John Locke Update / Research Brief

Feds May Undermines Cooper’s Medicaid Expansion Scheme

posted on in Health Care, Health Care & Human Services
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Despite the North Carolina legislature and other federal obstacles standing in the way, Governor Roy Cooper desperately wants to expand Medicaid, the state-federal program that provides health services at no cost to low-income children, parents, pregnant women, aged, blind, and disabled. In his proposed 2017-19 budget released last week, the first recommendation under the Division of Medical Assistance (DMA) section was to expand Medicaid coverage to an additional 624,000 adults.

Expanding Medicaid, Obamacare-style, would cost North Carolina $6 billion over the next ten years. So, how exactly will this be paid for, now that expansion states are now required to cover 5 percent of the cost in 2017?

Curiously, the budget line item description specifies that “no existing general fund tax dollars are needed to support the expansion.” Rather, the statement goes on to say that, “the non-federal share of expansion costs is provided through provider contributions that fall well under federal limits.” In plain speak, this means that North Carolina hospitals will initially foot the Medicaid bill and later get their money back.

But before exploring how this creative financing scheme works within Medicaid, it’s important to understand the program’s financial design.

Since the early days of Medicaid, Washington has shouldered a large portion of each state’s total program cost. In North Carolina’s case, the federal government has historically paid for two-thirds of the state’s program, which currently costs taxpayers $14 billion and covers over 1.9 million North Carolinians. The lower the state’s per-capita income, the higher the federal Medicaid “match rate” and vice versa. For example, a state with a 50 percent match rate would receive $1 federal dollar for every $1 state dollar spent on the program. North Carolina’s overall match rate for non-expansion enrollees is 66.88 percent, meaning that every state dollar spent pulls down an additional $2.02 from the federal government.

Because most state Medicaid expenditures trigger federal funds, legislators and health systems have devised clever strategies that ease the use of state funds while maximizing federal receipts.

“Provider contributions,” also known as provider assessments, is a classic example that dates back to the mid-1980s. Medicaid providers, such as hospitals, volunteer to be assessed or taxed by the state. In return, the state disburses this revenue back to hospitals and other health facilities, all the while collecting federal match money.

It took some time for federal regulators to recognize this financing game.  But in 1991, the Medicaid Voluntary Contribution and Provider-Specific Tax Amendment placed restrictions on states that, as least temporarily, held Medicaid’s bottom line in check. Today, if states place assessments on health care entities to help pay for Medicaid programs, the fee must not exceed 6 percent of net patient revenues, which explains the reason why Cooper’s budget notes that provider assessments fall within “federal limits.”

Can one really blame hospitals and other health care facilities for playing this assessment game? Those that are largely dependent on Medicare and Medicaid funds really have no choice but to be active players, given that public health insurance pays well under commercial payer rates. And Cooper isn’t the first governor to pitch the idea of using provider assessments as a way to pay for a state’s cost of Obamacare’s Medicaid expansion.

Naturally, many Republicans and Democrats alike see the federal Medicaid match rate as an attractive feature for their state budgets. Yet, a growing number in Washington see Medicaid’s financial design as a serious flaw, which could put Cooper’s method to pay for the expansion population on precarious footing. The assessment game paired with the open-ended federal match rate represents just two of many reasons why we spend almost half a trillion dollars on Medicaid nationwide every year. According to the CBO, program expenditures will most likely double each decade at the federal level, regardless of whether states decide to expand their medical assistance eligibility rolls.

The use of provider assessments could fall by the wayside if the GOP in Congress ends up restructuring how the federal government provides aid for state Medicaid programs. Over the course of many presidential administrations, lawmakers have debated the idea of reforming Medicaid with either block grants or capped funds per enrollee. House Speaker Paul Ryan’s health reform conversation starter, “A Better Way,” contends that states should be able to choose between the two options. Meanwhile, within a week’s time of Governor Cooper releasing his proposed biennium budget, Politico leaked a draft Obamacare repeal bill that sets to re-engineer federal Medicaid funding with per-capita block grants.

It is unknown what benefits and services would apply to limited per-capita Medicaid funding and whether it would dissolve the ability for states to engage in provider assessments. Even if Medicaid’s financial structure remains an open-ended tab, North Carolina could still face severe fiscal consequences and human costs under an expansion, given that the leaked repeal bill calls for states to bear a much larger share of their Medicaid expansion cost beginning in 2020.

Stay tuned for what could end up being a monumental week in health care, as the House Energy and Commerce Committee is set to deliver feedback on the bill that not only repeals and replaces the federal health law but also seeks Medicaid reconstruction – one of the key sticking points that will take the longest time to reach a majority agreement.

Katherine Restrepo is the Director of Health Care Policy at the John Locke Foundation. Before joining the John Locke Foundation, she interned at the Cato Institute under the direction of Michael Cannon, Director of Health Policy Studies. Katherine’s… ...

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