Utah’s Novel Approach to Medicaid Expansion

The state of Utah recently enacted legislation to expand its Medicaid program, albeit by less than provided for in the Affordable Care Act (ACA). Specifically, the Utah law would bring childless adults with incomes below the federal poverty line onto Medicaid, rather than all those with incomes up to 138% of the poverty line as specified in the ACA.

The Utah legislation is controversial because the state’s voters had endorsed the ACA’s full Medicaid expansion in a November 2018 referendum. Whether health policy details should be determined by public referenda or by the judgment of their representatives is a critical public policy question, beyond the scope of this article. However, if viewed from the narrow perspective of state policy interests, Utah’s lawmakers got this one right. This is likely why other states, including Georgia, are also considering a similar partial-expansion approach. 

The issue arises because the ACA does not provide states the same incentives to cover childless adults with incomes between 100-138% of the federal poverty line ($12,140 for a single individual in 2019) under Medicaid, as it does for states to cover childless adults who are in poverty. 

Some background information is needed to fully understand this issue. The ACA increased health insurance coverage via multiple methods, including the creation of subsidized health insurance exchanges and an expansion of Medicaid. Grossly simplifying, the ACA sought to require states to expand Medicaid to cover all childless adults with incomes below 138% of the federal poverty line. But when the Supreme Court ruled in 2012 that the ACA was broadly constitutional, it also found that the federal government could not force the states to expand Medicaid in this way. Specifically, the court ruled that the federal government couldn’t threaten to withdraw Medicaid funding from states that declined to expand coverage, which left expansion optional for the states.

After the Supreme Court issued its opinion, some ACA advocates moved to aggressively spin the decision, arguing that although expansion was technically optional for the states, they all should and would expand Medicaid per the ACA’s specifications anyway. These advocates argued that the terms presented to the states by the ACA -- specifically, that the federal government would pay 90% of the cost of covering the Medicaid expansion population over the long term – were simply too good for any state to pass up. 

I researched the question for the Mercatus Center in 2013 and found this was not so; to the contrary, I found that the decision facing states was a complex and closely-balanced one, that their incentives to cover individuals were different above the poverty line than below it, and that the conflicting incentives could lead to a variety of conclusions depending on the particular demographics, budget circumstances and value judgments of each state. Based on this analysis, I predicted (correctly) that states would make a wide range of decisions. As it turns out, the specific incentives identified in my 2013 paper are directly relevant to Utah’s recent legislation.

The conclusions of my paper can be summarized as follows:

1)    After the Supreme Court decision, states faced a common incentive to decline to expand Medicaid to cover childless adults with incomes above the federal poverty line.

2)    With respect to childless adults below the poverty line, the decision was a tough call and reasonable arguments could be made either way, depending on the state’s unique circumstances.

3)    Much rode on the federal government’s posture; if the federal government agreed to provide the enhanced 90% funding match rate for a partial expansion, states would be heavily incentivized to exclude childless adults with incomes above the poverty line from Medicaid. If instead the federal government presented states with an “all or nothing” ultimatum – i.e., either expansion up to 138% of the poverty line, or no enhanced federal support whatsoever for any Medicaid enrollees – then states’ decisions would be especially difficult.

Let’s review each of these three findings in turn.

First, it was clear that states should try to avoid expanding Medicaid to cover childless adults above the poverty line. This incentive arose because of the way the ACA was structured. The ACA offered substantial subsidies (tax credits) to individuals above the poverty line to buy health insurance on newly-established exchanges, but only if they were not otherwise eligible for Medicaid. If states covered this population through Medicaid, these individuals would be rendered ineligible for the health exchange subsidies -- and while the federal government would pick up most of such Medicaid costs, states would incur some. By contrast, if these individuals were left out of Medicaid, the entire cost of subsidizing their coverage would fall on the federal government. As my paper noted:

“If states cover adults with incomes above 100 percent of the FPL under Medicaid, per the terms of the ACA states will face 10 percent of the associated costs by 2020. If instead these individuals remain uninsured by Medicaid and receive their health insurance through the ACA’s exchanges, states will pick up none of the costs, as the subsidy for these individuals would be provided through federal income tax credits. States thus could potentially eliminate their own costs of covering this population if they leave them uninsured by Medicaid and their coverage is subsidized solely by the federal government. Not only would declining to cover those over 100 percent of the FPL through Medicaid limit states’ direct costs, but the available analysis suggests that if these individuals are covered through the exchanges, it could also improve the quality of the health insurance coverage they receive.”

The second finding was that states faced a difficult decision with respect to covering childless adults in poverty through Medicaid. The obvious benefit of expansion for states would be that their citizens would receive health insurance coverage financed predominantly by the federal government (meaning, in effect, by taxpayers in other states). But participating states would also incur substantial additional costs, especially when considering the “woodwork effect” by which individuals who were previously eligible for Medicaid but hadn’t yet signed up would be more likely to attain coverage during a Medicaid expansion. This is an important consideration, especially in states with large numbers of previously-eligible-but-yet-uninsured individuals, for whom states must pick up a much larger share of Medicaid costs than for the ACA’s target expansion population. 

Expanding the number of Medicaid beneficiaries also increases competition among patients for a limited supply of Medicaid services. A specific state facing budget constraints may place a higher priority on maintaining timely access to health services for vulnerable previously-eligible populations such as children and pregnant women. There is also the fact that current-law federal commitments to Medicaid are unsustainable and will almost certainly have to be rolled back at some point, increasing the share of expansion costs that falls on the states. In the end, there were indeed powerful incentives for states to expand Medicaid to cover childless adults below the poverty line, but the decision was hardly a slam-dunk for each and every state (see Figure 1, reproduced directly from my paper).

Figure 1: State Decision Tree re Medicaid Expansion

The third significant factor here is the attitude of the federal government. Partial expansion up to the federal poverty line was a superior choice for many states only if the federal government agreed to provide the ACA’s enhanced federal funding match rate for that partial expansion. But the Obama administration, which favored expanding coverage to 138 percent of the poverty line on policy grounds, issued guidance that it would not provide the ACA’s enhanced federal funding support for partial expansions. This left states to wrestle with a difficult “all or nothing” decision, with different states predictably falling on opposite sides of that line.

Since so much rode on the federal government’s attitude toward partial Medicaid expansion, it was unsurprising that some states would re-evaluate their decisions after the Trump administration succeeded the Obama administration. If the Trump administration also declines to provide the ACA’s enhanced match rate for a partial expansion, then Utah’s proposed partial expansion will be more expensive to the state than a full expansion that would bring in more federal dollars. It’s undoubtedly for this reason that the Utah legislation contains a provision to implement the full ACA Medicaid expansion “if the federal government does not approve” Utah’s proposed partial expansion. But if instead the Trump administration approves the partial expansion, then the optimal policy call for Utah and other states is to limit Medicaid expansion to covering only childless adults in poverty, for the reasons detailed in my 2013 paper.

But therein lies a critical rub: the very factors that make partial expansion attractive to states may also make it unattractive to the federal government. It is widely assumed that deviating from the ACA’s specifications with a partial Medicaid expansion requires a waiver under Section 1115 of the Social Security Act. Such waivers must not increase the federal deficit. Depending on enrollment assumptions, the federal government’s providing ACA tax credits to those with incomes between 100-138% of the poverty line may be more expensive to the federal budget than enrolling all such individuals in Medicaid. If so, the federal government would have reason to decline Utah’s application. 

Utah’s legislation deviates from the intent of the ACA to cover childless adults with incomes up to 138 percent of the federal poverty line, just as it deviates from the preference expressed by Utah voters last November. There should always be a high bar to legislators’ departing from voters’ expressed directions. But if the question is framed in terms of state interests, and if it turns out that the Trump administration is amenable, Utah’s attempt to limit its Medicaid expansion represents its optimal policy choice.