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.
