Health care in states' hands: Questions about costs, covering uninsured will drive decisions on future of Medicaid, health exchanges

Stateline Midwest ~ July/August 2012


In the weeks leading up to the U.S. Supreme Court’s decision on the federal Affordable Care Act, policymakers, commentators and experts mulled over the many possibilities that could come out of the landmark case. But virtually no one could have predicted the complicated outcome — or the unexpected lineup of justices in the 5-4 decision.

The court upheld virtually all of the law, including the controversial individual mandate, which requires all Americans to buy health insurance or pay a fee on their federal tax bills. Most other parts of the law, pertaining to insurance market reforms and state health exchanges, were untouched by the court.

But in what some consider a surprising twist — and a win for states’ rights— the court ruled that the federal government cannot force states to go through with a planned Medicaid expansion in 2014. Under the original law, states were required to expand the health program to all citizens earning less than 133 percent of the federal poverty level. (Under current Medicaid rules, states only have to cover certain “mandatory” populations, such as children, pregnant women, and the elderly and disabled.)

“It was a pretty strong affirmation of states’ power vis à vis the federal government,” says Alan Weil, executive director of the National Academy for State Health Policy.

Medicaid expansion is optional

Vern Smith, managing principal with Health Management Associates and a former Michigan Medicaid director, says he, too, was surprised by the ruling — particularly that the Medicaid portion of the law became a major part of the decision.

The Supreme Court ruled that the expansion of Medicaid was beyond the spending powers of the U.S. Congress, and that the federal government can’t threaten to take away all of a state’s Medicaid matching funds if it doesn’t want to add the new population to its program. In his majority opinion, Chief Justice John Roberts likened the law’s Medicaid provisions to putting “a gun to the head” of states: Participate in the expansion, or else.

“What had been regarded as a mandate now becomes a state option,” Smith notes.

States must decide whether they want to take on a new set of enrollees, most of whom will be childless adults — a population that has not traditionally been covered by Medicaid.

If every U.S. state agrees to this expansion, up to 16 million new enrollees would be added to the Medicaid program. In Midwestern states, just over 3 million new people would be eligible, according to Kaiser Family Foundation data.

The federal government will cover the cost of insuring these new enrollees through 2016. From there, the percentage covered by the federal government decreases gradually until it reaches 90 percent in 2020 and beyond.

“This is an opportunity to have this incredibly high federal match rate to cover people who are very poor and would otherwise be uninsured,” Weil says. “From a fiscal perspective, it is very appealing.”

Smith agrees, saying some states will find the unprecedented offer too good to resist.

“If a state has a policy goal to extend coverage to as many of its citizens as possible, it’s an easy decision,” he says. “There has never been an eligibility group with this extremely high match.”

In addition, hospitals and health care providers will likely exert pressure on states to take part in the expansion; more Medicaid participants could lead to less uncompensated care because more patients will be insured.

Bringing additional federal dollars to a state, too, will be seen by some as a way to boost economic activity. In fact, the Medicaid offer was so tempting for some states that they’ve already started the expansion. Minnesota is among those seven U.S. states.

Rep. Kim Norton strongly supported this decision in her state. It was a great opportunity, she says, to further a longtime goal of many Minnesota policymakers: to get as many people covered with health insurance as possible.

In 2010, the Legislature authorized the governor to implement the expansion. Democratic Gov. Mark Dayton then issued an executive order in 2011 offering coverage to childless adults earning up to 75 percent of the federal poverty level. More than 80,000 people were enrolled at the end of last year.

In Minnesota, the expansion replaced two medical assistance programs that were being funded completely with state dollars. The Legislature appropriated $188 million for the Medicaid expansion and is expected to reap $1.2 billion in federal matching funds.

“When we don’t cover people, we all pay the price for that through higher premiums and higher bills,” says Norton, a Democrat. “The more people we cover, the less cost-shifting occurs.”

States voice concerns about expansion

But within days of the decision, some policymakers were questioning whether their states should take part in the Medicaid expansion, including the governors of Iowa and Nebraska.
Why would a state turn down the opportunity to decrease uninsurance rates, mostly on the federal government’s dime?

Beyond the fact that the bill itself is a political lightning rod, some states are wary of the cost of covering their share for newly eligible participants. (States must cover 5 percent of the cost in 2017, 6 percent in 2018, 7 percent in 2019, and 10 percent in 2020 and beyond.)

“Any changes will reflect back to the taxpayers because we will need extra dollars,” says South Dakota Republican Sen. Jean Hunhoff. “Even though [the federal government is] supporting [the expansion] initially, we will need money later.”

Questions remain, too, about whether the fiscally strapped federal government will uphold its end of the bargain.

“It may choose to change [the matching rates]  when it looks at its own budget picture,” Weil says. “States are very hesitant to sign onto something that looks like a good deal now but may not be so good [later on].”

The prospect of expanding the Medicaid population also adds to states’ cost concerns about the “woodwork effect”: the enrollment of individuals who have been eligible for Medicaid, but haven’t applied for it in the past.

More publicity about the program, the mandatory opening of health insurance exchanges and the requirement that individuals have insurance are expected to increase Medicaid enrollment.

These currently eligible enrollees will cost states more because the traditional federal match (between 50 percent and 75 percent) applies.

The more-generous federal match will apply to any participants newly eligible under a Medicaid expansion. Still, for states, the decision to expand eligibility will result in more people being insured in a program that is already a major fiscal strain.

Smith says there is an administrative cost to managing additional enrollees — spending for which the federal government typically only covers 50 percent. So, all in all, “it’s not a free lunch, but it is a highly subsidized lunch,” he says.

Whether states take that “highly subsidized lunch” will determine whether a key goal of the new federal law is met: universal coverage. If all 26 states that signed onto the lawsuit challenging the Affordable Care Act (which included all Midwestern states except Illinois and Minnesota) reject the expansion, 9 million projected new Medicaid enrollees would not get coverage, according to the Kaiser Family Foundation.

Next steps for states

Now that the highest court has ruled on the ACA, states are looking ahead to 2014, the year when most of the major provisions impacting states take effect, including the optional Medicaid expansion.

The year 2014 is also when states must have online health insurance exchanges up and running. If they don’t set up an exchange — or if it isn’t ready in time — the federal government will step in to operate one.

Fifteen states nationwide have already created their exchanges, but as of early July, none of the Midwestern states had done so.

In setting up the exchanges, states must make a few key decisions. For example, who will oversee the exchange: a state agency, a separate nonprofit entity or a blend of both? States also have some leeway on whether they want to merge the small-group and individual markets.

But these insurance marketplaces must allow users to determine their eligibility for public programs and federal subsidies, as well as to shop for and compare health plans that comply with new federal standards.

Hunhoff says South Dakota has applied for some federal grant money to build an exchange, and some planning for it is moving ahead. But the state is likely to wait until after the presidential election to move forward with implementation of the exchange.

“We would not want the federal government dictating to us,” she says. “We would have to develop it, while making it a priority that consumers have choices.”

States that wait much longer, Weil says, are essentially placing a bet on the presidential election. That’s because the deadline for states to submit their insurance-exchange blueprints is Nov. 16 — less than two weeks after the election.

“My advice is that if you can envision a future in the event the ACA is in place, and you believe that the state should run its own exchange, you should get to work today or that option will not be available to you,” he says.