Will health care law raise states' Medicaid costs?

McClatchy NewspapersMarch 8, 2011 

WASHINGTON — The nation's Republican governors are raising a new complaint against the 2010 national health overhaul, which they deride as "Obamacare." They say it would drive up their Medicaid costs dramatically at a time they're already slashing their budgets to cope with debt.

There's no question that the health care law will force states to expand their Medicaid services, but how that ultimately will affect states' costs is a matter of considerable dispute.

The 2010 law requires that state Medicaid programs in 2014 begin covering all non-elderly people who earn up to 133 percent of the federal poverty level, which would comprise people with incomes of up to $29,400 for a family of four this year.

By 2019, that expansion is expected to add 16 million people to Medicaid, which now provides health coverage for about 60 million low-income Americans. Childless adults and parents who previously earned too much to qualify for the program will make up the bulk of the new enrollees.

Currently, the federal government pays about 57 percent of Medicaid costs on average, while states pay the rest. Under the new law, the federal government will pay the entire cost of the new enrollees for the first three years, after which it will scale down gradually to 90 percent in 2020 and thereafter.

Republican governors say that's an entitlement-program expansion they simply can't afford. As states try to close $125 billion in budget shortfalls for the next fiscal year, both Republican and Democratic governors say that any new spending is problematic. Twenty-six GOP governors have joined a lawsuit challenging the health care overhaul as an abuse of federal power.

A report released last week by Sen. Orrin Hatch, R-Utah, and Rep. Fred Upton, R-Michigan, says the health care act's Medicaid expansion will cost states $118 billion over 12 years. That's nearly twice the amount — $60 billion — that the Congressional Budget Office has estimated for a 10-year period.

The CBO estimates that the law would cut the federal budget deficit by $143 billion from 2010 to 2019 and by $1.3 trillion over the following decade, through a combination of new revenue sources and spending reductions.

Which numbers are more credible, the CBO's or the GOP's?

Democrats and independent researchers challenged the GOP report, saying it didn't use a standard methodology to estimate each state's costs. It also failed to account for savings that the Medicaid expansion is likely to produce, such as a reduction in state payments for medical care for the uninsured. Republicans defended the report, saying the estimates were conservative and the methodology sound.

The Urban Institute, a center-left research center, projected that from 2014 to 2019, the law will save states and localities $43 billion to $85 billion on uncompensated medical care for the uninsured, and $20 billion to $40 billion on their mental health services.

"If the Democrats ... want to argue that the Medicaid expansion included in Obamacare is not going to put a severe financial burden on states, I'm sure you will find the majority of governors disagree," said Julia Lawless, a spokeswoman for Hatch.

Henry J. Aaron, a senior fellow for economic studies at the Brookings Institution, a liberal research center, said the CBO's cost estimates for the new law were still the gold standard because of the agency's well-established reputation for skepticism on claims of legislative cost savings.

But the seismic changes brought on by the law probably will produce some unintended costs, Aaron said, so the GOP estimates shouldn't be discounted.

"I think it would be a mistake to dismiss without significance the estimates of skeptics who think things will be more expensive than CBO estimates," Aaron said. "Just as it would be a mistake to dismiss the estimates of those who believe the costs will be lower and the savings higher."

Medicaid is the third-largest domestic program, behind Social Security and Medicare. Last year, it accounted for 8 percent of federal spending, compared with 20 percent for Social Security and 15 percent for Medicare.

On average, states spend about 16 percent of their general fund budgets on Medicaid. That's second only to elementary and secondary education, which eats up an average of 45 percent of most state budgets.

At a Medicaid hearing last week before the House Energy and Commerce Committee, Rep. Joe Pitts, R-Pa., cited a May 2010 report from the Kaiser Family Foundation, a private, nonprofit health research group. It said that Pennsylvania's Medicaid expansion could add nearly 683,880 people and cost the state more than $2 billion from 2014 to 2019.

But the Kaiser figures Pitts cited were "enhanced" cost estimates, based on higher-than-usual sign-up rates for new enrollees.

The GOP study based Medicaid cost projections for 19 of the 50 states on these "worst-case scenarios" from the Kaiser report, said January Angeles, a policy analyst at the liberal Center on Budget and Policy Priorities.

The study used the enhanced Kaiser estimates when other state-level data were unavailable.

Under Kaiser's standard estimates, which used historic enrollment patterns that track more closely to the CBO's projections, Pennsylvania was projected to have 482,000 new enrollees at a cost of just over $1 billion from 2014 to 2019.

That's 1.4 percent more than Pennsylvania would spend on Medicaid if there were no expansion, the report said.

Using the same methodology, Kaiser estimates that the additional enrollees would boost national state spending for Medicaid by an average of 1.4 percent — just over $21 billion — from 2014 to 2019. The figure goes to $43.2 billion — 2.9 percent — under the worst-case enrollment scenario.

Neither amount is small, especially when so much uncertainty surrounds states' long-term fiscal health. But the Kaiser projections don't constitute a dramatic increase, in the judgment of Robin Rudowitz, the associate director of the Kaiser Commission on Medicaid and the Uninsured.

Consider that in 2009 alone, the states collectively spent more than $123 billion on Medicaid, Rudowitz noted, about one-third of Medicaid's total cost that year. The federal government paid the other two-thirds.

Aaron said that fighting about the numbers distracted from the central policy issues that should drive the debate.

"Reasonable people can reach different numerical estimates, but in order to avoid chaos, we need to use one set of numbers," Aaron said. "Until somebody comes along with a demonstrably better record, CBO's are the numbers we ought to use."

Knowing that states could face budget problems in implementing the health care law, President Barack Obama agreed this month to a modest change: He moved the date when states could modify portions of their Medicaid coverage from 2017 to 2014, as long as the changes met the coverage goals of the new law.

Obama wants concerned governors to form a bipartisan committee to work with the Department of Health and Human Services on ways to cut Medicaid program costs without affecting the level of care. But many GOP governors say the new law hampers those efforts because it requires states to maintain their Medicaid enrollment and eligibility levels until 2014.

At the hearing last week before the House Energy and Commerce Committee, Mississippi Gov. Haley Barbour asked for more flexibility to restructure the program. Barbour, a potential 2012 GOP presidential candidate, suggested turning Medicaid into a block grant, in which states would get lump sums of federal money to operate and restructure the program with little federal oversight.

"We'll take that every time," Barbour told the committee.

The Obama administration rejected the proposal. Experts say that such fixed funding would leave states and localities vulnerable to higher costs when economic downturns caused program enrollment to spike, as it did during the recent Great Recession.

"Block-granting Medicaid is no panacea for states," said Rep. Frank Pallone, D-N.J. "The flexibility my Republican colleagues seek seems more directed at destroying the Medicaid program than strengthening it."

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