What Good Tax Reform Looks Like

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Though the details remain unknown, Governor Bevin has described the kind of tax reform he’ll introduce in a special session this year as shifting Kentucky toward a “consumption-based” tax system, or from income to sales taxes. As shown in multiple other states that have enacted such a shift, this approach would give more tax breaks to the wealthiest Kentuckians and leave the state with less revenue over time to invest in our commonwealth. 1 In contrast, HB 263, filed in Kentucky’s 2017 General Assembly by Rep. Jim Wayne with 12 co-sponsors, is an example of comprehensive tax reform that would address inequities in our tax system and strengthen our ability to make the investments that build thriving communities. 2

The bill draws from the best elements of Kentucky’s 2012 Blue Ribbon Commission on Tax Reform along with other needed changes to make the state’s tax system more adequate, fair and reliable. According to the Legislative Research Commission’s fiscal note, HB 263 would raise $579 million annually at full implementation. 3 It would clean up tax breaks for powerful interests and help address the upside-down nature of Kentucky’s tax system, which asks the least of those with the most as a share of income. It would also result in revenue better keeping up with growth in the economy, improving Kentucky’s ability to sustain investments in our schools, health, infrastructure and more while paying down our liabilities.

HB 263 Cleans Up Expensive, Extensive Tax Breaks

Shifting from income taxes to greater reliance on sales taxes would be a huge tax cut for the wealthy; and Kentucky already spends billions of dollars on income tax breaks that primarily benefit those with the greatest ability to pay taxes. 4 Reducing those breaks, as HB 263 proposes, would generate more revenue for the investments that benefit all Kentuckians. Related to the individual income tax, the bill would:

  • Cap itemized deductions at $17,500 and index the amount to inflation, raising $200 million annually. High-income filers typically have more deductions and therefore benefit disproportionally from this tax expenditure. The majority of Kentucky’s neighbors allow little or no income tax deductions.
  • Phase out the pension income exclusion over $35,000, generating $220 million a year and helping ensure wealthy retirees don’t receive a large income tax break. Kentucky’s current exclusion is more generous than what the vast majority of states provide, and it will cause an increasingly large hole in the budget as baby boomers retire in the coming years. 5
  • Create a new higher top tax rate and reduce rates for brackets under $75,000. Though this particular measure would cost $110 million a year, it would make our tax system less upside-down overall by asking more of those with greatest ability to pay (at the very top of our income distribution) and less of low to middle-income families.

 

 

The bill would raise $25 million by reinstating the estate tax on wealthy Kentuckians as it existed before federal tax changes in 2003 eliminated it. 6 Only very few, very wealthy estates pay the tax.

At the corporate level, HB 263 would:

  • Lower the income threshold for the limited liability entity (LLE) tax from $3 million to $1 million and phase it in to $2 million instead of $6 million, generating $13 million in revenue a year. The threshold is currently so high that 82 percent of LLEs don’t even pay the tax (paying the $175 minimum instead), even though some are subsidiaries of large corporations.
  • Tighten loopholes that allow profitable corporations to avoid taxation by enacting a “throwback rule” on income from goods produced in Kentucky not taxed elsewhere; and by requiring corporations to report on their tax returns profits from all related subsidiaries, including in offshore tax havens. To address tax dodging, the majority of corporate-income taxing states require that method, called combined reporting. These measures would generate $66 million a year. 7
  • Trim $9 million from what we spend on ineffective corporate incentives to the film industry and businesses with production activity in the U.S. (the latter incentive does not require that production take place in Kentucky). 8 The bill would also create a review and sunset process for all “economic development tax incentives,” ensuring greater scrutiny of the cost-effectiveness of what we spend on businesses through the tax code. 9

Ending these individual and corporate income tax breaks would help address the core problem with Kentucky’s tax system: revenue growth is not keeping up with the economy, making it impossible to sustain investments over time. Because consumption does not grow as quickly as income in our economy – and because such a large share of the gains from economic growth are going to those at the very top – shifting from income taxes to sales taxes (from the wealthy to everyone else) would worsen this flaw.

Other elements in HB 236 would also help restore the relationship between our economy and revenue system by:

  • Expanding the sales tax base to include a number of luxury services. Despite operating in a service economy, Kentucky’s sales tax base includes very few services. Adding more, and starting with luxury services such as golf course and country club fees, landscaping and armored car services, would raise $104 million a year.
  • Freezing the property tax rate at 12.2 cents. Since 1979, Kentucky’s real property tax rate has fallen from 31.5 cents to 12.2 cents as a result of a cap on revenue growth that was enacted by the legislature. That cap (a less strict version of which also exists at the local level) has made Kentucky’s property taxes among the lowest in the country. Freezing the rate and letting state property tax revenues rise with property values will compensate for times when property values grow slowly, such as the years after the Great Recession.

Additionally, the bill would help offset the high public cost of tobacco use by increasing taxes on cigarettes and other tobacco products, including e-cigarettes. Though tobacco taxes are not a reliable revenue source over time, this measure would generate $155 million initially and would provide important benefits by serving as a disincentive to tobacco use.

HB 263 Would Make Kentucky’s Taxes Less Upside-Down

Because Kentucky’s income taxes are mostly progressive and sales taxes are regressive, an income-to-sales tax shift would worsen the imbalance in Kentucky’s existing tax system (see below). In other words, such a shift would make our system even more upside-down than it already is, asking less of the wealthiest Kentuckians and more of lower income families.

Source: Institute on Taxation and Economic Policy.

In contrast, HB 263 would ask more of those at the top and less of low- and middle-income people who currently pay a larger share of their income in taxes. To further help with inequities, the bill would create a state level Earned Income Tax Credit (EITC) – an effective poverty-fighting tool that supports work and helps families afford basic living expenses, pay off debt and invest in education. At 15 percent of the federal EITC, this refundable credit would cost $115 million a year. 10

Combining the distributional impact of HB 263’s individual income tax changes including the EITC; the expansion of the sales tax base to luxury services; and gas tax, cigarette and “other tobacco products” tax increases shows that HB 263 would make our tax system less upside-down overall even as it generates more revenue for investments that benefit all Kentuckians.

Source: Institute on Taxation and Economic Policy (ITEP).

As legislators consider what kind of tax changes deserve to be called “tax reform,” and what kind of tax reform warrants a special session, HB 263 provides a good example of the kind of sound approach that is needed: one that cleans up tax breaks and generates revenue for stronger investments in our commonwealth. It also provides a clear benchmark against which harmful tax-shift proposals should be measured.

 

  1. Nic Albares, “Moving from Budget Cuts to State Investments: A Blueprint for a Stronger Louisiana,” Louisiana Budget Project, February 22, 2017, http://www.labudget.org/lbp/wp-content/uploads/2017/02/Blueprint-for-a-stronger-Louisiana.pdf. Anna Baumann, “Kentucky Should Not Follow Kansas Down the Income Tax Cutting Road,” Kentucky Center for Economic Policy, November 28, 2016, http://kypolicy.org/kentucky-not-follow-kansas-income-tax-cutting-road/. Tazra Mitchell and Cedric Johnson, “2017 Fiscal Year Budget Falls Short of Being A Visionary Plan for North Carolina’s Economic Future,” North Carolina Budget and Tax Center, July 2016, http://www.ncjustice.org/sites/default/files/BTC%20Reports%20-%20FINAL%20BUDGET.PDF. Zach Schiller, “The Great Ohio Tax Shift,” Policy Matters Ohio, August 18, 2014, http://www.policymattersohio.org/tax-shift-aug2014.
  2.  HB 263, “An Act Relation To Taxation,” Kentucky General Assembly, 2017, http://www.lrc.ky.gov/record/17RS/HB263.htm.
  3. Legislative Research Commission, “Commonwealth of Kentucky State Fiscal Note Statement,” 2017 Regular Session, http://www.lrc.ky.gov/recorddocuments/note/17RS/HB263/FN.pdf.
  4. Anna Baumann, “Revenue Options that Strengthen the Commonwealth,” Kentucky Center for Economic Policy, February 2, 2016, http://kypolicy.org/new-report-kentucky-can-take-balanced-approach-to-budget-with-revenue-options/.
  5.  Jason Bailey, “Retirement Income Growing Much Faster than Wages, Spelling Trouble for State Revenues,” Kentucky Center for Economic Policy, July 14, 2015, http://kypolicy.org/retirement-income-growing-much-faster-than-wages-spelling-trouble-for-state-revenues/.
  6. Anna Baumann, “Reinstating Kentucky’s Tax on Extreme Wealth a Part of Making State Taxes Fair and Adequate,” Kentucky Center for Economic Policy, September 24, 2015, http://kypolicy.org/reinstating-kentuckys-tax-on-extreme-wealth-a-part-of-making-state-taxes-fair-and-adequate-2/.
  7.  Jason Bailey, “Closing Corporate Tax Loopholes to Fund Investments in Kentucky Families,” Kentucky Center for Economic Policy, February 10, 2015, http://kypolicy.org/closing-corporate-tax-loopholes-fund-investments-kentucky-families/.
  8. Anna Baumann, “Expanding Kentucky’s Film Tax Credits Not a Strategy that Will Pay Off,” Kentucky Center for Economic Policy, February 10, 2015, http://kypolicy.org/expanding-kentuckys-film-tax-credits-strategy-will-pay/.
  9.  Jason Bailey, “Report’s Findings Suggest Kentucky’s Business Tax Incentives Not Very Cost-Effective Way to Create Jobs,” Kentucky Center for Economic Policy, July 19, 2012, http://kypolicy.org/reports-findings-suggest-kentuckys-business-tax-incentives-cost-effective-way-create-jobs/.
  10. Ashley Spalding, “State EITC Would Help Working Kentuckians Afford Necessities,” Kentucky Center for Economic Policy, February 5, 2014, http://kypolicy.org/state-eitc-help-working-kentuckians-afford-necessities/.

Proposed Medicaid Waiver Would Reduce Coverage and Move Kentucky Backward on Health Progress

To view KCEP’s comments for the federal comment period, click here.

To view this brief in PDF form, click here.

Kentucky is applying to modify its Medicaid program through a waiver under Section 1115 of the Social Security Act. The proposed changes will result in fewer Kentuckians covered and decrease health care access, which will ultimately harm the health status of Kentuckians and move the state backwards in its recent health care gains. And while the proposal is framed in terms of increased financial sustainability and reduced costs, it can end up costing the state more overall as it introduces new, expensive and complex administrative burdens, and limits access to the preventative care that improves health. In the end, rolling back Kentucky’s historic gains in healthcare coverage would be antithetical to the goals of the Medicaid program and the 1115 waiver process and hurt the many Kentuckians who benefit from the Medicaid program in its current form.

How far we’ve come, and what is at stake

Kentucky’s Medicaid participants include thousands of working families, veterans, pregnant women and people with disabilities, as well as hundreds of thousands of children and seniors. Current enrollees include the following:

  • Children: 561,326 (39 percent) of enrollees are children.
  • Working adults: The majority of Medicaid-eligible adults who gained coverage under the expansion in 2014 in Kentucky were low-wage workers 1.
  • Veterans: An estimated 9,500 uninsured Kentucky veterans and 5,300 uninsured spouses of veterans became newly eligible for Medicaid under the expansion.
  • Pregnant women and infants: 43.6 percent of all births in Kentucky were covered by Medicaid in 2010 (the most recent year for which data were published).
  • Seniors: 90,794 of current Kentucky Medicaid enrollees are ages 65 and older.
  • Disabled or requiring long-term care: 161,380 Kentucky Medicaid enrollees are eligible through disability, blindness, long-term care needs or brain injury for which they require care either in a facility or at home.

Kentucky is a national leader in its substantial reduction in the uninsured rate under the Affordable Care Act; the share of the population without insurance dropped from 20.4 percent in 2013 to 7.5 percent in 2015, according to Gallup. The Medicaid and marketplace enrollment counts show these coverage gains were driven largely by the Medicaid expansion in 2014, which increased eligibility to up to 138 percent of the federal poverty level. Coverage alone is not the end goal, but it is the basis for better access to care, prevention of disease, cost-efficiency of long-term health spending and (over time) tremendous public health gains including reductions in preventable mortality.

As summarized by the Center on Budget and Policy Priorities, “Numerous studies show that Medicaid has helped make millions of Americans healthier by improving access to preventative and primary care and by protecting against (and providing care for) serious diseases. For example, expansions of Medicaid eligibility for low-income children in the late 1980s and early 1990s led to a 5.1 percent reduction in childhood deaths. Also, expansions of Medicaid coverage for low-income pregnant women led to an 8.5 percent reduction in infant mortality and a 7.8 percent reduction in the incidence of low birth weight. 2 ” When compared to Texas in 2014, which did not expand its Medicaid program, low-income Kentuckians were more likely to take prescribed medicines; more likely to receive regular care for chronic diseases such as asthma, hypertension, and depression; were more able to pay medical bills; and were less likely to use the ER as a usual source of care 3 .

In Kentucky, increased coverage has led to better access to services, including many forms of preventative care. State Medicaid data shows hundreds of thousands of people are using their new coverage for such cost-effective purposes. Comparing 2013 to 2014, the following services were funded by Medicaid:

  • Cholesterol screening, 80,769 to 170,514 (up 111 percent).
  • Preventative dental services, 73,739 to 159,508 (up 116 percent).
  • Hemoglobin A1c tests (diabetes), 52,685 to 101,360 (up 92 percent)
  • Cervical cancer screenings, 41,613 to 78,281 (up 88 percent).
  • Breast cancer screenings, 24,386 to 51,292 (up 111 percent).
  • Annual influenza vaccinations, 14,090 to 34,305 (up 143 percent).
  • Colorectal cancer screenings, 17,164 to 35,633 (up 108 percent).
  • Tobacco use counseling and interventions, 406 to 1,094 (up 169 percent).

Although each service does have a cost, the services being used by the expansion population are, for the most part, not the services that drive overall Medicaid spending. These enrollees are relatively inexpensive to cover and the coverage allows them to maintain health and continue working and caring for their families. And when a screening does indicate cancer or diabetes, it is still money well-spent 4 . Left undiagnosed or untreated, these conditions worsen and become more complicated (and expensive) to treat later on.

Kentucky’s current Medicaid program also has a positive impact on Kentucky’s economy, an impact that this waiver would put in jeopardy. For example, the General Fund savings Kentucky will realize because of Medicaid expansion in 2017 and 2018 from spending on public health, mental health, indigent care and other areas surpasses what the state will have to put in to match the federal investment. Even when 10 percent of the cost must be covered by the state beginning in 2020, the return on the state’s net contribution will be large after taking into account these savings, the additional tax revenue resulting from job creation due to the injection of federal dollars and the health benefits for our communities and workforce.

Waiver 1

Over $2.9 billion has flowed to health care providers because of Medicaid expansion as of last October. Such an influx of funds to the healthcare system has had an impact on jobs in the state. According to Bureau of Labor Statistics data, after modest growth in health care and social assistance jobs during the first year of Medicaid expansion, growth picked up at a rapid pace in 2015. The sector grew 5.5 percent from 2014 to 2016, compared to 3.4 percent growth overall (see graph below). That growth results in income and sales tax revenue to the Commonwealth 5. Also, everyone saves when fewer people let health problems go untreated only to use expensive emergency room care later 6.  Hospitals saw a reduction of $1.15 billion in uncompensated care from treating patients without health insurance during the first three quarters of coverage year 2014 when compared to the same time period a year before 7.

Waiver 2

Source: KCEP analysis of Bureau of Labor Statistics data.

Waiver does not meet criteria set forward in law

The purpose of 1115 waivers is to provide flexibility to create and share better methods of providing health coverage and care. Waivers ultimately should result in a healthier population. They should also be rooted in evidence that the changes proposed can be made without harming the people Medicaid seeks to serve. We strongly believe that far from benefitting Kentuckians, there is evidence this waiver would be detrimental to the most vulnerable citizens in the Commonwealth. This result becomes clear when looking at the components of the proposal through the lens of the four criteria the Centers for Medicare and Medicaid Services (CMS) use to evaluate an 1115 waiver:

  • Increase and strengthen overall coverage of low-income individuals in the state.
  • Increase access to, stabilize and strengthen providers and provider networks available to serve Medicaid and low-income populations in the state.
  • Improve health outcomes for Medicaid and other low-income populations in the state.
  • Increase the efficiency and quality of care for Medicaid and other low-income populations through initiatives to transform service delivery networks.

1. Will this waiver increase and strengthen overall coverage of low-income individuals in the state?

The waiver is projected to result in fewer people enrolled because it includes a number of measures shown to reduce coverage, including denying benefits to people who don’t pay premiums or fail to re-enroll in time and locking them out for a period of time as well as work requirements for maintaining coverage. Ample past research shows such barriers will reduce the number of people who can participate. But the purpose of 1115 Medicaid waivers is to test ways to expand coverage or otherwise improve care, not move backwards on health care access.

The waiver is designed to reduce coverage

The Medicaid waiver proposal claims the changes will save $2.2 billion in federal and state money over the first 5 years of the program. But the waiver document shows those savings would occur because fewer Kentuckians are covered.

The data provided shows 17,833 fewer people will be covered by Medicaid in the first year of the demonstration compared to not having the waiver, a number that would grow to 85,917 in year 5 (data from report presents “member months,” and the table below converts that to number of full-year members by dividing by 12. The actual number of members who would lose coverage would be larger as those who lose coverage for portions of a year are taken into account).

Waiver 3

Source: KCEP calculations from Kentucky HEALTH document.

Other elements of the waiver don’t explain the projected cost savings because the estimated cost per member, per month is actually slightly higher for the Medicaid expansion population under the waiver, though it is slightly lower for children and non-expansion adults.

Evidence does not support that the waiver will result in members’ incomes increasing such that they are no longer Medicaid eligible

The administration suggests coverage reduction will happen in part because they will move people to private insurance plans; in addition, their incomes would need to rise above 138 percent of poverty so  they are no longer eligible for either regular Medicaid or premium assistance and wrap-around coverage. But it is unclear what evidence is being used to connect the assumed increase in economic well-being to the measures and requirements included in the plan.

The assumption that promoting work will somehow lead to this outcome is at odds with the research on work requirements (reviewed below) and the reality that the majority of those who have gotten coverage from the Medicaid expansion are working now; they just work in jobs where they cannot afford or are not offered coverage 8. Many workers are Medicaid recipients because a large portion of jobs pay low wages while wage growth has been stagnant, and because rising health care costs over the last few decades have led employers to shed responsibility for coverage. Whereas 70 percent of Kentucky workers had employer-based coverage in 1980, only 56 percent do today 9. Even if the minority who are not working were to suddenly gain employment — which evidence does not support would result from these requirements — it should not be expected that many would obtain jobs that lift them above 138 percent of the federal poverty level.

Experience with past safety net programs shows that work requirements do not increase well-being

In spite of a rejection of work requirements in every other state that has proposed them (including Indiana and Pennsylvania), this waiver seeks to require work or community engagement activities as both an expectation for coverage and an incentive for added benefits. However, it has been long demonstrated that work requirements in other safety net programs are not only ineffective in promoting long-term employment and wage growth, but have led to a greater likelihood of being stuck in deep poverty – at or below 50 percent of the federal poverty level 10.

The Center on Budget and Policy Priorities’ analysis of potential work requirements for Medicaid eligibility determined that such requirements would ‘unravel’ many gains from the Medicaid expansion without increasing employment:

Imposing a work requirement in Medicaid thus could undo some of the Medicaid expansion’s success in covering the uninsured… The Medicaid expansion has enabled states to provide needed care to uninsured people whose health conditions have often been a barrier to employment, including people leaving the criminal justice system who have mental illness or substance use disorders and for whom access to health care can reduce recidivism and improve employability.  Connecting these vulnerable populations with needed care can improve their health, help stabilize their housing or other circumstances, and ultimately improve their ability to work.  These gains would be eroded if a work requirement led to significant numbers of these individuals losing coverage and being unable to access health care that they need 11.

Also, as already mentioned, most Kentuckians getting coverage because of Medicaid expansion don’t need an incentive to work because they are already working, they are just working in low-wage jobs where they can’t afford or are not offered health insurance through their employer. In the first year of Medicaid expansion, those who gained coverage most commonly worked in restaurants and food services followed by construction, temp agencies, retail stores, building services like cleaning and janitorial services and grocery stores. These kinds of jobs usually have limited benefits, if any.

Many Kentucky workers make low wages — in fact, in 2014 30 percent made wages that would put them below the federal poverty line for a family of four. Wages are low and also have been stagnant or declining across the bottom of the wage distribution after adjusting for inflation over the last 15 years. Because the waiver creates an escalating level of premiums for those who remain Medicaid eligible, it punishes workers for the low wages and wage stagnation that are beyond their control.

In addition, jobs are lacking in significant parts of the state as Kentucky still seeks to recover from the Great Recession and as fundamental restructuring of industries like mining and manufacturing have left certain communities with far fewer jobs than are needed. Only 28 of Kentucky’s 120 counties have more people employed now than in 2007 — before the Great Recession hit — and 24 counties have seen more than a 20 percent decline in employment 12. Those decreases are not because of a sudden unwillingness to work, but because jobs were eliminated and have not been replaced. The shortage of jobs is likely to exacerbate the extent to which work requirements result in losses of coverage rather than increases in employment.

Other Kentuckians face significant barriers to better employment including a criminal record, lack of education and training, inability to afford transportation and other hurdles. Absent a more comprehensive solution to create jobs and remove barriers, measures to make health coverage contingent on certain activities will result in fewer people covered.

Premiums are a barrier to coverage

According to an extensive body of research, premiums create a barrier for health coverage for many low-income individuals. For instance, Oregon received approval in 2003 to increase the premiums it charged participants in its Medicaid waiver program and also impose a six month lock-out period for non-payment of premiums; a study found that following these changes, enrollment in the program dropped by almost half 13. Similar effects occurred with programs in Utah, Washington and Wisconsin 14. All five states that have instituted premiums for their expansion populations have seen either an increase in collectable debt among enrollees, a decrease in enrollment or at the very least an increase in churn in and out of the Medicaid program 15. Finally, since many employers don’t offer coverage, escalating premiums are an ineffective incentive for moving people off of Medicaid on to employer-sponsored health insurance. They become, in effect, a penalty for being poor – especially as they increase over time while wages in low-income jobs remain flat. Escalating premiums are also harmful for entrepreneurs whose businesses often struggle in the early years after start-up; this proposal would introduce a graduating cost to those individuals just as their businesses are getting off the ground.

Instituting a lock-out period will lead to fewer people covered

A mandatory six-month lock-out for failure to re-enroll on time or to pay premiums on time for a population already struggling with low wages will almost certainly leave people without coverage. As of April of this year, Indiana had not publicly revealed how many people had been shut out of health coverage through their lock-out period, but given the thousands who had been disenrolled for failure to pay premiums, it is likely that the ranks of uninsured adults have swelled.

Reducing some benefits is another method of reducing coverage

The waiver proposal refers to benefits such as vision and dental coverage as “enhanced benefits” that people should earn back rather than be guaranteed. This stance reflects a dangerous departure from the recognized impact that oral and vision screenings and preventative care play in maintaining health as a whole. Though modest in cost, these benefits are a critical part of Medicaid coverage.

In addition, removing retroactive coverage and non-emergency medical transportation (NEMT) will create added barriers to coverage and the utilization of coverage. By eliminating retroactive coverage, there is risk of individuals facing unpayable bills, which would be further aggravated by the fact that they will owe premiums. Getting to and from treatment, especially in rural parts of the state, is often a challenge, which is why NEMT is such an important component of our state’s healthcare success. In two expansion states (Nevada and New Jersey) adults who newly received coverage through Medicaid and used NEMT did so largely (40 and 30 percent respectively) to get to treatment for mental illness and substance abuse 16. Removing this benefit would limit effective coverage for many Kentuckians who have difficulty with personal transportation, and could exacerbate drug abuse and mental health problems already rampant across the Commonwealth.

Waiver 4

2. Will it increase access to, stabilize and strengthen providers and provider networks available to serve Medicaid and low-income populations in the state?

Provider networks and providers will likely become even less available to those covered by Medicaid and low-income populations in Kentucky under this waiver. Specifically, in the case of vision and dental providers who already receive low reimbursement rates for the services they provide to Medicaid recipients, making coverage for such services contingent upon community engagement activities and healthy behavior incentives will likely reduce the number of people who use such services. It is likely that providers will no longer see it as worthwhile to continue accepting such inconsistent coverage.

Moreover, healthcare providers who serve patients that have a blend of employer-sponsored health-insurance and Medicaid, as the waiver would promote, will have to determine which insurer to bill, and create systems to be able to make those determinations. This will add more administrative overhead and inefficiency in delivering care. Some small, vulnerable providers may have to discontinue accepting Medicaid coverage because they are unable to afford the added administrative costs.

3. Will the waiver improve health outcomes for Medicaid and other low-income populations in the state?

Reductions in the number of people covered by Medicaid, disincentives for using benefits and the elimination of dental and vision coverage will not lead to healthier Kentuckians. The idea that community engagement activities, cost-sharing measures and financial or health literacy courses will result in better health outcomes is not supported by evidence. However, higher rates of coverage have been associated with better health outcomes, particularly those that can lead to early diagnosis of preventable conditions.

Dental and vision coverage are critical to wellness

Though the waiver refers to these benefits as “enhanced,” they should be viewed as necessary, basic benefits essential for health. Both of these routine services offer critical opportunities for specialized early diagnosis and preventative treatment that often cannot be offered in a primary care appointment. Such care is especially needed because Kentucky already has poor oral health and significant vision impairment, and because routine appointments with dentists and optometrists save money and sometimes lives.

The American Dental Association recommends that good oral health requires a minimum of one cleaning and check-up per year. The 2013 Kentucky Health Issues Poll found that individuals are much more likely to see a dentist if they are insured, or well off 17. Only 43 percent of uninsured Kentuckians saw a dentist in the past year, versus 70 percent of those who were insured.

Kentucky’s oral health reflects its low levels of dental care, and reducing access would only worsen these problems. A study by the Center for Health Workforce Studies shows 18:

  • Kentucky ranked eighth in 2012 for adults who had a tooth extracted because of tooth decay or gum disease.
  • Kentucky ranked 5th in 2012 for adults 65 years or older who had 6 or more teeth extracted for the same reasons. While this population is largely covered by Medicare, tooth decay is a long-term preventable condition that would have started much earlier.
  • Similarly, for Kentuckians aged 65 or older, 23.5 percent had untreated dental cavities, 19.3 had oral pain within the last 3 months and 22.1 percent had trouble chewing food.

Low-income Kentuckians are disproportionately affected by bad oral health. For instance, 28 percent of low-income Kentuckians surveyed by the American Dental Association in 2015 said the appearance of their mouth and teeth affects their ability to interview for a job, versus 17 percent of middle and high income Kentuckians. They were also more likely to report that life was less satisfying because of a dental condition and were more likely to have problems like dry mouth, difficulty biting and chewing, pain, avoiding smiling, embarrassment, anxiety, problems sleeping, reduced social participation, difficulty with speech, difficulty doing usual activities and taking days off from work due to oral conditions.

Although poor dental health can be debilitating on its own, there are several ways in which oral health is connected to more serious health problems. Problems with oral health have been linked to diabetes, stroke, adverse pregnancy outcomes and cardiovascular disease. Dental cavities left untreated often lead to secondary infections that can become life-threatening. Routine oral exams often lead to early detection of other diseases that display symptoms in the mouth, enabling less costly diagnosis and treatment.

Medicaid’s provision of dental coverage is cost effective. Trips to the emergency room (ER) for dental-related conditions (which are covered by Medicaid) are expensive and often preventable through routine dental visits. Dental-related ER care is at least 3 times as expensive as a dental visit – $749 for non-hospitalized care 19. States that report ER visits show large numbers of patients who receive costly care for conditions that could have been prevented in a dentist’s office 20. Medicaid is the primary payer for 35 percent of all dental-related ER visits, which amounted to $540 million in 2012 21, but it only makes up 28.1 percent of non-dental-related ER visits. According to Pew, when California ended its dental care for 3.5 million low-income adults in 2009, ER use for dental pain increased 68 percent; in 2014 adult dental benefits to eligible Californians were restored.

ER visits do not typically treat the underlying dental disease, so issues like infection can reoccur, leading to costlier and repeated emergency room visits. Dental pain is also the leading gateway to opioid addiction, and doing more to prevent such pain is critical to addressing Kentucky’s drug problem.

Dental care is relatively inexpensive as a Medicaid benefit. Given current Medicaid spending per patient, utilization rates and reimbursement rates in states that offer dental benefits, the Health Policy Institute estimated that it would cost an extra 0.7 percent to 1.9 percent for the other states to begin offering that benefit 22. In 2014, the 29 states that offered some dental benefit through Medicaid collectively spent $10.1 of $327.5 billion on dental care. This means only three percent of Medicaid expenditures were spent on dental care.

Likewise, the health consequences of eliminating vision coverage for routine screenings would likely be significant. The Centers for Disease Control notes early detection, diagnosis and treatment can prevent significant loss of vision, and “people with vision loss are more likely to report depression, diabetes, hearing impairment, stroke, falls, cognitive decline and premature death. 23

In Kentucky there are an estimated 192,060 people who are either blind or have serious difficulty seeing even when wearing glasses, according to 5 year estimates of the 2014 American Community Survey. This represents roughly 1 in 20 Kentuckians who aren’t in an institution like a nursing home. On a county level, vision impairment ranges from 1.5 percent in Gallatin county to 12.7 percent in Pike county.

Because diabetic retinopathy — or vision loss from diabetes — is a leading cause of blindness, early detection of diabetes often starts in an optometrist’s office. Other conditions like glaucoma and cataracts are also often detected early during annual vision screenings, before they become more difficult and costly to treat.

The current Medicaid vision benefit in Kentucky is modest, and only covers exams and diagnostic procedures at optometrist and ophthalmologist offices. Glasses (lenses, frames and repairs) are only covered for Kentuckians up to age 21, so most Kentucky adults are still responsible for buying their own eyewear and contacts out of pocket 24.

In the administration’s waiver proposal, beneficiaries could “earn back” vision and dental benefits by completing “specified health-related or community engagement activities.” But evaluations of similar incentive programs in Iowa and Michigan suggest few people likely would earn such incentives, leading to a big drop in the number of people with coverage 25.

Lower rates of coverage will result in poorer health outcomes

Findings from the ongoing Oregon Health Study show  Medicaid beneficiaries were less likely than those without insurance to suffer from depression and more likely to be diagnosed with and treated for diabetes. Those with Medicaid were also far more likely to access preventative care such as mammograms for women 26.  Another study found that 5 years after 3 states expanded Medicaid, expansion was associated with a 6.1 percent reduction in mortality 27. Recipients were also more likely to report that their health was “excellent” or “very good” and less likely to report delaying care due to costs 28.[vi] With the recent increase in screenings and other forms of preventative care in Kentucky, we can expect similar results. But as coverage is either taken away in the case of dental, vision or lock-out periods, or made less available in the case of premiums and work requirements, health outcomes will almost certainly decline.

4. Will the waiver increase the efficiency and quality of care for Medicaid and other low-income populations through initiatives to transform service delivery networks?

The waiver proposal would increase inefficiencies and add costs by creating complex new bureaucratic systems to track payments, activities and other elements that will shift dollars away from care and are likely to cost more than the revenue that is generated. While cost savings is stated as a primary purpose for submitting this waiver, it is not a sufficient criterion for an acceptable waiver on its own. Further, proposed changes would likely not even save money other than by reducing the number of people covered under the program — which could result in higher costs in the long-term as more Kentuckians are treated in the emergency room for expensive conditions that could have been managed through earlier intervention.

Added administrative costs and bureaucratic complexities will be expensive and inefficient

Creating new requirements for premiums means creating state administrative structures to bill, collect, track, answer customer questions and otherwise administer the program, including tracking expenditures against each enrollee’s income to ensure that premiums collected remain under federal caps. Also, the state must set up systems to manage two Health Savings Accounts (HSA) for each individual in the program (a deductible account and a “MyRewards” account), including tracking activities that earn credits and making payments between, into and out of the accounts. This tracking would require either expanded state government structures, or having the state contract (and oversee) the service to a third party.

Other states have examined the costs of collecting premiums in Medicaid programs and found the costs of collection typically exceed revenue collected. For example, several years ago Virginia introduced $15 monthly premiums to some families, but cancelled the program when the data showed the state was spending $1.39 to collect each $1 in premiums 29. Arizona concluded  even if it charged the maximum allowed premiums, it would cost four times more to collect them than the value of the collected funds 30. Another layer of complication arises from the fact that 31.7 percent of Kentucky households with family income under $15,000 are unbanked, according to the Federal Deposit Insurance Corporation 31. This makes collecting premiums even more difficult as traditional modes of making payments will not work for a significant portion of low-income households.

Regarding HSAs, the Urban Institute’s analysis concluded, “HSAs for the poor are highly likely to be administratively inefficient. The amounts collected from individuals would be small relative to health care costs. Because there are large numbers of individuals in these programs, there would be a relatively large number of small monthly transactions. Similarly, the money that flows out of these accounts, also small amounts each time a service is used, would have to be managed…. Although these payments may lead to lower enrollment rates and more disenrollment, it is unlikely they will lead to more appropriate use of care by enrollees. 32

Beyond collecting premiums and HSA contributions, new systems for assessing, certifying and tracking work or community engagement activities, financial literacy courses and health literacy courses will have to be created and managed. The state will then have to maintain a database that is able to affirm and record that members participated in some activity so that they can get credit in their “MyRewards” account. Then there will need to be some way of determining appropriate uses of those funds as enrollees make various health-related purchases. This will add significant bureaucratic inefficiencies and cost to the existing program.

For the premium assistance component of the waiver, yet another system will need to be created in order to track what benefits are being offered through employer-sponsored health insurance plans so the state will know what additional wrap-around services it will need to provide to satisfy all the guaranteed benefits of the Medicaid program. This will require reporting from insurance companies, a database for tracking benefit coverage for employees and ongoing monitoring for any changes that occur during open enrollment each year. It will also require that providers be knowledgeable about which program to charge for the services they perform – a patient’s employer sponsored health insurance plan, or the Managed Care Organization (MCO) offering the remainder of the benefits.

With less preventative care, costs will increase over time

Limited access to or use of preventative care is likely to add greater costs in emergency room care and in other more expensive treatment as otherwise preventable conditions worsen over time. Cutting access to early screening and detection will result in more significant health problems that go undiagnosed and untreated. Again, as was demonstrated in California, when dental benefits were cut they saw a 68 percent increase in ER usage for dental pain. As people are disenrolled without other forms of coverage, they are more likely to use care without being able to pay for it – resulting in more uncompensated care for which hospitals will seek payment.

Conclusion and recommendations

The Kentucky Center for Economic Policy seeks to improve the quality of life for all Kentuckians. We believe in policies that help create communities where everyone can thrive. To that end, we support the purposes and criteria of a Medicaid 1115 waiver as stated by CMS. That is why we are so concerned about the vast majority of the provisions in Kentucky’s proposed waiver. It is not only misaligned to the criteria of a demonstration waiver, in many cases it stands in opposition to them. Some elements of the waiver such as boosts to substance abuse treatment, chronic disease management and renegotiated contracts with MCOs are laudable, but either don’t require a demonstration waiver specifically, or don’t require waiving a part of the Social Security Act at all. We encourage the administration to continue to pursue these goals separate from the current proposal.

Work/community service requirements; premiums (including an escalation of premiums over time); reductions in coverage and benefits including loss of vision, dental, retroactive coverage and non-emergency medical transportation; lock-out periods for failure to pay premiums and for missing re-enrollment deadlines; blended employer-sponsored insurance; and complex administrative and compliance structures are real threats to the historic gains in health our state has recently experienced. For the first time in recent memory, Kentucky is heading in the right direction on health, and it would be a major mistake to go backwards now. We respectfully ask that the aforementioned features of the waiver be removed prior to its submission to the Department of Health and Human Services.

  1. Jason Bailey, “Many Kentucky Workers Have Gained Insurance through the Medicaid Expansion, Are at Risk If Program Is Scaled Back,” Kentucky Center for Economic Policy, November 10, 2015, http://kypolicy.org/many-kentucky-workers-have-gained-insurance-through-the-medicaid-expansion-are-at-risk-if-program-is-scaled-back/.
  2. Center on Budget and Policy Priorities, “Policy Basics: Introduction to Medicaid,” June 19, 2015, http://www.cbpp.org/research/health/policy-basics-introduction-to-medicaid.
  3. B.D. Sommers, R.J. Blendon, & E.J. Orav, “Both the ‘Private Option’ and Traditional Medicaid Expansions Improved Access to Care for Low-Income Adults,” Health Affairs, January 2016 35(1):96–105, http://content.healthaffairs.org/content/35/1/96.full?keytype=ref&siteid=healthaff&ijkey=A6hBKcGzMrX2A.
  4. Mary Cobb, “Protecting Medicaid’s Role in Advancing a Healthy Kentucky,” Kentucky Center for Economic Policy, May 2016, http://kypolicy.org/dash/wp-content/uploads/2016/05/Medicaid-Advancing-a-Healthy-Kentucky.pdf.
  5. Jason Bailey, “With Medicaid Expansion, Kentucky Healthcare Job Growth Picked Up in 2015,” Kentucky Center for Economic Policy, March 9, 2016, http://kypolicy.org/with-medicaid-expansion-kentucky-healthcare-job-growth-picked-up-in-2015/.
  6. Jason Bailey, “It’s Kentucky’s Lack of Coverage and Poor Health that are Unsustainable, Not Medicaid,” Kentucky Center for Economic Policy, March 10, 2016, http://kypolicy.org/its-kentuckys-lack-of-coverage-and-poor-health-that-are-unsustainable-not-medicaid/.
  7. The Kaiser Commission on Medicaid and the Uninsured, “What’s at Stake in the Future of the Kentucky Medicaid Expansion?,” The Henry J. Kaiser Family Foundation, July 7, 2016, http://files.kff.org/attachment/fact-sheet-Whats-At-Stake-in-the-Future-of-the-Kentucky-Medicaid-Expansion.
  8.  Jason Bailey, “Waiver Proposal Says Cost Savings Come from Covering Fewer People,” Kentucky Center for Economic Policy, June 23, 2016, http://kypolicy.org/waiver-proposal-says-cost-savings-come-covering-fewer-people/.
  9. Bailey, Kentucky’s Lack of Coverage and Poor Health that are Unsustainable, Not Medicaid.”
  10. LaDonna Pavetti, “Work Requirements Don’t Cut Poverty,” Center on Budget and Policy Priorities, June 7, 2016, http://www.cbpp.org/blog/work-requirements-dont-cut-poverty.
  11. Hannah Katch, “Medicaid Work Requirement Would Limit Health Care Access Without Significantly Boosting Employment,” Center on Budget and Policy Priorities, July 13, 2016, http://www.cbpp.org/research/health/medicaid-work-requirement-would-limit-health-care-access-without-significantly.
  12. Jason Bailey, “Kentucky’s Lopsided Recovery Continues,” Kentucky Center for Economic Policy, May 11, 2016, http://kypolicy.org/lopsided-recovery-continues/.
  13. Jessica Schubel & Jesse Cross-Call, “Indiana’s Medicaid Expansion Waiver Proposal Needs Significant Revision,” Center on Budget and Policy Priorities, October 17, 2014, http://www.cbpp.org/research/indianas-medicaid-expansion-waiver-proposal-needs-significant-revision.
  14. Ashley Spalding, “Indiana Approach to Medicaid Expansion Limits Access to Needed Care,” Kentucky Center for Economic Policy, August 26, 2015, http://kypolicy.org/indiana-approach-to-medicaid-expansion-limits-access-to-needed-care/.
  15. Andrea Callow, “Charging Medicaid Premiums Hurts Patients and State Budgets,” Families USA, April 2016, http://familiesusa.org/product/charging-medicaid-premiums-hurts-patients-and-state-budgets.
  16. MaryBeth Musumeci & Robin Rudowitz, “Medicaid Non-Emergency Medical Transportation: Overview and Key Issues in Medicaid Expansion Waivers,” The Henry J. Kaiser Family Foundation, February 24, 2016,  http://kff.org/medicaid/issue-brief/medicaid-non-emergency-medical-transportation-overview-and-key-issues-in-medicaid-expansion-waivers/.
  17. Foundation for a Healthy Kentucky & Interact for Health, “Most Kentucky Adults have had Dental Visit in Past Year,” 2013 Kentucky Health Issue Poll, March 2014, http://healthy-ky.org/sites/default/files/KHIP%20Dental%20visits%20FINAL%20032114.pdf.
  18. S. Surdu, M. Langelier, B. Baker, S. Wang, N. Harun, D. Krohl, “Oral Health in Kentucky,” Center for Health Workforce Studies, School of Public Health, SUNY Albany, February 2016, http://chws.albany.edu/archive/uploads/2016/02/Oral_Health_Kentucky_Technical_Report_2016.pdf.
  19. Laura Ungar, “ER Visits for Dental Problems Rising,” Courier Journal, June 28, 2015, http://www.courier-journal.com/story/news/local/2015/06/24/er-visits-dental-problems-rising/29242113/.
  20.  Pew Children’s Dental Campaign, “A Costly Dental Destination: Hospital Care Means States Pay Dearly,” The Pew Center on the States, February, 2012, http://www.pewtrusts.org/~/media/assets/2012/01/16/a-costly-dental-destination.pdf.
  21. Thomas Wall & Marko Vujicic, “Emergency Department Use for Dental Conditions Continues to Increase,” Health Policy Institute, April, 2015, http://www.ada.org/~/media/ADA/Science%20and%20Research/HPI/Files/HPIBrief_0415_2.ashx.
  22. Cassandra Yarbrough, Marko Vujicic & Kamyar Nasseh, “Estimating the Cost of Introducing a Medicaid Adult Benefit in 22 States,” Health Policy Institute, March, 2016, http://www.ada.org/~/media/ADA/Science%20and%20Research/HPI/Files/HPIBrief_0316_1.ashx.
  23. Vision Health Initiative, “Why is vision Loss a Public Health Problem?” Centers for Disease Control, September 29, 2015, http://www.cdc.gov/visionhealth/basic_information/vision_loss.htm.
  24. Dustin Pugel, “Vision Benefit Critical to Health of Kentuckians,” Kentucky Center for Economic Policy, July 5, 2016, http://kypolicy.org/vision-benefits-critical-health-kentuckians/.
  25. Judith Solomon, “Medicaid Beneficiaries Would Lose Dental and Vision Care Under Kentucky Proposal,” Center on Budget and Policy Priorities, June 30, 2016, http://www.cbpp.org/blog/medicaid-beneficiaries-would-lose-dental-and-vision-care-under-kentucky-proposal.
  26. Katherine Baicker, et. al., “The Oregon Experiment – Effects of Medicaid on Clinical Outcomes,” The New England Journal of Medicine, May 2, 2013, http://www.nejm.org/doi/full/10.1056/NEJMsa1212321.
  27. Benjamin D. Sommers, Katherine Baicker, & Arnold M. Epstein, “Mortality and Access to Care among Adults after State Medicaid Expansions,” New England Journal of Medicine, September 13, 2012, http://www.nejm.org/doi/full/10.1056/NEJMsa1202099.
  28. Ashley Spalding, “Medicaid Expansion Will Help Kentuckians Get the Care They Need and Increase Financial Security,” Kentucky Center for Economic Policy, May 9, 2013, http://kypolicy.us/medicaid-expansion-will-help-kentuckians-get-care-need-increase-financial-security/.
  29. Tricia Brooks, “Handle with Care: How Premiums Are Administered in Medicaid, CHIP and the Marketplace Matters,” Georgetown University Health Policy Institute, Center for Children and Families, December 2013,  http://www.healthreformgps.org/ wp-content/uploads/Handle-with-Care-How-Premiums-AreAdministered.pdf.

  30. Melissa Burroughs, “The High Administrative Costs of Common Medicaid Expansion Waiver Elements,” Families USA, October 20, 2015, http://familiesusa.org/blog/2015/10/high-administrativecosts-common-medicaid-expansion-waiver-elements.
  31. Federal Deposit Insurance Corporation, “2013 National Survey of Unbanked and Underbanked Households,” 2014, https://www.economicinclusion.gov/surveys/2013household/documents/tabular-results/2013_banking_status_Kentucky.pdf.
  32. Jane B. Wishner, et al., “Medicaid Expansion, the Private Option, and Personal Responsibility Requirements: the Use of Section 1115 Waivers to Implement Medicaid Expansion Under the ACA,” Urban Institute and Robert Wood Johnson Foundation, May 2015, http://www.urban.org/sites/default/files/alfresco/ publication-pdfs/2000235-Medicaid-Expansion-The-PrivateOption-and-Personal-Responsibility-Requirements.pdf.

Approach to Medicaid Should Reflect Realities Facing Low-Income Kentuckians

Kentucky’s Medicaid waiver proposal frames the issue of health coverage for low-income Kentuckians largely as a problem of Medicaid participants’ lack of understanding about private insurance and failure to engage in work to obtain employer-based coverage. This approach includes several important misconceptions about who is receiving Medicaid, what’s happened to private insurance and how to best promote economic mobility in Kentucky.

Most Non-Disabled Adults With Medicaid Are Already Working

A key component of the 1115 waiver proposal is the addition of work requirements for non-disabled adults without children — making Medicaid coverage contingent upon working and/or doing community activities such as volunteer work and educational classes or programs. However, in contrast to the assumption that “able-bodied” adult Medicaid participants need to be incentivized to work, most already are. The majority of those who gained coverage through the Medicaid expansion in 2014, which increased eligibility to 138 percent of the federal poverty level or $33,534 for a family of 4, were low-wage workers — primarily employed in food service, construction, temp agencies and retail stores.

It is also important to note that there is already a “churn” in Medicaid enrollment in Kentucky, with participants regularly leaving Medicaid (i.e., due to income increases) at the same time that new members are enrolling.

Fewer Employers Offer Health Insurance and Its Costs Have Long Been Rising Faster than Wages

The Medicaid waiver proposal places emphasis on transitioning low-income workers to employer-sponsored health plans without addressing the main reasons they are not participating. The proposal initially encourages participants who have access to a workplace plan to participate — and ultimately requires enrollment in the workplace plan for these employees and their children, with the Medicaid program providing reimbursement for premiums (minus the premium the member is required to pay for Medicaid). The waiver plan also assumes lack of participation in private insurance has much to do with Medicaid members not understanding how private insurance works and focuses on educating members about private insurance. It does not acknowledge that employer-based insurance has been eroding for decades. The share of Kentucky workers with employer-based health coverage has declined from 70 percent in 1980 to 56 percent today.

Private insurance has become more expensive, which prices many workers out of the market even when their workplace offers a plan. Nationally average premiums for family coverage have increased much faster than workers’ earnings, which overall have barely kept up with inflation (see below). Education about how private insurance works does not increase a person’s ability to afford premiums.

Medicaid 1

Source: “How Consumers’ Cost Increases Far Outpace Wage Growth,” Jane Sarasohn-Kahn, http://www.healthpopuli.com/2015/09/23/health-consumers-cost-increases-far-outpace-wage-growth/

Those Who Aren’t Working Face Significant Barriers to Employment Not Addressed in Waiver

The barriers to employment faced by Kentuckians who are not working are typically much more difficult than simply being incentivized or punished by the state’s Medicaid program. These Kentuckians find themselves looking for work in a limited job market in large parts of the state. Those with little education and/or issues in their past that prevent them from passing a criminal background check have even fewer opportunities (and the new expungement process for non-violent felonies is an important step but expensive). Other obstacles include care responsibilities for children or family members and not having access to or being able to afford reliable transportation on a low income. Meanwhile, higher education, which can improve employment prospects, is increasingly unaffordable — even at the state’s community colleges.

Measures Like Work Requirements and Premiums Are Not Successful at Improving Economic Situations for Individuals and Families

Decades of solid research show that work requirements, premiums and other punitive measures don’t move people into better jobs and can actually drive people deeper into poverty.

According to an extensive body of research, even premiums that may seem small create a barrier for health coverage for many with low-incomes. For instance, Oregon received approval in 2003 to increase the premiums it charged participants in its Medicaid waiver program and also impose a six month lock-out period for non-payment of premiums; a study found that following these changes, enrollment in the program dropped by almost half. Similar effects occurred with programs in Utah, Washington and Wisconsin. Meanwhile, those without health coverage are vulnerable to catastrophic out-of-pocket health care costs, which are the cause of the majority of personal bankruptcies in the United States.

In addition, an array of rigorous evaluations of programs tying work requirements to public assistance show this approach is not effective at promoting employment and reducing poverty. These studies found that any employment increases were modest and faded over time; stable employment for participants proved the exception rather than the norm; most with significant barriers to employment never found work; and the large majority remained poor and some became poorer.

Protecting Medicaid’s Role in Advancing a Healthy Kentucky

To view this report in PDF form, click here.

A new report by the Kentucky Center for Economic Policy provides an in-depth look at Medicaid in Kentucky, the benefits of Medicaid expansion and potential harmful impacts of changes that could create barriers to coverage and care.

The report was prepared in expectation of a proposal from Gov. Bevin to apply for a Medicaid waiver that might involve additional costs to recipients, benefit changes or other provisions.

The report highlights several key facts and points, including:

  • Medicaid is key to the health of Kentuckians for its role in covering many children, working adults, veterans, senior adults and the disabled. With Medicaid expansion, the program’s positive benefits are growing including a significant increase in health screenings, budgetary savings and a recent uptick in job growth in the health care sector.
  • The benefit package offered in Kentucky’s Medicaid program is reasonable and very similar to other states: most all of the services covered in Kentucky are also covered in least 40 other states or territories. And many other states offer important benefits not currently offered in Kentucky.
  • Some waiver ideas put forward by other states have the potential of impeding access to needed care, including premiums, lockout periods and elimination of certain benefits. Certain ideas introduce new administrative expenses that could end up costing the state more than any new revenue or savings generated. Also, there is a long list of state waiver requests the federal government has consistently rejected including: high premiums, benefit-reduction requests, work requirements and partial expansions.

Kentucky is in a unique situation among states because it has already expanded Medicaid while other states used a waiver-based approach in the decision to expand. By law, Kentucky cannot make changes designed simply to save money relative to the current program. Changes must meet the law’s goals of increasing coverage, expanding the provider network, improving health outcomes and/or improving the efficiency and quality of care.

The report concludes with recommendations that include active public participation in the process of developing a proposal, transparency, independent assessment of any changes and a focus on long-term benefits to the health of Kentuckians.

Governor Presents Austere Budget that Cuts Public Investments Further and Dedicates More for Pension Liabilities

To view in PDF form, click here.

Governor Bevin’s budget proposal includes major cuts to higher education institutions and across other areas of state government where funding has been reduced deeply by what will amount to a decade of cuts. It repurposes those resources primarily to increase funding for the state’s pension plans and put money aside in the rainy day fund.

How the Budget is Constructed

The General Fund budget relies on modest expected revenue growth over the biennium of 3.2 percent in 2017 and 2.4 percent in 2018. It utilizes a beginning balance of $221 million in fiscal year 2016 as well as revenues for 2016 that are currently expected to be $243 million above what was originally forecasted. That money is spent over the biennium, leaving no balance at the end of 2018 (though money is deposited in the rainy day fund, as described below).

Unlike previous budgets, the governor’s plan spends comparatively little in the way of fund transfers from dedicated pots of money in state government to the General Fund — only $120 million. The previous two-year budget included $369 million in fund transfers including money from the Public Employees’ Health Trust Fund and firefighter and law enforcement training funds. The average amount of fund transfers over the last eight biennia is $340 million.

Added Funding

Pensions receive significant new funding under the governor’s plan. The plan includes $130 million more to the Kentucky Employees Retirement System (KERS) over the biennium, or the full actuarially required contribution using the new, lower investment return assumption of 6.75 percent adopted by the KERS board. On top of that, the plan puts an additional $89.4 million into KERS over the two year-period.  The proposal also includes $591 million in new funding for the Kentucky Teachers’ Retirement System (KTRS) over the biennium, or approximately 56 percent of the new funding requested. And the plan includes what are called “contingent appropriations for pensions” of $136 million over the biennium, which are available for the state employee and teacher retirement systems if revenues come in as expected and spending is held at the levels appropriated (split evenly between the two plans).

The proposal also grows the Budget Reserve Trust Fund, known as the rainy day fund. It adds $179 million over the biennium to the fund, plus an additional $136 million in contingent appropriations (this is in addition to the $136 million in contingent appropriations mentioned above for pensions). In total, this would increase the balance of the rainy day fund from $209 million in 2016 to $524 million at the end of 2018.

Other areas with increased dollars in the budget include higher salaries for social workers and state police, a reduction in caseloads for guardians, more public defenders and money for cleaning up backlogs of untested rape kits.

The budget increases funding for college scholarship programs, but that increase largely doesn’t go to need-based scholarships like the College Access Program (CAP) as required by statute — from which lottery monies have been diverted in recent years 1. Instead, $27 million in 2017 and $32 million in 2018 are allocated to new “student financial aid for participation in workforce development and training programs.”

What is Cut

The governor’s budget includes 4.5 percent cuts in the current fiscal year to state agencies and then a 9 percent cut for the two-year biennium.

Among the biggest cuts in absolute dollars are to universities and community colleges, which would receive $63 million less in 2018 than they did in 2015 and $231 million less than they received in 2008. As seen in the graph below, funding for universities and community colleges would be 35 percent less in 2018 than it was in 2008 once inflation is taken into account. Kentucky already ranks 11th-worst among the states in per student cuts to higher education since 2008 2.

Budget Graph 1

Source: KCEP analysis of OSBD, BLS data.

The plan also eliminates Kynect, the state’s health insurance exchange, and uses a portion of the dedicated fee that had been funding Kynect to help pay for its shutdown, according to the governor’s address. It cuts General Fund dollars to behavioral health, developmental and intellectual disabilities by $14.5 million or 7.4 percent between the 2016 enacted budget and 2018. No raises for either teachers or state employees are included in the plan beyond the selected salary adjustments mentioned previously.

SEEK, the core formula that funds local schools, is the largest General Fund expenditure in the budget. Funding for SEEK in the governor’s plan is almost flat for the biennium — total SEEK funding goes up 0.8 percent in 2017 and declines 0.4 percent in 2018. The monies freeze the guaranteed per pupil SEEK level at $3,981 from 2016 through 2018. That would make this funding 12 percent below 2008 dollars once inflation is taken into account (see graph below). In a recent report, Kentucky ranked sixth-worst among states in cuts to its core formula funding with a 10.6 percent cut since 2008 3.

Budget Graph 2

Source: KCEP analysis of OSBD, BLS data.

The Learning and Results Services part of the education budget that includes pre-school, afterschool programs, textbooks, family resource centers and other services is cut substantially. This area (minus health insurance) is funded at a level 9.2 percent less in 2018 than it was in 2016’s original budget, and 13.2 percent less once inflation is taken into account. That’s a cut of $32 million.

The cuts in total General Fund dollars to a selection of other programs and agencies are included in the graph below (note these cuts differ somewhat from the across-the board percentages because added pension dollars are spread across agencies’ budgets). In some areas of government, cumulative budget cuts amount to over 30 percent since 2008 once inflation is taken into account.

Budget Table 1

Source: KCEP analysis of Office of the State Budget Director (OSBD), Bureau of Labor Statistics (BLS) data

  1. Dustin Pugel, “Diversion of Lottery Funds Undermines College Affordability,” Kentucky Center for Economic Policy, January 6, 2016, http://kypolicy.org/diversion-of-lottery-funds-undermines-college-affordability/
  2. Michael Mitchell, et al., “Years of Cuts Threaten to Put College Out of Reach for More Students,” Center on Budget and Policy Priorities, May 13, 2015, http://www.cbpp.org/research/years-of-cuts-threaten-to-put-college-out-of-reach-for-more-students.
  3. Michael Leachman, et al., “Most States Have Cut School Funding, and Some Continue Cutting,” Center on Budget and Policy Priorities, January 25, 2016, http://www.cbpp.org/research/state-budget-and-tax/most-states-have-cut-school-funding-and-some-continue-cutting

Pension Needs Far Exceed Likely Revenue Growth in 2017

The state needs to find $580 million more to make its actuarially required General Fund contributions to pension plans in the first year of the next budget, according to information shared with the Public Pension Oversight Board yesterday. But the state is currently expecting only $278 million in new General Fund revenue that same year — or less than half of what it needs for pensions alone — according to a recent draft estimate from the state’s Consensus Forecasting Group.

Presentations from the state budget director and retirement system officials show Kentucky will need $520 million more in order to fully fund the annual contribution to the teachers’ retirement system in 2017. The state stopped making the full required contributions in 2009 and the amount owed has since ballooned as payments were skipped and investment losses from the recession were fully felt.

In addition, the state will need to find $60 million more from the General Fund (and $108 million in total state dollars) in 2017 to make the full contribution to the Kentucky Employees’ Retirement System (KERS), according to the budget director (slightly different numbers were shared by legislative staff and KERS). That amount has increased in part because the system recently lowered its investment return assumption from 7.75 percent to 7.5 percent. A recent analysis of the system actually predicted an even lower rate of return (6.9 percent), meaning the $60 million extra contribution may not be enough. It’s certainly not enough to keep the funded ratio of the system from declining over the next ten years.

As shown in the graph below, the preliminary forecast for revenue growth shows only $278 million in new revenue for 2017. The state currently also expects to have some money in the rainy day fund — roughly $400 million by the end of this budget year if the forecast holds — though that makes for a still-small rainy day fund according to what experts say is needed to prepare for recessions.

Given the size of Kentucky’s pension liability, the problems with our tax system and the needs in other areas of the budget, we won’t be able to grow our way out of this problem. We need tax reform that fairly raises more revenue in order to meet our obligations to teachers and employees while also better funding our schools, health and other critical services.

general fund revenue

Source: KCEP analysis of Office of the State Budget Director data.

Year-End Revenues Highlight Importance of Individual Income Tax

Kentucky ended its budget year with General Fund revenues $165.4 million more than anticipated, equaling growth of 5.3 percent from the year before. The individual income tax is the main source of this bit of good news because of its ability to generate revenue from wealthier individuals whose incomes have soared in recent years.

For the year, individual income tax receipts grew 8.5 percent compared to 2014, meaning all other revenue grew by only 3.2 percent. Sixty-three percent of total net new revenue for the year was from the individual income tax. Income tax receipts were particularly high in April, when the state collected $535 million, or 39.5 percent more, in income taxes than it had the year before. This “April surprise” wasn’t unique to Kentucky, as almost all states with income taxes saw huge growth that month.

Capital gains taxes key to growth

In addition to encouraging growth in the Kentucky economy overall, a central explanation for the extra income tax revenues is likely a surge in capital gains taxes, or income taxes paid on growth in the value of assets, like stocks, when they are sold. The stock market was particularly strong during tax year 2014 (which benefits this year’s state budget), with average annual growth in the S&P 500 of 17.5 percent. Also, capital gains taxes were weak last year because of a federal tax law change that encouraged people to sell capital gains at the end of the prior year rather than hold them longer. Weak growth last year made for a lower bar to hop over this year.

Capital gains taxes are disproportionately paid by wealthy people—in Kentucky about two-thirds of capital gains are claimed by those with more than half a million dollars in income. And those same wealthy individuals have seen their incomes rise rapidly in recent years, while others’ wages have sagged. The highest-earning 1 percent of Kentuckians captured 38 percent of state income growth in the first 3 years of recovery from the Great Recession.

This year’s receipts are a reminder of the importance of income taxes in an era of rapidly climbing inequality. In fact, Kentucky should be doing even more to ensure wealthy individuals pay their fair share of taxes. The richest one percent in Kentucky pay only six percent of their income in state and local taxes, compared to nearly 11 percent of income for Kentuckians in the middle.

One of the many reasons for that inequity is that we never tax capital gains made on assets that are held by an individual until death, meaning a loss of about $78 million a year in revenue. And we allow unlimited deductions against individual income taxes no matter how high a person’s income, even while a growing number of states limit deductions and some don’t allow them at all.

If Kentucky was less reliant on income taxes, we would’ve faced more of a budget challenge in this year and previous years. Since 2007, individual income tax revenue has grown by 3.9 percent on average each year compared to 1.9 percent growth in the sales tax and a decrease of 0.2 percent in all other sources (see graph below). Cutting income taxes and moving to a so-called consumption based tax system based more on sales taxes would mean big tax cuts for the rich and less revenue to pay pension liabilities and invest in education, health and other needs. Just ask Kansas.

income tax

Source: KCEP analysis of Office of the State Budget Director data

Good revenue news today but not enough

The extra revenue this year is helpful, especially after last year’s $91 million shortfall. But while we dodged another shortfall this year, the fiscal outlook is still bleak. Although the economy is picking up, income taxes aren’t likely to continue growing at such a rapid pace and the stock market is flat so far in 2015. Extra revenues this year will go first toward payments to the SEEK education formula and drug treatment that were added to the budget this session, necessary governmental expenses like natural disasters and the state’s rainy day fund, which contains an amount equal to only 1.4 percent of the budget—far less than the 15 percent that many experts say is needed.

The latest interim forecast projects revenue growth in the first two quarters of next year to be only around 2.7 percent. And the state faces major funding needs, including the necessity of putting more money into its underfunded pension systems and filling funding gaps all across the budget.

Today is a moment of relief in an otherwise troubling picture that will improve only through tax reform that ends exemptions and loopholes to raise more revenue.

KCEP Seeks Research and Policy Associate

The Kentucky Center for Economic Policy (KCEP) seeks to hire a research and policy associate. This new position will be responsible for work advancing effective programs, policies and strategies aimed at reducing poverty in the Commonwealth. Successful applicants will bring experience, education and interest in analyzing policy issues and working with a wide range of partners to advocate for positive policy change.

See more about the position here.

Developing the Healthcare Workforce: Growing Need Is an Opportunity for Kentucky

report cover imageThe healthcare landscape is changing dramatically in ways that increase workforce needs. Greater numbers of people having access to healthcare through the Affordable Care Act (ACA) and an aging population are major drivers. In addition, other provisions of the ACA—such as cost-reduction imperatives and a focus on improved outcomes—are beginning to change how healthcare is delivered. These changes mean a big shift in healthcare workforce needs, including growth in healthcare jobs that require less than a bachelor’s degree. Occupations and industries related to healthcare are projected to continue having the fastest job growth over the next decade.

Developing the Healthcare Workforce

Who Stands to Benefit from Louisville’s New Minimum Wage

An estimated 45,000 workers in Louisville/Jefferson County who would otherwise make less than $9 an hour will have higher wages once the new metro government minimum wage ordinance—the first such local law in the South—is fully implemented in two and a half years.

In addition to the workers who will directly benefit, another 13,500 who make slightly above $9 an hour could also receive a small raise when wage scales are adjusted upward, based on the experience of minimum wage increases elsewhere.

Of the workers affected, an estimated 88 percent are at least 20 years old and more are over the age of 50 than are teenagers. Fifty-seven percent are women, 60 percent work full-time and 28 percent have a child in the household.

Fifty-nine percent of those workers with family income below the poverty line will benefit. Forty percent of affected workers are employed in either restaurants and food services or retail trade. See the table below for more detail.

Those workers benefitting will get smaller increases than the estimated 62,500 who would’ve received a raise from the original $10.10 proposal. But because the final ordinance also added a clause to adjust the minimum wage annually by growth in the consumer price index in the years after 2017, those workers affected are assured that their wages will not become stuck.

The final ordinance did not increase base pay for tipped workers from the current $2.13 an hour, where it has remained since 1991. The ordinance does require that tipped workers’ total wages including tips plus base pay be at least equal to the new local minimum wage. The original ordinance had increased the base pay for tipped workers to 45 percent of the new minimum wage, or $4.55 an hour for a $10.10 minimum wage.

louisvillebreakdownSource: KCEP analysis of 2013 American Community Survey data. See here for details on methodology.