November 17, 2013

Medicaid Expansion: States Under Duress

Robert Graboyes

Senior Research Fellow
Summary

In 2012, the U.S. Supreme Court ruled that the federal government could not use federal pursestrings to coerce states into expanding Medicaid. But that ruling left intact a different form of coercion that Virginia and other states now face.

In 2012, the U.S. Supreme Court ruled that the federal government could not use federal pursestrings to coerce states into expanding Medicaid. But that ruling left intact a different form of coercion that Virginia and other states now face.

The Affordable Care Act, otherwise known as Obamacare, instructed the states to expand Medicaid eligibility to include residents living at up to 133 percent of the federal poverty level (FPL) — effectively 138 percent after the law’s new method for calculating income is incorporated — or lose all current federal Medicaid funds. In National Federation of Independent Business v. Sebelius, the high court declared that this was unconstitutional. As a result, states can refuse to expand, and the federal government cannot retaliate by withdrawing its existing contribution.

The Supreme Court’s ruling upholding most of Obamacare had some unintended and very negative consequences. For example, in states that now refuse to expand Medicaid (and thus avoid the significant financial risks that come with Medicaid expansion), some residents may be left in a health insurance no-man’s land.

A Virginia couple with two children is below the federal poverty line if their combined income is less than $23,550 per year. As of 2013, this family is eligible for Medicaid if their income is below 31 percent of this amount ($0 to $7,300.50).

If Virginia expands Medicaid à la Obamacare, the family will be eligible for the program if their income is under 138 percent of FPL ($0 to $32,499) in 2014. At income levels between 138 and 400 percent ($32,499 to $94,200), they can receive taxpayer subsidies to buy private insurance on the new health insurance exchanges. Above 400 percent ($94,200 and up), they will not be eligible for either.

If Virginia does not agree to the expansion, the family gets Medicaid if they earn between 0 and 31 percent ($7,300.50) of the FPL. If they earn between 100 and 400 percent ($23,550 to $94,200), they get taxpayer subsidies. Above that, they get neither.

Here’s the outrageous part: In this scenario, a family of four earning between $7,300.50 and $23,550 — below the poverty line and earning less than those with access to subsidized insurance prices — also gets nothing.

Suppose a private family insurance policy costs $8,000. If the family earns $7,300, they dare not increase their income by even a dollar, because they will go suddenly from free Medicaid to health insurance that costs more than they earn in total.

Meanwhile, if the family earns $24,000, they will only have to pay $480 for private health insurance, with the remaining $7,520 paid for by the federal government. But if their income drops by $1,000, they will lose the subsidies and will have to pay the full $8,000 themselves. Obamacare turns a bit of bad luck into a large-scale family disaster.

It is worth noting that because Obamacare is sending the cost of health insurance through the roof, the reality for families and individuals may be even worse. Its insurance costs are especially heavy for younger people — the people currently struggling to find jobs, raise children and pay off student loans.

Some states have been given the latitude to work out partial-expansion plans to address these concerns, an idea which has been floated in Virginia. But a partial-expansion of Medicaid under the ACA requires federal approval — and there is no guarantee of acquiring such a waiver. Strictly going by the law, Virginia would not have the ability to simply expand Medicaid for the family of four up to 100 percent of the FPL — thus potentially leaving open the coverage gap.

Further, if Virginia turns down the Medicaid expansion, those in the 100 percent to 138 percent income bracket could go onto the health care exchanges and purchase a discounted private insurance plan — which the federal government would subsidize. On the other hand, if Virginia takes the Medicaid expansion, the most realistic option for those in this income group would be Medicaid, as they would become ineligible for the discounted plans in the exchanges.

This suggests another question for Virginia and the other states to raise. For all its good intentions, Medicaid relegates lower-income people to rotten insurance coverage providing rotten care.

So if Washington is going to provide health care, why don’t lower-income Americans deserve the same quality insurance and the same quality care that wealthier people have?

Obamacare aims to add 15 million people to the Medicaid rolls — including some who have had private insurance until now. The bean-counting of expansion dollars ought to be secondary to the real underlying questions: Shall we shovel more people into substandard care? If not, how do we fix things?