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States Face Higher Medicaid Costs Even If They Don't Expand Program, Kaiser Report Finds

By Rebecca Adams, CQ HealthBeat Associate Editor

November 26, 2012 -- State officials who are hoping to avoid high Medicaid costs from the health care law by not expanding the program might be in for an unpleasant discovery: Other Medicaid-related mandates in the overhaul will mean higher state spending regardless of whether a state expands, according to a state-by-state analysis the nonpartisan Kaiser Family Foundation released last week.

The report shows that if all states expand coverage, as allowed under the 2010 health care law, they would collectively spend $76 billion more from 2013 to 2022 on Medicaid than if the measure had never been enacted. That's only about $8 billion more than states would pay under the law if none of them expand.

Most of the increase in Medicaid spending over the decade will come even if a state chooses not to broaden coverage. That's because millions of people who are already eligible for the program are expected to sign up in 2014 when there's likely to be massive campaigns to tell people about the new law. States also will have to spend more money updating their IT systems, changing their enrollment and eligibility procedures and helping people understand the new system, which is supposed to allow for seamless coverage.

The report also suggests that state costs for expansion would be modest compared to the amount that the federal government would pay. That $8 billion in additional investment would allow states to draw $800 billion more in federal funding than they would get under the law, if no states expanded.

Moreover, the report finds that some states would actually save money on the expansion, considering that they would have fewer uncompensated care costs to fund. States and localities bear about 30 percent of the costs of uncompensated care when uninsured patients don't pay all of their medical bills. The report estimates that nationally, state and local spending on uncompensated care would decline by $18 billion—turning the total $8 billion cost to states under expansion into $10 billion in savings.

But each state would be affected differently, and some individual states would not fare as well as the national picture indicates.
"That might be true in the aggregate, but states are going to run the numbers themselves," said former Congressional Budget Office Director Douglas Holtz-Eakin, who conducted a similar analysis earlier this year for the American Action Forum.

For example, if Mississippi decided to expand Medicaid, it would cost the state about 6.2 percent more than if the state does not expand, a higher percentage increase than any other state, the Kaiser report estimated. But the authors concluded that because the state would save money on uncompensated care costs, the true net increase would be 3.8 percent.

The report also found that the financial incentives were best for states in the New England and Mid-Atlantic regions, while they were least attractive in the Mountain and Pacific regions.

The 61-page report was conducted by Urban Institute researchers including John Holahan and Matt Buettgens.

The report could be helpful to governors and state legislators preparing for their 2013 legislative sessions and trying to decide whether to expand Medicaid under the 2010 law (PL 111-148, PL 111-152).

The overhaul law allows states to expand coverage for people whose household income is at or below 138 percent of the federal poverty level, which in 2012 is $15,415 for an individual and $26,344 for a family of three. The federal government will pick up most of the costs, starting at 100 percent for the newly eligible in the first three years and phasing down to 90 percent of costs. The June 28 Supreme Court decision made it clear that states would be able to choose whether or not to expand Medicaid without jeopardizing their federal matching money for their entire Medicaid programs. Since then, governors and state legislators have been weighing whether to broaden their Medicaid programs.

A Closer Look at the Numbers

The details work like this: Assuming all the states participate in the Medicaid expansion, their total projected costs would increase by $76 billion from 2013-2022, an average increase of about 3 percent nationally over current costs. For that investment, the states would gain $952 billion in federal funding to help pay for coverage for an additional 21.3 million people, the report said. Of that $952 billion, the federal government would have had to pay $152 billion in higher Medicaid costs even if the law hadn't been passed.

Even if none of the states expand coverage, they still would be on the hook for a collective $68 billion over the same time period, because of other requirements in the law. If a state chooses not to broaden coverage, it still will have to simplify enrollment and eligibility procedures and help people understand their coverage options. Under that scenario, about 5.7 million people who are currently eligible but not enrolled in Medicaid would be expected to come out of the woodwork to sign up for coverage.

State officials who look at the Kaiser report will be asking themselves whether they can afford a slightly higher investment in order to significantly expand the number of people who will get coverage.

"It's very easy to have a little sticker shock at the potential cost," said Alan Weil, the executive director of the National Academy for State Health Policy. Weil noted that even a 1 percent increase can seem like a lot to officials in states whose fiscal climate is still recovering. For years, many state officials have complained about the burden that Medicaid costs impose on their state budgets.

But Weil, who spoke on a conference call organized by Kaiser, said that the report does a good job of putting the spending burden that states will face in the context of overall spending.

"Many states will be surprised at the results showing that the costs to them of the coverage expansion in the ACA come largely from things that they must do" and not from the optional expansion, Weil said.

He suggested, as he has said before, that state officials will come under tremendous pressure from medical providers and patient advocates to consider the expansion.

Of course, the Obama administration also is pushing state officials to expand.

Holtz-Eakin said the administration's interest gives states leverage they could use to strike deals on Medicaid or the exchanges with federal officials. For instance, GOP governors have sent the administration a list of ideas that they would like to pursue in Medicaid, and they might press federal officials harder to accept them. Republicans who have said they will rely on the federal exchange in their states also might be persuaded to work on a federal-state partnership if the administration shows a little more flexibility in Medicaid.

"I think that the major takeaway from this report and what we did is that the Medicaid expansion is not a no-brainer. States will have to think about it from their own narrow financial point of view," he said. "The Supreme Court decision really did deal the states back in, and they can use that leverage."

  • Kaiser Medicaid Analysis
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