Medicaid Expansion Sparks Savings, Revenue

More data confirms it: States that have expanded Medicaid are experiencing increased savings. And states that have in place taxes on hospitals and health plans are seeing additional revenue.

The economic punch that comes from Medicaid expansion stems mainly from decreased state spending on programs for uninsured populations and tax revenue from healthcare providers and payers. 

Data confirms it: States that have expanded Medicaid are experiencing increased savings and enhanced revenue, according to a study conducted by Los Angeles-based law firm Manatt, Phelps & Phillips and funded by the Robert Wood Johnson Foundation. 

Examining the Direct Financial Impact

"We've done this study twice, in the beginning of 2015 and 2016. Our goal is to look at the direct impact of Medicaid expansion on state budgets to see if expansion produced savings and if it produced new revenue. We are not looking at income tax revenue. This is taxes on providers and health plans," says Deborah Bachrach, a partner at Manatt, Phelps & Phillips. 

"The main takeaway is that in terms of economic impact, Medicaid expansion does produce savings—different states see different amounts—and it also produces additional revenue for states that have in place taxes on hospitals and health plans."

The additional tax revenue, Bachrach adds, comes as a result of more people having healthcare coverage and, therefore, receiving more services. It is not due to a higher tax rate. 

"What happens is that as more insured individuals go into the hospital, there is more Medicaid revenue being generated without reassigning the tax rate. The same tax rate generates more revenue because there are more individuals receiving care," she says. 

Reaping Substantial Savings

Researchers analyzed data for 12 states that expanded Medicaid, including Washington, D.C., to determine the revenue impact. Key study findings include: 

• California saved $250 million in spending on its low-income health program in 2015
• Colorado saved $96 million in spending in 2015 on childless adults that are newly eligible for Medicaid
• Kentucky saved $21 million on mental health services in 2015
• Maryland saved nearly $14 million on uncompensated hospital care in 2015
• Michigan saved $19 million on prison health services in 2015
• Pennsylvania saved nearly $108 million in state spending in 2015 because of expansion

While savings vary by category and amount among the states, two areas that consistently show positive results, Bachrach says, are services for pregnant woman and people with mental health or substance abuse issues. 

"If the state has expanded Medicaid, they are able to claim an enhanced matching rate for a portion or the entire duration of the pregnancy," she says. "For example, Arkansas reports that this has cut the cost of covering these women by about half."

When it comes to paying for services for people with mental health and substance abuse problems, Bachrach says, state coffers can also be helped tremendously by Medicaid expansion funding. 

"Virtually every state uses some state dollars to provide services to uninsured individuals with mental health or substance abuse issues. With expanded Medicaid, almost all of these individuals can get Medicaid, so now Medicaid is paying for services and medications. Now states are receiving 90% to 95% of the costs in federal dollars for this population, which is particularly vulnerable and expensive. It's a powerful incentive to consider Medicaid expansion," she says. 

Having more federal dollars to spend on treatment programs also means state funding can stretch a lot further, Bachrach says. 

"Medicaid expansion becomes a critical tool in addressing the crisis. Right now states that have not expanded Medicaid have to come up with all state dollars because a huge percentage of these individuals do not have employer-sponsored insurance and are low-income. Think of how much further state dollars could go if there were also federal dollars available to cover these costs."

Encouraging Non-expansion States to Reconsider

Some state leaders have rejected Medicaid expansion with the common sentiment that it will be financially unsustainable when the federal funding level declines from 100% to 90% by 2020.  

The study's data points should be cause for reconsideration, says Katherine Hempstead, director of coverage issues at the Robert Wood Johnson Foundation. 

"We think it is extremely important to provide evidence to show how states are saving to help build the evidence case. Through these examples, we are trying to demonstrate that there is a strong fiscal and budgetary rationale for expansion, and leadership in states that have not yet expanded is a primary audience," Hempstead says. 

"While the state share of payment for the expansion population will increase over the next few years, the federal government will still pay the great majority of the costs, and the state savings we have detailed will continue as well… And of course by not expanding, state leaders are essentially letting their residents' federal taxes be used to provide healthcare to residents of other states, with no benefits for themselves."

Additionally, Hempstead says, there are indirect financial benefits for states that expand Medicaid, such as job creation, a decreased need to use general fund dollars to provide healthcare services to low-income residents, and a dip in costs for addiction-related criminal justice activities.  

"This evidence suggests that even above and beyond the great benefits to state residents who will gain access to healthcare, there are strong benefits to state government from expansion. For all of these reasons, Medicaid expansion is basically an offer that states should not refuse," she says. 

Overcoming Political Opposition

Hempstead says she also hopes the study will be valuable to Republican leaders in non-expansion states who may be encouraged by the economics to push for expansion. 

"It presents enough information so that it really seems like these states are leaving a lot of money on the table by not expanding Medicaid. It starts to overwhelm the political reasons for leaders who may not want to support the ACA or the [Obama] administration. At the end of the day, there are very serious budget pressures in most states, and this study will increase awareness of what these states are foregoing," Hempstead says.  

"Not expanding Medicaid is really cutting off your nose to spite your face. It really is. But, I think it's hard for some of these leaders on the right who may want to do the right thing but are under a lot of political pressure and feel like they don't have any cover. We have to make the business case for these states to see the positive financial impact of expanding Medicaid."