Medicaid Expansion Is Expensive for Both States and the Poor

States should be wary of the impact the expansion will have on their state budgets when the expansion is perceived as permanent, but the federal aid turns out to be temporary.

Following the Supreme Court ruling two years ago that made the Affordable Care Act's Medicaid expansion basically optional, several states around the country are still in the process of deciding whether they will expand the program or not.

Although Florida, Utah and Virginia have signaled their interest in a full Medicaid expansion, governors in Pennsylvania, Tennessee, Indianaand Missouri are exploring different approaches using waivers or so-called “private option” type plans modeled after Arkansas recent expansion. Either way, it would be a mistake.

As it turns out, the Mercatus Center just released a new book edited by my colleague, Jason Fichtner, called The Economics of Medicaid that may prove to be an invaluable resource to states considering the expansion. It features contributions by health care experts like Jim Capretta, Joe Antos, June O'Neill and two of my other Mercatus colleagues, Chuck Blahous and Robert Graboyes.

As the book shows, Medicaid expansion is guaranteed to be an expensive endeavor. Under the ACA, states that expand Medicaid would have to expand eligibility beyond the previous subset of poor Americans, such as pregnant women, to cover all adults with incomes of up to 138 percent of the federal poverty level ($15,415 for an individual in 2012; $31,809 for a family of four). The ACA, of course, offers a sweetener. Between 2014 and 2016, federal government would pay for 100 percent of the expansion. That share would drop to at least 90 percent thereafter.

It may seem like a great deal, but states shouldn’t be fooled. As Blahous explains in the chapter called “Medicaid Under the Affordable Care Act,” states face different financial situations and different budgetary circumstances, their populations make different value judgments and they deal with very different populations. Thus, it’s only natural that we should see varying responses from the states.

However, some things will be true for every state expanding the program. First, from the get-go, states that expand will have to foot the bill for the administrative costs of covering those adults, as well as other costs related to other parts of the expansion.

Second, this almost-free lunch on paper will likely turn out to be very burdensome for the states. As Blahous explains, throughout the last decade, Medicaid has progressively become one of the biggest programs in most states' budgets, and it's still growing. Although each new beneficiary added under the expansion won't cost nearly as much to the states, it will still add to the cost of an already unsustainable situation.

In addition, states can’t be sure the federal government will stick to shouldering the extra costs of the Medicaid expansion in the future. The federal government is facing serious fiscal problems of its own, and it is very possible that future fiscal constraints at the federal level will leave the states footing the bill for the expansion.

In other words, states should be wary of the impact the expansion will have on their state budgets when the expansion is perceived as permanent, but the federal aid turns out to be temporary.

For all these reasons, he concludes: “Despite the arguments of some advocates that expanding Medicaid will reduce state costs of treating the uninsured, the available data do not appear to support the suggestion of net cost savings for states. On average, states should expect their total expenditures to rise significantly if they choose to expand Medicaid.”

As if that’s not bad news enough, the book also lays out other reasons to oppose the expansion. For instance, the authors note Medicaid is actually a bad deal for the recipients themselves. Study after study has shown that the program often provides second-class care. Poor access and poor health outcomes are often the fate that awaits Medicaid beneficiaries — including the need for greater reliance on emergency rooms and higher mortality rates.

In this context, state legislators should ask themselves whether the expansion is really worth the future cost to taxpayers in their states and whether it is really fair to throw more low-income Americans into costly substandard health care. I think the answer is clearly no.