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Medicaid Eligibility Expansion: Arguments For and Against States Opting for the ACA

In deciding whether to expand Medicaid eligibility under the Affordable Care Act (ACA), governors and state legislatures face a complex, politically and fiscally challenging choice. The decision on Medicaid eligibility expansion is already a hot topic in state capitals and state election campaigns. Expect the politics and policy of Medicaid to reach a fever pitch after the November elections. In this post, I outline some of the main arguments for and against a state opting for ACA Medicaid eligibility expansion.

Background on ACA Medicaid Eligibility Expansion Option:

Effective January 2014, the ACA originally expanded Medicaid eligibility to most adults between age 18 and 64 with incomes below 138 percent of the federal poverty level (FPL). According to the Congressional Budget Office (CBO), this was expected to add at least 16 million new enrollees to the 68 million currently enrolled in Medicaid. Actuaries at the Centers for Medicare and Medicaid Services (CMS) projected a much larger enrollment increase – 24 million by 2016 and 28 million by 2019 – but, unlike CBO, CMS estimates included the effect of new ACA-required federal rules substantially streamlining Medicaid eligibility and enrollment processes, for both many current (pre-ACA) Medicaid eligibility groups and the new ACA covered population. By itself, the streamlining is expected to (a) significantly increase Medicaid program enrollment, (b) reduce lapses or interruptions in Medicaid coverage, and (c) lengthen the average time individuals are enrolled in Medicaid.

For Medicaid costs of the expansion population, ACA offers states with enhanced federal match – 100 percent in CY 2014-2016 and thereafter phasing down from 95 percent to 90 percent. This compares to the standard federal Medicaid match rate of 50 percent to ~77 percent, which varies based on a state’s relative per capita income. The standard federal match rates will continue to apply for the benefit costs of all other Medicaid enrollees, including individuals entering Medicaid as a result of the streamlined, simplified processes for applications, eligibility determinations, and renewals required under CMS rules.

As written, the ACA Medicaid eligibility expansion was mandatory for states. If a state failed to implement the expansion, it faced the possible loss of all federal Medicaid funding – effectively making it an offer the states could not refuse.

However, in NFIB v. Sebelius, the U.S. Supreme Court ruled that Congress could not coerce states into expanding Medicaid. As a result, the ACA Medicaid eligibility expansion is now optional for each state. States still await official guidance from CMS, including revised ACA regulations to match the Court’s ruling, but the process to elect to expand Medicaid will likely be handled through a State Plan Amendment (SPA). It is also likely that states may opt into – and may subsequently opt out of – Medicaid eligibility expansion at any time in the future, although the year’s applicable enhanced federal match would still apply. For example, if a state delayed expansion to 2015, it would forever those one of the three years of 100 percent federal match.

Following is a sampling of arguments – pro and con – regarding the new state option for ACA Medicaid eligibility expansion. These are provided for educational purposes only without comment on their relative merits, counter arguments, or appropriateness for any given state or stakeholder. They do not necessarily represent my own opinions or those of my clients, my friends, or my dog. They are also intentionally written in context, whether pro or con, and are in no particular order. It is also not an exhaustive list. There are no doubt many other arguments for or against a state opting for the ACA Medicaid expansion option. So with those caveats in mind, here are some arguments in brief.

Arguments for ACA Medicaid Expansion:

1. Good Financial Deal for the State:

The enhanced federal match of 100% for the first three years (2014-2016) and thereafter 90% to 95% is a good financial deal for the state. This is far higher than the 50 percent to 77 percent states now receive for rest of Medicaid benefit spending. While a future Congress could renege and reduce or eliminate the enhanced federal match rate for the ACA expansion population, a state could then presumably opt out. Also, a state could opt in for only the three years with 100% federal funding, setting up a sunset provision to automatically opt out in 2017.

2. Economic Impact on State:

By opting for ACA Medicaid expansion, many States will see well over $1 billion in new federal funds annually, with a corresponding stimulus effect. The additional federal funding will lead to new jobs, tax revenues from for-profit providers and health plans, and other direct and indirect economic benefits to the state.

3. Impact on Hospitals:

Hospitals already face serious financial pressures are a result of uncompensated care, bad debts, and payment cuts. This is unsustainable and threatens access to care for everyone – both the insured and uninsured. Physicians and other health care providers also face financial pressures but hospitals, particularly safety net facilities, are in serious trouble. Medicaid eligibility expansion will bring in new, much needed revenue and significantly reduce uncompensated care.

4. ACA Payment Cuts:

To help pay for the federal cost of Medicaid expansion and other features of ACA, Congress made significant Medicare rate cuts and will dramatically cut Medicaid and Medicare payments for uncompensated care costs (disproportionate share hospital – DSH – payments). These cuts were predicated on uninsured rates declining nationally by about 50%, with most newly insured being covered through Medicaid and the rest through federally subsidized coverage in Health Insurance Exchange plans. In the deals between House and Senate Democrats, the Obama Administration, and provider associations during development of the ACA, there was an explicit quid pro quo. Industry groups supported ACA assuming new revenue from insurance coverage expansions would largely (albeit not necessarily fully) offset the lost revenue from payment cuts. Absent ACA Medicaid eligibility expansion, providers – particularly hospitals – face years of Medicare and Medicaid payment cuts without the offsetting revenue from more patients having coverage.

5. Health Benefits of Health Insurance Coverage:

Insured individuals are more likely to receive needed care and preventive screens, thereby lowering future medical costs. Since healthy individuals make for more productive employees, increased health coverage also improves employability, reduces absenteeism and presenteeism, and thus boosts workforce productivity and competitiveness. While designed for low-income uninsured adults, the ACA Medicaid eligibility expansion will boost coverage for poor children too. To receive Medicaid under the expansion option, parents must ensure their children are covered. This will increase the number of children with health coverage.

6. Health Disparities Reduction:

In many states, the low-income uninsured population and therefore the Medicaid expansion population is disproportionately minority. Therefore, non-expansion would unfairly hurt the state’s African American, Hispanic, and Native American citizens. In terms of medical care, Medicaid expansion is also needed to help reduce racial, ethnic, and geographic disparities in health care access and quality.

7. State Business Environment:

Non-expansion will make the state a less competitive environment for business. Employers in non-expansion states will be less competitive – in absolute terms and compared to businesses in expansion states. They must continue to absorb cost shifting and thus higher premiums from relatively higher rates of uninsured. If they have more than 50 full-time employees, they must also meet the ACA employer coverage mandate or pay the IRS penalty. So employers in non-expansion states face all the costs but few of the benefits of ACA. Businesses will ‘vote with their feet’ and relocate to expansion states. Those that remain in the state will be less able to add employees. The state needs to help increase employment, not place the state’s businesses at a competitive disadvantage.

8. Unfair to State Taxpayers:

As federal taxpayers, residents of non-expansion states will be further subsidizing the residents, employers, and providers of expansion States. It is important for the state to opt into ACA Medicaid expansion to bring back those federal dollars to the state. Otherwise they will merely go elsewhere.

9. Coverage Gap for Citizens Below 100% of Poverty:

In states opting out of ACA Medicaid expansion, there will be a gap in subsidized coverage for citizens between 0 percent and 100 percent of FPL. In ACA, Congress assumed Medicaid would be available for citizens under 138 percent of FPL and they therefore set different levels for federally subsidized premiums and cost sharing for citizens and legal immigrants in Health Insurance Exchanges. Specificcaly, legal immigrants may get subsidized coverage if their incomes fall between 0-400 percent of poverty, but federally subsidized Exchange coverage for citizens is only between 100 percent and 400%. Absent Medicaid expansion, only legal immigrants and not citizens will receive the benefits of ACA coverage expansion below 100 percent of federal poverty.

10. Medicaid Expansion Benefits Not ‘Cadillac’ Coverage:

Medicaid is often criticized for providing a broader benefit package than employer-sponsored health insurance. But this is not the case for the ACA Medicaid expansion population. The Medicaid expansion population will receive the same package of covered services as individuals and families in the new Health Insurance Exchanges and, in most states, most other privately insured Americans covered through small employer group plans.

11. Woodwork Effect Will Happen Anyway:

Fiscal conservatives are concerned that Medicaid expansion will lead to a woodwork effect, increasing number of applicants for current pre-ACA Medicaid and CHIP eligibility. However, much of this higher up-take will occur anyway because of a combination of:

  • Streamlined Medicaid eligibility and enrollment.

  • Pre-screening of all Health Insurance Exchange applicants for existing Medicaid/CHIP eligibility.

  • Requirement that children be covered for any parent to receive federally subsidized premiums in Health Insurance Exchange plans.

  • Massive public and private outreach campaigns expected in 2013-2014.

12. Use as Bargaining Chip:

A state can use opting for ACA Medicaid expansion as a bargaining chip with CMS, especially in negotiations for major waivers such as waivers to enroll dual eligibles into fully capitated, integrated Medicare and Medicaid health plans. A state could offer to expand Medicaid eligibility in exchange for a major waiver to reform Medicaid. (Of course, the reverse is also true – where CMS could offer waivers in exchange for a state agreeing to ACA Medicaid expansion.)

Arguments Against ACA Medicaid Eligibility Expansion:

1. ObamaCare Needs Repeal, Not Endorsement, Especially Before Election:

Endorsing Medicaid expansion would serve as an explicit, highly visible political and policy endorsement of ‘Obamacare.’

2. Massive Expansion of Broken, Entitlement Program:

Medicaid needs substantial, fundamental reform with state flexibility. The program needs reform, not expansion as it is today. Now is not the time for a massive, unprecedented, top-down expansion of a flawed or broken, highly bureaucratic, fiscally unsustainable entitlement program.

3. Risk of Bait and Switch in Federal Matching Funds:

The federal government spending is unsustainable. Medicaid and Medicare in particular are fiscally unsustainable. Congress faces an enormous fiscal cliff. The federal government simply does not have the money to pay for the enhanced matching funds offered in ACA. The risks to states of a federal “bait and switch” are too high. Once a state opts in, it will be politically impossible to later opt out when the feds cutback on funding. It would mean dropping hundreds of thousands (in some states over a million) from Medicaid.

4. Large State Budget Impact in Out Years:

While the enhanced match looks like a “good deal”, given the massive number of new adult enrollees even a state match of 5 percent or 10 percent would be a major new item cost to the state budget. It would also bind future governors and legislators to a large spending increase that in some states could easily absorb all new state revenues, leaving nothing for other priorities such as schools and transportation. Unlike the federal government, states must balance their budgets.

5. Woodwork Effect Will Dramatically Increase Medicaid Enrollment:

The woodwork effect will dramatically increase state Medicaid enrollment and significantly increase the state share of Medicaid spending. And the woodwork effect will be much higher with the presence of Medicaid expansion. In every state, large numbers of individuals are already eligible for but not enrolled in Medicaid. The combination of ACA Medicaid eligibility expansion, streamlined eligibility and enrollment rules, pre-screening in Exchanges, parental coverage mandate for both Medicaid eligibility and subsidized Exchange coverage, individual mandate, and massive outreach will bring individuals “out of the woodwork” to apply for Medicaid. Costs of the woodwork population – already eligible under pre-ACA policies but not enrolled – will be paid for using the standard, lower federal match rate and correspondingly higher state share – with a large hit to state budgets.

6. Crowd Out of Private Insurance:

Not everyone newly enrolled in Medicaid – whether through the ACA Medicaid eligibility expansion option or the woodwork effect – will be newly insured. According to CBO projections, about 30 percent of those new to the Medicaid rolls will already have private health insurance coverage (i.e. crowd out population). That is, the new government-sponsored coverage will “crowd out” private spending on individual and employer-sponsored coverage. Why pay for health insurance when the taxpayers will pick up the tab? Assuming the 30 percent CBO figure is correct, it means that for every 100 uninsured people who are enrolled in Medicaid, the taxpayers will need to pay to provide Medicaid for about 42 individuals who already have insurance. This is highly inefficient and wastes taxpayer money. Crowd out happens with every new or expanded government benefit program, is difficult to predict, and has been known to be substantially higher than 30 percent in past benefit expansions. So it may be understanded in federal estimates.

7. Higher Priority State Medicaid Reforms Such as Integrated Health Plans for Dual Eligibles:

The state has other, higher priorities for the state Medicaid program. In many states, this may include integrated care models for Medicare-Medicaid dual eligibles (e.g., integrated health plans, managed fee-for-service with shared savings from Medicare) or managed long-term care. In addition, states must implement many other high-priority activities, such as other federally mandated program or systems changes, managed care expansions, new anti-fraud and abuse efforts, and cost savings enacted in the state budget. States choosing to have a state-run or partnership Health Insurance Exchange face big challenges getting a Exchange up in time. The systems and processes needed to implement ACA Medicaid expansion are enormous and come at a time where states must make many other changes.

8. Taxpayers is a Taxpayer, Whether Federal or State:

Many advocates of using federal funds say that states should accept the newly offered money because it is federal and not state money. That is, it’s from federal taxpayers and not state taxpayers. But a taxpayer is a taxpayer. And since federal officials are obviously not willing or able to budget responsibly – as evidenced most notably by the looming fiscal cliff – state officials need to be the responsible ones and not hurt taxpayers by accepting debt-financed money for Medicaid expansion.

9. Provider Capacity is Inadequate Now and Will Worsen:

The state’s current provider capacity – especially the capacity of primary care physicians, hospital emergency departments, and safety net providers in general – will be severely stretched in 2014 when low and moderate-income uninsured individuals and families are enrolled in the Health Insurance Exchange (HIX). The state lacks the primary, specialty, inpatient, and outpatient capacity to take on a large increase in the Medicaid population. Further, new Medicaid enrollees are likely to have a pent-up demand for medical services, placing even more pressure on an already strained health care system.

10. Availability of Coverage Through Health Insurance Exchanges, Opportunity to Reduce Current Medicaid Eligibility:

Many of those who would be covered by the ACA Medicaid expansion option will have access to federally subsidized coverage in the Health Insurance Exchange. About 20-25 percent of the target population for Medicaid expansion are citizens who fall between 100 percent and 138 percent of FPL (the top end of the 0% to 138% FPL coverage in the Medicaid expansion option) and therefore will have access to federally subsidized premiums and cost sharing in the HIX.

Also, related to this, the availability of federally subsidized Exchange coverage for most individuals and families between 0-400 percent of poverty creates an opportunity for states to reduce current (pre-ACA) optional Medicaid coverage for any adults where Medicaid income eligibility overlaps with the new ACA Exchange subsidies. In effect, now that Medicaid expansion is optional, the expiration of the ACA maintenance of effort for adults at the end of 2013 and the presence of federal HIX coverage subsidies starting in 2014, there is a new kind of crowd out possible – new federal HIX subsidies may crowd out state spending on prior Medicaid optional coverage for the same population over 100 percent of FPL. Why should a state spend money on Medicaid for a population that is eligible for federally subsidized Exchange coverage? For many fiscally conservative states, cutting back current optional coverage for adults in 2014 (to the greater of 100 percent of FPL or the federal mandatory eligibility level, whichever is higher) may be an easier decision than declining the ACA Medicaid expansion option. And if a state opts out of ACA Medicaid expansion, cutting back optional adult coverage will likely get raised in many states. If a state opts for ACA Medicaid expansion, they effectively lose this budget option.

11. Don’t Give Up Bargaining Chip:

The decision whether to opt-in for ACA Medicaid eligibility expension is very useful bargaining chip in any current or future negotiations for federal waivers. The state should not act unilaterally and give up the opportunity to secure federal approval of major reforms to Medicaid in exchange for the state agreeing to opt into Medicaid expansion.

12. Wait and See What Happens:

The state should wait and see what happens with the results of the November 2012 election, the fate of the Affordable Care Act, how Congress and the White House handle the fiscal cliff, and how the marketplace responds to the Health Insurance Exchange, indvidual mandate, employer mandate, and the new regulatory framework, particularly adjusted community rating.


Kip Piper is a Medicaid, Medicare, and health reform consultant, speaker, and author. For more, visit Follow on Twitter at @KipPiper and connect with Kip on LinkedIn.

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