September 28, 2016

ACA Medicaid Expansion: A Poor Use Of Taxpayer Dollars

Brian Blase

Former Senior Research Fellow
Summary

In 2015, taxpayers spent $550 billion on Medicaid. Many program enrollees benefit from all of this spending. Moreover, the recipients of government spending benefit from higher incomes. However, the important question for economists and policy analysts is what value that Medicaid enrollees receive from the spending. The evidence, at least for ACA Medicaid expansion enrollees, suggests not much.

Dr. Aaron Carroll, a long-time supporter of the Affordable Care Act’s (ACA) Medicaid expansion, writes in The New York Times that, on balance, “it’s not hard to argue that money allocated to Medicaid is well spent.” Dr. Carroll’s analysis is flawed, however, and he fails to address evidence that contradicts his conclusion. A full accounting suggests that the ACA’s Medicaid expansion is a poor use of taxpayer dollars.

Dr. Carroll largely focuses on the ACA’s Medicaid expansion. Yet he did not address new data showing government spending on Medicaid expansion enrollees is nearly 50% higher than the government projected, nor that Medicaid enrollees obtain only 20 to 40 cents of value for each dollar the government spends on their behalf. Instead, he mainly supports his claim by citing studies that are inapplicable to the Medicaid expansion population; he fails to mention that higher medical consumption by Medicaid expansion enrollees reduces access to care for others in states that expand, including previously eligible Medicaid enrollees; and he erroneously treats economic transfers as benefits, rather than zero-sum.

Measuring the Health Benefits of Medicaid Expansion

The ACA expanded Medicaid to many lower-income, working-age, non-disabled adults. Prior to the ACA, federal law required participating states to provide Medicaid coverage to low-income children, pregnant women, the disabled, and the low-income elderly.

When discussing Medicaid’s effect on health outcomes, Dr. Carroll primarily cites studies examining children and pregnant women—groups not affected by the ACA’s Medicaid expansion. Some of these studies—as I discuss in recent Mercatus research—do find marginal benefits from targeted eligibility expansions. Whatever the results of these studies, however, they are largely irrelevant to the discussion of whether the ACA’s Medicaid expansion is worth the cost since they consider a different population than the one gaining coverage because of the ACA.

Dr. Carroll dismisses many observational studies that show Medicaid is associated with poor health outcomes, arguing that these studies show worse health outcomes because Medicaid enrollees are often poorer and sicker, not necessarily because Medicaid causes poorer health. One example is a study of nearly 900,000 procedures from 2003 to 2007, which controlled for a multitude of patients and hospital characteristics, and found that Medicaid enrollees were significantly more likely than others to experience complications, to spend additional time in the hospital, and to die in the hospital.

Avik Roy has written extensively on this study, suggesting it shows Medicaid’s shortcomings. Based on a review of many of these studies several years ago, I concluded that Medicaid enrollees frequently receive inferior medical treatment, are often assigned to less-skilled surgeons, and tend to receive poorer post-operative instructions. Still, Dr. Carroll is correct that studies with random assignment into a treatment group and a control group are superior to observational studies.

Fortunately, there is a randomized, controlled study of the effects of giving Medicaid to a very similar population to the one targeted by the ACA’s Medicaid expansion. In 2008, Oregon was able to expand its Medicaid program to a limited number of low-income adults. Oregon assigned those slots using a lottery. People who won the lottery and submitted their paperwork got Medicaid coverage. Oregon’s Medicaid expansion therefore produced a randomized experiment that enabled researchers to better study the effects of Medicaid.

Although Dr. Carroll references the Oregon Medicaid experiment, he failed to provide the key takeaways. Medicaid enrollment increased outpatient visits, hospitalizations, the use of prescription medications, and emergency room visits, but it did not produce discernible improvements on any of the three physical health metrics evaluated: blood pressure, cholesterol, or blood sugar. The study did find that Medicaid lowered medical debt and the prevalence of depression. (For those interested in further detail about the Oregon Medicaid experiment, including some of its limitations, see Jim Manzi’s excellent summary.)

Expanding Medicaid also affects health care utilization and health outcomes for people other than the targeted enrollees, and most studies looking at Medicaid fail to account for this. Expanding Medicaid increases demand for health care services, and therefore affects the allocation of those services. In the mid-1990s, Tennessee enacted a large Medicaid expansion that was similar in many respects to the ACA’s Medicaid expansion. Yet “TennCare” likely did not produce improved health outcomes relative to neighboring states. Indeed, all of Tennessee’s neighboring states experienced larger reductions in mortality in the first four years of the TennCare expansion than did Tennessee.

Correctly Applying Cost-Benefit Analysis 

Unfortunately, it is often easy to confuse benefits with transfers. A simple way to think about a transfer is if you give me a $1. I am clearly better off by $1, but society is not better off in the aggregate because you are worse off by $1. The exchange represents a resource simply transferred from you to me.

Carroll conflates benefits and transfers. For example, he references a study that Medicaid enrollment may reduce an enrollee’s medical debts by as much as $1,000. Carroll describes this as a benefit—which it undoubtedly is, from the perspective of the enrollee and the health care providers who ultimately receive that $1,000 payment. But from a societal perspective, there is no gain. The benefit to enrollees and providers is fully offset by the cost to taxpayers. Carroll likewise claims another benefit of the ACA’s Medicaid expansion is that states save money. But that benefit is fully offset by the cost of higher federal spending and thus federal taxes.

A key point that is not emphasized enough is which level of government is best suited to weigh the value obtained from an extra dollar of public spending. Unfortunately, because the federal government provides an open-ended reimbursement of about 60% of state Medicaid expenditures, states only need to receive at least 40 cents of value, on average, to justify spending $1 more through the program.

Since the open-ended reimbursement increases state spending and thus both federal and state taxes, the deadweight loss of taxation—which is a real cost—increases. In simple terms, this cost is the foregone economic activity as people take actions—such as working less—to avoid the tax.

Low Enrollee Value of Medicaid Strong Indicator That ACA Expansion Is Inefficient

In 2015, taxpayers spent $550 billion on Medicaid. Many program enrollees benefit from all of this spending. Moreover, the recipients of government spending benefit from higher incomes. However, the important question for economists and policy analysts is what value that Medicaid enrollees receive from the spending.

The evidence, at least for ACA Medicaid expansion enrollees, suggests not much.

The Oregon Medicaid experiment found, “Medicaid’s value to recipients is lower than the government’s costs of the program, and usually substantially below.” The researchers estimated that the “benefit to recipients from Medicaid per dollar of government spending range from about $0.2 to $0.4.” Another way to interpret the study’s finding is that a majority, potentially a large majority, of Oregon Medicaid expansion enrollees would rather receive 40 cents in cash than a $1 worth of Medicaid-financed services.

In fact, 40% of the people who won the Oregon Medicaid lottery did not even bother to submit the paperwork to get coverage. This inaction generally reveals that their expected benefit from Medicaid is less than the cost to them of completing the enrollment forms.

Main Beneficiaries of Medicaid Expansion Are Insurers and Hospitals

Though many Medicaid expansion enrollees are better off as a result of the expansion, many previously eligible enrollees will find themselves worse off, since some degree of resources will be reallocated from them to newly eligible enrollees. This is particularly true since federal reimbursement rules create a major bias in favor of Medicaid expansion enrollees over traditional enrollees. Moreover, taxpayers are worse off, and the overall economy is likely worse off, particularly if the health benefits from expansion are relatively small, because of the deadweight loss of taxation.

The real beneficiaries of the ACA Medicaid expansion thus far are health insurance companies and hospitals. Health insurance companies, whose stock has soared over the past several years, benefit from payment rates that are likely well in excess of the cost of providing health care coverage. States have taken advantage of the 100% federal financing rate for expansion enrollees and created payment rates 49% above what the Obama administration expected last year. Since many enrollees in Medicaid managed care plans likely receive little, if any, health care services during the year, and enrollment in the program is significantly above expectations, insurers are likely reaping a windfall from the expansion.

Hospitals also appear to be large beneficiaries of the ACA’s Medicaid expansion. Some of the excessive payments to insurers flow to hospitals. Moreover, hospitals will provide much less charity care as a result of the ACA. Prior to the ACA, low-income uninsured people only paid about 20% of their medical expenses. Taxpayers will now be picking up much of that tab through Medicaid payments.

Conclusion

Dr. Carroll acknowledged that Medicaid involves tradeoffs, yet failed to provide a complete framework for evaluating the benefits and costs of the ACA’s Medicaid expansion. A more complete accounting of the available evidence suggests the Medicaid expansion is a poor use of taxpayer funds.