Medicaid Expansion: Costs or Savings for South Carolina?

Will a Medicaid expansion under the Affordable Care Act (ACA) cost South Carolina $1.085 billion or save us somewhere between $59 million and $679 million. Those are two numbers on the table as South Carolina begins a debate on whether to expand its Medicaid program to cover all adults up to 138 %[1] of the Federal Poverty Level (FPL).  And we need to understand what those numbers mean to truly debate the future of healthcare for the least prosperous of our state.

The SC Department of Health & Human Services (SCDHHS) contracted with the actuarial firm, Milliman, to estimate the net cost of expanding Medicaid under the Affordable Care Act. The projected cost to South Carolina was $1.085 billion through State Fiscal Year 2019-2020 (SFY ’20). However, a July 2011 study by researchers at The Urban Institute suggests that South Carolina could save between $59 million and $678 million from 2014 through 2019 because of the same Medicaid expansion. Those are big differences with significant policy implications for the state.[2]

Why so different? Milliman estimates include half of calendar year 2020 when state costs for the expansion population will go up a little. From 2014 through 2016, the federal government will pay 100 % of those costs, declining to 90 % from 2020 on.

Good news is that more people will be covered under the program, and though it will cost more in Medicaid, it will mean savings elsewhere for South Carolina.  Although the Milliman report includes significant state savings from increased drug rebates ($335.5 million), lowered costs for uncompensated hospital care ($217.5 million) and four years of enhanced federal match for the Children’s Health Insurance Program (CHIP) ($130.2 million), it does not look at state savings outside the SCDHHS budget. Those would include significant increases to the number of Department of Mental Health patients made eligible for Medicaid, meaning that the feds would pick up at least 90% of costs now paid by state dollars. Nor does it address eliminating coverages for those currently eligible at above 138 % of FPL. That includes pregnant women who would be eligible for subsidized private insurance through the Health Benefits Exchange, so no longer need Medicaid coverage

Much of the difference in calculation is because we have to estimate how many people will sign up for Medicaid—especially among those currently eligible. Two-thirds of the added costs posited by Milliman are for folks who could walk into SCDHHS tomorrow and sign up regardless of whether South Carolina expands Medicaid. Milliman estimates twice as much cost from currently eligible families ($1.032 billion) as from the newly eligible ($429 million). The federal government will only cover the current match rates for those currently eligible, roughly 70 % for adults and 80 % for children eligible under the Children’s Health Insurance Program (CHIP).

There is a large body of academic research on participation rates, discussed here. The Milliman estimates are, to be generous, at the high end of the evidence on actual participation rates. Milliman asserts: “… the participation rates were reviewed for consistency with participation in the Medicare program which exceeds 95% and the Medicaid / CHIP programs for children which exceeds 85%.” In Medicare a large portion of enrollees are automatically enrolled as seniors eligible based on age, so these take-up rates are largely irrelevant to the more stigmatized Medicaid program. Child take-up rates will exceed those of adults.

Milliman argues (more strongly in public presentations than in their written report) that the personal responsibility requirement, the mandate, will drive eligible persons to sign up. But what is frequently ignored is that the mandate the Supreme Court dubbed a tax will not apply to persons who are not required to file federal income tax returns—which is just about anyone who is a parent with children living at below 50 % of FPL.

Yes, there will be a welcome mat effect which will see many currently eligible parents and children enroll because they are made aware of their eligiblility and enrollment is made easier. The high levels of already-eligible children enrolled when we opened our CHIP program were the result of very intensive outreach efforts. Any welcome mat effect here is likely to be more a product of consumer education efforts through the Health Benefits Exchange than through a Medicaid expansion—a cost of the ACA but not of an expansion. If we eliminate costs for those currently eligible, the multiyear Milliman estimate drops to $53.5 million.

And there will be some “crowd out” as newly eligible persons who currently have private insurance opt for Medicaid coverage. The research literature is pretty clear that there is practically no crowd out below 100 % of FPL. People paying below poverty wages (aside from public employers) don’t provide health coverage and private coverage is completely unaffordable. But Milliman shows large crowd out effects for those currently eligible.

Taking welcome mat and crowd out effects into account and relying on the available empirical research on participation rates, The Urban Institute estimates that Medicaid costs will increase by $570 million from 2014-2019, not the $1.8 billion asserted by Milliman.

South Carolina’s report is one of a series which Milliman issued across the country. Those reports have come under attack for a number of failings, including especially unrealistic participation estimates. See, for example, health policy researcher Leighton Ku’s analysis of the Milliman report on Nebraska. Milliman estimates that 85 % of expansion uninsured parents and 80 % of expansion childless adults will enroll. The Urban Institute coverage model, based on “take-up rates consistent with the empirical literature,” “achieves an average take-up rate of about 73 percent for the uninsured who are newly eligible.” This is higher than a 60 – 70 % “baseline rate due to outreach and enrollment simplification provisions in the ACA.”

A recent study “… suggest[s] that when Medicaid is expanded in 2014, take-up may be less than anticipated because new enrollees will be offered a more restrictive set of benefits—known as ‘benchmark coverage’—compared to those in traditional Medicaid, and the majority of newly eligible adults will be in groups with traditionally low take-up (primarily nondisabled adults).” (Benjamin D. Sommers et al, Reasons For The Wide Variation In Medicaid Participation Rates Among States Hold Lessons For Coverage Expansion In 2014, Health Affairs, 31, no.5 (2012) 909-919.) Although the low take-up rates (just above 50 percent in 2007-2009) for those currently eligible in our state create greater potential budget exposure, those low rates suggest that, without major changes in outreach and enrollment, South Carolina will never reach the very high participation rates assumed by Milliman and costs will be much lower than they suggest.

Two additional points. First, keep in mind these estimates cover several years, not just a single fiscal year. The highest yearly estimate by Milliman shows an additional $278.4 million in state costs on the Medicaid budget from the Affordable Care Act in SFY20. That is not chump change, but it is within the range of annual increases in the last decade for the Medicaid budget. Secondly, if Milliman’s estimates are correct, the return on South Carolina’s investment is $13.3 billion dollars in federal matching funds, or 1229 %, by SFY20. That is not even counting the multiplier effects of injecting an additional two billion federal dollars a year into our state’s economy in SFY20 and every year thereafter. Nor does it include a calculation of the benefit to small employers being better able to afford group health insurance because some employees are eligible for Medicaid.

In sum, the estimates for costs of a Medicaid expansion being advanced by SCDHHS are higher than those supported by empirical data and fail to take into account additional savings to the State, if not to SCDHHS. We have not begun to address the beneficial effects of expanding Medicaid to as many as half a million South Carolinians. As the General Assembly explores a Medicaid expansion, it should do so with realistic numbers based on empirical research and taking into account all costs and savings directly attributable to an expansion and not just SCDHHS costs and savings. To date, SCDHHS has failed to provide estimates of those other savings.


[1] The Affordable Care Act expands Medicaid coverage for all persons up to 133 % of the Federal Poverty Level, but the calculation of that income includes a 5 % disregard making the effective level 138 %. Base eligibility for the Low-Income Families Program (basic Medicaid) in South Carolina is currently 50 % of the Federal Poverty Level but only available to parents with children.

[2] For a discussion of why estimates of costs vary so much, see The Urban Institute’s report for the Kaiser Commission on Medicaid and the Uninsured at http://kff.org/healthreform/upload/8149.pdf.

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4 Responses to Medicaid Expansion: Costs or Savings for South Carolina?

  1. Pingback: Understanding the savings and cost of Medicad Expansion for South Carolina « South Carolina Healthcare Voices

  2. nikkihilton says:

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  4. Pingback: The sad case of Medicaid expansion | WIW Import Posts

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