State cost of health care reform likely to be modest and could yield net savings

Under the new national health care law, the Patient Protection and Affordable Care Act (ACA), one major strategy for providing health insurance coverage to the 50 million Americans who are currently uninsured is an expansion of eligibility in the Medicaid program. Even though the federal government will assume the lion’s share of the costs of insurance for those who gain Medicaid coverage, this expansion has created concern and uncertainty about the impact the law will have on state budgets.

We do not yet have a comprehensive study of the projected costs and savings of the Affordable Care Act for Oklahoma’s state budget. However, as a new OK Policy issue brief shows, most studies of the impact of the Affordable Care Act have concluded that increases to state Medicaid budgets will be modest. National studies from the Urban Institute and projections developed by the Oklahoma Health Care Authority have estimated that state spending on Medicaid may grow by $200 to $800 million between 2014 and 2019 or 2020, depending on various assumptions, while increasing state Medicaid spending by under 10 percent.  The federal government will assume over 90 percent of total costs of expanded Medicaid coverage. To cite the conclusion of the study by John Holahan and Irene Headen, the Urban Institute’s experienced and widely-respected health policy analysts:

Most of the cost of the new expansion will be borne by the federal government. States will have relatively small increases in state spending, but these will be swamped by new federal dollars that they will receive because of the reform. This is particularly true of the states that have low coverage today and will experience the largest increases in individuals newly eligible for the program.

Several studies at the national and state levels that have considered a broader range of factors associated with the Affordable Care Act – such as the federal government paying for the mental health care costs of those currently without insurance and new premium tax revenues from those purchasing insurance through a health care exchange – have concluded that the cost of the health care law will be less for states and could even yield net savings. A July 2011 report from the Robert Wood Johnson Foundation asserts:

State governments will collectively save between $92 billion and $129 billion from 2014 to 2019 because of provisions in the Affordable Care Act that are designed to reduce the uninsured population and provide federal funding for functions that, in the past, have been financed by states and localities.

Sticking out from this consensus, a report from the Oklahoma Council of Public Affairs and Cato Institute contends that Oklahoma’s Medicaid spending will increase by a staggering $11.4 billion during 2014-2023 as a result of the ACA, and grow 35 percent greater than without the new federal law.  OK Policy’s issue brief carefully shows how the OCPA/Cato Institute is based on flawed and exaggerated assumptions about who will enroll in Medicaid under the new law and how much they will cost. For example, all studies take into account the effect of enhanced outreach efforts and the individual mandate to bring those currently eligible but unenrolled out of the woodwork. This population of ‘old eligibles’ will only receive the traditional federal match rate and so will be considerably more expensive to the state. Because Medicaid eligibility for working-age adults in Oklahoma is  restricted to parents of dependent children under 37 percent of the poverty level, the state has few eligible but unenrolled individuals – 60,000, according to estimates by the Oklahoma Health Care Authority, most of whom are children. Yet the OCPA/Cato report somehow projects that some 145,000 individuals who are currently eligible but unenrolled in Medicaid will sign up under the Affordable Care Act.  This enrollment surge among the ‘old eligibles’ goes well beyond any ‘woodwork effect’ and appears to be more of a pure ‘thin air effect’

Similarly, in developing their cost calculations, the OCPA/Cato study overstates both the current Medicaid population and the average cost per recipient. Compounded together, the flaws in their study produce highly inflated estimates of the future cost of the Medicaid budget. At the same time, the report neglects to consider ways that additional state costs will be partly or fully offset by savings to the state budget under various provisions of the Affordable Care Act that reduce the uninsured population and provide federal funding for functions previously financed by the state.

There is no doubt that paying for health care at a time of scarce resources will remain an ongoing challenge for state leaders. However, by significantly reducing the number of Oklahomans without health insurance, the Affordable Care Act will reduce the strains that uncompensated care places on our health care providers across the state and will provide better health care and greater financial security to Oklahoma families. These benefits will  far outweigh the likely modest cost to the state budget of paying a small portion of the total bill.