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Does expanding Medicaid help a state’s finances, or is it Band-Aid?

Does expanding Medicaid help a state’s finances, or is it Band-Aid?

Fred Birnbaum
July 12, 2016
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July 12, 2016

One of the huge selling points for Medicaid expansion was that it would inject federal money into the states. Most supporters don’t go so far as to call it “free” money, but they do imply it was a no-cost to low-cost federal cash infusion.

How so?

Well, traditionally Medicaid has been a joint federal and state program, with the federal government picking up about 50 percent of the cost in states with the highest per capita incomes. Idaho isn’t one of the wealthier states, so the federal government picks up slightly more than 71 percent of its Medicaid tab.

After the U.S. Supreme Court ruled that states could not be compelled to expand Medicaid under the Affordable Care Act, states were left to choose whether to expand Medicaid coverage beyond the traditional population, including children, pregnant women and some heads of household with very low incomes. Expansion proponents leapt to their feet to point out that under the expansion portion of Medicaid, federal funding would start at 100 percent of the tab and scale down to 90 percent over several years.

The actuarial firm Milliman, which Idaho hired to review Medicaid expansion, ran the numbers in November 2014 and projected that expanding Medicaid would save Idaho $174 million in direct costs from fiscal 2016 through fiscal 2025.

In January, Milliman re-ran the numbers, and the figures went into the negative, with the savings evaporating and the net costs to Idaho coming in at $187 million.

What caused the $361 million swing? Delaying accepting federal dollars was one factor, as the expansion becomes cost-negative once the federal matching percentage reaches 90 percent. Idaho’s own costs for the state and county indigent programs have also come down.

A funny thing has happened since this shift in the costs were revealed. Now, Medicaid expansion supporters speak of the multiplier effect from the infusion of federal cash.

Is this reasonable? If you believe short-term cash from a federal government that’s more than $19 trillion in debt is a bet worth making, you might want to consider evidence from other states.

The Mercatus Center at George Mason University just published a comprehensive ranking of all 50 states by fiscal condition. A huge spectrum of financial metrics were evaluated, including: cash solvency, budget solvency, debt levels, pension liabilities, revenue and expense ratios to personal income, etc.

Of the top 10 most fiscally solvent states, only three — Alaska, North Dakota, and Montana— have expanded Medicaid. Of the 10 most fiscally distressed states, only one — Maine — rejected Medicaid expansion.

When we step back and look at the bigger picture, the trend still holds. Of the top 25 most fiscally solvent states, 40 percent have expanded Medicaid. Of the 25 least fiscally solvent states, 84 percent have expanded Medicaid.

Are we making the claim that expanding Medicaid leads to fiscal insolvency?

Of course not? But it should serve as a cautionary tale for Idaho and the other 18 states that have thus far refused to expand Medicaid. Federal money comes with policy strings attached, and often they can’t be undone simply because a state wishes it so.  Increasing dependency isn’t a long-term path to prosperity and state fiscal solvency. More likely, it signals a retreat from sound fiscal policy.

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