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A One-Sided White House Report on Medicaid Expansion

Charles Blahous | 07/07/2014 |
A One-Sided White House Report on Medicaid Expansion

The new White House report on Medicaid expansion, “Missed Opportunities,” argues that states that decline to expand Medicaid through the Affordable Care Act are sacrificing important benefits. 

The report is essentially an advocacy document rather than a neutral analysis of the conflicting considerations facing state governments. This slant is understandable because White House publications are written largely to advance the President’s policy agenda. However, those who are interested simply in understanding the issues in play should be aware of factors pointing many states to the opposite conclusion.

I take no position on whether states should expand Medicaid. Decision-makers in different states can reasonably reach different conclusions based on the state’s specific population needs, subjective value judgments, and budget situation. And states are making a variety of decisions with respect to expansion. One unfortunate undercurrent in the White House document is the implication that states that decline to expand Medicaid are acting against their citizens’ best interests. State government leaders who oppose Medicaid expansion, and President Obama as he supports it, should all be extended the presumption that they are pursuing what they believe to be the best policy.

The White House document makes several arguments in favor of Medicaid expansion, which can be summarized as follows:

1) Medicaid expansion is good for public health.

2) Medicaid expansion is good for state budgets.

3) Medicaid expansion is good for the economy.

The first of these—the public health case—is the strongest, though it is not unqualified. As my Mercatus colleague Robert Graboyes often states, we need to distinguish our societal goal of improving health outcomes from the somewhat contrived goal of maximizing insurance coverage. The two are not the same. It is not optimal for all health services to be purchased through insurance. This encourages overconsumption of unnecessary services and drives up prices. Indeed, if we did not now purchase the vast majority of routine health services through insurance, the price of a given service would be lower, which is another way of saying that we would receive greater health value for our money. 

Our societal overemphasis on insurance is not something that individual states can correct via their decision on whether to expand Medicaid. The White House is justified in pointing out that their insured population, relative to the uninsured, have greater access to health services, greater financial security, and better health on average. This health argument for expansion is not unambiguous given criticisms of Medicaid care quality, but it is the strongest available argument for the White House’s position.

On the other hand, the second argument, that states might actually save money by expanding Medicaid, is highly questionable. To make this case, the White House cites estimates by scholars at the Urban Institute that “if all states expanded Medicaid, reductions in uncompensated care currently financed by State governments would more than offset any additional Medicaid costs.” The report stresses that there is “no State contribution over the next three years and only a modest one thereafter”—and here comes a key qualifier—“for coverage for newly eligible people.”

As I have explained before, it is highly unlikely that Medicaid expansion would strengthen state budgets relative to non-participation, for several reasons. Among them:

1) The ACA makes federal subsidies available to individuals with incomes just above the poverty line who buy insurance through exchanges—but only if the individuals are not also eligible for Medicaid. Therefore, if these individuals are covered through the exchanges, the federal government will fund the entirety of their subsidies, whereas if Medicaid covers them, the states will pick up some costs. Hence, comparing state costs under Medicaid expansion with previous state costs for uncompensated care misses the point. What matters, at least for this population, is whether Medicaid expansion enables states to save money relative to their other option of simply letting the federal government subsidize coverage through the exchanges. It does not. 

2) The White House’s qualifier that the states would only make a modest contribution for coverage of “newly eligible people” is technically correct but incomplete insofar as state decisions are concerned. The ACA’s outreach processes for coverage expansion will bring many previously-eligible individuals onto the rolls for the first time (fully one-third of the new Medicaid participants in poverty, according to CBO), the so-called “woodwork” population, for whom states must cover over 40 percent of costs on average. Thus states should expect to finance more than 20 percent of such coverage expansion over the long term. States are already reporting that these woodwork costs are exceeding their prior projections.

3) When people become insured, their health service consumption (including emergency room use) rises. Thus this is not simply a matter of states getting federal assistance in covering a fixed amount of health care services. Instead, the act of expanding coverage increases the total costs requiring financing.

Medicaid has long strained state budgets, and the strain has increased since the ACA was enacted. Since 2010, Medicaid expenditures have risen from 15 percent to 19 percent of states’ general funds, as can be seen from the accompanying graph:

 

 

Despite the further strain that Medicaid expansion would place on state budgets, the White House report asserts that expansion would boost state economies. According to the report, “additional Federal funding will increase demand for both medical and non-medical goods and services” and “this increase in demand will boost overall employment and economic activity.”

This third argument can only be described as a curious one. It essentially amounts to asserting that it is better for the economy when the Federal government spends more on health programs to stimulate additional demand. This is exactly the opposite of a central case made for the ACA, that it was essential for our economic well-being that we reduce the growth of federal health care spending. Here is what the same White House council wrote in 2009:

Because the Federal government pays for a large fraction of health care, lowering the growth rate of health care costs causes the budget deficit to be much lower than it otherwise would have been. . . The resulting rise in national saving increases capital formation. Together, these effects suggest that properly measured GDP could be more than 2 percent higher in 2020 than it would have been without reform and almost 8 percent higher in 2030.

That document goes on to explain that the federal government must slow spending on health care to reduce budget deficits, “raise national saving,” boost economic growth, “raise employment,” and raise “real income.” 

It cannot be the case that higher health care spending and lower health care spending are both good for the economy as long as they are caused by the ACA. A sensible long-term economic strategy, as the White House correctly noted in 2009, requires reducing projected growth in health expenditures. Expanding Medicaid, whatever its other merits, works against that objective. 

The White House is certainly within its rights to argue forcefully for the president’s policy position. However, a balanced analysis of the considerations facing states with respect to Medicaid expansion would look very different from this report.

 

Charles Blahous is a senior research fellow for the Mercatus Center, a research fellow for the Hoover Institution, a public trustee for Social Security and Medicare, and a contributor to e21.

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