Medicaid Expansion Leads to Economic Benefits While Improving Access to Coverage

Authors: Deborah Bachrach, Partner | Patricia Boozang, Senior Managing Director | Dori Glanz, Manager

The Affordable Care Act provides states with a powerful incentive to expand Medicaid to adults with incomes up to 133% of the Federal Poverty Level, paying for 100% of Medicaid coverage through 2016, and eventually phasing to 90% in 2020 and beyond. To date, 29 states (including Washington, DC) have expanded Medicaid, and expansion is currently up for discussion in additional states, including Alaska, Florida, Montana, and Utah.

With support from the Robert Wood Johnson Foundation’s State Health Reform Network, Manatt Health Solutions collected early data on the immediate and longer-term fiscal impact of Medicaid expansion in eight states that adopted expansion in 2014—Arkansas, Colorado, Kentucky, Michigan, New Mexico, Oregon, Washington, and West Virginia. While these states are geographically, politically, and economically diverse, the study’s findings are remarkably consistent–in every case, states are seeing significant budget savings as a result of Medicaid expansion, and some are also realizing revenue gains. This is especially notable because these savings and revenue gains have been achieved while expanding healthcare coverage and services, creating a win-win proposition for states.

Based on interviews with state officials, the authors documented state budget implications for fiscal year (FY) or calendar year (CY) 2014 and projected savings for FY/CY 2015. Note that not all states have completed in-depth analyses of data, so findings may evolve as analyses are completed. Savings and increased revenue seen in expansion states fall into three major categories:

• Reduced need for state spending on programs for the uninsured
• Savings from accessing enhanced federal matching funds from certain previously eligible populations
• Revenue gains related to existing insurer or provider taxes

Reduced Need for State Spending on Programs for the Uninsured

Historically, many states have supported programs and services for the uninsured—including mental and behavioral health programs, public health programs, and healthcare services for prisoners—with state general fund dollars. With expansion, many beneficiaries of these programs and services can secure Medicaid coverage in the new adult category, allowing states to fund these services with federal rather than state dollars. The largest savings in this category have been in behavioral health programs as people who previously relied on state-funded mental health and substance abuse programs gain Medicaid coverage in the new adult group, thereby permitting states to fund the program with federal Medicaid dollars rather than state dollars.

Five states identified savings due to new federal Medicaid funds, ranging from $20 million (Colorado) to $389 million (Michigan) through 2015. Total savings across all states in this category, based on experience to date, are expected to exceed $610 million through SFY or CY 2015. All expansion states should expect to reduce state spending on programs for the uninsured.

• Michigan will save $180 million on services for the seriously mentally ill in the first six months—without reducing services.
• Arkansas will save $6.4 million on community health in the first 18 months—without reducing services.
• Colorado will save $5 million per year in state correctional spending—without reducing services.

Savings Related to Accessing Enhanced Federal Matching Funds

In the past, states often used waivers or specialized Medicaid eligibility categories to provide coverage to targeted low-income populations, including “medically needy” individuals, pregnant women, and people with disabilities. States historically have been responsible for 30 to 50 percent of the cost of covering such individuals. With expansion, many who were previously eligible for limited Medicaid benefits under pre-ACA eligibility categories are now eligible for full Medicaid coverage in the new adult group—which means the state will now receive enhanced federal funding (100% in 2015 and 2016, phasing down to 90% in 2020 and beyond) for providing full Medicaid benefits to these populations. This is a winning proposition for states, enabling them to save money without eliminating services.

Seven out of eight states projected savings in this category, ranging from nearly $4 million (West Virginia) to $342 million (Washington) through 2015. For example,

• Kentucky will save $9.6 million on healthcare spending for disabled adults in the first 18 months—without reducing services.
• West Virginia will save $3.8 million on healthcare spending for pregnant women in the first year—without reducing services.
• Oregon will save $137.5 million per year on healthcare spending for adults.

Revenue Gains Related to Existing Insurer or Provider Taxes

Most states raise revenue through assessments or fees on providers and health plans. As provider and health plan revenues increase with expansion, this translates into additional revenue for states.

Four states with insurer taxes (Arkansas, Michigan, New Mexico, and Washington) have found that expansion is increasing this source of state revenue in amounts ranging from $26 million (Michigan) to $60 million (New Mexico) through SFY or CY 2015. Total revenue gains in these states, based on experience to date, are expected to exceed $150 million through SFY or CY 2015. The other four states studied in this report did not use provider assessments. All states with insurer or provider taxes can expect to see revenue gains due to Medicaid expansion.

As a result of Medicaid expansion, all eight states studied have seen significant budget savings, and more than half have seen revenue gains, without reducing services. In fact, Arkansas and Kentucky both concluded that budget savings are likely to offset the costs of expanding through 2021. As more states begin to assess the budget impacts of Medicaid, we expect that these savings and new revenue estimates will grow. At the same time, we expect states will also begin to track the broader economic impacts of Medicaid expansion in terms of employment, productivity, and a reduction in the cost of uncompensated care borne by states and hospitals. This early data from states demonstrates that there are significant fiscal benefits to states that expand Medicaid, in addition to the well-documented social benefit of improving health insurance coverage rates.

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