The Affordable Care Act is expected to add up to 16 million more Medicaid enrollees and will significantly expand eligibility for families with incomes up to 133 percent of the federal poverty level. Initially, the federal government will pay 100 percent of the cost of the newly eligible, newly enrolled populations and 95 percent of costs through 2019. However, hidden costs will strain state budgets, and states will still find their share unaffordable.
The Cost of Enrolling the Already Eligible
An estimated 10 million to 13 million uninsured people are already eligible for Medicaid—but not enrolled. When the individual mandate to obtain health coverage takes effect in 2014, many states will find the cost of their Medicaid programs higher as a result.
For example, a decade after the new law’s implementation, Texas Medicaid rolls are predicted by the Texas Department of Health and Human Services to rise by 2.4 million people. Of these, only 1.5 million enrollees will be newly eligible, so a significant share of the cost for the remaining 9 million will have to be borne by the state.
Low Medicaid Provider Payments
On the average, reimbursements for Medicaid providers are only about 59 percent of what a private insurer would pay for the same service, but as shown below, it varies from state-to-state.
Low provider reimbursement rates make it more difficult for Medicaid enrollees to find physicians willing to treat them. Initially, the federal government will bear the cost of raising Medicaid provider fees to Medicare levels—but only for two years, 2014 and 2015. Then the rates will fall back to their previous levels, or the states will bear much of the cost of keeping Medicaid provider fees at a level necessary to ensure enough physicians are willing to participate in the program.
Lower Payment to Safety Net Hospitals
Disproportionate share hospital (DSH) payments are used to compensate hospitals that treat a disproportionate share of indigent and uninsured patients. The federal government distributes about $12 billion annually to offset part of the cost.
The ACA reduces DSH payments by about one-quarter, on average, through 2019. Beginning in 2018, annual reductions are about $5 billion per year. The federal government will initially deduct about three-quarters of hospitals’ historic allotment and then give back a portion of the funding reduction using complex formulas. The rationale is that as more patients have coverage, hospitals will have fewer uninsured patients. However, 23 million people will remain uninsured—some of whom may seek uncompensated care. States may have to bear some of the additional costs if their hospitals are to stay solvent.
Crowd Out of Private Insurance
Many of the newly insured under Medicaid will likely be those who previously had private coverage. Research dating back to the 1990s consistently confirms that when Medicaid eligibility is expanded, 50 percent to 75 percent of the newly enrolled are those who have dropped private coverage.
A Better Solution: Give the States Control Over Medicaid
A good argument can be made for abolishing Medicaid. Given the freedom to spend the same money in other ways, state governments should be able to deliver more care and better care. Even if they decide to retain the basic structure of Medicaid, the states can implement a slew of reforms that will lower costs, improve quality and increase access to care.
The most straightforward solution is to give the states their share of Medicaid dollars with no strings attached except the requirement to spend the money on indigent care. The fairest allocation system is to let each state’s block grant reflect the proportion of the nationwide poverty population living in the state.
For more ideas on reforming healthcare, please see my Independent Institute book, Priceless: Curing the Healthcare Crisis.
1. David Cutler and Jonathan Gruber, “Does Public Insurance Crowd out Private Insurance?” Quarterly Journal of Economics 111, No. 2 (1996): 391–430.
2. Thomas M. Suehs, “Federal Health Care Reform—Impact to Texas Health and Human Services Commission,” Presentation to Texas House Select Committee on Federal Legislation, April 22, 2010. http://www.hhsc.state.tx.us/news/presentations/2010/HouseSelectFedHlthReform.pdf.
3. Author calculations based on estimates of the ratio of Medicare to private insurers’ physicians fees and data from Kaiser State Health Facts. Also see Devon Herrick, “Medicaid Expansion will Bankrupt the States,” National Center for Policy Analysis, Brief Analysis No. 729, October 25, 2010, http://www.ncpa.org/pdfs/ba729.pdf.