Tag Archives: Avalere Health

How Graham-Cassidy’s Funding Formula Gives Washington Unprecedented Power

The past several days have seen competing analyses over the block-grant funding formula proposed in health-care legislation by Sens. Lindsay Graham (R-SC) and Bill Cassidy (R-LA). The bill’s sponsors have one set of spreadsheets showing the potential allocation of funds to states under their plan, the liberal Center on Budget and Policy Priorities has another, and consultants at Avalere (funded in this case by the liberal Center for American Progress) have a third analysis quantifying which states would gain or lose under the bill’s funding formula.

So who’s right? Which states will end up the proverbial winners and losers under the Graham-Cassidy bill? The answer is simple: Nope.

Policy-makers arguing over minute intricacies of the funding formula miss the fact that the bill gives the executive virtually unlimited discretion to change that funding formula. Whether the statutory formula benefits a given state could well matter less than what federal bureaucrats want to do to tilt the formula in favor of, or against, that state.

While the bill’s proponents claim the legislation will increase state authority, in reality the bill gives unelected bureaucrats the power to distribute nearly $1.2 trillion in taxpayer dollars unilaterally. In so doing, the bill concentrates rather than diminishes Washington’s power—and could set the course for the “mother of all backroom deals” to pass the legislation.

A Complicated Spending Formula

To start with, the bill repeals Obamacare’s Medicaid expansion and exchange subsidies, effective in January 2020. It then replaces those two programs with a block grant totaling $1.176 trillion from 2020 through 2026. All else equal, this set of actions would disadvantage states that expanded Medicaid, because the Medicaid expansion money currently being received by 31 states (plus the District of Columbia) would be re-distributed among all 50 states.

From there the formula gets more complicated. (You can read the sponsors’ description of it here.) The bill attempts to equalize per-person funding among all states by 2026, with funds tied to a state’s number of individuals with incomes between 50 percent and 138 percent of the poverty level.

The bill would adjust the funding formula to reflect both risk adjustment and actuarial value—in laymen’s terms, it would work to ensure that states with sicker-than-average individuals get more funding, and that states that choose to offer richer-than-average benefits don’t draw down excess federal funds as a result. Those adjustments would phase in over several years, with the goal of reaching per-person parity among states by 2026.

Thus far, the formula carries a logic to it. For years conservatives have complained that Medicaid’s match rate formula gives wealthy states more incentives to draw down federal funds than poor states, and that rich states like New York and New Jersey have received a disproportionate share of Medicaid funds as a result. The bill’s sponsors claim that the bill “treats all Americans the same no matter where they live.”

Would that that claim were true. Page 30 of the bill demonstrates otherwise.

The Trillion-Dollar Loophole

Page 30 of the Graham-Cassidy bill, which creates a “state specific population adjustment factor,” completely undermines the rest of the bill’s funding formula:

IN GENERAL.—For calendar years after 2020, the Secretary may adjust the amount determined for a State for a year under subparagraph (B) or (C) and adjusted under subparagraphs (D) and (E) according to a population adjustment factor developed by the Secretary.

In other words, if the secretary of Health and Human Services (HHS) doesn’t like the funding formula, he can change it however he likes. That’s a trillion-dollar loophole that leaves HHS bureaucrats with the ultimate say over how much money states will receive.

The bill does say that HHS must develop “legitimate factors” that affect state health expenditures—so it can’t allocate funding based on, say, the number of people who own red socks in Alabama. But beyond those two words, pretty much anything goes.

The bill says the “legitimate factors” for population adjustment “may include state demographics, wage rates, [and] income levels,” but it doesn’t limit the factors to those three characteristics—and it doesn’t limit the amount that HHS can adjust the funding formula to reflect those characteristics either. If a hurricane like Harvey struck Texas three years from now, Secretary Tom Price would be within his rights under the bill to cite a public health emergency and dedicate 100 percent of the federal grant funds—which total $146 billion in 2020—solely to Texas.

That scenario seems unlikely, but it shows the massive and virtually unprecedented power HHS would have under the bill to control more than $1 trillion in federal spending by executive fiat. To top it off, pages 6 through 8 of the bill create a separate pot of $25 billion to subsidize insurers for 2019 and 2020, and tell the Centers for Medicare and Medicaid Services administrator to “determine an appropriate procedure” for allocating the funds. That’s another blank check of $25,000,000,000 in taxpayer funds, given to federal bureaucrats to spend as they see fit.

In an op-ed over the weekend, former Florida Gov. Jeb Bush (R-FL) rightly criticized Obamacare for “put[ting] enormous power in the hands of a few people in Washington.” But the Graham-Cassidy proposal he endorses would imbue federal bureaucrats with an authority over spending the likes of which Obamacare never even contemplated.

Backroom Deals Ahead

With an unprecedented level of authority granted to federal bureaucrats to determine how much funding states receive, you can easily guess what’s coming next. Unnamed Senate staffers already invoked strip-club terminology in July, claiming they would “make it rain” on moderates with hundreds of billions of dollars in “candy.” Under the current version of the bill, HHS staff now have virtual carte blanche to promise all sorts of “state specific population adjustment factors” to influence the votes of wavering senators.

The potential for even more backroom deals than the prior versions of “repeal-and-replace” demonstrates the pernicious power that trillions of dollars in spending delivers to Washington. Draining the swamp shouldn’t involve distributing money from Washington out to states, whether under a simple formula or executive discretion. It should involve eliminating Washington’s role in doling out money entirely.

That’s what Republicans promised when they said they would repeal Obamacare—to end the law’s spending, not work on “spreading the wealth around.” That’s what they should deliver.

This post was originally published in The Federalist.

Unwinding Obamacare: Why Congress Must Rescind the Massive Medicaid Expansion

This report was originally published by the Palmetto Promise Institute, and is available in PDF form on their website here.

As Congress prepares to consider legislation repealing and replacing Obamacare in 2017, unwinding that law’s massive expansion of Medicaid should stand at the top of the Congressional agenda. The source of most of the law’s spending, Medicaid expansion has resulted in exploding enrollment, creating state budget shortfalls that legislatures will need to remedy in 2017.

Moreover, Obamacare’s expansion of Medicaid to the able-bodied has undermined Medicaid’s original mission to provide services to the most vulnerable in society—including seniors and individuals with disabilities. The law effectively discriminates against vulnerable populations, providing states with more federal funding to cover the able-bodied than individuals with disabilities. Sadly, even as able-bodied beneficiaries have flooded into Medicaid, hundreds of thousands of individuals with disabilities continue to suffer long waits for needed care.

Congressional Republicans have put forward proposals seeking to reform Medicaid, transforming the program into a system of block grants or per capita allotments that will provide greater flexibility to states in exchange for a fixed federal spending commitment. However, such reforms are necessary—but not sufficient—in reforming the Medicaid program. First and foremost, Congress should take immediate action to unwind Obamacare’s Medicaid expansion, re-orienting the program to serve the most vulnerable populations for which it was originally designed.

History of Medicaid and Obamacare

As originally enacted into law in 1965, the Medicaid program provided federal matching funds to states to cover certain discrete populations, including the blind, seniors, individuals with disabilities, and needy parents. Obamacare changed the program fundamentally by expanding the program to all low-income adults; under Section 2001 of the law, all those with incomes under 138 percent of the federal poverty level (FPL) qualified for Medicaid coverage.[1] The statute as written made expansion mandatory for all states participating in Medicaid. States could decline to expand Medicaid, but in so doing, they would have had to forfeit all federal Medicaid funds, including funds for their existing aged, blind, and disabled populations.

In June 2012, the Supreme Court struck down the mandatory nature of Medicaid expansion as unconstitutionally coercive. Speaking for a seven-member majority, Chief Justice John Roberts concluded that “the threatened loss of 10 percent of a state’s overall budget [i.e., the federal share of Medicaid spending]…is economic dragooning that leaves states with no real option but to acquiesce in the Medicaid expansion.”[2] The Court left the expansion, and the rest of the law, intact, but prohibited the federal government from withholding all Medicaid funds from any states that chose not to pursue the categorical expansion to all adults with incomes under 138 percent FPL.

Because the Supreme Court ruling gave them a free choice about whether or not to embrace Obamacare’s Medicaid expansion, states—the “laboratories of democracy”—have taken different approaches. Some states, fearing that the federal government will renege on its promised high levels of funding, declined to expand. Some states passed a traditional Medicaid expansion, ratifying Obamacare’s massive new entitlement as its authors intended. Other states have utilized a system of premium assistance—also called the “private option”—that uses Medicaid dollars to subsidize private Exchange insurance coverage for individuals qualified for Medicaid under the Obamacare expansion.

Whether through the “private option” or traditional Medicaid, outcomes for states embracing Obamacare’s massive expansion of Medicaid to the able-bodied have been little different. States that have embraced Obamacare’s expansion have faced spiking enrollment and skyrocketing costs, all while perpetuating a system that encourages discrimination against the most vulnerable. Policy-makers should closely examine these cautionary tales as they look to rescind and replace Obamacare.

Exploding Enrollment, Skyrocketing Spending

The evidence among those states that have expended Medicaid demonstrates the massive effects on state budgets—due in large part to skyrocketing enrollment. A recent report by the Foundation for Government Accountability showed how the Medicaid rolls exploded in states that chose to expand the program under Obamacare. In a whopping 24 states that decided to expand, state Medicaid programs exceeded the highest enrollment projections:

  • Arizona predicted a maximum enrollment of 297,000; by September 2016, 397,879 had enrolled in Medicaid;
  • Arkansas predicted a maximum enrollment of 215,000; by October 2016, enrollment had reached 324,318;
  • California predicted a maximum enrollment of 910,000; by May 2016, enrollment had more than quadrupled prior maximum projections, reaching 3,842,200;
  • Colorado predicted a maximum enrollment of 187,000; by October 2016, enrollment hit 446,135;
  • Connecticut predicted a maximum enrollment of 113,000; by December 2015, 186,967 had enrolled;
  • Hawaii predicted a maximum enrollment of 35,000; by June 2015, enrollment had exceeded that projection, reaching 35,622;
  • Illinois predicted a maximum enrollment of 342,000; by April 2016, nearly double that amount—650,653—were enrolled;
  • Iowa predicted a maximum enrollment of 122,900; by February 2016, enrollment had reached 139,119;
  • Kentucky predicted a maximum enrollment of 188,000; by December 2015, enrollment more than doubled the initial expectation, reaching 439,044;
  • Maryland predicted a maximum enrollment of 143,000; by December 2015, enrollment reached 231,484;
  • Michigan predicted a maximum enrollment of 477,000; by October 2016, enrollment exceeded that projection, reaching 630,609;
  • Minnesota predicted a maximum enrollment of 141,000; by December 2015, enrollment hit 207,683;
  • Nevada predicted a maximum enrollment of 78,000; enrollment more than doubled those maximum projections, reaching 187,110 by September 2015;
  • New Hampshire predicted a maximum of enrollment of 45,500; by August 2016, enrollment reached 50,150;
  • New Jersey predicted a maximum enrollment of 300,000; twelve months after expansion began, in January 2015, enrollment totaled 532,917;
  • New Mexico predicted a maximum enrollment of 140,095; by December 2015, enrollment had reached 235,425;
  • New York predicted a maximum enrollment of 76,000; by December 2015, nearly four times as many had enrolled—a grand total of 285,564;
  • North Dakota predicted a maximum enrollment of 13,591; by March 2016, a total of 19,389 had enrolled;
  • Ohio predicted a maximum enrollment of 447,000; by August 2016, enrollment hit 714,595;
  • Oregon predicted a maximum enrollment of 245,000; by December 2015, enrollment hit 452,269;
  • Pennsylvania predicted a maximum enrollment of 531,000; by April 2016, enrollment had hit 625,970;
  • Rhode Island predicted a maximum enrollment of 39,756; in December 2015, enrollment reached 59,280;
  • Washington state predicted a maximum enrollment of 262,000; by July 2016, enrollment had more than doubled the highest enrollment projections, reaching 596,873; and
  • West Virginia predicted a maximum enrollment of 95,000; enrollment in December 2015 hit 174,999.[3]

While Medicaid is considered a counter-cyclical program—one in which enrollment typically rises during recessions, as household incomes shrink and individuals lose access to employer-sponsored coverage—Obamacare’s Medicaid expansion went into effect at a time of steady, albeit slight, economic growth. In other words, Medicaid enrollment under the Obamacare expansion could eventually exceed these figures—even as the actual enrollment numbers themselves exceeded projections prior to implementation, in some cases by several multiples.

By contrast, enrollment in health insurance Exchanges remains far below expectations set at the time of the law’s passage. Just before Obamacare passed in March 2010, the Congressional Budget Office (CBO) concluded that in 2016, the Exchanges would enroll a total of 21 million Americans.[4] For the first half of 2016, the Exchanges averaged enrollment of only 10.4 million—less than half the original CBO projection.[5]

Moreover, an analysis of Exchange enrollees shows enrollment concentrated largely among the individuals who qualify for the largest subsidies. According to an analysis conducted by the consulting firm Avalere Health, 81% of eligible individuals with income below 150 percent FPL—who are eligible for both subsidized premiums and reduced cost-sharing—have selected an Exchange plan.[6] On the other hand, only 16% of those with incomes between 300 and 400 percent FPL—who qualify for modest premium subsidies, but not reduced cost-sharing—have enrolled in Exchange coverage, while only 2% of individuals with incomes above 400 percent FPL—who do not qualify for subsidies at all—have signed up.[7] When it comes to both Medicaid expansion and Exchange coverage, the evidence suggests that only those individuals who receive free, or heavily subsidized, insurance have signed up in great numbers.

Just as enrollment for subsidized Medicaid under Obamacare dramatically exceeded expectations, so too have per-enrollee health costs for Medicaid participants. In the official 2014 report on the state of Medicaid’s finances, government actuaries acknowledged for the first time that per-enrollee costs for Obamacare’s newly eligible Medicaid enrollees ($5,488) exceeded those of previously eligible Medicaid participants ($4,914).[8] Actuaries had previously assumed that per-enrollee costs for the newly eligible population would be 30 percent lower than spending on existing populations—but the actual data suggested otherwise.[9] At the time, the actuaries believed some of the higher Medicaid spending arose because of pent-up demand—newly insured individuals requesting care for long-ignored medical conditions—a phenomenon they suggested might fade over time.[10]

But contrary to the expectations of government actuaries, costs for newly eligible beneficiaries continued to increase for a second straight year in 2015. Whereas the gap between per-enrollee costs for newly eligible beneficiaries and existing beneficiaries stood at approximately $500 in 2014, in the following year the gap grew to over $1,000—an average cost of $6,366 for every newly enrolled adult, versus $5,159 for every adult previously eligible for Medicaid.[11] As a result, the Congressional Budget Office likewise increased their estimates of per-enrollee spending on Obamacare’s Medicaid expansion—at least in the short term.[12] CBO still believes that per-enrollee spending on Obamacare’s Medicaid expansion will stabilize at lower levels over time, despite the evidence that actual costs continue to exceed prior assumptions by sizable margins.

The combination of higher-than-expected enrollment and higher-than-expected enrollee costs has created a “double whammy” for state budgets. While the federal government paid 100 percent of the cost to cover Obamacare’s Medicaid expansion population for the law’s first three years, states must contribute 5 percent of costs for the newly eligible beginning in 2017, rising to 10 percent by 2020—a share proving larger than expected, and one placing fiscal strains on states.

With the new entitlement costing much more than expected, states may have to cut other critically important spending priorities to continue funding Obamacare’s expansion of Medicaid to able-bodied adults. In Kentucky, costs for fiscal years 2017 and 2018 are now estimated at $257 million—more than double the original estimate of $107 million.[13] As a result, education, transportation, corrections, and other priorities will receive $150 million less from the state budget. Ohio’s budget for Medicaid expansion more than doubled from the $55.5 million originally projected, likewise robbing other important state spending programs.[14]

Even Democrats serving in state legislatures have expressed alarm at the rising tide of spending associated with Obamacare’s Medicaid expansion, and the other programs being cannibalized to pay for this new entitlement. In Oregon, facing a $500 million Medicaid-imposed budgetary shortfall over the next three years, Democratic state Senator Richard Devlin noted that “the only way to keep this [budget situation] manageable is to keep those costs under control, get people off Medicaid.”[15] In New Mexico, also facing pressures due to higher-than-expected enrollment, Democratic state Senator Howie Morales expressed anguish over the fiscal choices:

When you’re looking at a state budget and there are only so many dollars to go around, obviously it’s a concern. The most vulnerable of our citizens—the children, our senior citizens, our veterans, individuals with disabilities—I get concerned that those could be areas that get hit.[16]

Sen. Morales’ comments eloquently describe the plight that legislators face. States that expand Medicaid may have to cut important programs for individuals with disabilities, seniors, and the most vulnerable—to provide additional taxpayer funds for an expansion of Medicaid to able-bodied adults.

Undermining the Most Vulnerable

Supporters’ claims to the contrary, Medicaid expansion actually undermines principles of social justice and fairness—in which our society focuses the safety net first and foremost on those unable to provide for themselves. Expanding Medicaid under Obamacare serves only to endorse a horrifically unfair system created by the law, which effectively discriminates against individuals with disabilities—prioritizing coverage of able-bodied adults over protecting the most vulnerable in society.[17]

How does this happen in practice?

In 2013, the congressionally-appointed Commission on Long-Term Care heard testimony about the significant numbers of individuals with disabilities on waiting lists for home- and community-based services (HCBS).[18] Because coverage of HCBS—as opposed to institutional care in a nursing home—remains an optional service for state Medicaid programs, Americans in 42 states remain on lists waiting for access to home-based care.[19] More than 582,000 individuals—including nearly 350,000 with intellectual and developmental disabilities, over 155,000 aged and/or disabled individuals, over 58,000 children, more than 14,000 individuals with physical disabilities, and more than 4,000 Americans with traumatic brain injuries—remain on Medicaid waiting lists.[20] All these individuals could benefit from home-based care that would improve their quality of life, and could keep them from requiring more costly nursing home care in the future—yet they must wait in the Medicaid queue, in many cases for years on end.

Yet even as more than half a million Americans with disabilities wait for service, Obamacare prioritizes coverage of able-bodied adults over treating the most vulnerable—providing states as much as 45 cents on the dollar more to cover the able-bodied than individuals with disabilities. In 2017, the law provides a federal match for expansion populations—that is, individuals with incomes under 138 percent of the federal poverty level—of 95 percent, dipping slightly to 94 percent in 2018, 93 percent in 2019, and 90 percent in 2020 and future years.[21] Conversely, states wishing to expand coverage to individuals with disabilities—to eliminate their Medicaid waiting lists—will receive only the normal Medicaid matching rate, which for the current fiscal year ranges from 50 percent to 75 percent, based on states’ relative income.[22] In other words, in 2017, states will receive at least 20 cents, and as much as 45 cents, more on the dollar for covering able-bodied adults than they will ending waiting lists for individuals with disabilities seeking care.

Sadly, some states have responded to Obamacare’s perverse incentives in predictable ways. In the few years since the law took effect, the most vulnerable in society have suffered, while able-bodied adults received a new, taxpayer-funded entitlement:

  • A recent report from Illinois found that 752 individuals with disabilities died while awaiting access to home- and community-based services since Obamacare’s expansion took effect. Ironically enough, on the very day that Illinois voted to expand Medicaid to the able-bodied early, it also cut funding for medication and services provided to special needs children.[23]
  • In Arkansas, while Gov. Asa Hutchison pledged to cut his state’s waiting list for individuals with disabilities in half, instead it has grown by 25 percent—even as Hutchison has embraced Medicaid expansion to the able-bodied. The individuals waiting for care include ten-year-old Skylar Overman, whose mother worries she will die before she ever receives access to the in-home care she needs.[24]
  • In Ohio, Gov. John Kasich’s administration cut Medicaid eligibility for 34,000 individuals with disabilities, even while expanding the program to the able-bodied.[25]

Any law that results in these types of inequities—the most vulnerable cast aside to hasten access to care for the able-bodied—cannot be considered compassionate or just.

The disparities and perverse incentives present in Obamacare apply to South Carolina just as much as they do in other states. The law provides massive incentives for South Carolina to expand Medicaid to these able-bodied adults—many of whom may be unemployed or under-employed—rather than ending waiting lists for individuals with disabilities. In fiscal year 2017, South Carolina will receive a 71.3 percent match from the federal government for the traditional Medicaid program—including coverage for individuals with disabilities.[26] Yet Obamacare will provide a 95 percent match should the state choose to expand Medicaid to able-bodied adults. Effectively, the law provides South Carolina with nearly 25 cents more on the dollar should the state discriminate against the most vulnerable in our society.

South Carolina has rightly rejected the effective discrimination perpetuated by Obamacare, for multiple reasons. The state has a list of 5,656 individuals with disabilities waiting to receive HCBS.[27] Providing enough funding to end the Medicaid waiting list should stand as the state’s pressing health care priority—not expanding health coverage to able-bodied adults, many of whom would exceed the income limits to qualify for Medicaid if they pursued full-time employment. The fact that Washington does not agree with South Carolina’s decision to prioritize the most vulnerable—because federal officials want the state to put the able-bodied, rather than individuals with disabilities, at the head of the Medicaid line—is a reason for Washington to change its priorities, not South Carolina.

Not a Panacea for Hospitals

In many states debating the future of Medicaid under Obamacare, hospital associations have served as the biggest supporters of expansion. Hospitals claim that expanding Medicaid will result in substantial improvements to their bottom line, making the difference between facilities remaining open or shutting their doors. Unfortunately, however, Medicaid expansion will not make a meaningful impact on hospitals’ bottom line.

In September 2016, staff at the non-partisan Congressional Budget Office (CBO) released a report illustrating the minimal impact of Medicaid expansion on hospitals’ profitability.[28] The paper analyzed the effects of several changes associated with Obamacare on two variables: hospitals’ aggregate profit margin nationwide, and the percentage of hospitals with negative margins. The analysis estimated these two factors in 2025, and compared hospital profitability with 2011, before most of Obamacare’s major provisions took effect.

The CBO analysis found that, under the best possible scenario, hospitals will fare no better in 2025 than they did prior to Obamacare’s major provisions taking effect—and they could fare much worse. A scenario that coupled the law’s Medicare payment reductions with its coverage expansions yielded a best-case scenario similar to the status quo ante: about one quarter of hospitals with negative profit margins (26% in 2025, versus 27% in 2011), and an aggregate margin of 6.0% in both cases.[29] However, should hospitals fail to achieve the productivity gains contemplated under Obamacare, margins will fall significantly—with as many as half of all hospitals having a negative profit margin by 2025, and the industry as a whole barely profitable.[30] Thanks to Obamacare, hospitals will struggle mightily just to tread water—and many may end up sinking financially.

The CBO paper also specifically examined whether all states expanding Medicaid would make a material impact on its analysis. Would a broader expansion of insurance coverage overcome the damaging fiscal effects of Obamacare’s Medicare payment reductions? CBO concluded that broader Medicaid expansion would have a minor impact:

Differing assumptions about the number of states that expand Medicaid coverage have a small effect on our projections of aggregate hospitals’ margins. That is in part because the hospitals that would receive the greatest benefit from the expansion of Medicaid coverage in additional states are more likely to have negative margins, and because in most cases the additional revenue from the Medicaid expansion is not sufficient to change those hospitals’ margins from negative to positive. Moreover, the total additional revenue that hospitals as a group would receive from the newly covered Medicaid beneficiaries…is not large enough relative to their revenues from other sources to substantially alter the projected aggregate margins.[31]

Despite claims from some hospital executives that Medicaid expansion represents a make-or-break financial decision for their industry, non-partisan experts disagree.

The real problem for hospitals lies elsewhere within Obamacare, in the Medicare productivity adjustments that will affect hospitals each and every year. The Medicare actuary, along with other non-partisan experts, has made annual warnings every year since the law’s passage concluding the productivity reductions are unsustainable, and will make most hospitals, skilled nursing facilities, and home health agencies unprofitable in the coming decades.[32] The September CBO report confirms, and further validates, the Medicare actuary’s work highlighting the unrealistic nature of the payment reductions used to fund Obamacare.

As has been explained elsewhere, hospitals made a terribly unwise bargain when negotiating behind closed doors with the Obama Administration: They agreed to annual reductions in their Medicare payments forever in exchange for a one-time increase in the number of insured Americans.[33] Hospital lobbyists themselves know full well that the agreement they negotiated will ultimately destroy the industry.

At a televised event in August 2010, months after the law passed, Chip Kahn—the CEO of the Federation of American Hospitals, which represents the for-profit hospital industry—admitted his knowledge of Obamacare’s long-term effects on the hospital sector.[34] Then-Medicare actuary Richard Foster asked Kahn why hospitals agreed to what appears on its face to be a bad deal: Perpetual Medicare payment reductions in exchange for a one-time increase in insured Americans. Mr. Kahn first claimed that “from the hospital industry standpoint, there never was any kind of illusion that this was some kind of standard that we could meet in terms of improving quality”—even though the law itself assumes that hospitals will become more productive year-over-year, and reduces their Medicare payments accordingly.[35] When pressed on this issue—what will happen to the hospital industry when these year-on-year reductions cascade over time—Mr. Kahn eventually threw up his hands: “Now, you could say, did you make a bad deal? And fortunately, I don’t think I’ll probably be working after 2020. [Laughter.]…I’m glad my contract only goes another six years. [Laughter.]”[36]

The candid comments by the head of the Federation of American Hospitals months after the law passed say it all. In endorsing Obamacare, hospital lobbyists knew they were agreeing to provisions that would decimate their industry in the long run—but didn’t care, because those devastating provisions would only take effect well after they had retired. These incredibly cynical comments provide two additional reasons for legislators not to embrace Medicaid expansion. As both the CBO analysis and Mr. Kahn’s comments indicate, expanding Medicaid will not solve hospitals’ financial difficulties, which arise from a self-inflicted blow—namely, agreeing to massive Medicare payment reductions that overwhelm the comparatively small revenue gain associated with Medicaid expansion. But while expanding Medicaid will not save hospitals in the long term, it will serve to sink state budgets, leaving them with the worst of both worlds on the fiscal front.

Work Disincentives

Supporters of Medicaid expansion claim that the additional federal funds generated by expansion have created jobs and economic growth. In reality, expanding Medicaid has only created additional disincentives for work, according to non-partisan economic experts.

Many studies claiming Medicaid expansion will create jobs represent one-sided—and therefore highly biased—analysis, examining the federal revenue flowing into states as a result of expansion without studying the impact of the tax increases necessary to generate said revenue. However, many studies—including a seminal analysis undertaken by President Obama’s former chief economic adviser, Christina Romer—find that the economic damage—in technical terms, the deadweight losses associated with Obamacare’s tax increases—will vastly outweigh any job gains associated with Medicaid expansion.[37]

Ironically, one of the architects of Obamacare disputes the economic theories put forward by Medicaid expansion proponents. In a New York Times op-ed, former Obama Administration advisor Zeke Emanuel stated that “Health care is about keeping people healthy or fixing them up when they get sick. It is not a jobs program.”[38] Likewise, two Harvard economists note that viewing the health system as a jobs program will ultimately increase spending and raise health costs, limiting access for the poor: “Treating the health care system like a (wildly inefficient) jobs program conflicts directly with the goal of ensuring that all Americans have access to care at an affordable price.”[39]

Rather than creating jobs, the Congressional Budget Office (CBO) believes that Medicaid expansion will discourage work. In part of its 2014 update on Obamacare’s effects on the labor supply—in which CBO asserted that the law as a whole will reduce the supply of labor provided by the equivalent of 2.5 million jobs by 2024—the budget office noted that “expanded Medicaid eligibility under [the law] will, on balance, reduce incentives to work.”[40] For instance, individuals who exceed Medicaid eligibility limits by even one dollar could face hundreds, or thousands, of dollars in premiums and co-payments to obtain subsidized Exchange coverage; such workers will likely work fewer hours to keep their income below eligibility caps.

Medicaid expansion will discourage work precisely because most of the participants in the expansion are able-bodied adults of working age. According to analysis conducted by the liberal-leaning Urban Institute, nearly nine in ten individuals (88.1%) who would benefit from Medicaid expansion in South Carolina represent adults without dependent children.[41] Moreover, the vast majority of South Carolinians to be covered under expansion would come within the ages of 19-55—prime working ages for most Americans. More than one-quarter (27.6%) of would-be beneficiaries of expansion are aged 19-24, with a further 21.9% aged 25-34, and more than one-third (35.5%) aged 35-54.[42]

The Urban Institute data strongly suggest that the vast majority of the potential beneficiaries from Medicaid expansion in South Carolina constitute individuals who could be in work, or preparing for work. Indeed, many South Carolinians working full-time would generate enough income not to qualify for benefits under Medicaid expansion. In 2016, 138 percent of the federal poverty level represents an income of just under $16,400 for an individual.[43] A South Carolinian working a full-time job (40 hours per week, 50 weeks per year) at a wage of $8.25 per hour would earn $16,500 annually, thereby exceeding the limit to qualify for Medicaid benefits.

However, CBO believes the Medicaid “benefit cliff” will discourage individuals from working, precisely because they wish to remain eligible for benefits. A December 2015 CBO paper quantified this impact: Analysts concluded that Obamacare’s Medicaid expansion will reduce beneficiaries’ labor force participation by about 4 percent, by “creat[ing] a tax on additional earnings for those considering job changes” that would raise their income above the threshold for eligibility.[44]

While Obamacare’s massive expansion of Medicaid to the able-bodied discourages work and will reduce the labor supply, unwinding the expansion will produce salutary economic effects. Tennessee’s decision to roll back a Medicaid coverage expansion in 2005 encouraged more individuals to join the labor force, in order to obtain employer-sponsored health coverage.[45] If states wish to grow their economies and encourage work, unwinding Obamacare provides a better approach to achieving those objectives.

“Private Option” Results in Greater Public Spending

While some supporters of Medicaid expansion believe that the so-called “private option”—using Medicaid dollars to purchase Exchange coverage for beneficiaries—represents an efficient use of taxpayer dollars, evidence suggests otherwise. In 2012, immediately following the Supreme Court ruling that made Medicaid expansion optional for states, the Congressional Budget Office (CBO) considered expansion through health insurance Exchanges significantly more costly than expansion through traditional Medicaid:

For the average person who does not enroll in Medicaid as a result of the [Supreme] Court’s decision and enrolls in an Exchange instead, estimated federal spending will rise by roughly $3,000 in 2022—the difference between estimated additional Exchange [premium and cost-sharing] subsidies of about $9,000 and estimated Medicaid savings of roughly $6,000.[46]

Providing Medicaid beneficiaries private coverage through the insurance Exchanges could cost approximately 50% more, according to CBO’s 2012 estimate—a concern other non-partisan experts have flagged.

Government auditors have raised significant concerns that the “private option” waiver method of providing coverage improperly wastes taxpayer funds. In an August 2014 report, the Government Accountability Office (GAO) noted that, when approving the first instance of this “private option” model in Arkansas, the federal Department of Health and Human Services (HHS) “did not ensure budget neutrality,” which is required under federal law, in three key areas:

  • “HHS approved a spending limit for the demonstration that was based, in part, on hypothetical costs—significantly higher payment amounts the state assumed it would have to make to providers if it expanded coverage under the traditional Medicaid program—without requesting any data to support the state’s assumptions.” GAO concluded that these higher payment assumptions increased the program’s budget caps by $778 million—or nearly 20% of the approximately $4.0 billion, three-year budget for the program.
  • “HHS gave Arkansas the flexibility to adjust the spending limit if actual costs under the demonstration proved higher than expected…one which HHS has not provided in the past.”
  • “HHS in effect waived its cost-effectiveness requirement that providing premium assistance to purchase individual coverage on the private market prove comparable to the cost of providing direct coverage under the state’s Medicaid plan—further increasing the risk that the demonstration will not be budget-neutral.”[47]

The GAO report illustrates how, in order to ensure that Arkansas endorsed Obamacare’s massive new entitlement, federal officials raised the budgetary caps required under law so high that they became nearly meaningless—and then gave Arkansas officials discretion to raise them even higher. Such actions represent a disservice to taxpayers in all states, including South Carolina. The GAO report demonstrates why unwinding the law’s Medicaid expansion—in all its forms, including the “private option”—represents the wisest way to protect taxpayer funds.

How to Unwind Obamacare’s Medicaid Expansion: Congress

As Congress considers legislation to repeal Obamacare in January 2017, it should embark on a three-step approach to unwind the law’s massive Medicaid expansion:

  • First, Congress should take action to freeze enrollment in the Medicaid expansion immediately after enactment of the repeal bill. Freezing enrollment will hold those currently on Medicaid harmless, while beginning a process to roll back the higher levels of spending associated with Medicaid expansion.
  • Second, Congress should roll back the enhanced federal match for expansion populations, consistent with budget reconciliation legislation that Congress passed, and President Obama vetoed, during the 114th Congress.[48] Ending the enhanced federal match by 2019 will eliminate the discrimination inherent in Obamacare—whereby states receive a higher match to cover able-bodied adults than individuals with disabilities.
  • Third, Congress and states should reorient Medicaid towards the vulnerable populations for which the program was originally designed. Added flexibility from Congress, and the incoming Trump Administration, will allow states to achieve additional savings in their Medicaid programs—savings that will permit states to achieve other important priorities, like reducing waiting lists for individuals with disabilities seeking access to home-based care.

While proposals to transform Medicaid into a block grant or per capita allotment would give states welcome flexibility from Washington’s dictates, lawmakers must focus first on unwinding Obamacare’s Medicaid expansion—and eliminating distortions to the program caused by same. Any block grant or Medicaid funding formula that uses the years 2014 through 2017 as a “base year” will perpetuate the inequities caused by the Obamacare expansion—the massive enrollment of able-bodied adults, and the increased spending by states that used the prospect of a 100% federal match to increase Medicaid reimbursements. States that made the policy choice to keep Medicaid focused on the most vulnerable in society should not be penalized by a block grant formula that rewards those states who embraced Obamacare’s expansion of Medicaid to the able-bodied.

How to Unwind Obamacare’s Medicaid Expansion: The States

The states also have a role, albeit a limited one, in the undoing of Obamacare’s massive Medicaid expansion. As state legislatures reconvene, they can:

  • Continue to resist calls for expanding Medicaid to able-bodied adults. No state is expected to expand or choose a “private option” scheme in their new legislative terms, but fiscally responsible legislators should nevertheless arm themselves with the facts of this paper and prepare for misguided calls for subjecting more states to the excessive costs of Medicaid expansion.
  • Pass resolutions memorializing Congress to resist attempts to retain any of the core principles of Obamacare, including Medicaid expansion, as having a negative impact on state budgets and state policies. Both with respect to the costs of Medicaid expansion, and with respect to skyrocketing premiums in health insurance Exchanges, states and consumers alike are begging for relief from Obamacare. If enough states call for a top to bottom repeal and replace of Obamacare, including Medicaid expansion, consumers will win.
  • Prepare for possible common sense solutions, formerly known as “Obamacare off-ramps,” that will insure freedom for the insured without bullying businesses or individuals into plans they don’t like and doctors they don’t want. Members of both the United States House and Senate previously introduced such plans in the last Congress.[49] The new Trump Department of Health & Human Services, and specifically the Centers for Medicare and Medicaid Services (CMS), should provide guidance on blanket waivers designed to maximize flexibility for state Medicaid programs immediately upon taking office.[50]

Need for Reform

Even prior to Obamacare, Medicaid stood as a program in need of significant reform. The program has nearly tripled as a share of state budgets since 1987, yet provides beneficiaries with care of questionable quality.[51] Results from Oregon suggest that newly enrolled individuals in Medicaid used the emergency room at rates 40 percent higher than the uninsured—a disparity that persisted over time—yet did not achieve measureable improvement in their physical health outcomes.[52] With high (and growing) levels of spending coupled with subpar outcomes, states should use the flexibility promised from the Trump Administration to rethink their approach to Medicaid.

However, such efforts should come only after Congress has first backed down Obamacare’s massive expansion of Medicaid to the able-bodied. Restoring Medicaid as a safety net program for the most vulnerable in society would unwind more than $1 trillion in projected spending over the coming decade providing coverage to the able-bodied.[53] Just as important, it would remove the inequities created by Obamacare, and put all states on a level playing field for the reformed Medicaid program that should follow.

Mr. Jacobs is the Founder and CEO of Juniper Research Group, a policy research and consulting firm.

[1] Patient Protection and Affordable Care Act, Public Law 111-148, as amended by the Health Care and Education Reconciliation Act, Public Law 111-152, http://housedocs.house.gov/energycommerce/ppacacon.pdf, Section 2001(a).

[2] NFIB v. Sebelius, 567 U.S. __ (2012).

[3] Jonathan Ingram and Nicholas Horton, “Obamacare Expansion Enrollment Is Shattering Projections,” Foundation for Government Accountability, November 16, 2016, https://thefga.org/download/ObamaCare-Expansion-is-Shattering-Projections.PDF, p. 5.

[4] Congressional Budget Office, estimate of H.R. 4872, Health Care and Education Reconciliation Act, in concert with H.R. 3590, Patient Protection and Affordable Care Act, March 20, 2010, https://www.cbo.gov/sites/default/files/111th-congress-2009-2010/costestimate/amendreconprop.pdf, Table 4, p. 21.

[5] Centers for Medicare and Medicaid Services, “First Half of 2016 Effectuated Enrollment Snapshot,” October 19, 2016, https://www.cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2016-Fact-sheets-items/2016-10-19.html.

[6] Avalere Health, “The State of Exchanges: A Review of Trends and Opportunities to Grow and Stabilize the Market,” report funded by Aetna, October 2016, http://go.avalere.com/acton/attachment/12909/f-0352/1/-/-/-/-/20161005_Avalere_State%20of%20Exchanges_Final_.pdf, Figure 3, p. 6.

[7] Ibid.

[8] The numbers in parentheses represent revised 2014 data cited in the 2015 actuarial report, based on actual spending patterns. The numbers initially cited in the 2014 actuarial report were $5,514 for newly eligible adults, and $4,650 for previously eligible adults.

[9] Centers for Medicare and Medicaid Services Office of the Actuary, “2014 Actuarial Report on the Financial Outlook for Medicaid,” report to Congress, 2014, https://www.medicaid.gov/medicaid/financing-and-reimbursement/downloads/medicaid-actuarial-report-2014.pdf, pp. 36-37.

[10] Ibid.

[11] Centers for Medicare and Medicaid Services Office of the Actuary, “2015 Actuarial Report on the Financial Outlook for Medicaid,” report to Congress, 2015, https://www.medicaid.gov/medicaid/financing-and-reimbursement/downloads/medicaid-actuarial-report-2015.pdf, p. 27.

[12] For an analysis of the ways that the Medicare actuary’s office and CBO have changed their baseline projections of Medicaid spending over time, see Brian Blase, “Evidence Is Mounting: The Affordable Care Act Has Worsened Medicaid’s Structural Problems,” Mercatus Center, September 2016, https://www.mercatus.org/system/files/mercatus-blase-medicaid-structural-problems-v1.pdf, pp. 15-20.

[13] Christina Cassidy, “Rising Cost of Medicaid Expansion is Unnerving Some States,” Associated Press October 5, 2016, http://bigstory.ap.org/article/4219bc875f114b938d38766c5321331a/rising-cost-medicaid-expansion-unnerving-some-states.

[14] Ibid.

[15] Christina Cassidy, “Medicaid Enrollment Surges, Stirs Worry about State Budgets,” Associated Press July 19, 2015, http://www.bigstory.ap.org/article/c158e3b3ad50458b8d6f8f9228d02948/medicaid-enrollment-surges-stirs-worry-about-state-budgets.

[16] Ibid.

[17] See also Chris Jacobs, “How Obamacare Undermines American Values: Penalizing Work, Citizenship, Marriage, and the Disabled,” Heritage Foundation Backgrounder No. 2862, November 21, 2013, http://www.heritage.org/research/reports/2013/11/how-obamacare-undermines-american-values-penalizing-work-marriage-citizenship-and-the-disabled.

[18] The author served as an appointee to the commission, whose work can be found at www.ltccommission.org.

[19] Kaiser Family Foundation, “Waiting List Enrollment for Medicaid Section 1915(c) Home- and Community-Based Services Waivers,” Kaiser Commission on Medicaid and the Uninsured 2015 survey, http://kff.org/health-reform/state-indicator/waiting-lists-for-hcbs-waivers/?currentTimeframe=0&sortModel=%7B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D.

[20] Ibid.

[21] Section 2001(a) of PPACA.

[22] “Federal Financial Participation in State Assistance Expenditures,” Federal Register November 25, 2015, pp. 73781-82, Table 1, https://aspe.hhs.gov/sites/default/files/pdf/167966/FMAP17.pdf.

[23] Nicholas Horton, “Hundreds on Medicaid Waiting List in Illinois Die While Waiting for Care,” Illinois Policy November 23, 2016, https://www.illinoispolicy.org/hundreds-on-medicaid-waiting-list-in-illinois-die-while-waiting-for-care-2/.

[24] Jason Pederson, “Waiver Commitment Wavering,” KATV June 15, 2016, http://katv.com/community/7-on-your-side/waiver-commitment-wavering.

[25] Chris Jacobs, “Obamacare Takes Care from Disabled People to Subsidize Able-Bodied, Working-Age Men,” The Federalist November 18, 2016, http://thefederalist.com/2016/11/18/obamacare-takes-care-disabled-people-subsidize-able-bodied-working-age-men/.

[26] “Federal Financial Participation,” Table 1.

[27] Kaiser Family Foundation, “Waiting List Enrollment.”

[28] Tamara Hayford et al., “Projecting Hospitals’ Profit Margins Using Several Alternative Scenarios,” Congressional Budget Office Working Paper 2016-04, September 2016, https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/workingpaper/51919-Hospital-Margins_WP.pdf.

[29] Ibid., Table 6, p. 29.

[30] Ibid.

[31] Ibid., p. 34.

[32] For the most recent version, see John Shatto and Kent Clemens, “Projected Medicare Expenditures under an Illustrative Alternative Scenario,” Office of the Actuary, Centers for Medicare and Medicaid Services, June 22, 2016, https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/Downloads/2016TRAlternativeScenario.pdf.

[33] Chris Jacobs, “The Report Every State Legislator Should Read,” National Review September 27, 2016, http://www.nationalreview.com/article/440411/obamacare-medicaid-expansion-hospitals-wont-benefit-says-cbo.

[34] American Enterprise Institute, “Medicare after Reform: the 2010 Medicare Trustees Report,” August 6, 2010, video available through C-SPAN at https://www.c-span.org/video/?c4402939/chip-kahn.

[35] Ibid.

[36] Ibid.

[37] Chris Conover, “Will Medicaid Expansion Create Jobs?” Forbes February 25, 2013, http://www.forbes.com/sites/chrisconover/2013/02/25/will-medicaid-expansion-create-jobs/#73893e3e3d25.

[38] Ezekiel Emanuel, “We Can Be Healthy and Rich,” New York Times February 2, 2013, http://opinionator.blogs.nytimes.com/2013/02/02/we-can-be-healthy-and-rich/.

[39] Kate Baicker and Amitabh Chandra, “The Health Care Jobs Fallacy,” New England Journal of Medicine June 28, 2012, http://www.nejm.org/doi/full/10.1056/NEJMp1204891.

[40] Congressional Budget Office, “The Budget and Economic Outlook: 2014 to 2024,” February 2014, http://cbo.gov/sites/default/files/cbofiles/attachments/45010-Outlook2014_Feb.pdf, Appendix C: Labor Market Effects of the Affordable Care Act: Updated Estimates, pp. 117-27.

[41] Genevieve M. Kenney et al., “Opting in to the Medicaid Expansion Under the ACA: Who Are the Uninsured Adults Who Could Gain Health Insurance Coverage?” Urban Institute, August 2012, p. 9, Appendix Table 2, http://www.urban.org/sites/default/files/alfresco/publication-pdfs/412630-Opting-in-to-the-Medicaid-Expansion-under-the-ACA.PDF.

[42] Ibid., p. 8, Appendix Table 1.

[43] “Annual Update of the HHS Poverty Guidelines,” Federal Register January 25, 2016, pp. 4036-37, https://www.gpo.gov/fdsys/pkg/FR-2016-01-25/pdf/2016-01450.pdf.

[44] Edward Harris and Shannon Mok, “How CBO Estimates Effects of the Affordable Care Act on the Labor Market,” Congressional Budget Office Working Paper 2015-09, December 2015, https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/workingpaper/51065-ACA_Labor_Market_Effects_WP.pdf, p. 12.

[45] Craig Garthwaite, Tal Gross, and Matthew Notowidigdo, “Public Health Insurance, Labor Supply, and Employment Lock,” National Bureau of Economic Research, NBER Working Paper 19220, July 2013, http://www.nber.org/papers/w19220.

[46] Congressional Budget Office, “Estimates for the Insurance Coverage Provisions of the Affordable Care Act Updated for the Recent Supreme Court Decision,” July 2012, https://www.cbo.gov/sites/default/files/112th-congress-2011-2012/reports/43472-07-24-2012-CoverageEstimates.pdf, p. 4.

[47] Government Accountability Office, “Medicaid Demonstrations: HHS’ Approval Process for Arkansas’ Medicaid Waiver Raises Cost Concerns,” Report GAO-14-689R, August 8, 2014, http://www.gao.gov/assets/670/665265.pdf, p. 3.

[48] Section 207 of H.R. 3762, Restoring Americans’ Health Care Freedom Reconciliation Act of 2015.

[49] Palmetto Promise Institute, “King v. Burwell: The Obamacare Off-Ramp?” Health Care Fast Facts May 2015, http://www.kbcsandbox4.com/palmetto/wp-content/uploads/2015/05/King-v-Burwell-Fast-Facts.pdf.

[50] Chris Jacobs, “Reforming Medicaid, Beginning on Day One,” Chris Jacobs on Health Care December 12, 2016, http://www.chrisjacobshc.com/2016/12/12/reforming-medicaid-beginning-on-day-one/.

[51] National Association of State Budget Officers, Fiscal Survey of States: Spring 2016, https://higherlogicdownload.s3.amazonaws.com/NASBO/9d2d2db1-c943-4f1b-b750-0fca152d64c2/UploadedImages/Reports/Spring%202016%20Fiscal%20Survey%20of%20States-S.pdf, p. 63; National Association of State Budget Officers, 1996 State Expenditure Report, April 1997, https://higherlogicdownload.s3.amazonaws.com/NASBO/9d2d2db1-c943-4f1b-b750-0fca152d64c2/UploadedImages/SER%20Archive/ER_1996.PDF, Table 3, p. 11.

[52] Amy Finklestein et al., “Effect of Medicaid Coverage on ED Use—Further Evidence from Oregon’s Experiment,” New England Journal of Medicine October 20, 2016, http://www.nejm.org/doi/full/10.1056/NEJMp1609533; Katherine Baicker, et al., “The Oregon Experiment—Effects of Medicaid on Clinical Outcomes,” New England Journal of Medicine May 2, 2013, http://www.nejm.org/doi/full/10.1056/NEJMsa1212321.

[53] Congressional Budget Office, baseline estimates for federal subsidies for health insurance, March 2016, https://www.cbo.gov/sites/default/files/recurringdata/51298-2016-03-healthinsurance.pdf, Table 3, p. 5.

The Importance of Unsubsidized Exchange Enrollees

Attempting to pre-empt concerns about rising premiums on Obamacare Exchanges in 2017, the Department of Health and Human Services (HHS) over the recess released a report claiming that federal subsidies will insulate most Americans from the effects of even a massive premium spike for Exchange plans. But in focusing on the number of individuals who qualify for federal subsidies, the HHS report missed an important detail: To become more financially stable and sustainable, the Exchanges need greater enrollment by those who do not qualify for subsidized plans.

I first noted back in March 2015 the split in Exchange enrollment: Only individuals who qualifyAvalere Enrollment by Income for the richest subsidies have signed up for coverage in significant numbers. While the numbers have shifted slightly, the same dynamic remains. An updated analysis from consulting firm Avalere Health found that 81% of the potentially eligible individuals with incomes between 100-150% of the federal poverty level—those who qualify for the richest premium subsidies, and cost-sharing reimbursements to help with things like deductibles and co-payments—selected an Exchange plan. But as the figure above shows, enrollment declines substantially as income rises. Only 16% of eligible individuals with incomes between three and four times poverty selected a plan, and only 2% of those with income above four times poverty—those ineligible for both premium and cost-sharing subsidies—signed up.

While insurance Exchanges in general have suffered from lackluster enrollment, unsubsidized coverage lags even further behind earlier predictions. When Congress enacted the bill into law in March 2010, the Congressional Budget Office (CBO) predicted that in 2016, Exchanges would enroll a total of 21 million Americans—17 million receiving insurance subsidies, and 4 million purchasing unsubsidized coverage. As of March 31, the Exchanges had enrolled 11.1 million Americans—9.4 million buying subsidized coverage, and 1.7 million in unsubsidized plans. When it comes to meeting the 2010 CBO projections, unsubsidized enrollment (42.3%) lags more than ten percentage points behind enrollment of individuals receiving federal subsidies (55.2%).

Although an imperfect proxy, rising income does in the aggregate correlate with longer life-expectancy and better self-reported health status. If wealthier individuals who do not qualify for insurance subsidies enrolled in Exchange plans, the overall risk pool of the Exchanges might improve. As it stands now, however, Exchange enrollees are sicker than those in the average employer-provided health plan. What the HHS report tried to highlight as a feature—the large number of enrollees receiving subsidies—is in reality a bug, as the poorer, sicker population has proved difficult for insurers to cover.

The HHS study contained other material shortcomings. It did not acknowledge that, according to multiple estimates, off-Exchange enrollment nearly matches Exchange enrollment—a fact with two major implications. First, it means more Americans will pay the full freight of higher premiums than the Administration would have you believe. Second, it reinforces that insurers can circumvent the statutory requirement to combine off-Exchange and on-Exchange enrollment into a single risk pool by only selling policies off the Exchange. Some carriers have effectively segmented the market in two by doing just that.

Most obviously, while the HHS report advertised how insurance subsidies would cushion the effect of higher premiums for most Exchange purchasers, it did not attempt to estimate the impact on the federal fisc of that higher spending. Others have also noted that the Department again declined to release the underlying data behind its assertions. But by highlighting how much of their population receives federal subsidies, HHS essentially advertised Exchanges’ one-dimensional nature—the same aspect that has many insurers heading for the exits.

Response to Brookings Premiums Blog Post

This Health Affairs blog post contains several material methodological errors, omissions, and distortions, such that it presents a misleading picture of the insurance marketplace.
First, the authors completely ignore multiple prior studies — including one published by one of their Brookings colleagues — all showing a significant increase in premiums when PPACA’s major insurance provisions took effect in January 2014.  A paper published by Brookings non-resident fellow Amanda Kowalski in the Fall 2014 issue of Brookings Papers on Economic Activity concluded that “Across all states, from before the reform to the first half of 2014, enrollment-weighted premiums in the individual health insurance market increased by 24.4 percent beyond what they would have had they simply followed state-level seasonally adjusted trends.”  This conclusion, as part of a paper studying the broader welfare effects of PPACA, utilized actual National Association of Insurance Commissioners data for 2013 and 2014 — unlike the post above, which compared 2009 data (extrapolated to 2013) with 2014 premiums. (Also unlike the blog post in question, Dr. Kowalski’s paper WAS peer-reviewed by colleagues prior to publication.)
Likewise, a recent Mercatus Center study (also peer-reviewed, unlike the above post) found that premiums for PPACA-compliant qualified health plans (QHPs) were significantly higher than non-PPACA compliant non-QHPs in 2014 — again suggesting a significant spike in premiums due to the law.  Despite the higher premiums for the new PPACA plans, however, insurers also suffered losses in 2014 — a point not acknowledged by the Brookings researchers.  Again, this Mercatus Center study utilized actual insurer data from 2013 and 2014, not the extrapolation method used by the blog post.
The blog post also conflicts with data from Standard and Poor’s showing significant increases in individual market costs in 2014 — a trend which continued in 2015.  The data show a nearly 38% increase in total health care costs for the individual market in 2014, and an aggregate 69% increase in total health care costs for the individual market from 2013 to 2015.  As with the Kowalski and Mercatus studies, the S&P report uses actual pre-post data, as opposed to an extrapolation of premium costs for the 2013 pre-PPACA period.
Second, as noted above, the authors make their estimates based on CBO’s estimate (using MEPS data) of premiums for 2009, extrapolated forward based on inflation measures to 2013, rather than actual 2013 premiums.  They provide insufficient support and justification for doing so.  While PPACA was enacted in March 2010, its largest regulations did not take effect until January 2014.  Moreover, as the authors themselves admit, by utilizing 2009 rather than 2013 data, they omit much of the effects of the slowdown in health spending that occurred following the 2008-2009 recession.  Given that the studies using ACTUAL (as opposed to extrapolated) pre-post data all show significant increases beginning in 2014, it is reasonable to question whether their conclusion is primarily, if not solely, the result of the use of a favorable inflation measure for the years 2009 through 2013.  Utilizing more recent MEPS premium data could have functioned as a sensitivity test — to determine whether their findings were solely a result of missing the effects of the health spending slowdown — but the authors chose not to undertake such analysis.
In a similar vein, the authors provide no explanation why they used 2009 CBO/MEPS data as the starting point, but then used a different inflation measure to adjust premiums upward from 2009-2013.  If the MEPS premium data (as utilized by CBO) were sufficient to provide the starting point, then why not use MEPS data going forward, to provide the inflation measure for years 2010 and following?  The authors neither acknowledge nor answer this question.
Third, the authors acknowledge — but failed to make any attempt to quantify — the effects of reinsurance on plan premiums in 2014 through 2016.  A recent Mercatus Center study using actual data from insurer filings found that in 2014, reinsurance payments to insurers amounted to approximately 20.4% of gross premiums — yet still suffered over $2 billion in losses.  Reinsurance payments alone account for all — if not more than all — of the supposed 10-21 percent premium “reduction” in premiums form 2013 to 2014.  It undermines entirely the authors’ argument that PPACA “lowered premiums” if said premium “reduction” came solely based on redistribution of reinsurance funds from employer-based plans (via the Treasury) — particularly when the reinsurance program will end following this calendar year.
Fourth, one of the authors himself admitted that the statements about PPACA plans providing “more” and “better” coverage because the law “increased the quality and robustness of coverage” were made in the absence of evidence.  On the afternoon this post was published, I asked one of the authors (Mr. Adler) on Twitter what evidence he had that plans under PPACA were “better.”  The law included new requirements regarding minimum actuarial values, but it also — as the authors admit — has resulted in narrower physician and hospital networks, as studies by Avalere Health and McKinsey have demonstrated.  I asked Mr. Adler what evidence he had that customers preferred these high-AV, narrow-network plans to the plans offered prior to the law.  Alternatively, did he have any evidence to suggest that these types of plans yielded better health outcomes for customers?
In response on Twitter, Mr. Adler stated that enrollees in PPACA plans have high satisfaction with them — a nice talking point, but not one that proves enrollees think their coverage “better” than what preceded it.  He then admitted that analyzing the quality of PPACA coverage — whether it really was “better,” as the post claims — “wasn’t the focus of the research piece.”  In other words, the authors made claims not supported by evidence.  He continued that the claim of “better” coverage “has nothing to do with the analysis itself of premium comparison” and that “the wording used in the intro/conclusion has nothing to do w/ analysis itself [sic].”
The talking point that “people are getting more for less” under PPACA remains key to press coverage of this post — despite one of the authors’ admission that they made said claim without undertaking research or analysis to support it.  A Los Angeles Times article last week highlighted that talking point, as have prior pieces elsewhere:
Fifth, the authors have failed to respond to concerns about their post that I raised directly with them.  The morning after their post was published, I e-mailed both authors — as well as Brookings Vice President for Economic Studies Ted Gayer — regarding their “conclusions” about PPACA providing “more,” “better,” and improved quality coverage.  I noted Mr. Adler’s public admissions the prior afternoon that the authors had conducted no research in this area, and that — in his own words — the claims made in the introduction and conclusion “has nothing to do with the analysis itself.”  Given that Mr. Adler had acknowledged making these claims without substantiating evidence, I asked for a clarification or correction.  To this date, nearly two weeks later, I have received neither an acknowledgment nor a reply.
In sum, this post appears to be a political talking point in desperate search of data.  With respect to the assertion that PPACA lowered premiums, the authors 1) did not explain why they used CBO/MEPS data from 2009 rather than more recent data, 2) did not explain why they used the inflation measures they did, rather than MEPS data, 3) did not attempt to quantify the effects of reinsurance on premiums, and 4) ignored the multiple studies — including one from a Brookings colleague — using actual pre-post data (as opposed to an extrapolation based on a 2009 estimate) that have all found PPACA raised premiums.
Mr. Adler conceded that he undertook no research to prove that PPACA coverage is “better” or of higher quality than prior plans — in other words, that the first half of the “people are getting more for less” equation has no evidence to support it.  Given this stunning admission, it is reasonable to ask whether the second half of the conclusion was “pre-cooked” as well — that is, whether the authors decided in advance to undertake a study determining PPACA lowered premiums, and cherry-picked data (quite possibly the only data available) to make their claims.  It would certainly explain why the authors made the four material omissions above — and it would also explain why the authors have obfuscated when I requested a correction/clarification following Mr. Adler’s own admission that the talking point of PPACA providing “more” or “better” coverage is unproven.
While not mentioned on Brookings’ site, Mr. Adler previously worked as a data analyst for then-Senator Obama’s campaign for the presidency in 2008.  This “analysis” properly belongs in that arena — as a political talking point for a campaign, not a scholarly study undertaken by a heretofore reputable organization like Brookings, or published (even in blog form) in a forum such as Health Affairs.  The authors should respond to the legitimate criticisms I (and others) have raised about their methodology — and if they cannot, or will not, the post should be taken down in its entirety.

Has Obamacare Enrollment Peaked?

Has the effort peaked to sign up uninsured Americans for coverage? The announcement that the nonprofit organization Enroll America is laying off staff and redirecting its focus in the face of funding cuts comes amid inconsistent sign-ups during the second Affordable Care Act open-enrollment period and concerns about affordability.

A recent New York Times analysis compared Kaiser Family Foundation estimates of potential enrollees with sign-up data from the Department of Health and Human Services. While some states that signed up few people in 2014 recovered during the 2015 open enrollment, other states lagged: “California, the state with the most enrollments in 2014, increased them by only one percentage point this year, despite a big investment in outreach. New York improved by only two percentage points. Washington’s rates are unchanged.”

Most states could not post consistent gains in both open-enrollment periods. An official from Avalere Health, a consulting firm, told the Times that she was “starting to wonder if we’ve overestimated the whole thing.”

A recent analysis from Avalere Health demonstrates why the enrollment push may have peaked. The percentage of eligible Americans signing up drops off significantly as income rises and federal subsidies phase out, suggesting that absent subsidies Americans find the exchange insurance products unaffordable or of little value. And if the carrot of federal subsidies has not resulted in expected enrollment, the stick—the mandate to purchase insurance—seems even less effective: The special open-enrollment period to accompany this year’s tax-filing season has resulted in 36,000 sign-ups in the 37 states using HealthCare.gov. But 4 million to 6 million people are expected to pay the mandate tax.

The Congressional Budget Office (CBO) estimates that ACA enrollment will average 11 million individuals, with 8 million receiving subsidies. So far, enrollees reporting incomes above the threshold for subsidies are only 2% of uninsured individuals who have signed up, making it hard to see how the administration can reach CBO’s estimate of 6 million unsubsidized exchange enrollees in 2016. The fact that California, New York, and Washington state achieved only marginal enrollment improvements from 2014 to 2015 does not bode well for achieving CBO’s target of 15 million subsidized enrollees next year—a more than 50% increase from the 9.9 million individuals who qualified for subsidies in 2015.

With outreach efforts scaling back, and many Americans uninterested in ACA coverage absent hefty federal inducements, CBO’s estimate of 21 million enrollees next year seems unlikely to be met. If this year’s results from California and New York are any indication, a good question may be whether 2016 enrollment will grow at all.

This post was originally published at the Wall Street Journal’s Think Tank blog.

A Tale of Two Exchanges

Two reports released in the past week demonstrate a potential bifurcation in state insurance exchanges: The insurance marketplaces appear to be attracting a disproportionate share of low-income individuals who qualify for generous federal subsidies, while middle- and higher-income filers have generally eschewed the exchanges.

On Wednesday, the consulting firm Avalere Health released an analysis of exchange enrollment. As of the end of the 2015 open-enrollment season, Avalere found the exchanges had enrolled 76% of eligible individuals with incomes between 100% and 150% of the federal poverty level—between $24,250 and $36,375 for a family of four. But for all income categories above 150% of poverty, exchanges have enrolled fewer than half of eligible individuals—and those percentages decline further as income rises. For instance, only 16% of individuals with incomes between three and four times poverty have enrolled in exchanges, and among those with incomes above four times poverty—who aren’t eligible for insurance subsidies—only 2% signed up.

The Avalere results closely mirror other data analyzed by the Government Accountability Office in a study released last Monday. GAO noted that three prior surveys covering 2014 enrollment—from Gallup, the Commonwealth Fund, and the Urban Institute—found statistically insignificant differences in the uninsured rate among those with incomes above four times poverty, a group that doesn’t qualify for the new insurance subsidies.

The GAO report provided one possible reason for the lack of enrollment among individuals not eligible for federal insurance subsidies. In 2014, premiums remained unaffordable—costing more than 8% of income—across much of the country for a 60-year-old making five times poverty. These individuals earned too much to qualify for subsidies, but too little to afford the insurance premiums for exchange policies. The GAO data confirm my July analysis, in which I wrote: “Those who do not qualify for federal subsidies appear to find exchange coverage anything but affordable.”

Other findings echo the strong link between subsidies and coverage. The Commonwealth Fund’s study last summer noted that among those with incomes between 250% and 399% of poverty, the uninsured rate had not changed appreciably. These individuals don’t qualify for the additional federal assistance with cost-sharing—deductibles, co-payments, and co-insurance—provided to those with incomes below 250% of the federal poverty level. Prior studies have demonstrated that some of these individuals won’t qualify for premium subsidies at all, based on their age, income, and premium levels in their state.

The overall picture presented is one of a bifurcated, or even trifurcated, system of health insurance. Individuals who qualify for very rich insurance subsidies or Medicaid have signed up for coverage, while those who qualify for small or no subsidies have not. It raises two obvious questions: Whether and how the exchanges can succeed long-term with an enrollment profile heavily weighted towards subsidy-eligible individuals—and whether an insurance market segregated by income was what Obamacare’s creators originally had in mind.

This post was originally published at the Wall Street Journal’s Think Tank blog.

How Automatic Renewal Could Cost Obamacare Enrollees

Last month I wrote that as the Obamacare open-enrollment period for 2015 approaches, the administration “faces a double-edged sword: Making reenrollment easier could result in premium increases for many individuals, particularly because the most widely subscribed plans have proposed significant rate hikes.” Two developments last Thursday appear to confirm that analysis.

First, the administration released proposed regulations regarding reenrollment for 2015. As some expected, the regulations confirmed that insurance exchanges would reenroll individuals in their existing plans if enrollees remain eligible for qualified health plans through the exchange and the plan in which they were enrolled remains available for renewal.

The same day, consultants at Avalere Health released an analysis showing that most low-cost plans have proposed sizable rate increases for 2015. In seven of the nine states Avalere analyzed, the lowest-cost “silver” plan would change; in six of the nine states, the second-lowest-cost silver plan would change.

These pricing changes have special importance: Federal insurance subsidies are tied to the price of the second-lowest-cost silver plan. Enrollees in plans with premiums greater than that benchmark stand to pay the full difference in premiums–without additional federal subsidies. The Avalere analysis demonstrates how costly such a decision could be. One hypothetical enrollee in Maryland would see her out-of-pocket premiums rise from $58 per month to $94, a 62 percent increase. In this instance, $32 of the $36 monthly premium increase stems from staying in a plan more costly than Maryland’s benchmark premium.

The administration no doubt views auto-enrollment as a way to minimize what even a supporter of the health-care law called the “massive technological challenge” associated with redetermining eligibility. But as The Wall Street Journal reported two weeks ago, the lowest-cost plans for 2014 have recorded some of the highest enrollments this year—and have proposed large increases for 2015. Unless millions of individuals switch plans, they could be in for some nasty spikes in their out-of-pocket premium costs come Jan. 1.

This post was originally published at the Wall Street Journal’s Think Tank blog.

Obamacare: Krugman’s California Dreamin’

Since California released its health care exchange premium rates late last week, liberals such as Paul Krugman have argued that Obamacare’s predicted “rate shock” will fail to materialize next year. At least three reasons explain why liberals’ argument falls short:

1. Dubious Assumptions About Exchange Enrollment

Some independent observers questioned whether the insurance companies in California’s exchange made favorable—and dubious—assumptions about the people who would buy insurance on the exchange next year. The Washington Post noted that “if sick people sign up en masse next year…that could dramatically increase costs for insurers, who would then have to recoup the money by increasing premiums.” One vice president at Avalere Health, a consulting firm, told the Post that a delayed premium spike could happen:

[The projected premium rates] are low enough that you have to think, are there going to be health plans in this market that are underwater…. It’s so hard to predict because you don’t know who’s going to show up on the market.

2. A Pre-Existing Preview

While no one knows who will sign up for exchange coverage next year, an Obamacare program already up and running—one established for individuals with pre-existing conditions—has attracted far sicker enrollees than first anticipated. As The New York Times reported last week:

The administration had predicted that up to 400,000 people would enroll in the program, created by the 2010 health care law. In fact, about 135,000 have enrolled, but the cost of their claims has far exceeded White House estimates, exhausting most of the $5 billion provided by Congress….

When the federal program for people with pre-existing conditions ends on Jan. 1, 2014, many of them are expected to go into private health plans offered through new insurance markets being established in every state. Federal and state officials worry that an influx of people with serious illnesses could destabilize these markets, leading to higher premiums for other subscribers.

People in the pre-existing condition program have been much sicker than actuaries predicted at the time the law passed. If that phenomenon repeats itself in the exchanges—either because only sick individuals enroll, or because employers struggling with high health costs dump their workers into the exchanges—premiums will rise significantly in future years.

3. Bait and Switch

As a column in Bloomberg notes, for all the press around California’s supposedly low exchange premiums, officials generated such spin only by comparing apples to oranges:

Covered California, the state-run health insurance exchange, yesterday heralded a conclusion that individual health insurance premiums in 2014 may be less than they are today. Covered California predicted that rates for individuals in 2014 will range from 2 percent above to 29 percent below average small employer premiums this year.

Does anything about that sound strange to you? It should. The only way Covered California’s experts arrive at their conclusion is to compare apples to oranges—that is, comparing next year’s individual premiums to this year’s small employer premiums. (Emphasis added.)

Therein lies one of Obamacare’s many flaws. Liberals now argue that while some may pay more for coverage, they will get “better” benefits in return. However, when campaigning in 2008, then-Senator Barack Obama didn’t say he would raise premiums; he said he would give Americans better coverage: He promised repeatedly that he would cut premiums by an average of $2,500 per family. That gap between Obamacare’s rhetoric and its reality makes arguments such as Krugman’s seem fanciful by comparison.

This post was originally published at the Daily Signal.

Kaiser Predicts 10% Increase in Part D Premiums

The Kaiser Family Foundation is out with a new report analyzing data released by the Centers for Medicare and Medicaid Services (CMS) last month regarding Medicare Part D plans for 2011.  The most noteworthy finding comes on the report’s first page:

The average monthly PDP premium will be $40.72 in 2011 (weighted by 2010 enrollment, assuming beneficiaries remain in their current plan).  This is a 10 percent increase ($3.82) from the weighted average monthly premium of $36.90 in 2010, and a 57 percent increase from $25.93 in 2006, the first year of the Medicare Part D drug benefit.  CMS reported a $1 increase in the average premium for standard Part D coverage between 2010 and 2011; the higher increase reported here incorporates higher premiums for enhanced coverage offered by nearly half of all PDPs and excludes premiums for Medicare Advantage drug plans.

These results are consistent with a study released two weeks ago by Avalere Health, which projected that the largest Part D plans would see premium increases averaging 10 percent.  They’re also consistent with an earlier analysis by the Congressional Budget Office, which found that closing the Part D prescription drug “doughnut hole” would raise premiums – because seniors would have stronger financial incentives to remain on costlier, brand-name drugs rather than switching to generics.  As a result, while premiums rose by less than $2 per month in 2010, the Kaiser report predicts a doubling of the increase in the coming year, to nearly $4 per month.  In other words, most seniors will pay higher premiums, so that only some seniors reaching the prescription drug “doughnut hole” will benefit.

AP: Double Digit Hikes for Medicare Drug Plans

Wanted to pass along this Associated Press article summarizing a new study from Avalere Health indicating that “premiums will go up an average of 10 percent among the top plans that have signed up some 70 percent of seniors.”  You may recall that Avalere also published a study earlier this month indicating that 3 million seniors could lose their current prescription drug plan as a result of changes made by Medicare; today’s article notes that “There are a lot of plans that are shutting down.”