Why States Have a Huge Fiscal Incentive to Opt Out of Heath Reform's Medicaid Expansion

July 30, 2012

Eight state governors have said that they will take advantage of the recent Supreme Court ruling allowing them to opt out of the Affordable Care Act's (ACA) dramatic expansion of Medicaid. Their actions have been dismissed by liberal columnists as mere partisan posturing, but further analysis reveals that opting out may be the fiscally responsible choice for a number of states, says Avik Roy, a senior fellow with the Manhattan Institute.

Though the federal government will pick up much of the tab, the remainder could still cripple states.

  • Prior to the ACA, the Medicaid program was somewhat limited: all states were required to cover pregnant women and children younger than age 6 with family income under 133 percent of the federal poverty level (FPL), and children aged 6 to 18 with family income under 100 percent of FPL.
  • There are also other eligible populations, such as people with disabilities, certain low-income parents, and low-income Medicare beneficiaries.
  • The costs for these populations are split between state and local governments, such that on average, every $43 paid toward Medicaid by the state is matched by $57 from the federal government.
  • The expansion, however, is much more generous: the federal government will cover 100 percent of the additional costs through 2016.
  • This will then be phased down to 95 percent in 2017, 94 percent in 2018, 93 percent in 2019, and 90 percent in 2020.

Though states would, ostensibly, be left with only 10 percent of the remaining bill, this is still a large amount of money that many states worry they will not be able to afford.

But an even bigger problem for states is what's being called the "woodwork effect."

  • Essentially, many Medicaid-eligible people have failed to enroll in the program.
  • Harvard University's Ben Sommers and Arnold Epstein estimated in 2010 that only 62 percent of people who are eligible for Medicaid today have actually signed up for the program.
  • The expansion would lubricate the system and encourage the millions of people who are already eligible to finally enroll.
  • Crucially, these late enrollees would be covered under the old system of matching rates, meaning that they would cost states a great deal.

Source: Avik Roy, "Why States Have a Huge Fiscal Incentive to Opt Out of Obamacare's Medicaid Expansion," Forbes, July 13, 2012.

For text:

http://www.forbes.com/sites/aroy/2012/07/13/why-states-have-a-huge-fiscal-incentive-to-opt-out-of-obamacares-medicaid-expansion/

 

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