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Medicaid expansion could cost $54M a year

November 26, 2012

Indiana’s Medicaid expansion may cost much less than expected.

A new set of projections released Monday estimates that expanding Medicaid coverage as called for in President Obama’s 2010 health reform law would cost the state government less than $54 million per year on average over the next decade—far lower than projections issued by the actuarial firm hired by Republican Gov. Mitch Daniels’ administration.

The projection, compiled by the Washington, D.C.-based Urban Institute, a left-of-center think tank, accounts for savings the state could enjoy by reducing the cost of care for uninsured Hoosiers. It also assumes lower rates of participation in expanded Medicaid coverage than did a previous estimate generated for Indiana by Seattle-based Milliman Inc.

In September, Milliman estimated that Indiana would spend an average of $140 million per year from 2014 to 2020 to pay for expanded Medicaid coverage as called for by the health reform law, which is called the Patient Protection & Affordable Care Act. To make it comparable with The Urban Institute's study, that figure does not include Milliman's estimates for administrative costs, increased payments to doctors, or the impact of new federal taxes on health insurers that help provide Medicaid benefits to low-income Hoosiers.

Still, The Urban Institute's analysis concludes Indiana faces a bill less than 40 percent of what Milliman estimated.

“The new state spending is really quite small as a percentage of general funds,” said John Holahan, director of the Health Policy Research Center at The Urban Institute and the primary author of the analysis, during a conference call with reporters.

The health reform law called for all states to expand eligibility for Medicaid coverage to residents making 138 percent of the federal poverty limit, or about $31,800 for a family of four. Indiana’s Medicaid program already covers children and pregnant mothers above that threshold. But it only covers adults without kids who earn less than 25 percent of the federal poverty limit, or about $5,800 per year.

The higher income threshold could bring more than 500,000 additional Hoosiers into the Medicaid program, according to Milliman’s estimates. But The Urban Institute expects just 340,000 additional Hoosiers to join an expanded Medicaid program.

Indiana does not have to expand its Medicaid program, but if it does not, it will pass up a huge amount of new federal funding. Gov.-elect Mike Pence, a Republican, has been sharply critical of the Affordable Care Act, and has said he would consider a Medicaid expansion only if Indiana is allowed to use its Healthy Indiana Plan as the vehicle for it.

Even without an expansion, Indiana will be paying more to operate Medicaid. That’s because costs and the percentage of the population eligible were expected to rise even before the health reform law passed. Also, the new law requires that most individuals obtain health insurance or else pay a fine—so it’s expected that a large number of Hoosiers who now qualify for Medicaid but have not yet signed up will do so.

This so-called “woodwork effect” was expected to add 92,000 Hoosiers to the Medicaid rolls in Milliman’s projections. But The Urban Institute estimates the “woodwork effect” at just 72,000.

If Indiana does expand Medicaid, Milliman assumed roughly 75 percent of Hoosiers eligible for Medicaid would in fact sign up. The Urban Institute assumed just 72 percent of newly eligible Americans and less than 25 percent of those already eligible for Medicaid would do so.

With those assumptions, The Urban Institute figures Indiana will spend $1 billion over the next decade to expand Medicaid. The state would spend little at first, as the federal government picks up most of the tab. But federal support would gradually decline after the initial years of the expansion.

Total federal spending in Indiana would total $17.3 billion over the next decade, according to The Urban Institute’s calculations.

The Medicaid expansion also would reduce the number of uninsured Hoosiers, whose care is now partially paid for via special Medicaid payments to hospitals. Such a reduction in the uninsured would likely reduce those special Medicaid payments, according to the Urban Institute's analysis. The resulting savings could reduce Indiana’s total bill by nearly half, so the state would spend just $537 million over the next decade—or $53.7 million per year.

By contrast, Milliman’s estimate assumed Indiana would spend $2 billion from 2014 to 2020 to pay for the expansion of Medicaid, which averages $291 million a year. That estimate does include more than $1 billion to pay for adminsitrative costs, higher payments to doctors seeing Medicaid patients and higher payments to health insurers to offset the impact of new federal taxes on them.

An expansion of Medicaid in Indiana would draw federal funding of $20.4 billion over that seven-year time frame, according to Milliman.

But the Urban Institute estimates that, on the whole, states actually will save more money from reducing the number of uninsured than they will pay in additional Medicaid coverage.

“While some states will see net savings, others will need to weigh the trade-offs between small increases in state spending in return for large gains in coverage supported by mostly federal dollars,” said Diane Rowland, executive vice president of the Kaiser Family Foundation, which released The Urban Institute’s analysis.

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