Health Care Reform’s X Factor

As states sort out the many implications of the federal health care overhaul, one of the biggest questions is how much the law actually is going to cost. For now, that’s impossible to answer with any precision. The law expands Medicaid, the state-run health insurance program for the poor, but it’s anybody’s guess as to how many new patients will sign up.

Up to now, the most-often cited estimate came from the nonpartisan Congressional Budget Office. Across the country, the CBO expects 16 million new Medicaid and children’s health insurance enrollees, a number it estimates would cost the states a total of $20 billion to cover between 2014 and 2019.

But a report released yesterday shows state Medicaid costs could increase by more than twice that amount — to $43 billion — thanks to enrollment that could far exceed CBO estimates. The higher figure, from the Kaiser Commission on Medicaid and the Uninsured, is based on the prospect of as many as 23 million people enrolling in Medicaid.

Whether enrollment ends up closer to the low estimate or the higher one represents one of health care reform’s biggest unknowns. Ultimately, the outcome will depend on a mix of factors, some of which are beyond the states’ control.

How will individuals respond to the new federal mandate to carry health insurance? Will the economy be weak or strong through the implementation period? How much of an outreach effort will the states and the federal government make to sign people up for Medicaid? And will the law result in, as Alan Weil, executive director of the National Academy for State Health Policy, calls it, a “culture of coverage” leading to higher enrollments?

The report is likely to heighten criticism from some cash-strapped states as they look ahead to implementing the federal law. However, supporters of the health care changes note that other provisions will save states money, offsetting some or perhaps all of their higher Medicaid costs. What’s more, any costs the states bear will add up to a fraction of what the federal government is set to spend.

How Medicaid’s expansion works

The federal health care law leans heavily on Medicaid to get the country close to universal coverage. States are to set their Medicaid eligibility level at 133 percent of the federal poverty level. In 2009, that was $14,404 for one person and $29,327 for a family of four.

For some states, this does not represent a change. States such as Connecticut, Maine and New York already had set their Medicaid cut-off point above that income level. But for most states, the eligibility rule represents a significant broadening of the program. In these states, covering more people simply will cost more money.

The health care law takes this variation among the states into account. For states that historically have had less generous Medicaid programs, the federal government will pay for the entire share of the expansion from 2014 to 2016. That aid tapers off to a 10-percent state share by 2020. For the historically more generous states, federal aid starts out lower but eventually levels out with the others.

In a state like Texas, enrollment is bound to increase by huge amounts under any scenario. Texas has set the Medicaid eligibility level for parents at 26 percent of the federal poverty line. Under the lower enrollment estimate, the state’s increased Medicaid cost is $2.6 billion. Under Kaiser’s higher enrollment scenario, those costs will be $4.5 billion.

But even historically generous states like New York could see large increases in enrollment and associated costs. That’s because there are a lot of people who currently are eligible for Medicaid but not enrolled, either because they don’t know about the program or just never bothered to sign up. If outreach efforts succeed in enrolling a lot of these people, New York’s Medicaid costs could go up quite substantially.

How much depends on exactly how many people sign up. Under the lower participation-rate scenario, New York is estimated to pay only $50 million more for Medicaid. Under the higher participation-rate scenario, New York’s costs balloon to $2.9 billion. Part of that difference is due to a wrinkle in the federal law. For this group of newly insured people, the federal government will pay a lower percentage of the increased cost.

State-specific scenarios

Some states have come up with enrollment figures of their own, which have fueled wildly different cost estimates. In Indiana, Governor Mitch Daniels recently released a report that included a scenario in which everyone who becomes eligible for Medicaid enrolls. That scenario was estimated to cost Indiana $3.6 billion over a decade. Texas is assuming a participation rate that could reach as high as 94 percent. State estimates that the federal health care law will cost Texas a staggering $27 billion between 2014 and 2023 are based in part on that number.

The challenge of estimating enrollments and costs will continue. The Kaiser report mostly avoids the issue of how much states are likely to save through changes to the health care system. Although the Urban Institute’s John Holahan, a lead author of the report, says it’s likely that money saved from paying for uninsured care, payments to hospitals and other state programs that can be cut under health reform could potentially outweigh the increased Medicaid costs.

Many experts agree on this point. Still, some states remain skeptical that those savings actually will materialize. They also point to the large administration and outreach costs associated with the law’s implementation. Texas estimates it will spend more than $5 billion just on administration between 2014 and 2023.

Advocates of the health overhaul say that while the law requires increased state spending on health care — at a time when states have little extra money lying around — the long-term goals and design of the program are a good deal for states. Even if they are forced to spend Kaiser’s higher estimate of $43 billion to expand Medicaid, proponents point out that the federal government is picking up as much as 95 percent of the cost for a program that’s likely to have many long-term, structural benefits for states. “It will go up a bit,” Holahan says of state spending on health care, “but it’s not a lot.”