JAMA Forum: Gaming Out the New Medicaid Option

Austin Frakt, PhD

Austin Frakt, PhD

The most important policy implications from the Supreme Court’s decision on the Affordable Care Act (ACA) pertain not to the individual mandate but to Medicaid. Although the court seems to have left the states with 2 options—accept or decline the 2014 expansion—without any implications for current program funding, the available range of options is potentially larger than that, and implications vary.


Option 1: Accept the expansion.I predict, as do others, that the vast majority of states will expand their Medicaid programs to cover individuals who make up to 138%* of the federal poverty level (FPL), as designed in the law. Officials in many states (notably the blue states) are ideologically sympathetic to coverage expansion in general and the ACA in particular, and it is a relatively inexpensive way to provide insurance to a low-income population. But Medicaid expansion is also a good deal for states—particularly for many red states.

The Congressional Budget Office (CBO) estimated that the federal government will pay 93% of the expansion’s costs over the first 9 years, compared with its coverage of just 57% of the costs for the existing components of Medicaid. The new funds will flow to hospitals, doctors, and other health care workers, all of whom would otherwise continue to wrestle with the uncompensated care problem. These groups will apply considerable pressure to state governors and legislators to take the federal government’s offer.

My guess: 35 to 40 states will expand Medicaid without much fuss.
Option 2: Decline the expansion. The governors of 10 states have said they will opt out of the expansion or are leaning toward doing so. Declining expansion would leave many millions of individuals uninsured.

What explains these governors’ positions? First, there’s ideological momentum generated in the long struggle over reform and the run-up to the Supreme Court case and decision. Some red state officials have been talking resistance and repeal for so long, it’s unsurprising that they haven’t changed their tune yet.

Second, the reform fight isn’t over. Repeal of the ACA is a likely outcome of a GOP sweep in November. Earlier this month Sen Jim DeMint (R, SC) and Rep Michele Bachmann (R, Minn) wrote a letter to state lawmakers, cosigned by 12 senators and 61 representatives, urging state governors to block ACA implementation and support repeal. So this is a defining issue in an active campaign.

Third, this is a substantial budget issue. Although the Medicaid expansion is arguably a good deal for many states, it will cost the federal government nearly a trillion dollars over 9 years.

My guess: although in the past, states have declined generous federal support for various programs, including Medicaid, unless the GOP sweeps in November, all but a few states will expand their Medicaid programs in the next few years.
Option 3: Play for favorable terms. States can propose variants to the Department of Health and Human Services (HHS) in the form of Medicaid waiver requests. A quirk in the law makes 1 option tempting to some states. Under the ACA, individuals with incomes between 100% and 133% FPL who obtain coverage through state exchanges are required to contribute only 2% of income toward the premium and pay only 6% of the actuarial value of the plan in cost sharing. The remaining expenses would be liabilities of the federal government. However, individuals below 100% FPL are not eligible for subsidized coverage through state exchanges. Many are also not currently eligible for Medicaid because federal statute only requires that Medicaid cover low-income pregnant women and children, parents, persons with disability, and elderly individuals. Consequently, in the fight over Medicaid expansion, it is the poorest of the poor—those with incomes below 100% FPL, notably adults without children—whose access to affordable insurance is most at risk.

In light of this, a state hoping to assuage stakeholders such as physicians and hospitals and to address the uncompensated care problem may be tempted to expand its Medicaid program just to the point where they could claim all state residents access to affordable health care. The minimum necessary to do so would be to permit only those with incomes below 100% FPL to be eligible for Medicaid, leaving the 100%-to-133%-FPL group to seek federally subsidized insurance through exchanges. (Incidentally, in some states the insurance industry may prefer this variant as well because it puts more customers in the fully private, exchange-based market.) Even though states pay only a small fraction of the costs of Medicaid expansion, this option is cheaper still for states.

On the flip side, such a strategy would increase federal costs considerably because private coverage is more expensive than Medicaid and the federal exchange-based subsidy rate is even higher than the federal-to-state Medicaid support rate (98% of premiums vs 93% of Medicaid costs for the expansion). Former CBO Director Douglas Holtz-Eakin has estimated that the additional federal cost would be $500 billion over 10 years if all states expanded Medicaid to just 100% FPL. For this reason, the waiver necessary for this partial expansion is unlikely to be routinely granted; by policy, waivers must be budget neutral. In principle, a state might attempt to craft a partial expansion that is lean enough to offset the additional federal costs (eg, by paring back benefits), although it is uncertain that would be viewed favorably by HHS.

This brings up another motivation for foot dragging on the expansion: states may use it as a bargaining chip. For example, states may seek waivers to change their existing Medicaid program by increasing managed care options or the relationship between Medicaid and Medicare for individuals who are eligible for both. My hypothesis is that, in the medium term and beyond the November election, this will be the strategic source of expansion resistance by states.

My guess: 5 to 15 states will attempt to extract concessions from HHS in exchange for partial or full expansion.

States have more options regarding the Medicaid expansion besides implementing or rejecting it in full. The ACA ruling leaves them with a means of stoking the political fire until the November elections and with a potentially powerful bargaining chip for extracting concessions from HHS.

I believe all states are likely to ultimately find ways of expanding affordable access to coverage for all citizens. The Administration may have some control over how long this plays out. The less it tries to find a middle ground with states reluctant to expand—by denying their waiver requests, for example—the longer this process will take.

Of course, a GOP sweep in the November elections would change everything, opening the door to such possibilities as the oft-stated desire among Republicans to turn Medicaid into a block-grant program or even a full ACA repeal.

All in all, it is therefore rational for some states to continue antiexpansion rhetoric. By doing so, they hope to improve the chances of remaking Medicaid to their liking within their borders. Unfortunately, the coverage, health, personal finances, and lives of some of their residents hang in the balance, as do the associated uncompensated care problems of providers.

*The income threshold is 133% of FPL, but there is a 5% income disregard, making it effectively a 138% threshold.

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About the author: Austin B. Frakt, PhD, is a health economist and an assistant professor at Boston University’s School of Medicine and School of Public Health. He blogs about health economics and policy at The Incidental Economist and tweets at @afrakt. The views expressed in this post are that of the author and do not necessarily reflect the position of Boston University.

About The JAMA Forum: To provide ongoing coverage throughout this election year, JAMA has assembled a team of leading scholars, including health economists, health policy experts, and legal scholars, to provide insight about the political aspects of health care. Each JAMA Forum entry expresses the opinions of the author but does not necessarily reflect the views or opinions of JAMA, the editorial staff, or the American Medical Association. More information is available here and here.



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