Potential federal legislation makes Medicaid expansion an even worse deal for North Carolina

Recently, while responding to reporters’ questions on the budget, Gov. Roy Cooper reiterated his desire to expand Medicaid. For years, the Republican-led General Assembly has resisted expanding the Medicaid program to include anyone with an income up to 138% of the federal poverty level (FPL) as the Affordable Care Act (ACA) allows. This main sticking point resulted in the state not passing a full biennial General Fund budget in 2019.

Locke Opposes Medicaid Expansion

The John Locke Foundation has long opposed the state expanding Medicaid under the ACA. In two previous blogs (see here and here), I’ve listed numerous reasons the state should continue rejecting Medicaid expansion. Medicaid expansion under the ACA remains bad health care policy that ultimately grows the size of government while ignoring numerous other issues our health care system faces.

Federal Medicaid Bypass

Ultimately, the timing of budget negotiations here in North Carolina is interesting given legislation being debated in Congress. Right now, among many other things, Congress is considering President Biden’s “Build Back Better” bill that congressional Democrats are attempting to pass through the reconciliation process. Currently included in that bill is a provision that would essentially bypass state authority and provide coverage for the Medicaid expansion population. One could reasonably conclude this is a push toward a “Medicare for all” system in nonexpansion states. The proposal would be completely funded by the federal government, i.e., taxpayers, and work in two phases. Phase one covers these individuals through expanded subsidies for ACA marketplace plans. Phase two creates a new federal Medicaid program.

Phase one of the plan would amend the rules to expand the ACA’s premium tax credits (PTC) to those making less than 100% of FPL. Under current rules, only those making between 100% and 400% of FPL are eligible for PTC to offset the cost of marketplace plans. Enrollment would be continuous, like Medicaid. These plans would begin in July 2022 and extend until Phase two begins or until the end of the 2024 plan year, whichever comes first.

Phase two makes things very interesting for nonexpansion states. Phase two is a new federal Medicaid program that begins in 2025, or whenever the secretary of the federal Department of Health and Human Services implements the program. The new Medicaid program would be delivered through state managed care companies (MCOs) or whatever entity the HHS secretary decides. MCOs would have strict requirements to meet to be eligible to deliver benefits for new Medicaid recipients. States would have their hands tied as most regulations potentially imposed on the new program would be preempted by the federal rules. It’s unclear if North Carolina’s generous Medicaid benefits would be replicated in this plan or if a more scaled back federal program would be implemented.

Legislative Republicans have reportedly begun budget negotiations with the governor. He will strongly urge that the budget include funding for Medicaid expansion. The John Locke Foundation urges Republican leadership to continue to hold firm in its position to reject expansion.

Medicaid Expansion Under Obamacare

As budget negotiations here in North Carolina and congressional negotiations over the Build Back Better bill happen simultaneously, it is even more important that North Carolina continues to reject traditional Medicaid expansion under the ACA. The state would be worse off if it expanded now, assuming part of the cost, because the federal government seems poised to fund the Medicaid expansion population in the future entirely. If the reconciliation bill passes with the expansion provision, North Carolina would likely not have any financial obligation or any choice in the federal government fully funding coverage for the expansion population through the two phases described above.

If North Carolina expands the program now, it would need to cover the 10% state share as required by the ACA. Furthermore, expanding now would trigger the 5%increase for the regular Medicaid population for the next two years as allowed by the American Rescue Plan Act. Estimates indicate the state could receive as much as $1.2 billion from the federal government. However, when the increased rate is clawed back at the end of the two-year period, the state would likely face a budget gap that would have to be made up somehow. This is not sound budgeting policy and a bad deal for North Carolina.

Just Say No

Here are some of the reasons why the John Locke Foundation continues to oppose Medicaid expansion under the ACA:

• There are hidden costs to Medicaid expansion, such as insurance crowd-out and rising private insurance costs.
• States are responsible for 10% of the total share of Medicaid expansion costs, no matter how many people sign up or the cost of each enrollee. Gov. Cooper and expansion advocates have claimed the 10% state share will be covered by taxes on hospitals and health insurance plans. According to a WFAE article by Dana Ervin, the North Carolina Hospital Association hasn’t committed to covering the cost through a self-imposed tax. Furthermore, this provider tax is a sleight of hand to draw down more federal money.
• Even if hospitals and health insurance plans agree to the tax to fund the 10% state share, it may not be enough. A recent analysis by the John Locke Foundation found that there could be a funding gap of anywhere between $119 million and $171 million each year even with the tax on hospitals and insurers.
• According to a report by the Foundation for Government Accountability, Medicaid expansion is not a silver bullet for rural hospitals and the complex issue of rural health. The report found that after expansion, hospitals haven’t seen financial conditions materially changed, nonexpansion states had higher hospital job growth than states that expanded Medicaid, and hospitals are still closing in states that have expanded Medicaid.

The Cost is Not Zero

No matter if it comes from the state or federal level, expanding public funding and eligibility for health coverage do not come without consequences. This entire policy is taxpayer-funded, and much of it will be paid for by new deficit spending at the federal level. Also, there always remains the possibility that Congress will ask for states to increase the state share. Whether the Medicaid expansion provision described above makes it into the final version of the bill Congress passes remains to be seen. There remains the possibility it is removed, altered, or challenged legally.

State leaders need to remember the negative impact Medicaid expansion would have on our state budget, as North Carolina can’t go into debt like the federal government. In spite of continued pressure from the governor, lawmakers should consider the uncertainty of what next steps the federal government may take, as well as the financial toll expansion would have on taxpayers. Keeping all these factors in mind, lawmakers are wise to continue to reject Medicaid expansion and should look for ways to lower the costs of health care.