Post Supreme Court Ruling, All Eyes on Medicaid

In one of the most surprising and consequential outcomes of the Supreme Court’s June 28th ruling, states are no longer required to expand Medicaid coverage to those earning up to 133% of the federal poverty level (FPL). By a 7-2 vote, the high court ruled that it is unconstitutionally coercive for the federal government, as outlined in the Patient Protection and Affordable Care Act (PPACA), to withhold all current federal funding for Medicaid should states fail to comply with the expansion. A narrower plurality of 5-4 ruled that it was acceptable for the federal government to allow states to opt-out of the expansion without a penalty, effectively rendering the expansion voluntary. As Chief Justice John Roberts noted, “Nothing in our opinion precludes Congress from offering funds under the ACA to expand the availability of health care, and requiring that states accepting such funds comply with the conditions on their use. What Congress is not free to do is to penalize states that choose not to participate in that new program by taking away their existing Medicaid funding.”

This is new territory for a law that was designed to achieve universal health coverage. Of the 32 million who stood to gain coverage under PPACA, nearly 17 million – half – were expected to be newly covered by Medicaid. To further complicate matters, PPACA was drafted with the assumption that our poorest population would be covered by the Medicaid program; federal subsidies to purchase insurance through the newly created insurance exchanges are not extended to those below the federal poverty level. Those who fall between 100-133% FPL can access subsidies but are still responsible for covering premiums up to 2% of their income – which may prove untenable for this low-income population. Moreover, this population – faced with a “penalty” or a “tax” – may decide that it is cheaper to not purchase insurance. The result? If states opt-out of the Medicaid expansion, most Americans whose incomes fall below 133% of the poverty line are left without an affordable option for obtaining health insurance, creating what some are calling a new Medicaid “donut hole.” Millions of Americans who were otherwise part of the expansion may now be left without coverage.

Medicaid programs vary widely in eligibility; currently, states cover anywhere from under 25% to over 200% FPL. Some states have already announced they will, or are highly likely, to opt-out of the Medicaid expansion, notably Texas, Florida, Mississippi, South Carolina, Wisconsin and Louisiana. Nearly six others are considering opting-out and several more have indicated they plan to take a “wait and see” approach. How many states will follow suit is unclear and will unfold in the coming months based on a number of circumstances, including state budgets, politics and federal guidance on Medicaid expansion options. But states may find it difficult to walk away from such an influx of federal funding. PPACA requires the federal government to pay the full cost of covering the newly eligible Medicaid recipients for the first three years, from 2014 to 2016, gradually decreasing the federal government’s share to 90% by 2020. Normally, Medicaid is a shared federal-state cost, with the federal government picking up an average of 57% of the total. In that context, the federal government’s offer to pay 100% of the expanded population’s medical claims seems like a good deal.

Nevertheless, states are concerned that the expansion may not be affordable over the long term – more than 10 years out. The Congressional Budget Office (CBO) recently estimated that if states expanded Medicaid eligibility as required under PPACA, their costs would increase approximately $73 billion, or 7% of the cost of the expansion between 2014 and 2022 (the federal government’s costs would increase $931 billion, or 93%). This increase could be a result of the “woodwork effect,” in which people currently eligible for Medicaid enroll after the expansion, prompted by expanded media coverage, streamlined enrollment procedures, or the new requirement to obtain health insurance. Because these individuals are not considered newly eligible, they would be subject to the current federal-state match. Some states could also find their share of the cost of the expansion, despite the significant price break, still too financially burdensome given current budgetary climates. Others may fear that Congress, facing looming deficit-cutting measures, would eventually scale back their contribution.

Providers, too, face new uncertainties if this population is uninsured. According to the American Hospital Association, in 2010, hospitals incurred $39.3 billion in uncompensated care costs. The hospital industry was counting on low-income individuals having health insurance, particularly because PPACA cut back on the traditional “disproportionate share” funds the federal government pays hospitals providing care to a large percentage of low-income and uninsured people. PPACA reduced these uncompensated care payments under the assumption that bad debt from uninsured care would drastically decrease with the new requirement that nearly every individual acquire a basic level of coverage. Should states decide to opt-out of the Medicaid expansion, providers will face cuts without the guarantee of an insured patient population.

Perhaps most significant, the Supreme Court’s ruling afforded states new flexibility in their administration of the Medicaid program. Some believe the Court’s decision will offer states the ability to negotiate the terms of an expansion, thus opening the door for a host of programmatic changes, including privatizing parts of the program, customizing an expansion, paring down existing programs or requesting the federal contribution to Medicaid come to states as a block grant. Restricting PPACA’s Medicaid expansion could mean a transformed federal-state relationship in administering and structuring the Medicaid program.

The Court’s decision on PPACA’s Medicaid expansion will have real and long-lasting implications for our health system for months, and years, to come. Many questions remain: When must states decide whether and how they will structure their expansions? Could states extend eligibility to some, but not all, who would have qualified under PPACA? Does this leave room for governors to renegotiate the terms of Medicaid dollars, potentially reshaping their programs and increasingly shifting control to the states? These questions and more are certain to be hotly debated over the next several months. Stay tuned.

Join us for BPC’s July 30th event, “Our Health Care Future: What’s Next After the Supreme Court Decision?”

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