The Budgetary Impact of States Opting Out of the Medicaid Expansion

Last week, the Supreme Court released its ruling on the constitutionality of the Patient Protection and Affordable Care Act (PPACA). As the initial discussion over the ruling for the individual mandate has subsided, experts are now weighing in on the potential federal budgetary impacts of the Court’s decision which enables states to opt out of expanding Medicaid coverage to low-income adults. There is also a debate surrounding the state budgetary impact, but we will focus on the federal budget for this blog post.

As we explained after the ruling, the Supreme Court's decision provides states with the choice to either expand Medicaid coverage under PPACA or opt out and maintain their current eligibility levels without losing their current Medicaid funding. For states choosing to undertake the Medicaid expansion, individuals and family under 133 percent of the poverty line would have access to Medicaid coverage. For the states that opt out, individuals and families earning below 100 percent of the poverty line who are not currently Medicaid eligible will not have access to subsidized healthcare, while those with earnings between 100 percent and 133 percent of the poverty line may qualify for federal subsidies to buy purchase private coverage in the new health insurance exchanges.

As we wait for an official CBO analysis, debate has arisen from both ends of the political spectrum on whether the possibility of states opting out of the expansion will reduce or increase the budget deficit. According to the American Action Forum, by qualifying individuals earning 100 percent to 133 percent of the poverty line to receive subsidies in an exchange, the net effect of the Medicaid opt-out could add hundreds of billions of dollars to budgetary expenditures, assuming that all states chose to do so.

For the taxpayer this is a nightmare. The taxpayer would save some money on the Medicaid expansions that would not take place (where the feds pay 90 percent of the cost) but they will pick up the full cost of the additional and generous insurance, bearing an additional $500 billion over ten years.

Charles Blahous has also said that he believes that if many states go this route, this could cause the overall law to add to the deficit and could create additional fiscal pressure on the health insurance exchanges from the added enrollment.

In a rebuttal, the Center on Budget and Policy Priorities claims that the ability of the states to opt out of the Medicaid expansion will actually reduce the deficit, though at the expense low-income individuals that would otherwise be eligible for Medicaid under PPACA’s provisions. They explain the counteracting effects as follows:

First, there are many more uninsured people who are below the poverty line than are between 100 percent and 133 percent of the poverty line.  Put another way, the people who are likely to cost the federal government less money than expected outnumber the people who are likely to cost it more money than expected.

Second, on a per-person basis, the federal savings from not providing Medicaid coverage to people below the poverty line who don’t qualify for Medicaid because their state didn’t implement the expansion are much greater than the modest increase in federal costs from providing tax credits rather than Medicaid coverage to people above the poverty line.

In addition to these reports, the Urban Institute has their take on what the ruling will mean and a state-by-state breakdown of how coverage may be affected.  And over at Wonkblog, Sarah Kliff offers a chart to better understand what will happen when a state does opt out.

Whether or not states opting out of this Medicaid expansion will increase or reduce the budget deficit remains to be determined. It will, of course, depend on how many, if any, states ultimately do decide to forego the expansion, the nature of their Medicaid program, and each state's income distribution.

Even after CBO comes out with an updated score, it will still be difficult to predict what each state may decide and how that could change under future state governments. What is clear is that regardless of the budgetary impact of PPACA, permanent measures to curb burgeoning healthcare costs should be at the forefront of a permanent deficit reduction deal this year.