Monday, November 8, 2010

Will States Drop Their Medicaid Programs?

Amidst the controversy of the past few weeks about whether the health care law will result in employers dropping health coverage (about which more later) comes a related story in Sunday’s New York Times.  The article reports that the state of Texas is considering dropping out of the Medicaid program entirely.  As the piece notes, some states may save money by opting out of the Medicaid program, “dropping coverage for acute care but continuing to finance long-term care services.”  After 2014, low-income individuals in states that have dropped out of the Medicaid program would receive federal insurance subsidies to purchase coverage on insurance Exchanges.  In other words, these individuals would still have insurance coverage – but the federal government would be paying 100% of the cost of providing that coverage, potentially raising federal deficits significantly.

While the New York Times article attempts to link Texas’ Medicaid musings to “far-right conservatives,” the reality is that state officials in both parties have contemplated such a move.  In fact, in August 2009 the Times quoted Washington state’s Medicaid director – appointed by a Democrat governor – as saying that “I can foresee a situation where states would say ‘I don’t have enough in general funds to put up my share of this new expanded Medicaid program, and I have to get out of the Medicaid program…’  That’s what I think the doomsday scenario is here.”

Particularly given the massive budget deficits many are facing, states, like employers, will behave like rational actors when it comes to the health care overhaul.  The law gives both states and employers a pathway to shed much of their health care obligations – and if these entities find it makes economic sense for them to do so, they likely will, given the tight economic climate facing corporations and governments alike.  The bigger question is what the impact of the law will be on the federal budget if these decisions collectively result in a larger-than-expected share of individuals receiving insurance subsidies on federal taxpayers’ dime.