Medicaid Work Requirements Look Like Money Losers for States
While the future of legislative health care reform is looking uncertain, many things continue to develop on the administrative front. Probably the biggest of these is the letter, sent from HHS to states this week, inviting state Medicaid directors to apply for federal authorization to allow work requirements in state Medicaid programs. The new director of CMS (the Center for Medicare & Medicaid Services; apparently the feds omit the second M to save money on printing costs) is Seema Verma, who was the architect of work requirements in Indiana under then-Gov. Mike Pence. So, it’s fair to say, this administration is very interested in pushing work requirements. I think they are an awful idea, for reasons too numerous to list in just one post.
Let’s start with some basic fiscal calculations: work requirements don’t save money, and probably actually are net money losers for many states. The reason is that, generally speaking, we will still provide care for individuals who are thrown off Medicaid for failure to work. These costs of care must still be paid by someone. In many cases, that someone will be the state itself (or, perhaps, a political subdivision, such as a county government, which may or may not be fiscally independent from the state).
Do the math. Right now, the federal government pays nearly all of the costs of Medicaid coverage for so-called new eligibles (those made eligible by the ACA in 2009) and a lower percentage, reaching about 80% in the poorest states, for the rest of the Medicaid population. Let’s call the average rate of federal payment 80%. On my calculator, that number would imply that if states end up paying more than 1/5 of the costs of care for the uninsured, then every person they throw off Medicaid for failure to work actually results in net losses.
Turns out, there are lots of reasons to think states pay at least that much of the costs of “free” care. For one thing, some health providers are entirely public; though there are few state-run hospitals as such, there are many county & municipal hospitals, and a large share of mental-health institutions are state run.
Probably more importantly, from a budget perspective, to participate in Medicaid states must provide support to hospitals with significant free-care burdens through a system of so-called “disproportionate share” payments. States do draw a federal match on their “DSH” (rhymes with “fish”) payments, but that match is much lower than the Medicaid match, closer to 50% (at last estimate, states paid $8B and the feds $10B in DSH payments in fiscal 2015). And many states grant property-tax exemption to hospitals in exchange for their willingness to provide free care, though often this cost is borne by local governments.
Yet another cost center is that states are big employers who buy a lot of health insurance for their workers. Uncompensated care drives up the costs of health care, and therefore of health insurance. The state share of the workforce runs about 1% in most states, so figure this is another penny on every dollar of uncompensated care that states must pick up. This omits local and municipal workers. Don’t forget most states are also still paying for health insurance for all their retirees; I couldn’t find readily available estimates of how big these costs are.
Finally, though this is more speculative, higher health costs are likely to reduce state tax revenues. In theory, as the costs of health coverage rise, employers should shift some fraction of compensation over to health insurance premiums, which (following federal law) states do not tax. If (as labor economists usually assume) this substitution is roughly dollar-for-dollar after tax, employees will accept about $(1-T) dollars less in salary for every new dollar of insurance coverage, where T is the combined state & federal tax rate. Let’s call the average combined rate 25%. So every dollar of higher premiums is something like seventy-five cents less in state taxable income. This wasn’t a problem in Indiana, where there’s no income tax. But in a state like Arkansas, where the top rate is close to 7%, that means every dollar of health costs passed to insurers costs the state $1 x .75 x .07 = about a nickel of tax revenue.
It adds up, folks. Work requirements are probably a very big money loser, and will continue to be as long as the federal Medicaid match stays at the 90%+ levels the ACA authorizes.
