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Tennessee should block Medicaid expansion March 15, 2013 , ,

By Grace-Marie Turner and Avik Roy

Tennessee Gov. Bill Haslam still is undecided about whether to recommend expanding TennCare to families earning up to $30,000 a year, as the Affordable Care Act allows. 

“We’re doing the homework on three or four things: The cost to the state, the health impacts on the people who are going to be covered, the financial impacts on the hospitals,” Haslam told reporters.

But state legislators are cautious, fearing hidden cost down the road.  They are correct to be concerned. Rep. Jeremy Durham, R-Franklin, and 21 colleagues have introduced legislation to bar Tennessee from participating in the ACA’s Medicaid expansion.

Durham said Tennessee taxpayers “cannot afford the long-term financial burden of expanding our Medicaid rolls.” Here are twelve reasons Tennessee should not expand its TennCare program and instead should demand from Washington greater control over spending to better fit coverage expansion with the state’s needs, resources, and budget.

1. Medicaid spending will explode.

The initial 100% federal match rate for the expansion population is very tempting, but the match rate starts to decline in three years and falls to 90% by 2020.  In addition, the state must pay added administrative costs as well as its higher share of coverage for other eligible citizens outside the expansion band who are not now enrolled but who would likely do so after the Affordable Care Act’s individual mandate triggers in 2014.

According to The Heritage Foundation, Medicaid spending will increase dramatically as the federal matching rate for the expansion population begins to drop and as more and more Tennesseans enroll in the program, as this chart demonstrates.  The expansion would cost Tennessee taxpayers $1.2 billion through 2022 – an additional $421 million in 2022 alone.

Inflation-adjusted, per capita Medicaid spending for Tennessee already had increased 86% over the last two decades.  The additional spending surely would crowd out funds for education, transportation, parks, public safety, and other vital state needs.

2. Medicaid harms the poor.

The Medicaid program is so badly broken that it actually harms the people it is intended to serve. Medicaid has the worst health outcomes of any insurance program in the developed world. Mountains of clinical literature show that, on average, patients on Medicaid have poorer health outcomes than those with no insurance at all. The largest such study by far, conducted by surgeons at the University of Virginia, examined outcomes for 893,658 individuals undergoing major surgical operations from 2003 to 2007. It found that patients on Medicaid were 13 percent more likely to die in the hospital after surgery than those with no insurance, even when adjusting for age, gender, income, region, and health status. Medicaid patients were 97 percent more likely to die than those with private insurance.

This is largely because the Medicaid program pays doctors and hospitals far less than private insurers do. As a result, few doctors can afford to take many Medicaid patients.  When patients can’t get predictable access to care, their cancers go undiagnosed and their heart conditions go unmanaged. Receiving care from a specialist is particularly challenging for Medicaid patients.

Tennessee should instead insist that Washington provide more flexibility over TennCare spending so the state can develop innovative programs to expand access to care without burdening taxpayers with significant new costs. Tennessee can benefit from its past experience with Medicaid expansion to learn from past mistakes and build better solutions.

3. Medicaid’s access problems will get worse as more doctors drop out.

Coverage is not the same thing as care.  In 2011, 39% of office-based physicians in Tennessee did not accept new Medicaid patients. That’s the fifth-worst ratio in the country, only behind Connecticut (39%), Florida (41%), California (43%), and New Jersey (60%).  The main reason is Medicaid’s chronically-low payment rates.  Nationally, for every dollar a primary care receives from someone with employer-sponsored insurance in 2008, Medicaid only paid 52 cents.

The ACA provides for a temporary two-year increase in Medicaid payments for primary-care physicians, but few observers believe that this temporary increase will lead physicians to increase their participation in the program.

4. Tennessee will be exposed to higher Medicaid costs when Washington recalculates its matching payments.

While the lure of the 100% match in federal funding tempts states to expand Medicaid, Tennessee will pay a high price for the expansion. According to a 2011 congressional report, the ACA’s Medicaid expansion would cost states at least $118 billion over the next ten years. Once millions more people are enrolled in Medicaid, history teaches that it is nearly impossible to contract.

And there is no guarantee these high federal matching rates will continue.  In outlying years, the federal government will attempt to reduce entitlement spending by reducing its matching payment for the expansion. Indeed, President Obama proposed doing just that in his fiscal-year 2013 budget, which would have reduced Medicaid spending by $100 billion over ten years.  HHS Secretary Sebelius’ assurances that the match won’t be reduced have no force of law and cannot influence future congressional policy.

In addition, many states have made extra money from their Medicaid programs by taxing providers and insurers for participating in the program. These accounting gimmicks will almost assuredly be prohibited in future federal budget negotiations, leaving states on the hook for more Medicaid spending.

5. Medicaid expansion will worsen the cycle of dependence and harm the economy.

Medicaid imposes a huge disincentive on the poor to find work because they fall out of the program once they start earning better incomes. If Tennessee chooses not to expand its Medicaid program, able-bodied adults who seek work and who successfully cross the poverty line should have the option of subsidized private insurance.

This should be the focus of negotiations with Washington — seeking a united front with other states to demand much more flexibility in expanding coverage but allowing people the dignity of private insurance instead of being trapped in a failing public program.

Private insurance is a morally superior approach, one that will increase the incentives for employment and stimulate the economy through privately generated income rather than the shell game of transfer payments.

6. Claims about job creation are exaggerated.

The claim that Medicaid will add approximately 18,000 new jobs in Tennessee by 2016 uses out-of-date Keynesian models that have been eminently disproven. These same forecasts were used to predict that the American Recovery and Reinvestment Act of 2009 (ARRA) — commonly known as the “stimulus” — would bring the national unemployment rate below 6% by 2012. Instead, the unemployment rate has remained around 8%.

Those who claim that the Medicaid expansion will create jobs should be required to explain, specifically, how their forecasting models differ from those used to project unemployment rates under the ARRA.

Robert Murray of Catalyst for Payment Reform reports on recent research from the RAND Corporation “which indicates that every new job added to the health care sector results in 0.85 fewer jobs in the rest of the economy.  For every job created, the costs of running this health care system grow and eventually result in layoffs in other sectors unable to manage the growing burden of the cost of health insurance premiums for employees.”

Chris Conover of Duke University calls economic analyses claiming Medicaid expansion will lead to huge job creation “a shell game.” He explains that “every dollar going into the U.S. Treasury to finance this expansion is a dollar taken out of the private economy.”  And he adds that “Every additional dollar of new taxes shrinks the economy…That dollar would have been spent (i.e., “created” or supported jobs) anyway: the Medicaid expansion simply transfers the decision about how to spend that money to Washington, D.C.” 

Conover adds, “Currently every added dollar of federal taxes essentially shrinks the economy by 44 cents. Thus, if we convert this to jobs, we will lose 144 jobs for every 100 health sector-related jobs that are induced by expansion.”

State calculations are more complicated, Conover explains, but the bottom line is that the 18,000 figure is significantly overstated and further, that expanding Medicaid means relegating up to 330,000 more Tennesseans to a program that can be worse than being uninsured.

7. Medicaid crowds out private coverage.

Advocates of expansion claim that between 145,000 and 330,000 Tennesseans will be denied coverage if the state doesn’t expand TennCare do not account for the crowding out of private insurance. TennCare expansion would end up replacing higher-quality, employer-sponsored health coverage for hundreds of thousands of Tennesseans. While these individuals will still have “coverage,” and therefore will not increase the ranks of the uninsured, the quality of their coverage will meaningfully decrease.

As Clare Gray, M.D., head of Physicians for Reform, explains:  “Even before passage of the PPACA, economists estimated the crowd-out rate from previous expansions of Medicaid stood at approximately 60 percent. This means that out of every 10 new Medicaid patients, six previously had private insurance.

“Because new forces now threaten to push even more patients out of the traditional insurance market into Medicaid, the next expansion of Medicaid may well have even higher crowd-out rates. This means a significant portion of the massive funding spent on ‘healthcare reform’ will only displace those who already have insurance and place them on Medicaid—a program with demonstrably poor outcomes,” Gray writes.

Therefore, expanding Medicaid will lead to more people losing private health insurance — a fact that is not included in the standard assessments of how much Medicaid expansion would increase coverage.

8. Medicaid raises premiums for those with private insurance.

There is an additional hidden cost to people with private insurance of expanding Medicaid. Because both Medicaid and Medicare underpay doctors and hospitals for their costs of care, providers make up the difference by charging higher rates to private insurers. In 2008, Milliman, the leading insurance consulting firm, estimated that the average American family with private health insurance paid $1,800 more in premiums because of this cost-shifting phenomenon. By dramatically expanding Tennessee’s Medicaid program, the state will impose a hidden tax on the millions of Tennesseans with private insurance.

Because expanding Medicaid leads hospitals and doctors to shift costs onto patients with private insurance, this makes private insurance less affordable and increases the number of people without insurance.

9. Medicaid’s undercompensated care is a bigger problem than providing uncompensated care for the uninsured.

There is much concern about the problem of “uncompensated care,” whereby the uninsured use emergency rooms to get care but cannot afford to pay the bills. (Under federal law, emergency rooms must serve all who come.) But the problem of undercompensated care is a larger one. 

Many hospitals believe that they will be able to improve their bottom lines if Medicaid is expanded and more patients have coverage.  But because Medicaid generally pays below costs, it’s hard to see how they can make up the losses with more volume.  

In Maine, a 2002 expansion of Medicaid was “a calamitous failure” for hospitals because uncompensated care did not meaningfully decrease at the same time Medicaid crowded out higher-paying commercial insurers. In Ohio in 2010, for example, hospitals lost $1.3 billion on Medicaid patients while spending $1.1 billion on charity care.

10. Expanding Medicaid will expose Tennessee to increased risks of fraud and waste.

All Medicaid spending takes money out of productive sectors of the economy and re-routes it as transfer payments to health care providers, the vast majority of whom are underpaid for their services — and a few of whom are bilking the system.

Official federal estimates show that at least 10% of Medicaid payments are fraudulent. Many prosecutors believe that the figure is closer to 30%. Unfortunately, there is little incentive to police fraud and waste because excess Medicaid spending frequently accrues to the benefit of providers and politicians.

In North Carolina, state auditor Beth Wood, a Democrat, recently found that the state’s Medicaid program endured $1.4 billion in cost overruns each year, including $375 million in state dollars. As a result, North Carolina has decided not to expand its Medicaid program. Before considering a Medicaid expansion, Tennessee should conduct a similar audit of the program and demand flexibility to fix the problem.

11. By rejecting the Medicaid expansion, Tennessee encourages other states to do the same, reducing waste of taxpayer dollars.

Many states still are deciding whether or not to expand their Medicaid programs under the ACA. A principal justification that Medicaid advocates use is that declining to expand Medicaid means that a state’s taxpayer dollars go to fund Medicaid in other states.

But the large “blue states” mostly have gone along with the Medicaid expansion because they already have expanded their programs beyond the ACA mandate. Indeed, only half of the funds dedicated to the Medicaid expansion are being spent outside the South.  Large “red states,” on the other hand, where the ACA’s Medicaid dollars are directed, have mostly rejected the expansion.

Tennessee will set an example to other states that are deciding what to do about the Medicaid expansion. Thirteen states have already rejected the expansion, with many others undecided. If Tennessee joins them, it will do much to limit spending of Tennessee taxpayer dollars by other states.

12. Tennessee should demand more control and flexibility to expand coverage its own way.

If Tennessee expands TennCare again, as many as 330,000 citizens between 100 and 138 percent of the federal poverty level will be added to the program. The state should demand more control over how subsidy money is distributed so citizens can seek higher-quality private insurance. The Healthy Indiana Program provides an attractive option.  This popular program, initiated by former Indiana Gov. Mitch Daniels, provided a routine health spending account jointly funded by modest contributions from recipients and from the state, with a back-up insurance plan to cover larger medical expenses, including hospitalizations. The popular program provides a better path to private coverage, while saving taxpayers and recipients money.

Given greater flexibility, Tennessee could build on its experience with Medicaid expansion to provide access to better health services, and in turn produce better health outcomes.

Access to a Medicaid card is not access to care.  The Tennessee legislature needs to demand that the state gain more control and flexibility TennCare so it can build innovative models that give recipients a stake in their care.

If states join together, they have more leverage to demand flexibility in Medicaid spending and the ability to protect the state when Washington attempts to increase costs to Tennessee later on.

Tennessee can lead the way to show that Medicaid can have a more efficient and effective service delivery system that enhances quality of care and outcomes.  Expanding TennCare without a guarantee of flexibility would be a major missed opportunity for the state.

Grace-Marie Turner is president of the Galen Institute (gracemarie@galen.org), and Avik S. Roy a senior fellow at the Manhattan Institute (aroy@manhattan-institute.org).