Quick Take: Key Considerations in Evaluating the ACA Medicaid Expansion for States

A central goal of the Patient Protection and Affordable Care Act (ACA) is to significantly reduce the number of uninsured by providing a continuum of affordable coverage options through Medicaid and new Health Insurance Exchanges.  Following the June 2012 Supreme Court decision, states face a decision about whether to adopt the Medicaid expansion. These decisions will have substantial consequences for health coverage for the low-income population. The 3 key questions that states should consider in evaluating the ACA Medicaid expansion are:

1. What are the fiscal implications of the ACA Medicaid expansion for states?

• Overall, many states are likely to see net savings from the Medicaid expansion.
• The Medicaid expansion also may have positive economic effects for states like increased jobs, revenues or economic activity.
• Studies show that the Medicaid expansion could increase revenues to hospitals, offsetting hospital reimbursement reductions that were also included in the ACA.
• Some states are concerned about federal deficit reduction efforts and the implications for Medicaid; however, the FMAP formula that determines the federal share of Medicaid spending has remained steady since the start of the program.  Congress has only amended the formula to provide more federal funding, not less.

2. What effect will the Medicaid expansion have on coverage? 

• The Medicaid expansion would make health care coverage available to millions of low-income adults and significantly reduce the number of uninsured.
• A large body of research shows that Medicaid increases access to care and limits out-of-pocket burdens for low-income people.  Despite claims to the contrary, research points to improved outcomes and reduced mortality from Medicaid coverage.
• Actions to address workforce challenges and low provider participation in Medicaid will be important to improve access with the Medicaid expansion.
• For most states that do not implement the ACA Medicaid expansion, there will be large gaps in coverage for low-income individuals because individuals with incomes below poverty are not able to access subsidies to purchase coverage in in the new health insurance exchanges.

3. What flexibilities do states have in implementing the Medicaid expansion?

• States have considerable flexibility to administer traditional Medicaid programs.
• Under the ACA Medicaid expansion, states have flexibility around benefits, cost sharing as well as how to deliver and pay for care.
• Proposals are emerging that would allow states to purchase exchange coverage for Medicaid expansion enrollees through premium assistance options.
• States also continue to have ability to seek approval for demonstration waivers.  Beginning in 2017, 1115 waivers may be combined with State Innovation Waivers.

1. What are the fiscal implications of the ACA Medicaid expansion for states?

Overall, many states are likely to see net savings and positive effects from the Medicaid expansion. The ACA expands Medicaid to a national eligibility floor of 138% of the federal poverty level (FPL) and provides 100% federal financing for those newly eligible for Medicaid from 2014 through 2016.  The federal contribution phases down to 90% and by 2020 and beyond.  A report prepared by the Urban Institute for the Kaiser Commission on Medicaid and the Uninsured estimates that if all states expanded Medicaid, the total cost of the expansion would be about $1 trillion over the 2013-2022 period with the federal government paying $952 billion (93%) and the states paying $76 billion.¹ States costs are related to increased participation among those currently eligible for coverage (reimbursed at the traditional Medicaid match rate) and a small share for those newly eligible (up to 10% by 2020).  Increased participation in Medicaid is likely to occur due to national outreach and enrollment activities as well as provisions that are in place even a state chooses not to implement the ACA Medicaid expansion including requirements to simplify and streamline the enrollment process and to coordinate enrollment across health programs (Exchange, Medicaid and CHIP).

States are also likely to see savings or offsets to costs from the Medicaid coverage expansion from:  reduced state spending for uncompensated care; transitioning current Medicaid coverage for specific groups (such as Breast and Cervical cancer targeted coverage) to “newly eligible” coverage at the higher match rates; transitioning current Medicaid coverage to individuals with incomes above 138% FPL to coverage in the exchange; or reduced spending for programs that serve indigent populations (such as  state funded mental health or substance abuse programs).  States could also see revenue from broader economic effects of the Medicaid expansion such as increased jobs, income and state tax revenues at the state level within the health care sector and beyond due to the multiplier effect of spending.

Studies show that the Medicaid expansion could increase revenues to hospitals, offsetting hospital reimbursement reductions that were also included in the ACA.  Hospitals and other provider groups are also likely to benefit from the Medicaid expansion due to increase revenues to hospitals tied to new coverage.  The Urban analysis estimates an increase of nearly $300 billion over the 2013-2022 period – a 23% increase in Medicaid reimbursement for hospitals.²  A recent analysis shows these new revenues are likely to offset other reductions to providers under the ACA such as Medicare and Medicaid cuts to Disproportionate Share Hospital (DSH) payments.³  The ACA cuts to DSH payments will go forward even if states do not implement the Medicaid expansion.  In these states, the revenues from the expansion will not offset these cuts.  Managed Care Organizations (MCOs) could also benefit from additional revenues from the Medicaid expansion as states are expected to continue to use managed care to serve the Medicaid expansion population.

Some states are concerned about federal deficit reduction efforts and the implications for Medicaid; however, the FMAP formula that determines the federal share of Medicaid spending has remained steady since the start of the program.  Congress has only amended the formula to provide more federal funding, not less. States have often cited risks related to changes in the federal commitment to financing the Medicaid expansion.  While there is some concern that federal deficit reduction efforts could affect Medicaid, the history of Medicaid financing points to a matching formula that has been stable with only a few temporary adjustments to the formula have resulted in FMAP increases (like increases under the American Recovery and Reinvestment Act), not decreases.   A number of states have language in their proposals to expand Medicaid to safeguard against any declines in federal support.

2. What effect will the Medicaid expansion have on coverage? 

The Medicaid expansion would make health care coverage available to millions of low-income adults and significantly reduce the number of uninsured.  The Medicaid expansion would make millions of low-income uninsured adults newly eligible for the program. Nationally, over half of the non-elderly uninsured have incomes below 138% FPL ($15,856 annually in 2013). If all states implement the Medicaid expansion, Medicaid enrollment could increase by 21.3 million.⁴  The Medicaid expansion, together with other provisions in the ACA, could cut the number of uninsured in half.  If states do not implement the expansion, poor adults in these states will be left without affordable coverage options and will continue to face the health and financial consequences of being uninsured.

A large body of research shows that Medicaid increases access to care and limits out-of-pocket burdens for low-income people. A large body of research shows that Medicaid increases access to care. Children and adults enrolled in Medicaid have much better access to care than the uninsured. On key measures of access to preventive and primary care, Medicaid enrollees fare as well as people with private health insurance. Medicaid’s limits on cost‐sharing help to ensure that cost is not an obstacle to obtaining care and Medicaid beneficiaries are far less likely to face high financial burdens for health care than low‐income people with private insurance. ⁵  A recent and seminal study in Oregon shows that Medicaid increased the likelihood of using outpatient care, inpatient services and prescription drugs, and recommended preventive care.  Medicaid increases the probability of individuals having a usual source of care. ⁶, ⁷

Actions to address workforce challenges and low provider participation in Medicaid will be important to improve access with the Medicaid expansion. Although access to primary care in Medicaid is quite robust, many states report challenges to ensuring enough providers, including dental and specialty providers, to serve Medicaid beneficiaries.  Increased state outreach to providers, higher and quicker payment, and streamlined enrollment and billing processes for providers may help foster increased participation.  States could also seek to increase the supply of providers willing to serve Medicaid patients by liberalizing scope-of-practice laws related to nurse practitioners and dental therapists.  But closing access gaps is also a matter of workforce planning and investment (e.g., training more primary care physicians, and developing a more diverse workforce) that states may have limited levers to influence and are relevant for Medicaid as well as other payers.

Often cited claims regarding poor quality in Medicaid run contrary to the weight of evidence from studies that point to improved outcomes and reduced mortality from Medicaid coverage. Research from a broad set of literature has found that expansions of Medicaid to children and pregnant women have led to improved child health and birth outcomes.⁸  Studies also found that Medicaid expansion for adults were associated with significant reduction in mortality compared to states without a similar Medicaid expansion.⁹ The Oregon Health Study also showed improvements in measures of self-reported physical and mental health.¹⁰

For most states that do not implement the ACA Medicaid expansion, there will be large gaps in coverage for low-income individuals because individuals with incomes below poverty are not able to access subsidies to purchase coverage in in the new health insurance exchanges.  Individuals with incomes below 100% FPL ($11,490 annually in 2013) generally cannot receive subsidies to purchase coverage in the newly established health insurance exchanges and will not gain any new affordable coverage options and continue to face the consequences of being uninsured.    This could leave individuals with higher incomes access to health coverage options while leaving those with lower incomes few or no options for affordable coverage.  People of color will be disproportionately impacted if states do not implement the expansion.¹¹

3. What flexibilities do states have in implementing the Medicaid expansion? 

States continue to have considerable flexibility to administer traditional Medicaid programs.  States have a great deal of flexibility to administer their current Medicaid programs.  In guidance issued on December 10, 2012,¹² the Administration highlighted new flexibility available to states such as:  structuring payments to better incentivize higher-quality and lower-cost care; ability to use cost-sharing, enhanced matching funds for health home care coordination services for those with chronic illnesses; new templates to make it easier to submit section 1115 demonstrations and to make it easier for a state to adopt selective contracting in the program; and a new tool to help support states interested in extending managed care arrangements to long term services and supports.  CMS is also working with states to improve data analytics and value-based purchasing.

Under the ACA Medicaid expansion, states have flexibility around benefits, cost sharing as well as how to deliver and pay for care.  The December 10, 2012 guidance also highlighted requirements and new flexibility for the Medicaid expansion group.  For example, the guidance specified that states could not receive enhanced ACA matching funds to expand coverage to levels lower than 138% FPL, but states can choose a benefit package benchmarked to a commercial package or design an equivalent package.  The guidance also stated that the federal government would review state proposals for the Medicaid expansion population that encourage personal responsibility, promote value and individual ownership in health care decisions as well as accountability tied to improvement in health outcomes.  Proposed regulations issued in January 2013 included changes that would allow for additional flexibility around cost sharing, particularly related to non-preferred drugs and non-emergent care in the emergency room.  States also will continue to have flexibility to determine how to deliver care (i.e. through managed care, fee-for-service or a combination of approaches).  About two-thirds of current Medicaid enrollees access care through private managed care arrangements and most states would continue to expand these arrangements for new Medicaid enrollees.

Proposals are emerging that would allow states to purchase exchange coverage for Medicaid expansion enrollees through premium assistance options.¹³  CMS recently issued a set of FAQs affirming that states would not be able to implement partial expansions, that premium assistance programs would still need to ensure Medicaid protections related to benefits and cost sharing and that the Secretary of HHS would approve a limited number of 1115 demonstration waivers through 2016 that meet certain criteria.¹⁴ Arkansas is likely to pursue this demonstration option.

States also continue to have ability to seek approval for demonstration waivers.  Beginning in 2017, 1115 waivers may be combined with State Innovation Waivers.  As under current law, states also retain the ability to apply for Section 1115 demonstration waivers to test new approaches in Medicaid that differ from federal program rules.  It is an open question about what type of proposals will be offered by states and approved by the Secretary.  The December guidance specified that HHS would not consider partial expansions for populations eligible for the 100 percent matching rate in 2014 through 2016. Waivers for partial expansion would be considered at the regular Medicaid match rates.  In 2017, when the 100 percent federal funding is slightly reduced, further demonstration opportunities will become available to states under State Innovation Waivers with respect to the Exchanges, and the law contemplates that such demonstrations may be coupled with section 1115 Medicaid demonstrations. 1115 Medicaid demonstrations, with the enhanced federal matching rates, would be considered in the context of these overall system demonstrations.