Seeing Beyond the Medicaid Expansion Policy Debate

Calculating the Financial Implications of Medicaid Expansion

According to an Urban Institute analysis, federal spending on Medicaid expansion would reach $443.5 billion by 2019 if all states expand coverage to 133 percent of the Federal Poverty Level (FPL). During this time, states would spend approximately $21.1 billion on the expansion and would receive anywhere from $112 million to $52.5 billion,¹ averaging $8.7 billion in additional revenue per state.² To understand the impact, it can be helpful to use a decision framework that accounts for the key costs and benefits, and also highlights the significant policy choices that may affect financial outcomes for states.

Deciding whether to expand Medicaid is a difficult policy decision exacerbated by financial complexities. The return on investment (ROI) can be calculated by states if they approach the analysis with a structured financial framework that helps account for the variables that will affect the bottom line.

In this paper, Accenture examines the key variables to consider when calculating the financial implications of Medicaid expansion, including the benefits, the costs and the estimated return on investment for the various Medicaid expansion choices that states may make.

1 John Holahan and Irene Headen. “Medicaid Coverage and Spending in Health Reform: National and State-by-State Results for Adults at or Below 133% FPL.” Kaiser Family Foundation, May 2010.
2 Authors’ calculations based on Holahan 2010 publication.

Policy dialogue surrounding the Affordable Care Act (ACA) shows no sign of diminishing in the wake of the Supreme Court decision. The focus is now on the new decision facing states—expand Medicaid or retain current rules. There is no simple answer. According to recent Accenture analysis, some states could experience a net revenue gain by expanding Medicaid; others will break even while some states will face additional expenditures.

States need to find a clear answer on the financial questions, while also exploring important policy issues. The intricacies of the ACA, coupled with each state’s unique circumstances, make this calculation more complex than simply “more people = net growth in state spending.” Determining the financial ROI for each state requires a comprehensive analysis that outlines the state costs and public benefits of the expansion.

In taking a closer look at the benefits of Medicaid expansion, Accenture identified the following:

• Reduced uncompensated care costs. State payments to reimburse hospitals and other providers for uncompensated care for the uninsured will likely decline if Medicaid coverage were expanded to 133% FPL.

• Shifting state-only healthcare costs to Medicaid. State expenditures on state-funded programs for persons up to 133 percent FPL should be eligible for Medicaid reimbursement under the expansion. States with low Medicaid eligibility thresholds could access federal revenue to cover most of these costs as the previously uninsured adults who relied on these state-funded services gain Medicaid coverage.

• Capturing higher Medicaid match on existing beneficiaries. States that currently use other Medicaid authorities—waivers or condition-specific Medicaid categories—could now see those people covered under the new “Adult” category. Under the expansion, some costs for this group may be eligible for 100 percent federal matching until 2017, tapering down to 90 percent by 2020.³

In examining the costs of Medicaid Expansion, Accenture identified the following:

• State share of expenditures for newly eligibles. States will be responsible for a share of costs for the newly eligibles starting in 2017—assuming five cents on the dollar in 2017, and growing to 10 cents on the dollar in 2020 beyond.

• Enrollment in all categories could increase. Any increase in enrollment will drive higher state spending, particularly for new enrollees who fall outside of the Adult group, and are therefore not eligible for enhanced federal matching.

• Disproportionate Share Hospital (DSH) payments will decrease. The ACA reduces Medicare and federal Medicaid DSH payments by $35.6 billion over the next 10 years, regardless of a state’s expansion decision. In expansion states, hospitals may expect increased Medicaid payments to offset losses due to reduced DSH payments.

3 Patient Protection and Affordable Care Act, Pub. L. No. 111-148, Section 2001.

While there is no simple answer as to whether states should expand Medicaid or retain current rules, Accenture recommends that states conduct an ROI analysis, considering these key variables:

• Uptake rates among the newly eligible and the eligible, but un-enrolled. ACA-related outreach at the Federal level, combined with state Health Insurance Exchange outreach, may affect the enrollment rate of new Medicaid eligibles and those eligible, but un-enrolled. States will benefit from a dynamic model that can project a range of uptake scenarios.

• Changes to State Medicaid Waiver Strategy. Some states may determine that existing waiver programs can be eliminated because coverage will be available through the exchange, or under the Expansion. Eliminating waiver programs could free up state dollars to help offset increased state expenditures for the Expansion.

• Selection of Medicaid benefits. To obtain enhanced match rates for the new Adult category, states should establish “benchmark” standards that meet the HHS requirements to include certain categories of “essential health benefits.” When designing the new benefit package, states will need to weigh the benefits of increased federal funds against additional costs related to meeting the “essential” standard.