Medicaid Expansion Increased Spending Without Boosting Benefits

When the Affordable Care Act was signed into law by President Barack Obama in March 2010, one of its most important features was a provision intended to expand Medicaid, the public insurance program founded in 1965 that pays for health care for tens of millions of low-income Americans, including one in three children. Obamacare sought to boost Medicaid by providing more funds to states to expand the program to cover people with incomes up to 138% of the federal poverty level (currently around $20,120 for a single person).

A 2012 Supreme Court ruling gave states the option of whether or not to accept the additional money to expand their coverage. By 2023, 40 states and the District of Columbia have done so.

Yet the expansion of Medicaid didn’t just affect people who were now eligible for coverage. In a study published in National Tax Journal, Stanford GSB professor of political economy Daniel P. Kessler and M. Kate Bundorf of Duke University looked at the overall impact of the increased federal subsidy and found that spending on Medicaid recipients who would have qualified under the old system increased by 15%. However, that didn’t necessarily translate into more generous benefits. Instead, the additional spending likely went into higher reimbursement rates for health care providers.

Though technically a federal program, Medicaid is actually an assortment of state programs largely financed by federal subsidies. It is a prime example of what economists call fiscal federalism, in which federal, state, and local governments divide responsibilities for a public policy objective.

“Fiscal federalism is about how the federal government can allocate resources by delegating responsibility to subnational governments and then giving them incentives to engage in different kinds of activity,” Kessler explains. “In Medicaid, that’s a huge deal — that’s how the whole thing operates. The key parameter is how responsive states are to the subsidy that the federal government gives them.”

Expanding Medicaid Spending

As Kessler and Bundorf’s paper describes, a statutory formula specifies what portion of each state’s Medicaid spending will be subsidized by the federal government. This rate, called the Federal Medical Assistance Percentage, varies inversely with a state’s per capita income. In 2018, wealthier states such as California and New York got a 50% FMAP, while Mississippi, the poorest state, got 76%, meaning that it paid only a quarter of its Medicaid costs from its own funds.

Obamacare gave states that expanded Medicaid a higher “enhanced” FMAP for new enrollees — those low-income adults who wouldn’t have previously qualified for the program — but not for previously eligible enrollees. (The enhanced FMAP was initially set at 100% in 2014-2016, gradually decreasing to 90% in 2020.) Before the ACA, Medicaid covered only low-income children and their parents, pregnant women, people with disabilities, people aged 65 and older who were poor enough to qualify, and other specified groups. According to the Centers for Medicare & Medicaid Services, 21 million people gained Medicaid coverage due to the ACA expansion.

From a research standpoint, the new recipients in expansion states were difficult to compare with recipients in states that didn’t expand. For an apples-to-apples comparison, Kessler and Bundorf only looked at the outcomes for previously eligible enrollees — people who already qualified for Medicaid before the ACA in both expansion and non-expansion states.

They found that in the four years before the ACA’s Medicaid expansion took effect, there was no significant upward trend in spending in states that chose to expand versus those that rejected expansion. (In fact, there was a slight downward trend.) And spending didn’t differ significantly between expansion and non-expansion states in any single year prior to expansion.

However, one year after the ACA expanded Medicaid, spending on previously eligible enrollees in expansion states was approximately 15.4% higher than in non-expansion states. Kessler and Bundorf estimated that this translated into $1,340 more spending per previously eligible recipient in expansion states than in non-expansion states.

Medicaid expansion may affect spending per enrollee in two ways: more generous benefits for beneficiaries or higher reimbursement rates for providers. To assess the relative importance of these potential mechanisms, Kessler and Bundorf investigated whether benefits were more generous in expansion states. They found that they were not. This suggests that expansion likely affects spending through increases in payments to providers.

Kessler hypothesizes that this occurred because “states responded to the increased federal subsidy by increasing their spending on program enrollees. But because of the difficulty of maintaining different benefits packages or reimbursement rates for enrollees who faced different subsidy rates, states simply increased spending on all enrollees — even those who did not receive the increased subsidies.”

Balancing the Benefits

According to Kessler, this is significant for two reasons. “First, it shows that the federal government can influence spending by states through subsidies to programs that states operate,” he says. “At least when it comes to Medicaid, it also shows that increasing subsidies to new enrollees to induce a program expansion has two costs: the cost of the subsidies to the new enrollees plus the cost of the subsidies to the existing enrollees, even if the subsidies were intended only to apply to the newcomers.”

In this sense, the ACA’s approach to expanding Medicaid was a two-edged sword. “It induced states to expand Medicaid, which was an explicit goal of the ACA, but at the cost of expanding both state and federal spending on existing enrollees — without any evidence that this extra spending translated into more generous benefits,” Kessler says.

That does not mean the ACA’s approach was flawed or not in states’ interest. “All it means is that Congress and state legislatures have to balance the benefits from Medicaid expansion against the costs, including those costs that may not have been explicitly written into the statute,” Kessler says.

Additional research is needed to shed light on how to make Medicaid — and other public health insurance programs across the world — work as well as possible, according to Kessler.

“Every advanced industrial society has support for low-income people to have health care,” he notes. “There’s something about that upon which we all kind of agree. That support has to be there.” The question, he says, is, “What’s the best way to pay for care and to subsidize it so that people who don’t have a lot of money can get reasonable health care at the lowest possible costs?”