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How a GOP Gov. Walked Arizona into Obamacare's Medicaid Expansion Trap

January 19, 2013

By Avik Roy

One of the most transformative aspects of Obamacare is that it conscripts state governments for the purpose of providing subsidized health insurance to their residents. Most red states have done their best to refuse, by declining to expand their Medicaid programs, and by passing up the opportunity to set up state-based insurance exchanges, through which Obamacare’s subsidies would flow. But a handful of Republican governors are doing their part to implement Obamacare. Arizona’s Jan Brewer, in particular, is proposing to do so in a way that sheds a lot of light onto the trap that Obamacare has set for state governments.

Earlier this week, Gov. Brewer recommended that Arizona go along with Obamacare’s Medicaid expansion. Previously, parents and childless adults in Arizona were eligible for Medicaid if their income was below 100 percent of the federal poverty level. Gov. Brewer’s expansion would expand Medicaid eligibility to adults with income between 100 and 133 percent of FPL, and take additional federal money to fund Medicaid for childless adults below the poverty line.

"By slightly expanding eligibility for Arizona’s Medicaid program," said Brewer in a statement, "Arizona will receive $7.9 billion in federal funds over four years…This money will not only insure hundreds of thousands of low-income Arizonans, it will be an economic boon and help maintain the viability of rural and safety-net hospitals feeling the pinch from growing costs of uncompensated care."

Arizona’s checkered Medicaid history

Brewer’s decision—and her justification for that decision—are telling, and problematic. Like most Medicaid stories, it’s worth stepping back and understanding how Arizona got to where it is today.

Arizona was the last state in the Union to implement Medicaid, doing so in 1982, 17 years after Lyndon Johnson signed the program into law. Arizonans ultimately joined in for one reason above all: they faced the classic fiscal prisoners’ dilemma, in which states that forego federal Medicaid funds end up having their federal tax dollars go to fund similar programs in other states.

Since 1982, Arizona has made up for lost time. In 2000, at the peak of the dot-com bubble, Arizona voters passed Proposition 204, which expanded Medicaid eligibility to all state residents below 100 percent of the federal poverty level, even though many such individuals don’t get federally subsidized Medicaid coverage.

Soon after, through a waiver agreement with the federal government, Arizona received federal matching funds to cover the Medicaid subpopulation of childless adults, a group that normally didn’t get federal funding.

The hangover came quickly. During the recent recession, as Medicaid spending skyrocketed, Arizona faced a massive budget shortfall. The state decided to stop reimbursing Medicaid patients for organ transplantation in order to save money: what even liberals were calling a "death panel."

In addition, the state was forced to freeze Medicaid eligibility for childless adults. As of July 2011, any childless adult who was enrolled on the program could stay on, but no new enrollees would be approved. Childless adults enrolled in Medicaid went from 227,000 before the freeze to 86,000 today: a decrease of 141,000.

Unfortunately, the state’s Medicaid waiver expires at the end of 2013. Kathleen Sebelius’ Department of Health and Human Services will have to approve any future agreements. Sebelius, in effect, gave Arizona two choices: opt out of Obamacare’s Medicaid expansion, and end coverage of childless adults through the program, or expand Medicaid as Obamacare attempted to mandate, for all individuals below 133 percent of the federal poverty level.

Brewer’s advice: take money from out-of-state taxpayers

Given this choice, Brewer went with the choice Sebelius favors: fleecing the taxpayers of other states. "For a state match of a little over $154 million in FY 2015," Brewer’s office asserts, "the State can draw into its healthcare sector $1.6 billion in federal funds—a return on investment of more than 10-to-1." Note Brewer’s abuse of the terms "investment" and "return," given that what she’s really talking about is coercing out-of-state taxpayers to subsidize the previous mistakes that her state has made.

And that’s not the only way Brewer is hoping to get at federal dollars. She also proposes dramatically increasing taxes on hospitals in order to spend more money on Medicaid: a classic shell game that profligate states use to get more federal Medicaid dollars for each net dollar spent by the state.

Her excuse for this maneuver? It’s been done before. "The provider assessment would not be an unprecedented step, as Arizona already charges a 2% insurance premium tax [and] a provider tax on nursing homes in order to draw federal funds for special payments to the homes." Translation: Arizona residents who pay for their own insurance face higher costs, so that Arizona can fund a Medicaid expansion that it can’t afford.

Medicaid’s hidden ’woodwork’ costs

Gov. Brewer’s view as to Medicaid’s "return" on "investment" is flawed in other ways. She is putting her state on the hook for part of the cost for the substantial number of Arizonans who had always been eligible for Medicaid, but hadn’t signed up for the program. This "woodwork" phenomenon—what we might call Medicaid’s pre-existing condition—is crucial, because the state government is still on the hook for a big chunk of the Medicaid funding for these previously eligible individuals.

A 2010 study by two Harvard researchers found that barely half of Arizonans who were eligible for Medicaid in 2010 had signed up for the program. Note that this is prior to the 2011 budget freeze. (If Medicaid is so awesome, why is it that so many people who are eligible for the program don’t bother to sign up?)

And while the federal government is covering most of the costs of the Medicaid expansion, it’s not covering all of it. Moreover, there’s no guarantee that Washington will continue to fund the Medicaid expansion in future years.

Gov. Brewer claims to have solved this problem be including a "safeguard that rolls back enrollment if federal reimbursement rates decrease." But, as Gov. Brewer should know, it’s not so easy to roll back Medicaid once it has been put into place. Why not avoid this risk altogether by putting more Arizonans onto the Obamacare exchanges, which are fully funded by federal taxpayers?

Undercompensated care is a bigger problem than uncompensated care

Brewer claims that expanding Medicaid will "help maintain the viability of rural and safety-net hospitals," because the uninsured are allegedly consuming a lot of uncompensated care. But this isn’t true. It’s actually the Medicaid population that is responsible for much of the inappropriate use of emergency rooms, and Medicaid’s underpayment of providers is a far greater economic problem for most hospitals.

Obamacare’s exchanges, which subsidize a highly regulated form of private insurance, also kick in at 100 percent of FPL. The quality of coverage on the exchanges, while far from luxurious, will be meaningfully superior to that of Medicaid, and provide higher reimbursement rates to Arizona hospitals and doctors. By foregoing exchange-based insurance for Medicaid, Gov. Brewer is asking local hospitals and doctors to accept lower payments for their services than they would otherwise receive.

By far, the best course for Arizona would have been to opt out of both the state-based exchange and the Medicaid expansion. Arizona adults with income between 100 and 133 percent of FPL would still get federally subsidized coverage through the federally-run exchange, but the quality of that coverage would have been superior.

Moreover, as these lower-income Arizona residents moved up the income ladder, they’d be able to maintain their coverage, because Obamacare’s exchanges continue to subsidize insurance, on a sliding scale, up to 400 percent of FPL.

That’s important, because going with the exchanges instead of Medicaid removes a key disincentive for poor Arizonans pursue additional opportunities for self-sufficiency. Indeed, an able-bodied, childless adult at 80 percent of the poverty level would have a huge incentive to seek extra work, knowing that getting to 100 percent of FPL would allow him to sign up for subsidized coverage on the exchange.

Obamacare’s exchanges have their problems as well. Thanks to our health law’s economically illiterate spaghetti of costly mandates and requirements, coverage on the exchanges will cost a lot more than it should. But if a state government is to choose between Medicaid, America’s worst health care program, and the exchanges, I’d take the exchanges every time.

By siding with Medicaid over the exchanges, Jan Brewer is attempting to shoehorn her constituents into a lower-quality and less efficient program, force state and federal taxpayers to pay more, and financially destabilize Arizona hospitals and doctors. It takes a special kind of policy proposal to achieve that trifecta. Fortunately, it’s the Arizona state legislature that will have the last word.

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