Is Health Care Reform a Medicaid Torpedo?

States could get clobbered with new costs.
October 15, 2009 AT 3:00 AM
Girard Miller
By Girard Miller  |  Finance Columnist
The finance columnist for Governing.

Just as the Obama administration announced that, except for targeted jobs incentives, a second stimulus package was off the table, a Congressional committee was about to adopt a provision in the health care bill that could torpedo state governments. It could send them a $30 billion Medicaid bill.

The Medicaid provision under consideration in the Senate would essentially provide Medicare-type benefits to most Americans earning less than $14,400 -- at considerable expense to the state governments that administer Medicaid.

From a fiscal standpoint, the timing could not be worse. States are already struggling with Medicaid costs. Florida recently reported deficit gaps of $2.6 billion, led by Medicaid funding problems.

The nation's governors are voicing concerns about additional and new costs from health care reform. The new initiatives could force states to cut back non-health spending to keep their fragile budgets in balance. The effort to shift costs from the federal government to the beleaguered states is disingenuous. If Congress wants to extend medical benefits to the entire national population of poverty-level households, then Congress should find the money to pay for it. To stiff the states at a time when they are raising taxes and laying off workers to balance their budgets is exactly the opposite of fiscal stimulus. Uncle Sam might as well cancel 25 percent of all the highway projects that are scheduled to be built under the stimulus program.

Medicaid expansion isn't the only way that the health care bill will impact state and local governments. As I've written before, the annual bill for governmental employee health care is likely to rise in coming years as access to the nation's health care system is expanded. As desirable as the concept of universal health care access might be, the economics are simply not friendly: We will push another 40 million Americans into a pipeline that lacks capacity to serve more recipients without a cost-push inflation trend.

The other sleeper in the legislation may be the proposed tax on high-premium health insurance policies. Although the public employee unions have lobbied hard to set the threshold on a "Mercedes health insurance policy" tax at a high enough level to avoid penalizing most state and local government plans, the limits originally proposed would clearly have impacted states and localities with higher than average premium costs -- typically the industrialized states with higher costs of living in general. If your jurisdiction's benefits costs exceed the proposed taxable limits, your provider will pay a tax that will inevitably be passed along to your taxpayers.

Some of the Democratic governors are acting like good soldiers and supporting the health care reform initiative, even though they know it will impact their budgets and their local economies. That's laudable loyalty, but it may backfire on them in the next round of elections. Americans clearly wanted change in the health care arena in the last election, but it's not clear that they want or expect higher state taxes and more state layoffs to pay for it.

None of this is meant to suggest that I'm opposed to the national health care reform effort. Broadening access for all Americans is a laudable goal. I just don't want to see the bill delivered to state and local governments that are already on the ropes financially. If Washington wants to put the economy into a double-dip recession, that would be a way to start. Let's find the means to alleviate the fiscal impact on the governments outside the Beltway. It makes no sense to lay off teachers, highway patrol and social workers to pay for Medicaid.

Girard Miller
Girard Miller | Finance Columnist |