Even after the Supreme Court struck down a requirement of the Affordable Care Act (ACA) that required states to expand Medicaid coverage to low-income individuals,* states still seemed to have a juicy carrot to do so. That’s because 100% of the extra cost for states will be met by Uncle Sam for the first 3 years, starting in 2014. And although the federal share of costs for these newly covered individuals will gradually decrease thereafter to 90%, that is still a much bigger share than for “regular” Medicaid.

Not surprisingly, the Obama Administration is pressing states to see this as a deal that no sensible governor and state legislature can refuse and to think that doing so would harm the state and its clinicians and health care facilities. And even some Republican governors, such as Rick Scott of Florida, say there is no sense in leaving federal money on the table. Still, others are balking, such as Louisiana’s Bobby Jindal. Are they lacking common sense?

It turns out that the picture is not so simple.

For one thing, taking into account the projected cost of Medicaid, which goes together with the ACA’s reduction in subsidies to states for hospitals treating patients without insurance, most states taking the deal would still have to dig deep into their already overstretched budgets in the future—albeit with a reduction in the number of uninsured individuals. A 2012 Kaiser Family Foundation/Urban Institute analysis of the ACA’s Medicaid provision found that 40 states and the District of Columbia would be in this category. Meanwhile, 10 states would actually receive a net windfall from Washington, particularly those like New York that have already expanded Medicaid eligibility beyond the minimum required populations. These states would now receive a much higher federal payment for residents they already cover.

But a recent Heritage Foundation simulation, using the Kaiser/Urban data and assumptions but tracking spending annually (rather than using cumulative numbers over the 2014-2022 period provided by Kaiser/Urban), offers a different projection. That simulation makes it clear that although most states will enjoy a net budget gain for the first 3 years, they will be experiencing a rapidly escalating trajectory of state costs by the end of the period.

Uncertain Assumptions?

Another thing to consider is this: for states to be on the projected track for their Medicaid spending, the ACA assumes that states will be able to institute payment cuts to clinicians and health care facilities on top of the ACA’s federal payment cuts to Medicare and Medicaid funding for hospitals that treat indigent patients through the disproportionate share hospital program. That’s going to be a tall political order for most states, where health care lobbyists can be expected to push back strongly. If those lobbyists are successful, the Medicaid expansion could be much more costly to states.

And there’s another thing. There is no guarantee that the deficit-burdened federal government will be able to maintain its funding promises to the states. Nobody yet knows what will result from negotiations in Washington over entitlements. Moreover, the Administration already indicated in last year’s budget proposal that it is interested in introducing a “blended rate” in Medicaid. That proposal would replace the range of matching rates (the percentage of Medicaid costs shouldered by the Federal government) currently used for different populations with a single blended rate for a state. According to a 2011 analysis of that idea by the liberal Center on Budget and Policy Priorities, the blended rate would likely shift costs to states and to certain population groups.
 
A Faustian Bargain?

Fearing that the ACA’s design of Medicaid expansion could end up as a Faustian bargain for state budgets, some governors—even some Democrats, such as Arkansas’s Mike Beebe—are pushing the White House to allow the federal funding for Medicaid to be used to buy private coverage. The Administration is said to be open to that modification, but that willingness simply underscores that there are far better ways to approach this particular group of the uninsured than simply expanding Medicaid. For example, Sen Orrin Hatch (R, Utah) earlier this year proposed a per capita allotment to states for people eligible for Medicaid, which would be adjusted by their eligibility category and health condition. This approach, similar to a proposal in 1995 by President Clinton, would give states more flexibility in how they covered individuals and allow a wide range of approaches to coverage.

But as I’ve noted before, it’s time to address the creaking foundations of the Medicaid program and use tools other than expanding traditional Medicaid to provide coverage for the uninsured population targeted in this part of the ACA. One segment of this population, low-income individuals who pay federal income taxes, should be addressed through tax reform by creating a tax credit to help households afford adequate private coverage through their employers or elsewhere. Others eligible for the Medicaid expansion could receive a form of premium support—a defined subsidy using a mixture of federal and state funds—to choose a plan. And other households could receive a blend of a tax credit and premium support, depending on their income and whether they currently pay any federal taxes.

Pressing states to participate in the expansion of Medicaid is a bad idea. That is not to say that uninsured households that would be eligible do not need coverage. But the ACA’s approach threatens future state finances and locks in an approach that makes it less likely to ensure Medicaid coverage that will be affordable to future federal and state taxpayers while providing adequate health services to beneficiaries.

*For states that agree to the Medicaid expansion, the program will offer coverage up to 133% of the federal poverty level (FPL)—although because of changes in the way the ACA calculates income, the eligibility standard is effectively 138% of the FPL. The FPL is $23,550 for a family of 4 in 2013.

-Stuart M. Butler, PhD, is Director of the Center for Policy Innovation at the Heritage Foundation in Washington, DC, where he focuses on developing new policy ideas. Previously he served as Vice President for Domestic and Economic Policy Studies. He is also an Adjunct Professor at Georgetown University’s Graduate School.