Stateline Story

Health Care Reform's Costs Rankle States

As Democrats in Congress work feverishly to meld separate House and Senate health care bills into a single blueprint for a historic overhaul of America's health care system, state leaders are bracing against the potential costs to states that they say could devastate already battered budgets. 

Some states also are protesting that the legislation's efforts to set minimum standards for health insurance coverage across the country will "reward" low-performing states, while penalizing others that have already expanded their eligibility for Medicaid, the state-federal program for the poor that is the nation's largest health insurance program, covering 60 million low-income or disabled Americans.

"It is not reform to push more costs onto states that are already struggling, while other states are getting sweetheart deals," California Gov. Arnold Schwarzenegger, one of the few Republican elected officials to have publicly supported the president's health care reform efforts, said in his state of the state address earlier this month.

Schwarzenegger figures the legislation would cost California, which had already expanded its safety net, an additional $3 billion to $4 billion every year. At the same time, the state is currently looking to close a $6 billion deficit in its current budget after plugging $60 billion in shortfalls throughout last year.

"Health care reform, which started as noble and needed legislation, has become a trough of bribes, deals and loopholes," said the action-star-turned-governor, who is in the final year of his term.

Tennessee Gov. Phil Bredesen (D) said he was "'moderately outraged" at the inconsistent treatment states could receive under the bill, the Nashville Business Journal  reported. Bredesen, a former health care executive, estimated the Medicaid expansion could cost his state as much as $1.2 billion over five years at a time when the state is looking at a $1.5-billion budget gap.

Riling politicians of both parties are the deals brokered on Capitol Hill to secure passage of the bill in the Senate. Nebraska, for example, was promised that the federal government would pick up the full cost of expanding Medicaid there, even past the first few years of implementation, while Louisiana was assured an extra $300 million in Medicaid funding.

Alabama Gov. Bob Riley (R) said the Nebraska deal "reeks to me of legalized bribery," according to the Montgomery (Ala.) Advertiser while attorneys general in more than a dozen states have threatened to sue, arguing the preferential treatment is unconstitutional.

And Republican Nevada Gov. Jim Gibbons also vowed to sue the federal government to stop the health care plan if it becomes law, calling it "ill-conceived" and "illegal."

Meanwhile, Nebraska's U.S. Sen. Ben Nelson (D), a former governor, announced Jan. 7 he is working with Senate leaders to change the pending health reform legislation to give all states the extra Medicaid funding promised to Nebraska in the health care bill. "Every state should be, and will be, treated the same," he said.

If and when President Obama signs a bill, responsibility shifts to the 50 states to implement the changes to make medical coverage more affordable and more accessible to many of the 45 million Americans currently uninsured. Under both the House and Senate versions passed last year, at least 15 million could be added to the Medicaid rolls.

Besides expanding the Medicaid rolls, states also would be involved with helping other uninsured individuals who earn too much to qualify for Medicaid and who don't get insurance through work by setting up "exchanges," or marketplaces, where subsidized coverage would be offered to these individuals and small businesses. Under the Senate bill, states would set up their own exchanges, while the House measure would create a federal exchange, but allow states to set up their own — a major difference yet to be resolved.

The Congressional Budget Office estimates an overall pricetag for health care reform over the next nine years at $25 billion under the Senate bill and $35 billion under the House measure. The big question for states is how much of this burden will be passed along to them. Costs to individual states will vary widely. How much depends on how rich a state is, how many additional residents states will add to their programs, which funding formula Congress ultimately adopts and whether a state's congressional delegation cuts a lucrative deal.

All of this comes as states try to weather declining revenues and growing demands for their services in the leanest budget years in a generation. States have already closed gaps of $300 billion from 2008 through 2010 and are facing deficits of at least $55 billion for fiscal 2011, according to estimates from the National Conference of State Legislatures. Collectively, states and the federal government spent more than $315 billion on Medicaid in 2007and the costs are climbing.

Lawmakers in more than a dozen states are pushing legislation that would allow their states to opt out of federal health care reform, arguing that a key tenet of the health care reform — to require people to buy health insurance or face a penalty — is unconstitutional. The campaign is led by the American Legislative Exchange Council , which advocates limited government. Arizona lawmakers have approved a measure to do just that, but voters will first have to approve it this November. A similar ballot measure in Arizona was narrowly defeated in 2008.

Governors assail reform in `state of the state' addresses

Schwarzenegger was not the only Republican governor to use the annual state of the state address this month to blast the federal health care legislation that Democrats were hoping to deliver to Obama in time for the president's State of the Union address, typically delivered in late January or early February.

"Washington's alleged solution will cost Arizona another half-billion dollars every year," said Arizona Gov. Jan Brewer whose state is still grappling with a $1.4-billion deficit for the current fiscal year. "Only in Washington can they look upon massive federal entitlement programs bleeding red ink — and propose an even bigger new entitlement program," she said in her state of the state address. 

And in Idaho, Gov. C.L. "Butch" Otter estimated that the legislation would add as much as a half-billion dollars to Medicaid costs there. "Folks, that kind of unprecedented expansion would force us here at home to make even more difficult and painful decisions about what gets cut from public schools, higher education, corrections, public safety and other fundamental services," he said during his annual address.

Governors of both parties started expressing concern about the costs federal reforms might have on states since last summer, but Republican governors have been the most vocal. Twenty GOP governors and governors-elect recently wrote in a letter to Capitol Hill that the current legislation "omits reform and saddles American taxpayers for generations to come," while Mississippi Gov. Haley Barbour, chairman of the Republican Governors Association, had said in a statement that the health care reform legislation "would have a catastrophic impact on state budgets."

Sweeping changes, costs

When it was created in 1965, Medicaid was designed for the uninsured poor, but not all poor people were eligible. The program targeted low-income pregnant women, uninsured children, low-income elderly, the blind and disabled and some parents in low-income families. States were left to determine how poor working adults qualified for Medicaid, but childless adults were left out completely, even if they were penniless, unless a state got a waiver from Washington to cover them.

Under both the House and Senate versions of the legislation, all states would be required, for the first time in Medicaid's history, to offer coverage to childless adults, parents and others with incomes under a certain level. The cutoffs are calculated using the baseline of federal poverty-level incomes in the U.S., which are $10,830 for a single person, for example, or $22,050 for a family of four in 2009.  

In the House bill, all families of four earning up to $33,075, or 150 percent of the federal poverty level, could now qualify for coverage, while the Senate puts the level at $29,300 for families of four (133 percent of poverty).

About a dozen states, including New York, already cover working parents at these levels and some even higher, but other states cut off Medicaid eligibility at much lower incomes  — for example, Texas at 27 percent of the federal poverty. Arkansas offers coverage to only those whose incomes are up to 17 percent of the federal poverty level, or about $3,750. These states with lower cutoffs will have many new people who will be eligible for their states' Medicaid rolls, under any new legislation.

"The big shift we will see if health reform comes to pass it to change eligibility" from a system that varies across states to "a national eligibility standard for adults and children alike, based solely on income," said Diane Rowland, executive director of the nonprofit Kaiser Family Foundation's Commission on Medicaid and the Uninsured.

"We are looking to health reform really leveling that field, especially for adults," she said at a recent roundtable with reporters. The commission has a side-by-side comparison of key provisions of the House and Senate bill, current Medicaid eligibility levels for low-income adults, background information about expanding Medicaid and state-by-state health data.

Washington's share of states' Medicaid spending varies, and that will continue even after health care reform is implemented. Generally, the richer the state, the less it gets, since the federal match is based on states' average per-capita income.

So California and New York, for example, typically receive the minimum 50 percent federal matching rate, while Arkansas, Mississippi and West Virginia get more than 70 percent. (The stimulus package temporarily increased all states' matching rates until the end of this year.)  

Under the reform measures, the federal government would pick up most of the tab of covering people who would become newly eligible for Medicaid. The House proposal would pay entirely for Medicaid expansion until 2015 when states then would contribute 10 percent of the costs of adding this new group to their rolls. The Senate bill is more complicated, but generally, the Congressional Budget Office estimates that the federal government would pay about 90 percent of the costs for bringing newly eligible people onto state Medicaid rolls.

Generous states cry foul

But many states that for years have gone the extra mile and provided benefits to more people under Medicaid worry that they will be left out under the Senate bill.

The problem, these more generous states say, is that many people in their states who are already eligible for Medicaid have not signed up. Even if these people sign up after the health care bill becomes law, they won't be considered "newly eligible," and the states would continue to get reimbursed at their current, lower match rates, not the higher rates that the federal government will pay for newly eligible people.

Schwarzenegger said California is being penalized for expanding its safety net and has pulled his support for the bill. Under both the House and Senate versions, Schwarzenegger says the federal government will shoulder almost the entire cost for states like Texas, while California would have to pay for half the cost of covering newly eligible Californians. "Thus, states that made little or no effort to expand coverage to low-income families are rewarded ... and states that did expand coverage, like California, are punished," he recently wrote .

New York Gov. David Paterson (D) likewise worries his state will get hit financially for having already extended Medicaid to parents making up to 150 percent of the poverty level. New York also is just one of five states that currently provide coverage comparable to Medicaid to childless adults making up to 100 percent of the poverty level.

"In exchange for New York's early commitment to coverage, [the Senate bill] denies New York federal funds extended to nearly every other state in the nation," he wrote in letter with New York City Mayor Michael Bloomberg (I) to Senate leaders. Paterson said he figures the bill would add an additional $1 billion a year in new Medicaid costs. New York faces a $3.2-billion budget gap in its current budget even after raising more than $6 billion in new taxes and fees last year.

The Senate bill carves out special matching funding levels for Massachusetts and Vermont, which both in 2006 launched major health care reform efforts and would not have qualified for additional federal money under the bill's formula. Massachusetts Gov. Deval Patrick (D) said in a statement he was grateful that "the progress that Massachusetts has already made is recognized and protected," in the Senate bill and that he was "heartened that the nation as a whole is moving towards our model."

But even states that will get generous amounts of federal funds are wary, especially state Medicaid directors who will be on the frontlines. Alabama Medicaid Commissioner Carol Steckel said that under the reform, states would have to track newly eligible people separately, since the federal government would pay a bigger match for new enrollees. States also have to process these new applications.

"All of this is a significant administration cost that no one has accounted for," Steckel said.