Gold Dome, Health Care

Significant hidden costs in Colorado Medicaid expanison plan

The federal Patient Protection and Affordable Care Act has radically restructured federal subsidy programs for medical care. For the first time in decades, it makes it reasonable for Colorado to begin mending its structural fiscal imbalance by reversing the excessive growth in the state’s Medicaid and child health insurance programs.

The act makes commercial insurance widely available for both working and nonworking people at all income levels. If it works as advertised, the federally subsidized commercial health coverage offered through the Affordable Care Act health benefits exchange will provide better health coverage for the basically healthy adults and children who make up the largest part of the Colorado Medicaid caseload. It will do this at no cost to the state, provided the state Medicaid program is changed to make those who would benefit from commercial policies ineligible for Medicaid. Under the act, individuals eligible for exchange insurance subsidies cannot access them unless they are ineligible for Medicaid.

Commercial coverage historically has provided better access to care than Medicaid. Commercial policies have reimbursed at significantly higher rates, making it easier to find a physician and to arrange for timely care. A number of recent papers in the medical literature report that Medicaid coverage is an independent predictor for increased mortality, extended hospital stays and higher costs, even after adjusting for known risks. In some cases, Medicaid patients have worse outcomes than uninsured patients. Although the extent to which the actions of patients in the Medicaid program contribute to these differences remains unknown, studies of health disparities generally assume that different patient populations behave similarly.

Under the Affordable Care Act, annual premiums for commercial coverage for people at 100 percent of the federal poverty level ($11,170 in income in 2012) are limited to $217 for a single person. They increase by about $75 for each additional person. Federal poverty level income refers only to cash income. It does not take into account subsidies from programs like those that provide means-tested assistance for food, housing, transportation, child care or heat. According to the 2010 Consumer Expenditure Survey, people in spending groups with under $10,000 a year in pre-tax money income spent about $1,000 on entertainment, $1,000 on food away from home and more than $2,000 on private vehicle transportation.

Commercial policies may also do a better job than Medicaid of controlling health expenditures at a given quality level. Unlike state Medicaid agencies, commercial insurers have detailed knowledge of how their individual policyholders consume medical care. They also have the freedom to use that knowledge to structure their policies in ways that give patients the incentive to use health care wisely.

Though health policymakers in Colorado recently expressed their surprise at a report showing that the rate at which Medicaid patients use emergency rooms for routine care is higher than that for the uninsured, private insurers have long employed modest fees to deter emergency department overuse. In 1993, for example, Kaiser-Permanente in Northern California reduced inappropriate emergency room use by 15 percent simply by applying copayments of $25 to $35 to all emergency department visits. Unfortunately, federal Medicaid rules are so complex that state Medicaid programs cannot do this. One 2008 feasibility analysis for Texas found that imposing Medicaid emergency department copays would actually increase total costs.

Because Medicaid puts severe limits on the price that can be charged for care, clients frequently wait for everything, increasing the time price of care. This is especially burdensome for hourly workers who aren’t getting paid while they wait. Many low-income people would rather pay nominally higher prices for care than miss work. When North Carolina Medicaid reduced the allowable one-stop supply of Medicaid prescription medications from 100 days to 34 days and raised the copay from $1 to $3, raising the time price led to a much greater reduction in the needed drugs obtained by chronically ill patients than increasing the money price.

Even if the Affordable Care Act didn’t offer the opportunity to make many Medicaid clients better off by switching them to private insurance plans, Medicaid expansion makes little fiscal sense given Colorado’s difficult budget circumstances. The 100 percent federal match through 2017 does not cover the state share of additional administrative costs, for which the national average is an estimated $2.48 for each additional $100 of state Medicaid spending. Once the expansion occurs, there is no guarantee that the federal match will stay the same. The Obama Administration’s 2013 fiscal year budget has already proposed reducing the federal match — a reduction that would substantially increase Colorado’s Medicaid expansion costs.

Finally, Medicaid expansion is a bad idea because the state does not yet have a firm idea of the cost increases the Affordable Care Act will cause in its current Medicaid program. There is no enhanced federal match for caseload increases in segments of the population that are currently eligible for Medicaid. Caseload increases in those segments are likely because some fraction of the estimated one-third of the uninsured who are already Medicaid eligible but have not enrolled will enroll, and because people who are eligible but privately insured may lose their coverage as employers respond to incentives by changing working hours or dropping coverage entirely.

The Affordable Care Act is also likely to increase the demand for additional state subsidies for uncompensated care. Medicaid generates significant amounts of uncompensated care, so increasing Medicaid caseloads will add to uncompensated care burdens. Finally, additional state support will likely be demanded by current Medicaid providers whose balance sheets begin deteriorating as a result of the substantial  Medicare reimbursement cuts under the act.

Linda Gorman is director of the Health Care Policy Center at the Independence Institute, a free-market think tank in Denver.

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