John Locke Update / Research Brief

New Study Points to Funding Gap in Cooper’s Medicaid Expansion Scheme

posted on in Health Care, Health Care & Human Services, Spending & Taxes
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Most voters know the dynamics in the federal elections when it comes to health care. Former Vice President Joe Biden and those on the Left favor building on the Affordable Care Act (ACA) with a public option, or they even support a full-blown single-payer health care system. President Donald Trump and those on the Right support repealing the ACA and moving to a more decentralized system of health care administration.

Health care will be an important issue for voters casting votes for statewide and local elections, too. Here in North Carolina, the most significant issue concerning state health care policy is whether the state should expand Medicaid, which the ACA allows. Gov. Roy Cooper and legislative Democrats have strongly supported expanding Medicaid in the state, while most Republicans have opposed such a move.

The critical issue in the North Carolina Medicaid expansion debate is what it would cost the state. As of 2020, the federal government picks up 90 percent of the tab for the new enrollees’ costs who gain eligibility through expansion. The state is, therefore, responsible for the remaining 10 percent of costs no matter what they are.

Cooper and his fellow Democratic supporters of Medicaid expansion have proposed a scheme to cover the 10 percent state share through new taxes on hospitals and prepaid health plans (PHP). The governor and other Medicaid expansion supporters have repeatedly claimed the expansion of Medicaid in North Carolina would be “free to the state” and wouldn’t cost “any state money” because the new taxes would cover the full cost.

While this framing might make Medicaid expansion sound as if it’s too good to pass up, the reality is likely to be much different. According to a new study conducted by the John Locke Foundation, Medicaid expansion in North Carolina would leave a funding gap between $119.3 million to $171.3 million in the first year alone.

This research update will discuss how the study was set up and how the funding gap was calculated.

Methods

To determine how much Medicaid expansion would cost the state, we first needed to determine the expansion policy’s total cost. To conduct our analysis, we used findings from a 2018 report from the Urban Institute, the governor’s budget recommendations, data from the Centers for Medicare and Medicaid Services, and data from the Kaiser Family Foundation.

Calculating the total costs associated with Medicaid enrollment after a substantial policy change requires researchers to model an accurate number of enrollees, the cost per enrollee, and the composition of the new enrollees. To determine the total number of enrollees, we built on analysis from the Urban Institute, which found that expansion would result in 626,000 additional enrollees joining the Medicaid rolls. We also used the governor’s budget as he indicated the total enrollment for his Medicaid expansion plan would be somewhere between 500,000 and 626,000.

The composition of enrollees is also a crucial part of calculating the total costs of Medicaid expansion. When states expand Medicaid eligibility, there is a phenomenon called the “woodwork effect,” where individuals who were previously eligible for Medicaid enroll after expansion. When a state expands Medicaid, the new enrollees will consist of a new population of adults, called the “expansion population,” and traditional enrollees who were previously eligible but for whatever reason had not enrolled in Medicaid before the state expanded eligibility. Knowing the composition of the new group of enrollees is important for cost calculation because while the federal government pays for 90 percent of the expansion population, it only pays for two-thirds of the traditional population.

Finally, we needed to know the costs per each enrollee. CMS provides data from several states that expanded their Medicaid programs. We used those costs to calculate a low, median, mean, mean plus 20 percent, and high costs for each population to plug into our model.

Findings

Neither the Urban Report nor the governor’s budget recommendations give exact numbers of enrollees in the traditional population and the expansion population, nor do they provide the cost per enrollee. Given the lack of exact information about these variables, we modeled twelve different scenarios with various enrollment levels, different shares of the traditional population to the expansion population, and different levels of per enrollee costs.

After modeling the twelve different scenarios, we narrowed the possibilities down to the two most likely scenarios based on everything we knew based on the Urban report, the governor’s budget, and our calculations. We were then able to calculate the total cost of the program, including both the expansion and the traditional enrollees, and therefore the ten percent share for which the state would be responsible.

In our two most likely scenarios (Scenario B.2 and C.1 in the report), we found that Cooper has likely underestimated enrollment and cost per enrollee when we compared our scenarios with his total costs of the program in his budget recommendations.

So, how did we calculate the funding gap? Recall that the governor planned to tax hospitals and PHPs to fund the ten percent state share of costs for the program. The tax on PHPs comes out to roughly 1.8 percent of the total cost, leaving the tax on hospitals to cover the rest. Presumably, the hospitals and insurers agreed to the amount of money Cooper would need to raise by those taxes to cover his proposal’s state share in his budget recommendations.

To calculate the funding gap, we first calculated the taxes needed to cover the state share for Cooper’s proposed plan and used it as a baseline. We believed Cooper’s estimates to be low on both cost and enrollment. Then we took our most likely scenarios and calculated how much revenue would need to be raised by the taxes to cover the state share under our two most likely scenarios (see Scenario B.2–Taxes and Scenario C.1–Taxes in the report).

Then we took the total amount of money needed to cover the state share in our scenarios and subtracted the baseline amount of revenue that we calculated Cooper would need to cover his proposed plan. In so doing, we calculated the funding gap for Medicaid expansion in the amount of money needed for expansion in just the first year.

Our two most likely scenarios showed a funding gap of between $119.3 million and $171.3 million in the first year. Making up that gap would require new state appropriations or increased taxes on the hospitals.

Medicaid expansion has been a contentious topic in the state, dating back to the time the ACA was passed into law. Cooper and state Democrats have told voters repeatedly they can implement Medicaid expansion without any new state appropriations. Our analysis presents a different reality. Our study shows that Cooper is likely underestimating the total enrollment in the program and the cost per enrollee.

The funding gap that we show in the paper of between $119.3 million and $171.3 million is only for the first year following expansion. This gap would perpetuate indefinitely if the state were to expand Medicaid and it would require new state appropriations or increased taxes on the hospitals.

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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We are North Carolina’s Most Trusted and Influential Source of Common Sense. The John Locke Foundation was created in 1990 as an independent, nonprofit think tank that would work “for truth, for freedom, and for the future of North Carolina.” The Foundation is named for John Locke (1632-1704), an English philosopher whose writings inspired Thomas Jefferson and the other Founders.

The John Locke Foundation is a 501(c)(3) research institute and is funded solely from voluntary contributions from individuals, corporations, and charitable foundations.