Federal help for Medicaid expansion will aid adoption

Officials in the Obama administration confidently predict that few, if any, states will opt out of the expansion of Medicaid that health care reform allows. Opponents say most of them will.
My guess is, both sides are right. Many states seem likely to opt out at first, judging by what their governors have said. Over time, however, assuming the law stays in place, most states will find it difficult to resist the substantial subsidies for new enrollees. After all, over the past few decades, states have gradually added optional benefits and expanded the number of beneficiaries beyond the bare minimum required by the federal government. And they have done so in response to much smaller subsidies than offered under the 2010 health care-reform law.
Before the court’s ruling, the Affordable Care Act was projected to reduce the number of uninsured Americans by 30 million to 33 million in 2016 and beyond. More than half of those additional insured – 16 million to 17 million – were expected to gain coverage through the enlargement of Medicaid and the Children’s Health Insurance Program.
During the first three years, 2014 to 2016, the federal government is to fully subsidize this expansion. Then, the subsidy is scheduled to gradually decrease, to 90 percent in 2020 and thereafter. The average federal subsidy for current Medicaid beneficiaries varies from state to state but averages less than 60 percent.
Looking at the decade ahead as a whole, the Congressional Budget Office has projected that the federal government will pay 93 percent of the added Medicaid costs. The 7 percent state share would generate less than a 3 percent increase in total state Medicaid spending over that time, the Center on Budget and Policy Priorities has calculated.
The additional costs depend on current Medicaid-eligibility patterns, which vary from state to state, research from the Kaiser Family Foundation shows. Some states, such as Maine and Massachusetts, are projected to experience a reduction in costs because the federal government will pay a higher matching rate on already-covered beneficiaries than those states. Other states, such as Texas, would face higher costs because their existing coverage is so skimpy. Even in Texas, though, state Medicaid costs would rise by about 5 percent over the coming decade, not a tidal wave.
On average nationwide, the additional state spending would amount to less than $600 per year for each additional insured beneficiary. So what do state governments get for that? First and most important, they help their residents. Evidence indicates that access to Medicaid reduces people’s financial strain and improves their self-reported health.
Second, state governments enjoy reductions in other costs. For example, as the number of uninsured decreases, so does the cost of uncompensated care. In 2008, state and local governments paid roughly 20 percent of the hospital costs for uninsured people, according to an Urban Institute study.
There is history to support the expansion argument as well. In 2007, about 60 percent of Medicaid costs were not federally required, according to research by the Urban Institute and the Kaiser Commission on Medicaid and the Uninsured. They reflect additional benefits that state governments have chosen to cover, or optional beneficiaries that states have decided to include.
In other words, an average federal matching rate of less than 60 percent has proved sufficient incentive for state governments to include optional add-ons – to the point that those add-ons account for the majority of Medicaid costs.
Two important factors affect this analysis. First, if Medicaid is turned into a block grant, the federal government’s payments would be fixed, no longer providing an incentive to expand coverage on the margin.
Second, even without a fundamental change in Medicaid, some state policymakers are legitimately worried about whether the 90 percent matching rate will remain, given the federal government’s long-term-deficit challenges.
With more certainty about the long-term fiscal gap, the wavering governors’ concerns that they will one day have the rug pulled out from under them should be attenuated. &#8226


Peter Orszag is vice chairman of global banking at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration.

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