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As Detroit Goes Bankrupt, Michigan's Senate Considers Adding Billions of Unfunded Liabilities to Its Medicaid Program

July 22, 2013

By Avik Roy

Last week, the City of Detroit filed for bankruptcy, making it the largest municipal bankruptcy in American history. It’s a remarkable story, especially for natives of the state, like me, who have watched Detroit slowly decline for decades. But it’s even more remarkable when you consider the fact that the Michigan state legislature is on the verge of adding billions in unfunded liabilities to the state’s Medicaid program, precisely at the time when Michigan’s politicians should be most acutely aware of the dangers of fiscal irresponsibility.

In June 2012, the Supreme Court ruled that states had the legal right to opt out of Obamacare’s dramatic expansion of the Medicaid program, America’s government-run health care program for low-income individuals. Unlike Medicare and Obamacare’s insurance exchanges, which are funded by the federal government, Medicaid is jointly funded by the states and the federal government.

In Michigan, the feds pay for about two-thirds of the program. But the state’s one-third share is still a large number. Of Gov. Rick Snyder’s fiscal 2014 budget of $50.9 billion, 45 percent will be spent on health and human services, compared to 30 percent for education, the next highest total.

Many Michigan Republicans support expanding Medicaid

Despite the fact that the state’s burgeoning Medicaid program is already putting a severe strain on state finances, Michigan’s Republican-controlled House of Representatives in June voted to expand Medicaid, as Obamacare prescribes. 28 Republicans, including House Speaker Jase Bolger, voted for the expansion, along with all 48 Democrats. 31 Republicans voted against.

However, the Medicaid bill stalled in the state Senate, also controlled by Republicans 26-12, because the upper chamber couldn’t agree on legislation before the commencement of its summer recess. Gov. Snyder, also a Republican who supports expansion, lashed out at the Senate, demanding that senators “take a vote, not a vacation.”

Senate majority leader Randy Richardville told reporters last week that the Senate is likely to vote during the last week of August or the first week of September. With all 12 Democrats on board, the bill only needs eight of 26 Republicans to pass the Senate.

Medicaid expansion is a $3-7 billion unfunded liability

Based on projections by the University of Michigan, the Wolverine State will experience a near-term windfall from the Medicaid expansion, as the federal government funds the entirety of the expansion. However, that matching rate drops from 100 percent to 95 percent in 2017, and drops to 90 percent from 2020 onward.

That may seem like a great deal—federal taxpayers are funding 90 percent of the bill!—but that ten percent share is still large for the residents of Michigan. The state begins losing money on the Medicaid expansion beginning in 2020, six-and-a-half years from now. And from then on, the expansion will bring on a gusher of red ink.

If growth in state Medicaid spending is roughly equal to the risk-free discount rate (a way of measuring inflation), then the net present value of the state’s 75-year liability for expanding Medicaid is $3 billion. If, however, net spending on the Medicaid expansion is merely 2 percent greater than the risk-free discount rate, the unfunded liability is $7 billion. Let’s leave aside for now the possibility that 2 percent is conservative.

Medicaid doesn’t improve health

As we know, Medicaid does nothing to improve health outcomes relative to being uninsured. And yet, Michigan is on the verge of adding 3 to 7 billion dollars to its unfunded liabilities in order to expand a program that doesn’t make people healthier. To put that in perspective, independent analysts believe that the size of Detroit’s unfunded pension liability is about $3 billion.

Let’s say you’re a teacher or a state trooper in Michigan, and your pension is supported by the state. If, in the next few years, Gov. Snyder or the legislature asks you to take a pay cut or trim your pension, you can rightly ask them: if you were so concerned about my pension, why did you expand Medicaid?

Detroit has been declining ever since a series of tragic race riots in 1967 drove wealthier residents out of the city, handing the keys over to a series of corrupt and demagogic politicians, exemplified by longtime mayor Coleman Young. It took 46 years to bring Detroit from that moment to this one. If Michigan goes down the same path to bankruptcy as Detroit, the state legislature won’t have race riots as an excuse. It will be their own shortsightedness, and their willingness to spend money they don’t have, that will seal the state’s fate.

Original Source: http://www.forbes.com/sites/theapothecary/2013/07/22/as-detroit-goes-bankrupt-michigans-senate-considers-adding-billions-of-unfunded-liabilities-to-its-medicaid-program/

 

 
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