John Locke Update / Research Brief

Lawmakers need to resist expanding Medicaid  

posted on in COVID-19 Series, Health Care, Health Care & Human Services
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As we approach the end of the Gov. Cooper’s month-long stay-at-home order, state lawmakers have begun to debate possible solutions for responding to the coronavirus. Naturally, much of the discussion has focused on health care and the fiscal needs of the state. Several advocates and elected officials have suggested that this is the time for the state to expand Medicaid. Rest assured, the coming budgetary crisis means expanding Medicaid would be a costly and lasting mistake.

As lawmakers begin to evaluate massive drops in tax revenues, we must keep in mind that the state has limited resources and a balanced budget requirement. Unlike the federal government, state debt is limited, so a dollar spent now is a dollar that we cannot spend in the future.

Congress passed several bills to respond to the coronavirus outbreak. Many of the provisions dealt with the treatment of individuals that may have contracted the coronavirus. The Families First Coronavirus Response Act (FFCRA) provided funding for the states to test those who are uninsured. The astonishing, deficit-financed, $2 trillion Coronavirus Aid Relief and Economic Security (CARES) Act provides funding for uninsured people who need treatment. While it’s regrettable the federal budget was in such bad shape before this pandemic, the state does not need to duplicate these services by expanding Medicaid in any capacity. Instead, the state should focus on allocating resources to ensure that core government functions can continue. The state needs to resist making significant changes to the Medicaid program, such as expanding the program to non-traditional populations.

North Carolina’s Medicaid Program at a Glance

Enrollment in Medicaid is likely to increase without expansion, due to the economic fallout of coronavirus shutdowns, so understanding its current characteristics is important. According to the North Carolina Department of Health and Human Services (NCDHHS), over 2.2 million people are enrolled in the Medicaid program in April. Annual unduplicated enrollment in fiscal year 2018-19 was 260,000 higher than in 2014-15, a 12% increase despite an improving economy.

There is $186 million in the Medicaid contingency fund, which can be to pay for shortfalls in the Medicaid program. As it currently stands, the federal government reimburses the state 67.4% of each dollar that is spent on Medicaid enrollees. The federal government will increase the matching rate for states, boosting North Carolina’s match to 73.4%. The North Carolina Department of Health and Human Services estimates that this will free up about $200 million of additional Medicaid funding.

Federal Assistance for Uninsured  

The state should not expand Medicaid in any way because it would duplicate federal efforts that cover testing and treatment for the uninsured. NCDHHS recommended that the state temporarily expand Medicaid eligibility to 200% of the federal poverty level for as long as the COVID-19 emergency period lasts. Early estimates indicate this would cost the state at least $240 million over the first six months, probably more depending on the duration of the emergency. There is no need for such a vast expansion of Medicaid given other steps targeted to help the uninsured with coronavirus testing and treatment.

Through the CARES Act and FFCRA, Congress appropriated money to be used directly for testing and treatment for anyone who is uninsured. In the FFCRA, Congress specified that the states would be reimbursed at a rate of 100% for the costs of treating uninsured patients (see sec. 6004 of the law). The state would need to submit a Medicaid State Plan amendment to the federal government that would expand the benefits to include coronavirus testing. This means that an uninsured individual could access testing, and that provider will be reimbursed 100% by the federal government.

What about the uninsured who contract the disease and need treatment? The federal government will directly cover the costs of treatment. In the CARES Act, Congress appropriated $100 billion specifically for hospitals’ expenditures on coronavirus response. The administration announced later that a portion of the hospital fund would reimburse hospitals at Medicare rates for treating those who don’t have insurance. Furthermore, in exchange for federal relief funds, hospitals are prohibited from sending surprise bills or extra charges to patients.

Medicaid Expansion and Rural Hospitals  

Many hospitals, particularly rural hospitals, have seen a reduction in revenue because they suspended elective procedures and patient volume dropped. But these facilities have been promised relief by the federal government. The fourth round of coronavirus relief appropriated an additional $75 billion for hospitals and other providers. This is on top of the $100 billion appropriated in the CARES Act. Reports indicate that after an initial distribution of $30 billion, the second wave of $20 billion was released for hospitals recently. The $50 billion remaining from the CARES Act fund is earmarked for paying claims for the uninsured, major hotspots, and rural hospitals.

Just like many small businesses, rural hospitals were asked by the government to refrain from collecting revenue they otherwise would. Some advocates and lawmakers have said this is another reason to expand Medicaid. However, short-term financial losses are not something Medicaid expansion can solve, especially with the stay-at-home orders in place. Medicaid expansion is not a long term solution for rural hospitals either, as Nic Horton of the Foundation for Government Accountability and I concluded in a recent study.

First, we found that hospital finances were not materially changed after a state expanded Medicaid. Drawing on findings from Moody’s Investor Service and an analysis of six years of hospital finances at 1,700 hospitals, the net effect of Medicaid expansion is “close to zero.” Second, Medicaid expansion is not a hospital job creation machine, as so many advocates have claimed. Medicaid expansion states compared to non-Medicaid expansion states saw a slower rate of hospital job growth over the first several years of Medicaid expansion, and about half of Medicaid expansion states lost jobs in their first year. Third, Medicaid expansion may further harm rural hospitals by removing people from private insurance and placing them on Medicaid.

Fiscal Responsibility is More Important than Ever

There is a lot of uncertainty regarding the future of the state and the country after dealing with the coronavirus. One thing for certain is that the state will face a serious budget shortfall in the short term, even with the federal funds coming into the state. Most of the federal relief funds cannot be used for prior state obligations. This means state funds will have to make up the projected shortfall.

North Carolina lawmakers should resist expanding Medicaid because it is a financially reckless policy that could hamstring the state budget. It will be a daunting challenge for state leaders to navigate the economic impacts of the coronavirus over the next several years. Fiscal responsibility means prioritizing spending and acknowledging that all the wishes of advocates and lawmakers cannot be fulfilled.

Jordan joined the Locke Foundation in the summer of 2018 as Health Care Policy Analyst. He analyzes state and national health policy issues with an eye toward removing government barriers and instead infusing health care with free-market solutions that encourage… ...

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