Medicaid Expansion in Virginia? Maybe Not.

The Obamacare ruling from the Supreme Court in late June is best known for upholding the requirement that people buy health insurance. But it also gave cash-strapped states a significant break. They can no longer be forced to expand their Medicaid programs, as the health-care law sought beginning in 2014.

The court ruled that it would be unconstitutionally coercive for Washington to cut existing Medicaid funds to states that refuse to grow the increasingly costly program. Now that this federal leverage is gone, governors and legislators can decide on the merits whether Medicaid expansion makes sense.

President Obama’s Affordable Care Act, as Nina Owcharenko of the Heritage Foundation notes, depends on two things to achieve the vast gains it promises in the number of insured Americans: the Medicaid expansion it attempted to require, and subsidies for people who buy insurance through the new “health-care exchanges,” or subsidized markets the law asks states to set up. Nationally, the Medicaid expansion is, or was, supposed to provide half the reduction in the number of the uninsured.

There’s something of a tradeoff here. Owcharenko, who directs the Center for Health Policy Studies at Heritage, explains that if a large number of states opt out of Medicaid expansion, as might happen, more people will qualify for the exchange subsidies. This would, she says, raise the cost of the latter program substantially. But still, a much larger Medicaid might be fiscally foolish.

At the recent National Governors Conference in Williamsburg, the Richmond Times-Dispatch reported on July 15, “many governors from both parties said they haven’t decided how their states will proceed” on Medicaid expansion and insurance exchanges. Furthermore, several states have said they do not plan to expand Medicaid.

Under the Affordable Care Act, the federal government is to fund the whole cost of states’ Medicaid expansion for the first three years, then drop its share gradually to a still-generous 90 percent. But some Republican governors at the conference feared Congress might cut some, or even all, of that money in order to reduce the enormous federal deficit. They suspect this could bankrupt states.

Even though it’s partly funded by the federal government, Medicaid takes up nearly one-fifth of Virginia’s budget. But because of the strict eligibility thresholds the state uses, most working-age adults are now excluded from Medicaid coverage.

Should there be no Medicaid expansion in Virginia, people at or slightly above the federal poverty level could buy insurance on the exchange, through federal tax credits and subsidies tied to those exchanges, if these were enough to make such insurance affordable.

Although Governor Bob McDonnell has directed state health officials to make plans and preparations for Medicaid expansion and the creation of exchanges as best they can, he has refused to call a special session of the General Assembly for that purpose. He recently said the state should await the outcome of the presidential election. If Mitt Romney should win in November, these policies may be moot.

In a recent letter to the General Assembly, McDonnell cited figures from its Joint Legislative Audit and Review Commission indicating that Virginia has had a 1,600 percent increase in Medicaid spending over the last three decades. There has also been a near-quadrupling in the program’s share of the state budget.

“This is an unsustainable trajectory that demands improvement and greater efficiency,” the governor warned. “A great expansion of Medicaid, without significant reform of the current … ‘federal-state partnership’ is not responsible.” McDonnell’s point is that if states can’t get more flexibility in running Medicaid, it would be wrong to expand it.

But the dollars and cents of the issue aren’t as simple as Medicaid spending alone. As state Senator John Watkins (R-Powhatan County) points out, the uninsured who would be added to the program under the Obamacare framework are already getting health services at public expense. Although the Supreme Court has, in effect, let states reject Medicaid expansion without direct penalty from the federal government, Washington can still, in states that won’t expand Medicaid, reduce the compensation it pays hospitals for care of the uninsured.

Dr. Sheldon Retchin, chief executive of Virginia Commonwealth University Health System—the largest provider for uninsured and Medicaid patients in the state—worries about the “catastrophic” prospect of that reduction in hospitals’ federal dollars. But still, he thinks McDonnell’s refusal to rush into a commitment to more Medicaid is sensible. “I can’t fault the state for taking a little time and a deep breath to think this through,” Retchin said shortly after the Supreme Court ruling.

A new report from the State Budget Crisis Task Force, co-chaired by former Federal Reserve Chairman Paul Volcker, includes Medicaid as one of the group’s major worries. It discusses several state programs, including Virginia’s.

Our current program is conservative in terms of eligibility, basically limiting coverage to the minimum federal requirements for Medicaid. The report notes, however, that optional benefits to enrollees in Virginia are generous. Sixty-two percent of the Medicaid spending in the state is for optional services, while the national average is just below that.

And payment rates to providers are unusually high in Virginia—90 percent of the provider rates  that Medicare pays. (This compares with a national average of 72 percent.) As a result, the average cost per Medicaid enrollee in Virginia is actually higher than the national average.

It isn’t as if our state government has ignored the program’s rising price tag. “Unlike many other states experiencing fiscal pressures in recent years,” the task force notes, “Virginia has not attempted to reduce rising costs by eliminating optional benefits and services. However, it has implemented several provider-based cost saving policies, freezing or reducing various components of delivery and expanding managed care.”

Even so, those steps haven’t been enough, which suggests that McDonnell is right to seek additional flexibility from Washington.

As he rightly admonished the president in a letter last month, “Increased spending on Medicaid crowds out resources available to states to spend on other meaningful priorities like education, the environment, public safety and infrastructure.”

Both of the Republican elected officials running to succeed the governor next year have also weighed in. Attorney General Ken Cuccinelli opposes the expansion, calling Medicaid “the biggest, fastest growing monster in our budget … eating everything else up.”

He warns that Virginia should have no confidence that the 100 percent and 90 percent federal contributions that are supposed to cover Medicaid expansion will materialize. “The people promising to put that money in,” Cuccinelli points out, “the federal government, they’re broke. They’ve never been broker.” That’s a crucial consideration. Lieutenant Governor Bill Bolling has urged rejection of the Medicaid expansion as well. State officials estimate it could cost Virginia well over $2 billion in the first decade even if the intended federal funding occurs.

And the big picture is similarly discouraging. As the Volcker task force report says, referring to the nation as a whole, “Medicaid costs have been growing faster than the economy since the program’s inception and generally have grown faster than state revenue as well.”

A go-slow approach in Virginia would seem more than justified.

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About David Frisk:
David Frisk is the author of "If Not Us, Who? William Rusher, National Review, and the Conservative Movement," published in March by ISI Books. A former newspaper reporter, he holds a PhD in political science from Claremont Graduate University and is a Senior Fellow at the Thomas Jefferson Institute.

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