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Guest Post: A Medicaid Expansion Offer the States Should Refuse

This piece was published originally by National Review Online ( ©2016 National Review, used with permission). The author is John Daniel Davidson. Mr. Davidson is the Director of the Center for Health Care Policy at the Texas Public Policy Foundation in Austin.

In the wake of Louisiana governor John Bel Edwards’s announcement last week that his state would expand Medicaid under Obamacare, the White House rolled out a new scheme to persuade the 19 states that are still holding out to fall into line and expand their programs: throw more money at them.

The offer, which Obama will include as a legislative proposal in his 2017 budget, is that any state that expands Medicaid will get the first three years of expansion free — paid for entirely by the federal government. As written, the law says that Medicaid expansion in a given state will be paid by the feds for the first three years, beginning in 2014, and after that the state gradually picks up an increasing share of the tab until by 2020 the federal government will be paying only 90 percent. Obama is proposing to extend the three years of full federal funding to states regardless of when they expand, which means those 19 non-expansion states are still eligible for 100 percent federal funding should they follow Louisiana’s lead.

The purpose of this little twist on the Medicaid expansion deal is to give President Obama a fighting chance to claim victory for his otherwise failing health-care law. Full federal funding for three years would mean potentially billions of federal taxpayer dollars for holdout states like Texas and Florida, where large numbers of poor, uninsured adults enrolling in Medicaid would mean a revenue windfall for Medicaid providers and managed-care organizations. Those special interests, the White House no doubt realizes, will now redouble their efforts to persuade state lawmakers and governors to cave.

But these state officials should resist the temptation, for at least three reasons. First and most obvious is that expansion states have all experienced the same thing: More people signed up than expected, and it blew a hole in the states’ budgets. Jonathan Ingram and Nicholas Horton of the Foundation for Government Accountability studied this trend and found that expansion states routinely underestimated the number of people who would sign up in 2014, such that after one year of expansion, “several states have already seen more adults sign up for Medicaid welfare than they thought would ever sign up or even be eligible.”

The numbers are staggering. In Colorado, officials thought only 61,000 people would sign up in FY 2014, and an additional 100,000 by the end of FY 2015. But by March more than 210,000 people had already enrolled, and the total was more than 307,000 by year’s end. To varying degrees, the same thing happened in Arkansas, California — where 2 million enrolled in 2014, nearly three times what was projected — Illinois, Kentucky, Michigan, Ohio, Washington, West Virginia, and every other expansion state. Those extra enrollees cost states money, even with 100 percent federal funding, because many of them were “previously eligible,” meaning they aren’t part of the Medicaid expansion group and states must pay for about 43 percent, on average, of the cost of covering them. That works out to billions of state tax dollars. In Ohio, the Medicaid program went $1.5 billion over budget in the first 18 months. In Illinois, $800 million. In Kentucky, $1.8 billion. Washington State increased its biennial budget by $2.3 billion just to deal with expansion costs.

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