Medicaid Expansion: Texas Should Chart Its Own Course

Policy Reports | Health

No. 363
Wednesday, January 07, 2015
by Devon M. Herrick

The 2010 Patient Protection and Affordable Care Act (ACA) required each state to expand Medicaid eligibility to individuals and families with incomes up to 138 percent of the federal poverty level or risk losing federal funding for its entire Medicaid program. However, the U.S. Supreme Court ruled that provision of Obamacare unconstitutional.

As a result, Texas and other states that have not expanded Medicaid eligibility have more options to tailor the program to better meet their unique needs.

The ACA also provides generous, sliding-scale subsidies for low- to middle-income individuals to purchase private coverage in a government-operated health insurance exchange. Exchange subsidies are more generous, and more valuable, than Medicaid:

  • Exchange enrollees are getting a subsidy that, on average, is roughly 50 percent greater than the value of Medicaid coverage ($9,000 versus $6,000).
  • In the exchange, an individual or family earning at the federal poverty level is required to pay (at most) 2 percent of their income toward a private health plan that might otherwise cost a family of four $14,500 or more annually outside the exchange.
  • However, there are no exchange subsidies for people earning below 100 percent of the poverty level — because they are expected to enroll in Medicaid — and families earning from 100 percent to 138 percent of poverty are not eligible for subsidies if they are eligible for coverage under their state Medicaid program.

On paper, Medicaid coverage appears far better than the private health coverage most Americans enjoy, with little or no cost-sharing and unlimited benefits. However, nearly one-third of Texas physicians do not accept new Medicaid patients.If more people are added to the Medicaid rolls and new patients flood doctors with requests for appointments, access to care for existing (and future) Medicaid enrollees would likely decrease even more.

Proponents of Medicaid expansion often tout the “economic benefits” that additional federal Medicaid funds might create within states. A study by economist Robert Book found that rather than stimulating the economy, Medicaid expansion is a drain on employment and slows economic growth. If all states expanded Medicaid, his analysis shows Texas would suffer a $46 billion negative economic impact over 10 years. Moreover, Texas employment losses would amount to 54,445 work-years from 2014 to 2017.

In states which expand Medicaid eligibility to all legal residents earning from 100 percent to 138 percent of poverty, many of the new enrollees will be individuals who previously had private coverage. Crowd-out (or substitution) occurs when people who are already covered by employer or individual insurance drop that coverage to take advantage of the public option. An analysis of past Medicaid expansions to mothers and children in the early 1990s by recent Obama administration advisers David Cutler and Jonathan Gruber found that when Medicaid eligibility was expanded, 50 percent to 75 percent of the newly enrolled dropped private coverage. A conservative estimate is that Medicaid rolls might have to rise by 1.4 people in order to reduce the uninsured by 1 person.

Furthermore, private insurers pay much higher physician fees than state Medicaid programs. If more Texas residents were privately insured, the Texas health care economy — local doctors and hospitals — could expect far more generous reimbursements from private insurers than under Medicaid. A rule of thumb is that private insurers generally pay fees at least 50 percent higher — and often double — what Medicaid pays. Certainly, not all who qualify would enroll. But if merely 600,000 uninsured Texans with incomes above 100 percent of poverty enrolled in private coverage in the exchange rather than in an expanded Medicaid program, health care providers will receive roughly $25 billion more over 10 years than Medicaid would have paid them.

In Texas, stakeholders composed primarily of hospitals and other providers have proposed a compromise solution they claim would cover the nearly one million individuals that fall in the coverage gap. The proposal, promoted under the banner “The Texas Way,” includes: 1) sliding-scale subsidies for low-income individuals to obtain coverage in the private market; 2) cost-sharing to encourage wellness and penalize inappropriate or unnecessary medical utilization; 3) chronic disease management; and 4) small business subsidies. Supporters claim their proposal shares ideas with the Healthy Indiana plan, often touted by conservatives as a better alternative to traditional Medicaid.

Though it depends on how the program is implemented, some of the goals of the Texas Way are consistent with those of conservative Texans who oppose Medicaid expansion. The outgoing governor’s office backed a proposal for a federal block grant that would allow Texas greater flexibility in its Medicaid program (and county indigent health care programs). A block grant might include some of the provisions in the Texas Way proposal. However, much work needs to be done to align the disparate stakeholders’ goals. Certainly, Congressional Budget Office projections following the 2012 Supreme Court decision assumed many states would negotiate with the U.S. Department of Health and Human Services to innovate state Medicaid programs.

Texas made the wise choice to forgo cookie-cutter Medicaid expansion in favor of a tailored program that would maximize the availability of private coverage for low-income residents. The states should work toward a program that meets its unique needs.

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