John Locke Update / Research Brief

Will Obamacare-Lite Undermine Governor Cooper’s Medicaid Expansion Scheme?

posted on in Health Care & Human Services, Land Use Planning
Featured Image

The House GOP Obamacare-lite bill, the American Health Care Act (AHCA), has officially cleared the House of Ways and Means and Energy and Commerce committees and is now being reviewed by the House Budget Committee – the next necessary step in the budget reconciliation process for a different version of Obamacare to make its way to reality. Meanwhile, the intraparty divide over how health reform should take shape remains intense, especially when it comes to restructuring Medicaid, the health insurance program that provides medical assistance at no cost for low-income children, adults, and the disabled.

How do the AHCA’s recommended changes to Medicaid impact North Carolina?

The bill actually entices non-expansion states like North Carolina to expand program eligibility to working childless adults by 2020, which aligns with Governor Roy Cooper’s persistent pleas to do so against a resistant state legislature. In his recent budget proposal for 2017-19, the first recommended change listed under the Division of Medical Assistance (DMA) section would make room for an additional 624,000 adults.

It’s been consistently reported that 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 required to cover 5 percent of the cost in 2017, and 10 percent of costs after 2020? The budget line item description states, “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 then 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 spend. In North Carolina’s case, the federal government has historically paid for two-thirds of the state’s $14 billion program that covers over 1.9 million people. 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 for every $1 state 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 money.

“Provider contributions,” also known as provider assessments, are 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 pulling down 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 prevented them from running up Medicaid’s bottom line. 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 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. Others see Medicaid’s financial design as a serious flaw. The assessments paired with the open-ended federal match rate represent 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.

Over the course of many presidential administrations, lawmakers have debated the idea of holding states more accountable for Medicaid spending by transitioning federal Medicaid funds to either block grants or capped funds per enrollee. AHCA goes for the latter, however.  It would apply neither to all patients nor all Medicaid funding streams. And the federal match rate would still exist on many levels, inclusive of a continued 90:10 federal match to pay for states that have expanded Medicaid and for states that decide to expand before 2020.

So, while it looks like Medicaid’s restructured financial design limits the ability for states to engage in provider assessments, Cooper’s method to pay for an expansion still holds.

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. … ...

Donate Today

About John Locke Foundation

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.