DHS officials say expanded Medicaid will save money

Late Tuesday (July 17), state Medicaid officials released documents showing they expect the state to save about $372 million over a 7-year period if Arkansas were to opt into a Medicaid expansion under the federal health care law.

The savings would come from additional federal money, more compensation for indigent care, and potential new state revenue from the financial boost that hundreds of millions of dollars in federal funds would inject in the state’s economy.

When the U.S. Supreme Court ruled the federal Affordable Care Act was constitutional in late June, the high court also declared that states could not be penalized for choosing not to participate in the law’s proposed Medicaid expansion. Medicaid is federal-state program that provides health care funding for poor, uninsured citizens.

The law says the federal government will pay for 100% of the Medicaid expansion from 2014 to 2017. At that point, states would begin picking up a portion of the tab, ultimately matching 10% in state funding with 90% of federal funds by 2021.

While Democratic Gov. Mike Beebe said he was “inclined” to support the expansion, which could provide health care to another 250,000 uninsured Arkansans, several Republican lawmakers have said they are opposed to the expansion. Their opposition stems from the financial obligation the state may ultimately incur and the philosophical problem of providing more state-sponsored health care to citizens.

Upon learning of the state analysis showing $372 million in savings, several GOP lawmakers balked at the possibility.

Andy Allison, director of the Arkansas Medicaid program at the Department of Human Services, authored the economic analysis released Tuesday showing the savings.  In an interview with Talk Business on Wednesday (July 18), Allison answered the following questions.

Talk Business: In layman’s terms, summarize where $372 million in savings over 7 years comes from by adding more people to the Medicaid rolls.

Andy Allison: The simple answer is that the federal government is going to pay initially all, and down the line, 90% of an expansion of coverage to the uninsured in the state. Much of that – probably over half – will come from an expansion of the Medicaid program. That expansion will allow the state to forego what it might otherwise have spent on the uninsured. And it’s more than an even swap so that the coverage provided will enable individuals to receive more care and they’ll obtain that care and it will be reimbursed.

Total spending on medical care will also go up. The new revenue that comes in from the federal government will have — as all money that comes into an economy from outside that economy has — an impact on the size of the economy and that ultimately results in some form of taxation. In this case, we’re assuming that a fair amount, very conservatively assuming, that federal money will ultimately flow through the state tax coffers at about a 4% clip.

When you add all that up, there actually are a fair number of offsets to the cost of the expansion, and the expansion itself, even in the out years, would only cost the state 10% of the total.

TB: On the component of “new state revenue” from your analysis, explain this dynamism that would allow for the state to capture more tax dollars because of the economic activity. Walk me through that analysis.

Allison: It’s very straightforward, intentionally so, and conservative. When an economy receives money from outside that economy, it grows. In this case, the federal tax money will be coming in to support the Medicaid expansion — and by the way also the premium subsidies in the exchange, but we’re not including those in this analysis which is focused on Medicaid — that federal money will come into the state and flow to hospitals and doctors and mental health professionals and pharmacies etc. around the state.

Ultimately, that becomes somebody’s income and income is taxed. So we’re just assuming very straightforward that the federal money is ultimately going to be taxed at least once at the state level and having that sort of proportional impact on state tax revenue, which is likely to be over $30 million a year.

TB: A lot of people are going to be skeptical that if you add a lot of people to the Medicaid rolls you can save money. Philosophically, explain that concept.

Allison: I think philosophically it is hard to understand. Maybe the simple answer is when the federal government adds individuals to the state Medicaid rolls then that makes a lot of things possible, including savings to the state. If the state was paying full freight for that expansion, there would be no question that it cost the state money. There would be no economic multiplier if we paid that full freight. There would simply be a redistribution of money within the state and would add to the state tax burden.

In this case, the federal government is essentially doing it on our behalf. And the percentage that we are responsible for in the out years [ultimately 10%], that 10% is almost completely offset by the economic impact, by the ability that we have to no longer pay full costs for — you have insured in hospitals and clinics and elsewhere — that 10% as it turns out doesn’t cost the state on net because you can displace spending on the uninsured through direct subsidy with spending on the uninsured through Medicaid which the feds are paying most of.

Again, that’s a long answer, but the short answer is: if the federal government is paying all or most of it, it turns out not to be all that hard to understand why this could save the state money. This is a state-level analysis. It’s not a federal analysis. It’s not a comprehensive review of the bill. It is simply a review of the impact on the state of the Medicaid expansion.