How the Medicaid Expansion Can Save Money in the State Budget

Governor Beshear’s announcement that he’ll expand Medicaid in Kentucky included release of a report showing that expansion will result in a net savings of $802 million to the state budget over the next eight years. The report also demonstrates that not expanding Medicaid would cost the state $39 million over that same period.

But how can expanding health insurance to 308,000 Kentuckians save money in the budget, and how can not doing so increase costs? Here’s how.

Medicaid expansion will cover some indigent health costs currently paid for through the state’s General Fund.

The state now uses General Fund (and some local) dollars to help pay for health services for low-income and uninsured Kentuckians, and some of those costs can now be shifted to federal funds. Affected areas include mental health services for low-income adults, preventive health services provided through local health departments, insurance for former foster care children, inpatient hospital costs for prisoners, and state payments to hospitals for serving the uninsured (known as Disproportionate Share Hospital (DSH) payments).

Medicaid expansion will allow the state to cover some currently-eligible individuals at a higher federal Medicaid match rate.

The federal government currently pays about 71 percent of Kentucky’s Medicaid costs, but for those who become eligible under the expansion the federal government will pay 100 percent of costs for the first three years before scaling down to 90 percent. Accepting the Medicaid expansion allows the state to get the higher federal match for certain currently-eligible populations, including low-income pregnant women, people who experience a catastrophic medical expense and “spend down” to become eligible for Medicaid, and individuals who participate in a breast and cervical cancer program.

Medicaid expansion will create jobs that will generate additional tax revenues.

The University of Louisville Urban Studies Institute estimates that accepting the Medicaid expansion (and the federal money that goes along with it) will have an added state economic impact of $1.9 billion by 2015 and will create 15,600 jobs. Those jobs will result in greater taxes paid to state and local governments. The Urban Studies Institute estimates $50 million in additional state income and sales taxes and $10 million in new local occupational taxes in 2015 because of the expansion.

The Affordable Care Act (ACA) will increase some state costs and lower some federal payments regardless of whether the state expands Medicaid.

The publicity associated with the rest of the ACA and the other policy and funding changes in the legislation will impact the budget whether or not the state accepts the expansion. One reason is what’s called the “woodwork effect,” in which more of those who are currently eligible for Medicaid will sign up (in part because the law’s individual mandate requires everyone to have insurance) but their coverage will not receive the higher federal match rate, meaning additional state costs. The ACA also adds costs by requiring that Medicaid cover substance abuse treatment whether or not a state expands Medicaid. And the law will cut $288 million federal DSH payments to hospitals serving the uninsured (under the assumption that those patients can now receive Medicaid). If the state doesn’t accept the expansion, it will incur these costs while not benefitting from the billions in additional federal dollars and the revenue that will come from the expansion’s job creation.

So that’s why the analysis shows that accepting expansion will help the state budget while rejecting expansion will hurt it. Medicaid expansion means federal money will help replace state money now spent on the uninsured and on other currently-eligible populations, and it will mean job creation that will result in more tax revenue.

The Medicaid expansion is a great step forward in Kentucky for lots of reasons—principally because it will make Kentuckians healthier and more financially secure. The fact that it’s better for the state budget is yet another reason to support it.

Medicaid Expansion Will Help Kentuckians Get the Care They Need and Increase Financial Security

The Medicaid expansion that the governor announced today means more Kentuckians will get the treatments they need to stay healthy while avoiding the risk of financial catastrophe should they get sick.

Given our state’s health status, the help is needed. According to the United Health Foundation, Kentucky ranks 7th from the bottom among the states in overall health. Kentucky has the highest rates of cancer deaths and preventable hospitalizations in the U.S.—and also ranks among the ten worst states in obesity, diabetes and cardiovascular deaths.

Many of the state’s health problems can be improved by increasing the number of people with health coverage. Research shows that those who are uninsured have worse health outcomes than those with insurance—particularly for those with chronic conditions like diabetes that Kentuckians suffer from at high rates. According to a survey of both insured and uninsured Kentuckians, those who are uninsured are more likely to refrain from seeking medical care because of cost—delaying medical attention; skipping medical tests, treatments or follow-ups; not filling prescriptions for medicine; and not seeking out needed treatment from a specialist.

Expanding Medicaid will qualify about half of Kentucky’s uninsured for coverage, enabling them to receive preventive care and timely medical treatment (many of the remaining uninsured will gain coverage through the health insurance exchange that will be launched in 2014). New findings from the ongoing Oregon Health Study show that 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 preventive care such as mammograms for women.

In addition, the Medicaid expansion will protect more Kentuckians from the risk of financial hardship. The Oregon study indicated that Medicaid very nearly eliminated catastrophic out-of-pocket health care costs, which are the cause of the majority of personal bankruptcies in the United States.

While the Oregon Health Study did not find significant changes in diagnoses or treatment of high blood pressure or high cholesterol during an average of 17 months on Medicaid, recipients’ increased use of preventive care could take years or even decades to show its full effect on health. Another recent study found that five years after three states expanded Medicaid, expansion was associated with a 6.1 percent reduction in mortality. 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.

The Medicaid expansion will allow 308,000 Kentuckians to access the care they need to stay healthy. And it will give them the peace of mind of knowing that financial disaster is no longer an illness away.

Statement: Medicaid Expansion Will Make Kentucky Healthier and Our Economy Stronger

KCEP Director Jason Bailey made the following statement today about Governor Beshear’s announcement that he will accept the Medicaid expansion:

“Governor Beshear’s decision today to expand Medicaid will increase the health of Kentuckians and strengthen the foundation of our economy. It will allow hundreds of thousands of our neighbors the dignity and security of health care coverage, improving quality of life and allowing Kentucky to make much-needed progress on our poor indicators of health.

The governor’s move will mean coverage for around half of the state’s uninsured adults, including workers who toil at low-wage jobs in restaurants, construction sites, nursing homes and day care centers, as well as 9,500 uninsured veterans. It will also allow the state to take advantage of a great deal, generating hundreds of millions of dollars in new income to health care providers that will translate into jobs for nurses and health practitioners across the state. The expansion is a great step toward a healthier state and a stronger Commonwealth.”

Recent KCEP Publications on Medicaid Expansion in Kentucky:

“Expanding Medicaid is a Good Move for Kentucky”

“Interactive Map: Expanding Medicaid Would Increase Health Coverage In Every Kentucky County”

“Medicaid Expansion Would Benefit Workers Across Kentucky’s Economy”

“Thousands of Kentucky Veterans Could Get Health Insurance Under Medicaid Expansion”

“Expanding Medicaid in Kentucky Could Improve the Health of Women and Babies”

“Medicaid Expansion Will Help Kentuckians Get the Care They Need and Increase Financial Security”

Medicaid Expansion Decision Expected from Gov. Steve Beshear on Thursday

Decision to Expand Medicaid in Kentucky Gets Reactions from State Officials, Advocates

Tax Reform on Beshear’s Agenda

Op-Ed: Five Big Problems Stand in Way of Adequate State Budget

Published in the Lexington Herald-Leader on May 5, 2013 and the Louisville Courier-Journal on May 12, 2013.

Cuts now being made to child care that will leave thousands of working parents facing painful choices between jobs and family are only the latest casualty of the legislature’s failure to provide the resources necessary to meet Kentucky’s needs. State lawmakers in recent years have set back our schools and universities, health care and other vital services by presiding over $1.6 billion in budget cuts.

In the recent legislative session, they passed a meager revenue bill that provides only a portion of the money needed to pay pension liabilities and ignores everything else. The job of raising the funds necessary to cover Kentucky’s needs and reforming the tax system for the long haul remains undone.

But ducking our problems won’t solve them. Because of five budget realities, those problems will still be front and center when lawmakers write a new budget in January:

Economic recovery is a long way off.

The worst recession since the Great Depression tore a big hole in state revenue, and the slow recovery means we haven’t made up much of the ground we lost. Revenue is expected to grow only slightly faster than inflation in the current budget. If job creation stays slow, unemployment will remain higher than before the recession until the end of the decade. That means depressed sales and income tax revenues and lots of struggling people in need of low-income assistance.

The tax system is failing.

Kentucky’s antiquated tax system simply doesn’t keep up with growth in the economy, making it hard to maintain the current level of services even if economic growth was faster. State revenues are growing 20 percent slower than the economy, a trend that by itself will create a gap of $1 billion between the state’s needs and the resources it can muster to meet them by the end of the decade. Closing a variety of loopholes in our tax system would allow Kentucky to better keep pace with the cost of educating our children and promoting health and safety.

Budget tricks won’t fill the gap.

Policymakers have used every gimmick they could find in recent years to keep budget cuts from being even worse—delaying bond payments, offering tax amnesty so that scofflaws will pay up, underfunding retirement benefits and raiding various state accounts. Some of these moves have been harmful to Kentucky’s financial condition, and other one-time options have been exhausted.

Federal funds are shrinking.

Federal dollars make up about 35 percent of Kentucky’s state budget, but federal funds to states are being cut. The 2011 Budget Control Act set caps on federal spending that will reduce grants for schools, public safety, water treatment and other areas to the lowest level in four decades. More cuts will occur if automatic spending reductions, known as sequestration, become permanent or if there are additional cuts as part of another deficit reduction package.

Kentucky’s needs are many.

The $1.6 billion in state budget cuts have made college tuition less affordable, kept new textbooks out of schools and reduced access to services for the elderly and people with disabilities. While we should be talking about new investments in early childhood education and other critical areas—and working harder to help Kentuckians become healthier and more educated—the cuts are setting us back.

Last year, I was one of 16 Kentuckians who served on the Governor’s tax commission that came up with a proposal to raise $659 million for Kentucky’s needs through comprehensive tax reform. In public hearings across the state, we heard Kentuckians from all walks of life stress the need for more investment in schools, health and other resources that make our lives better and our economy stronger. They told stories about opportunities lost because of a lack of resources, and of how great Kentucky could be with a stronger commitment to our future.

Our leaders should start working now to build support for the bold revenue action Kentucky must have in order to make just such a commitment.

Jason Bailey is director of the Kentucky Center for Economic Policy.

Op-Ed: A Win-Win for Kentucky’s Budget and Small Businesses

Published in the Richmond Register, Mary 3, 2013.

Legislation requiring internet retailers to collect sales taxes owed to states would aid Kentucky’s depleted budget and end the unfair advantage out-of-state sellers have over Main Street Kentucky businesses.

The Marketplace Fairness Act passed the first hurdle in the U.S. Senate recently by a vote of 63 to 30, although Kentucky senators Mitch McConnell and Rand Paul voted against the measure. It’s expected to come to a full vote in the Senate soon, and then will be considered in the House.

A 1992 Supreme Court ruling has kept states from requiring remote sellers to collect sales and use taxes unless the seller has a physical presence in the state.

Consumers are legally required to pay the taxes themselves, but compliance is low.

The Marketplace Fairness Act would give states the ability to mandate collection by internet sellers just as they already require of in-state businesses.

The bill would generate considerable revenue that is greatly needed given Kentucky’s serious budget woes. Kentucky loses $224 million in revenue a year because of untaxed remote sales, according to a University of Tennessee study. The actual amount Kentucky would collect depends on the details of the legislation; the final report of the governor’s tax reform commission included an estimate of between $130 and $200 million annually.

An influx of revenue at that level won’t solve Kentucky’s budget problems, but it will be a big help. The state has cut $1.6 billion out of the budget in recent years, resulting in no new money for textbooks, cuts in child care support for working families, continued increases in college tuition and more.

The growth in untaxed internet sales is one of the reasons Kentucky’s sales tax revenue doesn’t keep up with growth in the economy (along with the failure to tax very many services). That lag makes it harder for the state to maintain funding for schools, health and other areas even when economic growth is strong.

The bill would also level the playing field for local Kentucky businesses. Many small businesses complain of “showrooming,” the growing tendency of shoppers to check out items at brick-and-mortar stores but make their final purchases online. In effect, out-of-state internet retailers start out with a six percent price advantage because they are not required to collect sales taxes. Fewer sales at small businesses have a ripple effect on local economies as shop owners spend less at nearby dry cleaners, restaurants and other stores.

Collecting sales tax on internet sales would also make the tax fairer. Lower-income people are less likely to have broadband access at home. A Pew report says that 87 percent of those who make more than $75,000 a year have home broadband while only 46 percent of those who make less than $30,000 a year do. People living in rural areas – including much of Kentucky – are also less likely to have reliable broadband internet access.

The future of the Marketplace Fairness Act is far from certain, as the bill faces substantial barriers in the House. One point of contention concerns exempting some small retailers. Another question is whether House leaders will try to link tax cuts to the bill.

In many ways, the economic backbone of Kentucky communities consists of the local businesses that line Main Street and state-funded schools and other public services that depend on sales tax revenue. The Marketplace Fairness Act would strengthen that backbone.

Jason Bailey is director of the Berea-based Kentucky Center for Economic Policy.

Bill to Collect Internet Sales Tax Would Help Kentucky’s Budget and Level Playing Field for Local Businesses

Federal legislation requiring internet retailers to collect sales taxes owed to states would aid Kentucky’s depleted budget and end the unfair advantage out-of-state sellers have over Main Street Kentucky businesses.

The Marketplace Fairness Act passed the first hurdle in the Senate last week by a vote of 63 to 30, although Kentucky senators Mitch McConnell and Rand Paul voted against the measure. It’s expected to come to a full vote in the Senate next week, and then will be considered in the House.

A 1992 Supreme Court ruling has kept states from requiring remote sellers to collect sales and use taxes unless the seller has a physical presence in the state. Consumers are legally required to pay the taxes themselves, but compliance is low. The Marketplace Fairness Act would give states the ability to mandate collection by internet sellers just as they already require of in-state businesses.

The bill would generate considerable revenue that is greatly needed given Kentucky’s budget woes. Kentucky loses $224 million in revenue a year because of untaxed remote sales, according to a University of Tennessee study. The actual amount Kentucky would collect depends on the details of the legislation; the final report of the governor’s tax reform commission included an estimate of between $130 and $200 million annually.

An influx of revenue at that level won’t solve Kentucky’s budget problems, but it will be a big help. The state has cut $1.6 billion out of the budget in recent years, resulting in no new money for textbooks, cuts in child care support for working families, continued increases in college tuition and more.

The growth in untaxed internet sales is one of the reasons Kentucky’s sales tax revenue doesn’t keep up with growth in the economy (along with the failure to tax very many services). That lag, shown in the graph below, makes it hard for the state to maintain existing public services even when economic growth is strong.

The bill would also level the playing field for local Kentucky businesses. Many small businesses complain of “showrooming,” the growing tendency of shoppers to check out items at brick-and-mortar stores but make their final purchases online. In effect, out-of-state internet retailers start out with a six percent price advantage because they are not required to collect sales taxes. Fewer sales at small businesses have a ripple effect on local economies as shop owners spend less at nearby dry cleaners, restaurants and other stores.

Collecting sales tax on internet sales would also make the tax fairer. Lower-income people are less likely to have broadband access at home. Pew reports that 87 percent of those who make more than $75,000 a year have home broadband while only 46 percent of those who make less than $30,000 a year do. People living in rural areas—including much of Kentucky—are also less likely to have reliable broadband internet access.

The future of the Marketplace Fairness Act is far from certain, as the bill faces substantial barriers in the House. One point of contention concerns exempting some small retailers. Another question is whether House leaders will try to link tax cuts to the bill.

In many ways, the economic backbone of Kentucky communities consists of the local businesses that line Main Street and state-funded schools and other public services that depend on sales tax revenue. The Marketplace Fairness Act would strengthen that backbone.

 sales tax

Source: KCEP analysis of data from the Office of the State Budget Director and the Bureau of Economic Analysis.

Photo Credit: Shawn Poynter/Rural Archive