Should Medicaid Expansion Cost More Than Employer-Sponsored Insurance? Our safety net is broken

 Experts thought Medicaid expansion would be a cheap way to expand coverage

The Affordable Care Act (ACA) included a massive expansion of Medicaid coverage to able-bodied, working age adults generally without dependents. The law’s authors typically justified this route over alternatives (private insurance, Medicare, etc.) by its purported efficiency. In their defense, this is what they were told by most experts. Per ACA chronicler John McDonough:

"The Congressional Budget Office…estimated much higher costs to cover individuals through an exchange rather than Medicaid because the latter pays medical providers much less than private insurers can get away with and because Medicaid administrative costs are much lower." 

This was not a view exclusive to the CBO. In the last year before Medicaid expansion was implemented, the Centers for Medicare and Medicaid Services (CMS) projected the cost per enrollee would be $4,636, a full $1,200 below the average single premium for an enrollee on ESI in the same year. Even further, CMS projected an elevated initial year cost from pent up demand among the previously uninsured. Thus, CMS expected the per enrollee cost would decrease for several subsequent future years, causing the gap between Medicaid expansion and ESI to grow.

Medicaid expansion enrollee cost exceeds average cost of ESI

Yet ten years into the law’s implementation, the per enrollee cost of Medicaid expansion is much higher than anticipated – more than 50 percent on average. So much so that it is higher than the average cost of ESI and higher than the cost of ESI in almost 20 states, sometimes by a considerable margin (see chart).

Some may try to explain Medicaid being more costly by arguing that ESI has more cost-sharing associated with it than Medicaid coverage, but this would be a red herring. For instance, while average single coverage in the group market had a deductible of $1,735, Medicaid has only nominal cost-sharing (up to $75 per inpatient stay and $4 per outpatient service for most enrollees). But these dynamics were known well in advance of the erroneous projections of the ACA Medicaid expansion cost. Self-reported health status among Medicaid enrollees is poorer, but this is true nationwide, was known at the time of these projections, and thus does not appear to be the driving factor in a trend that encompasses 20 states. And while the figures in the chart are not age adjusted, the average person on ESI is older than the average Medicaid expansion enrollee so adjusting for age would show even higher relative costs for Medicaid.

While states should have the freedom to vary Medicaid programs to best suit the needs of their populations, the fact is the Medicaid financing mechanism invites irresponsible behavior which all states take advantage of – some more than others. The federal government provides open-ended matching grants to state Medicaid spending, originally intended to give states a financial stake in the program and an incentive to be prudent with purchasing decisions. However, it has instead created an incentive to invent complicated financing gimmicks to create an illusion of state spending – using Medicaid as a vehicle to steer federal money to politically well-connected health providers and sometimes to just plug budget holes completely unrelated to health care.

The Medicaid expansion is particularly vulnerable to this chicanery given every $1 states contribute (or claim to contribute) generates $9 in federal spending. States have an incentive to be more generous in paying insurers and providers for this population over traditional Medicaid enrollees where they only receive on average of $1.34 for every state dollar spent, sometimes in attempt to cross-subsidize other lines of care and other times just to reward the politically well connected. Many states have chosen to finance Medicaid expansion through provider taxes or intergovernmental transfers that are the primary way of creating the illusion of state spending. Paragon has developed a proposal that would end the federal discrimination against traditional Medicaid enrollees—children, pregnant women, seniors, and the disabled—by equalizing the federal payments rates for all enrollees within a state.

Supporters of expanding Medicaid even further note that the vast majority of Americans are compassionate and want to ensure a safety net that provides health care for the neediest among us. However, the Medicaid program has largely failed as an effort to improve the health of low-income Americans, and is being exposed as an inefficient way to even mitigate their financial risk. That Medicaid expansion in many states costs more than the private coverage the average American obtains through their employer shows that it has not been an efficient way to expand access to care.

Theo Merkel is the Director of the Private Health Reform Initiative and a Senior Research Fellow for the Paragon Health Institute and a Senior Fellow at the Manhattan Institute.

https://www.realclearhealth.com/articles/2024/09/23/should_medicaid_expansion_cost_more_than_employer-sponsored_insurance_1060220.html