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Bill for Medicaid expansion? $516M a year

September 24, 2012

If Indiana expands its Medicaid program as called for under President Obama’s health reform law, it likely will hike state spending on the program an extra 13.5 percent by 2020, according to the latest projections from Seattle-based actuarial firm Milliman Inc.

That means the state would spend $516 million more per year to provide Medicaid health benefits to low-income Hoosiers. And since Medicaid spending—even without the new law—already is projected to grow more than $1 billion between now and 2020, the extra spending would put even more pressure on state finances.

But the decision before state lawmakers will be whether the benefits outweigh the costs. The state’s extra spending could provide coverage for more than 500,000 additional Hoosiers. And even though the state’s tab would be high, in 2020 it would draw down federal spending of nearly $3.4 billion—a match of more 6-to-1.

“It’s too good a deal,” Dr. David Orentlicher, a former Democrat state representative who is now co-director of the Hall Center for Law and Health at the Indiana University McKinney School of Law, said during an Aug. 21 presentation to the Indiana Medical Group Management Association. He expects Indiana officials to eventually expand Medicaid as much as the health reform law called for.

The decision in Indiana will be left to the winner of the gubernatorial contest between Republican Mike Pence and Democrat John Gregg, as well as the Indiana General Assembly.

The 2010 Patient Protection and Affordable Care Act originally mandated that states expand their Medicaid programs to cover all adults and children in households with incomes up to 138 percent of the federal poverty limit. That threshold is equal to $31,800 per year for a family of four.

Currently, Indiana offers Medicaid to children and pregnant mothers with incomes even higher than that threshold. But it restricts Medicaid to adults making only 25 percent of the federal poverty limit, or less than $5,800 per year.

But in June, the U.S. Supreme Court ruled that states could elect not to expand their Medicaid programs as called for by the law—without the risk of losing federal funding for their existing Medicaid programs. In Indiana, the federal government currently matches state spending 3-to-1.

Officials in some states have asked the Obama administration if the health reform law allows them to expand Medicaid to all adults making 100 percent of the federal poverty limit, because people making more than that amount would be eligible for new federal subsidies to buy private health insurance.

That option would require Indiana to spend only $411 million extra per year, come 2020, according to Milliman’s estimates. The Obama administration has yet to provide guidance on that option.

Indiana faces at least some extra spending no matter what, according to Milliman’s assumptions. The firm assumes that the Affordable Care Act’s requirement that nearly all individuals have health insurance—or else pay a tax—will lead to growing enrollment in Medicaid even under the current income eligibility thresholds.

The tax, known as the “individual mandate,” would not apply to low-income individuals, but Milliman still assumes the talk about it will lead to 100,000 more Hoosiers coming out of the woodwork to apply for Medicaid.

“The individual mandate, while not necessarily imposing a tax penalty, may just raise awareness of people,” said Rob Damler, a principal at Milliman’s Indianapolis office. He led the analysis for the state of Indiana, which was released on Sept. 19. “Individuals will hear about an individual mandate for health insurance and let’s say, go to the exchange, to find out if they’re eligible for a subsidy at the exchange and will find out that they are eligible for Medicaid as well.”

Damler thinks employers—who also face a penalty under the law for not providing health benefits to their workers—will more actively check to see if employees qualify for Medicaid.

If he’s right, Indiana faces higher annual Medicaid spending of at least $123 million by 2020, even if it does not expand its Medicaid eligibility at all.

Damler’s estimates assume that even if Indiana expands Medicaid, the program will not draw participation from all Hoosiers who are eligible. That’s because, since the Medicaid program was launched in 1967, it has never drawn full participation in any state.

But Damler did assume the state will have to pay doctors at least 25 percent higher rates to attract enough to care for another half-million Medicaid patients. The federal government will pick up most of those costs, but in 2020 Indiana will still be paying doctors $114 million more per year, he estimates.

Damler also assumed the state would have to pay $28 million to cover the costs of the health reform law’s excise tax on health insurers. The tax would apply to the three companies the state uses to run managed care plans for Medicaid recipients—Anthem Blue Cross and Blue Shield, MDWise Inc. and Managed Health Services Inc. But Damler assumes the state would have to raise the rates it pays those insurers in order to still provide “actuarial sound” payments.

Lastly, Damler assumes an expansion of Medicaid would force the state to hire more people to process eligibility applications for Medicaid and to do more active contracting and analysis of the Medicaid program. He assumes that will cost an extra $50 million in 2020.

“It’s general overhead of just having more people,” Damler said. “If you have more people [receiving Medicaid benefits], you may be trying to control costs, bidding out program pieces, doing different procurements and things of that nature.”

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