August 15, 2016

Cost of Medicaid Expansion Far Exceeds Initial Estimates

Brian Blase

Former Senior Research Fellow
Summary

A study last year from economists at Harvard, Dartmouth, and MIT found that Medicaid enrollees value program benefits at only between 20 to 40 cents for each dollar of spending. That finding, coupled with the Medicaid expansion cost explosion, means that tens of billions of federal taxpayer dollars are being wasted while health-care interest groups gain excess profits.

Washington experts have been frequently wrong about the Affordable Care Act.

They projected far more enrollees in ACA exchanges than materialized. They also projected that the individual insurance market would stabilize in 2016 with robust competition. Instead, the country is grappling with enormous premium hikes and fewer choices.

A new government report reveals perhaps the largest mistake yet: Medicaid enrollees who gained coverage through the ACA cost almost 50 percent more, on average, than the government projected just one year ago.

ACA supporters often point to Medicaid expansion as the law's greatest success since it reduced the overall uninsurance rate. We now know that result comes with a gigantic price tag.

According to the government's own experts at the Department of Health and Human Services (HHS), taxpayers spent an average of $6,366 on Medicaid expansion enrollees in 2015. That's 49 percent more than the $4,281 amount that HHS projected in last year's report. With 9 million Medicaid expansion enrollees in 2015, this amounts to a $19 billion mistake and a substantial additional burden on federal taxpayers.

Experts told us that the ACA Medicaid expansion population would be healthier than previously eligible adults on Medicaid and about 30 percent less expensive than previously eligible Medicaid enrollees.

While the experts, using sophisticated models, got the average cost of expansion Medicaid enrollees off by nearly 50 percent from projections made last year, basic economics explains what happened:

The federal government is reimbursing states for 100 percent of the cost of the expansion population, so states are negotiating Medicaid managed-care contracts with the knowledge that they are entirely using Washington's (read: other people's) money. The expansion population rate is much higher than the rate for other people on Medicaid.

Think about it like this: When you go out to dinner on a tight budget, you are careful about what you order. Maybe you order a burger and fries. But when you go out to dinner and someone else is picking up the tab, the filet mignon is a lot more tempting.

As a result of the incentives, it shouldn't be surprising that states have set extremely high Medicaid managed-care payment rates for the ACA expansion population. Hospitals and insurers in the state are happy with the outcome and no doubt reward politicians in the state who are responsible for their excess profits.

Federal taxpayers are then left with an enormous tab as both enrollment in the ACA Medicaid expansion and spending per expansion enrollee has far exceeded expectations.

Including the $19 billion mistake with the Medicaid expansion cost, taxpayers ended up spending $26 billion more on Medicaid in 2015 than the government's experts projected would be spent just one year prior. Overall, Medicaid spending grew by nearly $100 billion in the first two years of the ACA Medicaid expansion. Congress and other government watchdogs should investigate what's going on and act to protect federal taxpayers' interests.

First, the models and assumptions employed by the Obama administration to estimate the impact of the Medicaid expansion must be reexamined.

Second, the contracts between the states and the insurers must be closely reviewed.

Third, spending patterns of the insurers should be examined to determine any peculiarities like significantly higher expenditures at the end of the year to avoid rebating money back to the federal government if the capitated payment rates were excessive.

A study last year from economists at Harvard, Dartmouth, and MIT found that Medicaid enrollees value program benefits at only between 20 to 40 cents for each dollar of spending. That finding, coupled with the Medicaid expansion cost explosion, means that tens of billions of federal taxpayer dollars are being wasted while health-care interest groups gain excess profits.

The Medicaid expansion cost explosion is another reason why President Obama's signature domestic accomplishment needs significant change.