medicaid will be much sicker and more expensive to cover than the people who get Medicaid coverage now. Research shows that is not the case.


States also have to take into account the fact that there will be some new costs for covering people in Medicaid whether the state expands or not. Because these new costs will happen regardless, they should not be attributed to the Medicaid expansion. Specifically, the requirement for people to purchase coverage (known as the individual mandate), along with a significant amount of outreach to get people to sign up for subsidies to buy insurance in the new health insurance exchanges, will lead people who are already eligible for Medicaid, but not currently enrolled, to apply and get coverage. States will incur the costs of covering these people even without the Medicaid expansion.


BLOOMBERG BNA: Is there a time limit for states' signing up for the Medicaid expansion?

ANGELES: No. The Department of Health and Human Services has said that there is no deadline for when a state can decide whether or not to move forward with the Medicaid expansion.

BLOOMBERG BNA: Are there any downsides to a state expanding Medicaid?

ANGELES: No, it's a great deal that states shouldn't pass up. By expanding Medicaid, states get to help hundreds of thousands of their residents get the health insurance they need while only paying a small fraction of the costs.

Ms. Angeles has authored a paper on How Health Reform's Medicaid Expansion Will Impact State Budgets, which can be found on the website for The Center on Budget and Policy Priorities. The Washington Post article, “Texas Counties Consider Going It Alone on Medicaid Expansion” is available in the Aug. 27, 2012 edition.

1 U.S., No. 11-393 (June 28, 2012); together with Department of Health and Human Services et al. v. Florida et al., U.S., No. 11-398 (June 28, 2012); Florida et al. v. Department of Health and Human Services, et al., U.S., No. 11-400 (June 28, 2012).

2 The individual mandate requires virtually all U.S. citizens to obtain health care insurance or pay a penalty.

3 John Holahan & Irene Headen, Medicaid Coverage and Spending in Health Reform: National and State-by-State Results for Adults at or Below 133% FPL, Kaiser Commission on Medicaid and the Uninsured (2010).


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