Study of health-care law rebuts state protests on Medicaid costs

By Alec MacGillis
Washington Post Staff Writer
Wednesday, May 26, 2010; 2:06 PM

The federal government will bear virtually the entire cost of expanding Medicaid under the new health-care law, according to a comprehensive new study by the Kaiser Family Foundation that directly rebuts the loud protests of governors warning about its impact on their strapped state budgets.

About half of the increase in health insurance coverage under the new law is expected to come from expanding Medicaid in 2014 to a new nationwide eligibility threshold of 133 percent of the poverty level -- $14,400 for a single adult or $29,300 for a family of four. A disproportionate share of the 16 million people expected to enroll in the expanded Medicaid live in states in the South and West that until now have had very stringent eligibility rules for low-income adults.

Governors of many of those states have predicted fiscal calamity for their budgets, and some have cited the Medicaid expansion in the suits they have filed against the new law, saying it violates their states' rights. But the Kaiser study released Wednesday predicts that the increase in state spending will be relatively small when weighed against the broad expansion of health coverage for their residents and the huge influx of federal dollars to cover most of the cost.

Even the small increase in Medicaid costs may be canceled out by the savings states will enjoy from no longer having to subsidize the uncompensated care of uninsured people who will be on Medicaid, study co-author John Holahan said.

"It's absurd," Holahan, an Urban Institute researcher, said of the states' doom and gloom predictions. "They come out ahead. It's just crazy."

The federal government splits the cost of Medicaid with the states, ranging from a 50-50 split in wealthy states to more than 75 percent in poor states, for a nationwide average of 57 percent, although it has been paying higher rates under the economic stimulus package. Under the new law, the federal government will pick up 100 percent of the cost for all newly eligible people through 2016, a rate that will drop gradually to a 90 percent match in 2020 and beyond.

The federal government will continue to pay its existing match rates for people who would have already been eligible under their states' current rules. But the study's authors predict that there will be relatively few of these people among the new enrollees.

As a result, the overall federal share of the expansion cost will be somewhere between 92 and 95 percent from 2014 through 2019. Although Medicaid enrollment nationally is estimated to increase by 27 percent by 2019, state spending will increase only 1.4 percent, on average, and federal spending will increase by 22 percent, the report finds.

States have widely varying eligibility levels for adults. In many Northeastern and Midwestern states, parents are covered to double the poverty level or above, whereas in others, such as Texas, Virginia and Missouri, only disabled or truly indigent adults -- those making less than $8,000 for a family of four -- are eligible.

The widely varying status quo means that the impact of raising the eligibility threshold to a single national standard will have a disparate state-by-state impact. In the states that have invested the most heavily in expanding Medicaid to low-income adults, it will have relatively little impact. In New York, for example, the Medicaid population is expected to increase by only 6 percent by 2019, and the cost impact on the state is expected to be zero because the federal government will be paying the new 100 percent match rate for some of the adults that the state has been paying a large share for today.

In states with slightly less generous current Medicaid eligibility standards, there will be a larger increase in new enrollees, but the increase in costs will be only slightly higher, the study predicts. New Jersey, for instance, is expected to see a 38 percent rise in Medicaid enrollment by 2019 and a 1.2 percent increase in state spending on Medicaid as a result; California is expected to see a 20 percent increase in enrollment and a 1.5 percent increase in state Medicaid costs.

In the states that have had the most stringent eligibility rules, there will probably be a huge increase in enrollment -- a predicted 45 percent in Texas, where a quarter of the population is uninsured, and 37 percent in Alabama. But because of the very high federal match rate, the predicted increase in state Medicaid spending in these states will be small -- about 3 percent.

Seen more broadly, the report finds, these states will be making out better than states with more expansive Medicaid eligibility today because a vast swath of their population will be covered at the 100 percent (and eventually 90 percent) federal match rate for newly eligible people, whereas most of the Medicaid population in the other states will be covered under their existing lower federal match rates. In Texas, for instance, the overall federal match rate for Medicaid will go up from 60 to 67 percent, but in New York it will remain at 50 percent.

Alan Weil, executive director of the National Academy for State Health Policy, said that states that will enjoy the very high federal match rate may be protesting nonetheless because they are worried that they will not be able to afford even their small share of the expansion -- and because they may be less committed to Medicaid generally. Someone offered a $200 pair of shoes for $20, he said, will appreciate that only if he likes the shoes -- and if he has $20.

"This is a pretty good deal," for states, Weil said. But it's a question of whether "states focus on what they're going to get versus whether they can afford this slightly smaller amount they have to put in."

The study used the same assumptions as the Congressional Budget Office for what the participation levels will be in the expanded Medicaid but also produced a second set of estimates assuming a higher participation, with Medicaid expanding by 22.8 million people, if outreach efforts and the goad of the individual insurance mandate succeed beyond expectations. Even under this higher enrollment, the increase in state Medicaid costs would be relatively small -- 3.4 percent in California and 5.1 percent in Texas.

Kaiser officials dismissed predictions by some governors, such as Indiana's Mitch Daniels (R), that 100 percent of the newly eligible people would sign up, thereby resulting in much higher costs to states. History shows that large numbers of people eligible for Medicaid never bother to sign up, they said.

"The reality of the fiscal situation today at the state level is going to be the lens through which any state is going to assess the future," Kaiser Executive Vice President Diane Rowland said. But, she added, "if you want to make assumptions like 100 percent of people signing up, that doesn't bear out any experience we've had."

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