Health-care ruling raises thorny questions about impact on Medicaid expansion

June 29, 2012

The Supreme Court’s announcement Thursday that states can opt out of the 2010 health-care law’s expansion of Medicaid without losing current federal funding has raised some thorny questions about the practical and financial ramifications.

Take the debate raging over what would happen to federal spending if some states decide against participating in the expansion, which will be almost fully funded by Washington. The federal government would save money because poor people who would otherwise have been newly eligible for coverage would no longer get it.

But there’s a twist. Because of a quirk in the law, the most well-off of these people — those with incomes between the federal poverty level and 133 percent of that level — would become eligible for federal subsidies to purchase private insurance plans on the state-based marketplaces, or exchanges, created by the law.

This subset of people might cost the government more than if they had gotten Medicaid, because the program is considered more efficient than private insurance.

So, what would be the net effect on federal spending? It depends on which is larger: the savings on people with incomes below poverty — who wouldn’t get Medicaid or any other federal help with insurance — or the extra cost of providing subsidies for those with incomes at or above poverty.

For now, no one has hard numbers. The nonpartisan Congressional Budget Office is crunching the data.

John Holahan of the Urban Institute says the savings will more than offset the cost. He released an analysis Friday that estimated that among people currently uninsured, 80 percent have incomes below the poverty line.

That statistic is hardly an exact match for the number who might be affected if some states were to pass on the Medicaid expansion, he said. But it suggests that if a state were to opt out of the Medicaid expansion, a large share of its residents who would lose the opportunity to get Medicaid wouldn’t qualify for a subsidized private insurance plan either.

Paul Van de Water, a senior fellow at the left-leaning Center on Budget and Policy Priorities, adds that even those who would qualify for the subsidized plan might not want to sign up.

That’s because in contrast with Medicaid, which would have been available for free, the federally subsidized plan would require such individuals to spend about 2 percent of their income on premiums. That could be a daunting price for someone at 133 percent of poverty — $14,856 in yearly income for an individual, or $30,656 for a family of four.

Also, although people could face a tax penalty for failing to get insurance, the law gives the health and human services secretary broad authority to issue a hardship exemption, which could let them off the hook.

The upshot, said Van de Water: “It seems far more likely than not that the Supreme Court’s decision will lower federal costs rather than increasing them.”

“Not that it would be a desirable savings,” he added. “Because all these people would end up without health coverage.”

Conservatives have a different nightmare scenario: What if states don’t just decline to go along with Medicaid’s expansion, but take advantage of their newfound flexibility to scale back their existing Medicaid programs — for which they get a far lower federal match than they will for opening the program to the newly eligible.

It’s an open question whether this would be permissible in light of the court’s decision, and if so, how it would work.

But in an analysis also released Friday, former CBO director Douglas Holtz-Eakin, now president of the conservative American Action Forum, posited that the fiscal impact would be huge.

“Suppose that every state takes advantage of this opportunity and that every individual who is either on Medicaid or would be eligible for the expansion actually moves to the exchanges. The federal government would save as much as $130 billion in Medicaid in 2014, but it would be on the hook for $230 billion in new insurance subsidies,” he wrote. “The net bottom line: a $100 billion annual expansion in federal costs.”

Holtz-Eakin conceded that such an extreme scenario would never occur. Still, he predicted, the additional tab could be as much as $500 billion over the first 10 years.

“There’s real money at stake here,” he said.

Lori Montgomery contributed to this report.

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