Health Care Reform (2): New costs and new savings for state government

This is the second of what will be an ongoing series of posts looking at the impact of the new federal health care reform law on Oklahoma and Oklahomans. The first looked at how reform will mitigate the public benefits “cliff effect”. For full information on health care reform, the Henry J. Kaiser Family Foundation website is excellent.We encourage your contributions as comments or as  a guest blog.

The passage of the new federal health care law represents a monumental shift in the nation’s health care delivery system that will unfold over the coming years. States and state governments will be effected by the new law in myriad ways, only some of which are recognized at this early stage. One issue that has caused some concern for state governments, particularly in the context of the deep and prolonged state fiscal crisis, is the obligation that states will eventually be asked to assume for a portion of the cost of covering the newly insured.

With the passage of health care reform, the Oklahoma Health Care Authority has estimated that an additional 250,000 Oklahomans will be newly qualified for Medicaid, the nation’s primary health insurance program for the poor, jointly financed by the federal and state governments.  Under the law, all working-age  adults with household incomes up to 133 percent of the federal poverty level – around $24,000 for a family of three in 2009 – will become eligible for Medicaid effective in 2014. 

Historically, Medicaid has covered very few working age adults. In Oklahoma,  Medicaid coverage for adults extends only to parents of dependent children with extremely low income –  up to about one-third of the percent of the federal poverty level.  Currently, low-income adults have the highest rates of uninsured and represent a large share of the estimated 565,000 Oklahomans without health insurance. Accordingly, a broad swath of the working poor adult population will be added to the Medicaid program.

The federal government is taking important steps to assist the states absorb these newly eligible individuals into Medicaid. According to the official estimates of the Congressional Budget Office (CBO), the federal government will pay 96 percent of the total cost of the Medicaid expansion over the next 10 years, while the states share will be about 4 percent of the total. The federal government will cover 100 percent of the costs for newly eligible adults in all states for three years, from 2014-2016. The federal share would be reduced incrementally over the following four years, settling at 90 percent in 2020. According to FFIS,which analyzes federal issues for the states, Oklahoma’s share of the cost of Medicaid expansion is estimated at $65 million in 2017, $83 million in 2018, and $105 million in 2019. (For the sake of comparison, the cost of the final income tax cuts approved by the Legislature in 2006 and set to take effect in Oklahoma in 2012 is $108 million).  These estimates only consider populations who will become newly eligible for Medicaid, not the uninsured who may already be eligible but are not enrolled in the program.

At the same time, a sizable part of the increased Medicaid obligations would be offset by savings to the state. Oklahoma currently spends tens of millions of dollars providing indigent care for uninsured adults through the Department of Mental Health and Substance Abuse Services and Health Department, and through subsidies and payments to charity care hospitals. Many of those low-income patients will gain Medicaid coverage, freeing up currently unmatched state dollars.

A further benefit to state government, identified in a report by the President’s Council of Economic Advisers, is that by significantly reducing uncompensated care, health reform would also reduce the “hidden tax” that this care currently imposes on insurance premiums paid by the insured and their employers. A Families USA study found that the “hidden health tax” of subsidizing uncompensated care amounted to $1,017 annually for family coverage in 2008.   Oklahoma state government in its role as employer and payer of health insurance coverage should thus benefit from lower premium costs due to expanded coverage of the uninsured.

In addition, as a paper by John Holahan of the Urban Institute pointed out, in the absence of health care reform,  states would have stilled faced substantially higher expenditures over the coming decade from rising Medicaid costs and enrollment and escalating indigent care costs. Instead, with health care reform, the federal government assumes the lion’s share of the costs for Medicaid, along with 100 percent of the cost of subsidies of low-income adults who purchase private insurance through the new health insurance exchanges.

There are certainly many unknown variables and wildcards that will determine the ultimate fiscal impact of health care reform for the states.  But the most likely bottom line is that health care reform will impose some additional obligations on the state Medicaid budget in the latter years of this decade, offset at least partly by savings from reduced burdens of caring for the uninsured and lower premium costs for state employees.