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Medicaid Expansion & States: Will They or Won’t They?

Faced with the decision to expand Medicaid or not in the wake of the federal health law ruling, states can be divided into three categories.

Robert Durell

A little after 10 a.m. on June 28, Chief Justice of the United States John Roberts altered the Affordable Care Act forever. It wasn’t his unexpected support for the individual mandate. It was his opinion on the Medicaid expansion -- a decision, it is safe to say, no one saw coming -- that upended a law aimed at universal health insurance coverage for all Americans.

To achieve health coverage for a significant chunk of the 50 million uninsured Americans, the law called for states to increase eligibility for their Medicaid programs to 138 percent of the federal poverty level (a little less than $32,000 for a family of four). This expansion of state Medicaid rolls, which was scheduled to go into effect in 2014, was essentially mandatory. If states failed to expand their rolls, the federal government could withhold its matching funding for the state’s existing Medicaid program. Since the federal government contributes at least 50 percent of states’ spending for the program, that threat made refusal to expand unlikely for any state.

Roberts, however, saw the federal deterrent as “a gun to the head.” That is, the federal law was, in effect, forcing states to adopt what is actually a new state-federal program by threatening to withhold funding for an existing one. As Roberts wrote in his opinion, “The threatened loss of [funding] … is economic dragooning that leaves the states with no real option but to acquiesce in the Medicaid expansion.”

So the chief justice gave the states an option. The federal government could still offer the states an incentive to join in the Medicaid expansion -- say coverage of 100 percent of the costs for the newly enrolled population through 2016 and then a minimum of 90 percent coverage after that. But the feds couldn’t withdraw money if a state didn’t. Under Roberts’ decision, existing federal Medicaid funding cannot be at risk if states opt out. That means states have a real choice about whether to participate.

That new reality has been in place for nearly six months. Governors, legislators, health-care providers and patient advocates have been weighing the political, financial and moral variables and debating whether expanding public insurance for low-income Americans is the right thing to do. In many states, the discussion is linked to larger plans to reform the state’s overall Medicaid program. While some governors have announced their preferences, final decisions on the expansion will be made in the coming 2013 legislative sessions.

What’s at stake nationally? The Affordable Care Act’s goal of universal health coverage. “The ACA is the biggest and most significant piece of legislation since Medicare and Medicaid,” says Len Nichols, director of the Center for Health Policy Research and Ethics at George Mason University. As Nichols points out, the ACA with the Medicaid expansion would cover a bigger proportion of the population than Medicare and Medicaid did when those programs first came into existence. “Medicaid would close the loop and make sure everyone has access to health insurance. We’ve never made it social policy to complete the safety net in that way,” he says. “That’s a big freaking deal.”

What’s at stake for the states? Taking or turning down up to $900 billion in federal dollars. Insuring or not insuring up to 17 million people. Figuring out how this all works while attempting to reform their own Medicaid programs. “It is one of the biggest public policy decisions that we’re going to face in this generation,” says Matt Salo, executive director of the National Association of Medicaid Directors.

States are at a crossroads. Thanks to the Supreme Court’s ACA decision -- and President Obama’s reelection -- Medicaid expansion will be the big issue when legislatures open for business next year. Each state will be approaching the discussion with its own set of facts: the number of poor and uninsured within its borders, the state of its current Medicaid program, the projected fiscal and economic impact of expansion. Right now, states can pretty much be divided into three categories: those that oppose expansion, those that support it and those still trying to decide.


Texas Gov. Rick Perry has become the poster child for opposition to the Medicaid expansion. When callers to his office are put on hold, they hear the governor’s voice explaining why the expansion is a bad deal for the state.

His administration says the new additions would cost too much. The state would add about 1.5 million people to its Medicaid rolls over the next 10 years under the expansion, according to estimates from the Texas Health and Human Services Commission (HHSC). Current enrollment is about 3.6 million. The new beneficiaries would cost Texas an estimated $16 billion over the next decade (annual spending was $27.2 billion in fiscal 2010), while the federal government would contribute about $100 billion.

The real problem, Perry’s office says, is that the Medicaid program is already approaching financial insolvency. The state underfunded Medicaid by nearly $5 billion last year. Any additional cost to the state -- especially billions of dollars -- is too much for a program that has widely acknowledged structural problems. “We’re not expanding Medicaid. That’s it. It’s like putting a thousand more people on the Titanic when you know it’s going to sink,” says Lucy Nashed, Perry’s deputy press secretary. Medicaid, she points out, is already taking up a huge part of the state’s budget and expanding it “would only take away from other state programs. We need to be looking at how we can fix Medicaid.”

And how can it be fixed? Perry wants a block grant. He wants to get rid of all federal requirements, give states a capped amount of federal funding and let states experiment with their own reforms. The idea was proposed by former Republican vice presidential candidate Rep. Paul Ryan as part of his recent federal budget proposals. It’s also become a rallying cry for conservative governors, who have tried to use it as leverage with the White House: Give us a block grant, and we’ll expand coverage. President Obama has expressed opposition to the idea.

In an editorial published in the Austin American-Statesman in July, then-HHSC commissioner Tom Suehs outlined a vision for reforming Medicaid that proposed higher co-pays for beneficiaries who don’t seek cheaper primary care, moving to managed care instead of fee-for-service payments and allowing providers to form regional partnerships to coordinate care. But nobody is quite sure how all this would expand coverage. Most projections of a block grant scenario foresee reductions in Medicaid enrollment, not additions. Texas could drop up to 1.9 million beneficiaries, according to estimates from the Kaiser Family Foundation.

Meanwhile, Perry’s administration and Republican lawmakers are facing mounting pressure from health-care providers and patient advocates to take the big pool of federal money and give more people health insurance coverage. As it is, Texas has one of the highest uninsured rates in the country, at 24 percent.

The Texas Hospital Association has started an education tour of sorts, explaining to individual legislators how hospitals in their district -- as well as their constituents -- would benefit from the expansion. Texas hospitals already deliver $5 billion in annual uncompensated care to uninsured or underinsured residents, according Jon Hoggins, the association’s executive director. Those costs are then passed onto taxpayers and insurance companies through higher rates. There is also a growing economic argument: A study in Mississippi (where Gov. Phil Bryant has joined Perry in opposing the expansion) estimated that expanding Medicaid could create 9,000 jobs in that state in the coming decade.

So when the Texas Legislature convenes on Jan. 8, expect Hoggins and his colleagues from the provider community to be vying for front-row seats. They’ll be meeting with lawmakers, testifying at hearings and -- if need be -- rallying grassroots support. “We’re willing to push pretty hard on this, just given the Texas situation -- our high number of uninsured and our fiscal situation,” Hoggins says. “We have the ability to create some public pressure to get folks engaged.”


At the other end of the spectrum is Oregon, where the working plan is to embrace the expansion, albeit in a “financially sustainable way,” says Mike Bonetto, Gov. John Kitzhaber’s senior health-care policy adviser. According to estimates from the Urban Institute and Kaiser Family Foundation, the state would add 325,000 people to Medicaid and spend an additional $438 million in state dollars by 2020. (The state has been spending upward of $4 billion a year on Medicaid.)

Bonetto’s confidence that the expansion will be fiscally responsible stems from something Oregon has done that a state like Texas has not: undertaken a fundamental Medicaid reform effort. This year, lawmakers passed legislation that dramatically overhauls the program. Beneficiaries will be enrolled in coordinated care organizations, a network of providers that will be paid a lump sum to oversee care for a set Medicaid population. Oregon is receiving $2 billion from the Obama administration to implement it, and policymakers have high hopes for its prospects. The reforms are supposed to save $11 billion over 10 years, which more than offsets any new spending for the expansion.

What’s more, Kitzhaber’s office estimates that if every state adopted its reforms, Medicaid would save a combined $1.5 trillion in the next decade -- that’s more than the $1.2 trillion in sequestration cuts that Congress will be agonizing over this month. Kitzhaber appeared before the Center for American Progress in September and called Oregon’s approach a model for the nation.

With reforms in place, Kitzhaber’s office is optimistic it can marshal support in a politically split Legislature to pass the expansion, much as it did with the reform legislation this year. “The core concern from Republicans and Democrats is: Can we do this in a sustainable way? Increasing the predictability from a budget perspective has given everybody much more comfort,” Bonetto says. “We feel much more confident that if we bring more people in, we have the tools and levers to achieve sustainability.”

In a reversal from Texas, some Oregon health-care providers aren’t so jubilant at the prospect of expansion. It isn’t because they’re opposed to greater health coverage. Rather, they’re more skeptical of the coordinated care experiment. Through its agreement with the federal Centers for Medicare & Medicaid Services, which provides set federal funds to finance the reforms, Oregon has essentially agreed to a spending cap. So if costs aren’t kept down, providers could lose money and still handle more people at the same time.

“People are really afraid that the minute you take an expansion dollar, you’re committed,” says Andy Davidson, president and CEO of the Oregon Association of Hospitals and Health Systems. “If the grand experiment doesn’t work, what do you do down the line?”

In other words, even if a state is undertaking significant reforms and expanding Medicaid, the battle isn’t over. In the end, Davidson says his organization supports the expansion, as long as continued talks about Medicaid’s long-term solvency are also on the table. “Getting our fiscal house in order, providing insurance coverage to those who need it the most -- there isn’t anything more important we could be working on,” he says. “But we have to do it responsibly.”

From the governor’s office, Bonetto points out that the coordinated care reforms, which are already under way, will have more than a year to become established before the expansion starts in 2014. “The health-care community will have a year of experience under its belt,” he says. “If we were doing this in one swoop, I think it would be more of a challenge.”


Texas has uniform Republican state leadership; Oregon’s Kitz-haber is a Democrat with a slight Democratic majority and a recent track record of reaching across the aisle. But Arkansas Gov. Mike Beebe, a Democrat, will be contending with an unfriendly Republican Legislature as he tries to push for Medicaid expansion. (Beebe’s inverse is in New Jersey, where Republican Gov. Chris Christie has expressed resistance to the expansion, while the Democratic Legislature is advocating for it.)

So what’s the governor’s pitch? It’s layered. About 250,000 people are expected to be covered by the expansion. According to estimates from the Arkansas Medicaid office, the state pro- jects it could save $60 million on currently covered populations by recategorizing them as newly eligible, which the federal government will pay for in full. As much as $90 million more could be saved by reduced payments to hospitals and other providers for uncompensated care as more individuals receive coverage. And Beebe’s office has gone a step further and estimated that the state could receive as much as $30 million in additional tax revenue from the natural economic fallout from the $900 million infusion of federal funding to pay for the expansion.

With some estimates placing Arkansas’ projected Medicaid budget shortfall at $400 million for fiscal 2013, the state must pursue those savings, Beebe’s administration argues. “The choice is between taking advantage of the federal money or not. It’s not a vote for or against the law itself,” says Andy Allison, Arkansas’ Medicaid director. “The choice we face is to help people and save money or to not help them and try to find dollars elsewhere.”

Providers are on the governor’s side. The Arkansas Hospital Association, much like its counterpart in Texas, spent the past few months meeting with legislators and legislative candidates to explain what the benefits of expanding Medicaid would be. The association thinks the lobbying effort has already made an impact, says president and CEO Bo Ryall, but the pressure will continue once the legislative session commences on Jan. 14. “It’s a priority issue for us,” he says. “When you look at its effect on Arkansas, it’s got economic benefits, it’s got jobs benefits, it’s got health-care benefits. It should be a priority, and it should happen.”

But the newly christened Republican majority in the General Assembly might need a little more persuading. Current Republican House Caucus Leader Bruce Westerman points out that, with the expansion, more than one-third of Arkansas’ population would be on Medicaid. “We have to ask ourselves: Philosophically, is that where we want to be as a state?”

He’s also skeptical about one of Beebe’s selling points. The governor received assurance from the Obama administration that, if the state expands, it can still contract if the costs become too great. “I don’t think we can realistically do that,” Westerman says. That’s a position shared by many independent analysts -- it would be practically and politically difficult for states to bring people onto the program then try to kick them off in a few years.

No votes are imminent, of course, but Westerman says that the providers, no matter how much they lobby, won’t have the last word on expansion. Legislators are going to make the decisions they think are the most fiscally responsible for the state. “The industry is going to survive, and I think it’s going to be a vibrant industry,” he says. “It may go through some struggles and reshaping, but I don’t see not expanding Medicaid destroying our health-care industry.”

The specifics may differ in other states, but Texas, Oregon and Arkansas provide a broad overview of the variables that policymakers will be juggling starting next month. The Obama administration still has some questions to answer, starting with: What’s the default? If a state like Arkansas can’t reach an agreement, does it automatically expand or not? And of equal importance: Could states expand partway, to say, 100 percent of the poverty level? Guidance should be coming soon, especially if the administration wants broader cooperation. But the White House has also already addressed some of the most pressing concerns. Cindy Mann, director of the federal Center for Medicaid and CHIP Services, said in August that states could adopt the expansion and then drop it, as governors like Beebe were assured.

Outside observers expect that, regardless of any initial bravado, most states won’t be able to resist a huge injection of federal money into their health-care system and their economy. They point to the example of Medicaid itself: When the program was established in 1965, only half of the states initially participated. But within the next few years, 49 were on board. Arizona held out until 1982. “They all did the math and had to ask, ‘Why am I leaving all this money on the table?’ Usually, in the history of the world, math trumps ideology,” says George Mason’s Nichols. “It’s a deal that most states will not be able to refuse in the long run. That’s why the administration is acting confident that all states will come in.”

Regardless, policymakers of all stripes seem to understand the gravity of the situation. The conversations that take place and votes taken in the next few months will profoundly change the nature and the trajectory of the single largest health insurance program in the United States. The state decisions will have a huge impact on not only the 17 million people who would be eligible for coverage, but also the 62 million who are currently on Medicaid.

“This is a transformational moment,” says the National Association of Medicaid Directors’ Salo. “The decision is going to be: Are we adding 17 million people to a program that is struggling under its weight already? States are going to have to say yes or no. Then how much does that decision motivate or force conversations around quality or cost? Those are the fundamental issues of our time.”

Caroline Cournoyer is GOVERNING's senior web editor.
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