Obama's Medicaid expansion: How many states are likely to rebel?

The Supreme Court ruled that states do not have to abide by the expansion of Medicaid under President Obama's health-care law. There are strong economic arguments on both sides.

What states will participate in Obamacare’s expansion of the Medicaid program? The answer to that will have a profound effect on national and state health-care budgets and the number of uninsured US residents for years to come.

The president’s signature Affordable Care Act (ACA) raises the income level for Medicaid eligibility up to 133 percent of the federal poverty line. That’s one of the major ways the health reform attempts to expand coverage. If all states participate, 21 million will get Medicaid coverage, reducing the number of uninsured in America by 48 percent, according to a Kaiser Family Foundation analysis.

But the US Supreme Court ruling that upheld ACA’s core individual mandate for health insurance also held that Uncle Sam can’t make states go along with the Medicaid expansion. So right now, governors and state legislators across the country are facing a tricky decision: Should they dive in and accept the expansion? After all, the federal government is promising to pay virtually all the costs of such a move, at least for now.

Or should they decline to join in something that could eventually gobble a larger share of their states’ budgets?

So far, twice as many states have said “yes” than have said “no.” According to a review by consulting firm Avalere Health cited in the Washington Post’s Wonkblog, there are 17 participant states as opposed to nine confirmed nonparticipants.

The breakdown here is generally along red state/blue state lines, as determined by which party holds the governor’s office. Texas and Florida both said “no,” for instance. (Yes, President Obama won Florida, but the GOP’s Rick Scott is governor.) Maryland, Illinois, and California are “yeses.”

But “no” states insist that their hesitance has as much to do with economics as with the relative unpopularity of Obamacare among their voters. While current law calls for Washington to pay for the expansion, Congress is under tremendous pressure to cut federal spending, and it’s not implausible that this subsidy might end up a target.

“States feel a lot of anxiety about making a decision to expand a program, and then having the federal government change the rules and shift more cost onto the states,” said Diana Rowland, a health policy analyst for the Kaiser Family Foundation, during a recent forum on Medicaid expansion hosted by the Alliance for Health Reform.

“Yes” states, in contrast, see the economics of their decision as a no-brainer. The formula is complicated, but in general the US will pick up 100 percent of the expansion through the first three years. After that, Uncle Sam’s share drops progressively down to about 90 percent by 2020. The presumption among budget analysts is that the match will then stay at that level – though that isn’t written into current law.

There’s also the matter of US Disproportionate Share Hospital (DSH) payments. DSH is an $11 billion pot of money that Washington uses to subsidize hospitals that treat large numbers of the uninsured who simply walk through their doors. That program is being heavily reduced under the Affordable Care Act, under the theory that the expansion of Medicaid should provide low-income Americans who are uninsured with an alternate form of financing.

That is a concern for states that turn down the Medicaid expansion. Hospitals in those states will face the prospect of a continued stream of uninsured patients, but a much-reduced stream of cash to fund their care.

“That is the perfect storm that we are very nervous about. Don’t expand Medicaid, and DSH payments go away,” said James Keeton, vice chancellor for health affairs and dean of the School of Medicine at the University of Mississippi Medical Center, at the Alliance for Health Reform seminar.

The Medicaid expansion would also generally pump money into the health-care establishments of states. Thus, those who stand to gain more customers from such a move may lobby for inclusion in the ACA Medicaid program, whether they live in deep-blue Vermont or red Alabama.

“The economics of it are just so overwhelming that I think it’ll dominate the politics,” said John Holohan, director of the Health Policy Center at the Urban Institute.