Many states have conducted various versions of evaluation of the budgetary effects of expanding Medicaid. One state in particular that has participated in a rather robust analytical discussion is Virginia.
According to the Urban Institute, “Virginia exemplifies a state where public officials and private stakeholders have carefully analyzed multiple effects of the Medicaid expansion.” In addition to the state’s own in-depth analysis of Medicaid expansion, Chmura Economics and Analytics provides a macroeconomic analysis of Medicaid expansion that is being combined with state-level cost and benefit data to paint a “full picture.”
While Virginia’s work does provide a robust evaluation of the Medicaid expansion, the results must be read with caution. As with many Medicaid studies, looking to the future is incredibly important for making a decision on Medicaid expansion. A simple characterization of Virginia expansion as a “net budget saver” is dangerous for future taxpayers.
The Take-Up Rate and the Effect on Costs and Savings
In microsimulation models, such as models run by the Urban Institute and The Heritage Foundation, take-up rates (that is, the percentage of eligible recipients who actually enroll) are calculated internally through econometric methods that take into account characteristics of individuals. Other models often assume a take-up rate after calculating the eligible population.
While the assumptions behind different take-up rate predictions are incredibly important, a far more complex question has to do with the timing of enrollment. Under the Medicaid expansion, the federal government pays a 100 percent match for the first three years, which is then gradually reduced to 90 percent as the state begins to pick up the tab. Under this scheme, if enrollment is higher in the early years, state-level savings will be overstated.
The quality of the state-level studies in Virginia illustrates this point. In the Chmura study, 72 percent of average enrollment (or 288,000 new enrollees) in Medicaid is supposed to happen in the first year of expansion. In 2015, enrollment is estimated to be 372,000, and by 2019, enrollment is expected to be 452,000. The Urban Institute, however, estimates 407,000 new enrollees by 2022.
Additionally, uncertainty about enrollment in the first three years leads to drastically different estimations of costs and benefits. If enrollment in Virginia is lower than expected in the early years, the drastic offsets that occur will be reduced. For example, Virginia is estimated to receive around $1.5 billion in additional Medicaid funds from the federal government in 2014. If enrollment is slower than expected by 30 percent in 2014, the amount decreases by $500 million. In Virginia, where yearly costs for Medicaid expansion are expected to begin in 2020 and continue, a small change to enrollment estimates could lead to earlier yearly costs.
Macroeconomic Impact and Virginia
Proponents claim that Medicaid expansion will increase employment and consequently increase state tax revenues and hence create even more savings for the state. This “multiplier effect” always appears positive at the state level. Seemingly free federal funds flow into a state, encouraging activity in the affected sector. These funds cause activity to be created or shifted from other sectors. Chmura estimates these positive effects in Virginia to be around $30 million in additional state revenue per year.
Admittedly, state-level macroeconomic analysis is limited in that it cannot fully capture which resources from other sectors will be transferred to provide health care, not to mention whether productivity within the health sector will respond immediately in order to cover the supposed increases in demand for care and services.
Uncertainty and the Future
Virginia’s Medicaid expansion is estimated to cost the state $137 million from 2010 to 2022, according to a complete estimate conducted by the Virginia Department of Medical Assistance Services. However, the Commonwealth Institute estimates that expansion will save Virginia $555 million over the first 10 years due to additional state savings and positive economic effects. By including economic savings, Commonwealth estimates that the Medicaid expansion will cost the state of Virginia $77 million in 2020. In 2021, this cost increases to $168 million and climbs in 2022 to $188 million. From 2020 to 2022, the Medicaid expansion will cost the state $433 million. While state savings are clearly concentrated in the first five years of expansion, it is also clear that costs will be coming in the out years.
The certainty of the savings and costs in the future can be debated, but it is important to note that the most rigorous studies of costs and savings in Virginia show that, by 2022, the Medicaid expansion will cost the state nearly $190 million annually. At this point, the state will have to find new ways to pay for the Medicaid expansion, as the federal government will no longer fully subsidize the program. This will create a tax burden or cause resources to be shifted from other public programs, such as education.
The Commonwealth analysis does not take into account the negative economic effects of funding in the later years. This portrays Medicaid expansion in a more positive light, since spending in the early years is assumed to affect economic multipliers, but in later years, the negative economic impacts are simply ignored.
There Will Be Costs
In the majority of the states, the option to expand Medicaid is highly appealing in the early years. However, using highly detailed estimates conducted in Virginia, it is clear that the Medicaid expansion begins to drastically cost the state in later years.
In the case of Virginia, a budget window summary does not describe what will really happen to the state if it chooses to expand Medicaid. Looking at yearly costs, it is clear that expansion signs the state up for increased costs well into the future. While future savings—and, consequently, costs—will be disputed, the best estimate the state has in terms of expansion shows that large and recurring costs are coming to Virginia if it chooses to expand.
—Drew Gonshorowski is Policy Analyst in the Center for Data Analysis at The Heritage Foundation.