Partial Medicaid Expansion Would Increase Federal Costs

By James Capretta | January 16th, 2019 at 11:46 pm

BY: James Capretta / Real Clear Policy — Contributor

James C. Capretta is a RealClearPolicy Contributor and a resident fellow at the American Enterprise Institute.

Filed Under: Commentary, Contributor, Federal Government, health, Insurance, Medicaid, Mississippi PEP, MS State Government, National, Obamacare, Opinion, Politics, Spending, US Congress

For several months, the Trump administration has been engaged in an internal debate over the merits of allowing states to partially expand Medicaid under the terms of the Affordable Care Act (ACA). Now, after losing the House to Democratic control (and thus also losing any opportunity to repeal and replace the ACA until at least 2021), the administration is said to be ready to make a decision in favor of allowing partial Medicaid expansion to proceed under state waiver requests.

One important question that has not yet been addressed clearly is the added federal cost of allowing states to proceed with expansion in this way. State requests to “waive” federal law and operate under waiver-specific rules are supposed to be granted only if the waivers will not increase costs for the federal government — the so-called “budget neutrality” test. It is very unlikely that allowing states to adopt partial Medicaid expansions would be less expensive for the federal government than current law and policy.

Some background and context helps explain why this is the case.

As written at enactment, the ACA appeared to give states the option to expand their Medicaid programs. In reality, states had no choice. The law required states either to allow all residents with incomes below 138 percent of the federal poverty line (FPL) to enroll in Medicaid, or to decline expansion and lose the entirety of their existing federal Medicaid funding. No state could survive financially if it lost all of its federal funding for Medicaid (total federal Medicaid spending in 2018 was about $390 billion). In effect, then, the ACA imposed a new mandate on states to expand eligibility for Medicaid enrollment to state residents with incomes below 138 percent of the FPL.

In 2012, the Supreme Court ruled that the ACA’s penalty for not expanding Medicaid was unconstitutional because it trampled on the legitimate expectation of state discretion in administering the program. After the 2012 decision, the Medicaid expansion became truly optional; states now face no federally-imposed penalty for opting out.

While the Court’s ruling invalidated the federal penalty for non-expansion, it did not alter the binary nature of the expansion decision. For most Medicaid spending, the federal government pays for, on average, about 60 percent of state Medicaid expenditures. For the expansion population, the ACA stipulated that the federal government would pay 100 percent of the costs initially, which would then phase down to 90 percent in 2020 and later years. However, states that want to get this preferential federal funding must agree to cover all residents with incomes up to 138 percent of the FPL. If a state expands Medicaid, but not up to the ACA standard, then it will get only the regular federal matching rate (around 60 percent), not the 90 percent rate tied to full expansion.

Since 2014, the number of states that have agreed to adopt the full, ACA-prescribed Medicaid expansion has increased at a steady pace. In 2018, a majority of voters in Utah, Nebraska, and Idaho supported ballot initiatives to approve full Medicaid expansions. With these states, along with Maine, now in the expansion column, only 14 states remain that have not agreed to expand Medicaid to households with incomes below 138 percent of the FPL.

The decision not to expand Medicaid is uncomfortable for state political leaders, even those from strongly conservative states, for two reasons. First, not expanding Medicaid leaves a large gap in coverage. Under the ACA, if a state decides not to expand Medicaid, households with incomes between 100 and 138 percent of the FPL can get heavily subsidized coverage through the ACA exchange. However, households with incomes below 100 percent of the FPL but above the state’s standard for eligibility for Medicaid are left with unpalatable or unrealistic coverage options. There are approximately 2.2 million people nationwide in this coverage gap.

Second, states that forgo the Medicaid expansion are leaving substantial federal money on the table. It is true that, starting in 2020, states must put up 10 percent of the money to cover the expansion population, but if they do so, they get substantial federal funding flowing into the state. That funding goes into the state’s medical care system, which then leads to additional economic activity outside of the health system.

For these reasons, political leaders in many of the holdout states are attracted to a partial Medicaid expansion. Under the most common formulation of the idea, a state would ask permission in a waiver to expand Medicaid up to 100 percent of the FPL, instead of 138 percent of the FPL as required by the ACA, and yet still get the 90 percent federal matching rate for the added cost. Above 100 percent of the FPL, state residents would go into the ACA’s exchange and get premiums subsidies when enrolling in private coverage.

Partial expansion is attractive for a number of reasons. It is a reasonable middle ground position between full Medicaid expansion, and no expansion. If all of the holdout states adopted partial expansion, there would no longer be a coverage gap. It would establish boundaries within which states could exercise some discretion. States with more conservative political leadership could be tighter with Medicaid eligibility but not so tight as to leave those below the poverty line with no real options. States with less conservative political leanings could opt for more generous Medicaid coverage, but only up to the 138 percent of the FPL threshold.

So allowing states to adopt a partial Medicaid expansion makes sense for political and programmatic reasons. However, it is hard to make the case that doing so would be cost-neutral for the federal government. The argument is sometimes made that, if the federal government does not allow partial expansion, then all of the hold out states will eventually capitulate and agree to the full ACA expansion, and costs will be higher as a result. But if the expected scenario under current law is eventual adoption by all states of the full expansion, then a partial expansion option would increase federal costs relative to that baseline because Medicaid coverage is less expensive than premium subsidies and partial expansion would mean more people getting premium subsidies and less getting Medicaid.

Moreover, current policy is likely to lead some states to continue holding out against expanding Medicaid, at least for several more years. If these states are given the option of a partial expansion, many if not all of them would jump at the chance, which is why the idea has appeal. But it is undeniable that bringing more states that otherwise would not expand into the expansion column would add to federal spending.

That partial Medicaid expansion would increase federal expenditures does not mean it is a bad idea. It is actually a reasonable compromise balancing the interests of those states that favor a more expansive Medicaid program with those that would like to see lower enrollment in public coverage. But it would be better if partial Medicaid expansion were pursued as a legislative change rather than an allowable state waiver because, in legislation, Congress could offset the added federal expense with cost-reducing reforms. Among other things, Congress could cut costs by limiting the use of tax schemes intended to circumvent the states’ matching payment requirements.

The Supreme Court’s decision in 2012 disrupted the plan to establish a national standard of Medicaid eligibility. The result is vastly different Medicaid eligibility rules across the country, which probably isn’t sustainable over the long term. Partial Medicaid expansion is a sensible middle ground position between full and no expansion, but it would cost some money. The danger is that the administration will pretend these costs don’t exist in waiver approvals granted to states. If that were to occur, the waiver process will become even less credible than it already is. The better route, over the long run, is to be honest about the costs and to work for a budget-neutral compromise in Congress, despite the difficulty of achieving success in the current political environment.