As the May 2013 edition of “The Utah Taxpayer” noted, the Supreme Court’s Obamacare ruling gave Utah the choice of whether to expand eligibility for Medicaid to include all Utahns who earn up to 138% of the federal poverty level. As an inducement to expand Medicaid, Obamacare offers what is effectively an introductory price.
From 2014 to 2016, the federal government will cover 100% of the Medicaid costs associated with the newly eligible Medicaid population. Beginning in 2017, the federal government will reduce its support of this population, but promises to always cover at least 90% of this population’s Medicaid costs.
Unfortunately, the federal treasury isn’t capable of keeping those promises. The trajectory of federal entitlement spending is unsustainable. Given the federal government’s inability to meet its existing obligations, it is hard to see how Utah can rely on Obamacare’s promise to pay its share of expanding Medicaid.
The Trajectory of Federal Entitlement Spending
Last year Nicholas Eberstadt published a short book entitled “A Nation of Takers: America’s Entitlement Epidemic,” on the long term spending patterns of the federal government. His chilling graphics show the astounding growth in federal welfare spending over the last 50 years. Specifically, he shows that, “in 1960, U.S. government transfers to individuals from all programs totaled about $24 billion. By 2010, the outlay for entitlements was almost 100 times more” (page 4). “Even after adjusting for inflation and population growth, entitlement transfers to individuals have more than septupled” over that time period (Eberstadt, page 8).
Shocking as those statistics are, a response by economist Yuval Levin published in the same book focuses attention on the driver of this phenomenal growth. In 1971, “all non-health care federal spending combined (including Social Security, defense, all other benefit programs, everything but interest on the debt) was 17.1 percent of GDP” (Eberstadt, page 122). The same was true in 2011. However, federal health spending as a share of GDP “more than quintupled over that period.”
Table 1: CBO Projections of Federal Spending as a Share of GDP
|
2012 |
2022 |
2037 |
|
|
Federal Healthcare |
5.4% |
7.2% |
9.6% |
|
Social Security |
5.0% |
5.4% |
6.2% |
|
Other, non-interest spending |
11.6% |
7.3% |
6.9% |
Source: Congressional Budget Office, “The 2012 Long-Term Budget Outlook,” Table 1-2, page 12.
As Table 1 shows, current spending trends reflect similar patterns. Federal healthcare spending (Medicaid, Medicare, and various subsidies associated with Obamacare) will nearly double as a share of GDP by 2037. Social Security will continue to grow, while all other non-interest federal spending will decrease by nearly 41 percent over the same time period. As Levin puts it, “On the course we are on, … the federal government will become a health-insurance provider with some unusual side ventures, like an army and a navy” (Eberstadt, page 122).
How much will Medicaid expansion really cost at full implementation?
These long-term federal trends matter because they of what they portend for Utah’s decision over whether to expand eligibility for Medicaid. Utah’s Health Department commissioned a study to show taxpayer costs or savings associated with expanding Medicaid or not. Conducted by PCG, a national public policy consulting group, the study evaluates five scenarios
- Make only those expansions required by Obamacare.
- Expand Medicaid to all Utahns earning up to 138% of the federal poverty level (FPL) with traditional Medicaid benefits.
- Expand Medicaid to all Utahns earning up to 138% of FPL with essential health benefits.
- Expand Medicaid to all Utahns earning up to 100% of the federal poverty level (FPL) with traditional Medicaid benefits.
- Expand Medicaid to all Utahns earning up to 100% of FPL with essential health benefits.
Table 2 shows how PCG projects Utah’s Medicaid costs to change between 2014 and 2023 for each of those scenarios. During the first 3 years of implementation, when the federal government has promised to pay the full cost of expanding Medicaid, Utah would save about $28.4 million by expanding Medicaid to cover all Utahns up to 138% of FPL. During the same time period, any other choice would cost the state between $39.1
million and $88.3 million. (See the column labeled “3 year total” in Table 2.)
After that initial 3-year period, the federal government has promised to step down their coverage of the newly eligible Medicaid recipients to 90% by the year 2020. Utah taxpayers would have to cover 10% of the cost of newly eligible Medicaid recipients.
To reflect these separate promises, PCG also calculated the total costs over a 10-year period (see column B). Once the Medicaid expansion is fully implemented and the federal government is paying for their 90% share on going, the cost of not expanding Medicaid becomes the least expensive 10-year option.
PCG also provides the annual costs associated with these 10-year and 3-year options, which are represented in Table 2 by columns C and D. However, the 10-year annual does NOT accurately reflect the average annual costs Utah will face in 2023, because the costs and savings in years one through three (when the federal government is paying 100% of the cost of newly eligible Medicaid recipients) are fundamentally different than the costs and savings in the last years, when the federal government is only covering 90% of those costs. Table 3 attempts to approximate those differences.
In Table 3, Columns A and B replicate Columns C and D from Table 2. Column C is the difference between Columns A and B from Table 2. Finally, Column D divides Column C by 7, the number of years within PCG’s 10-year analysis that the federal government promises to cover 90% of the cost of newly eligible Medicaid enrollees. 
Column D is a more realistic approximation of Utah’s actual annual Medicaid costs beginning in 2023. The 3-year savings Scenarios 2 and 3 generate are fully consumed in the following 7 years. In other words, the total and annual losses in those last 7 years are much larger than the overall and annual 10-year losses. The annual costs calculated by recognizing the full costs over the last 7 years (Column D) are a more accurate reflection of Utah’s Medicaid costs beginning in 2023. To be clear, the federal promise to cover 90% of the costs for newly eligible Medicaid enrollees is permanent. PCG’s estimates merely reflect the 10 years they evaluated.
For example, PCG projects that the 10-year annual loss for Medicaid will range from $22.1 million to $58.1 million (Column A). However, as Column D notes, the state’s annual costs in 2023 will be likely vary between $25.9 million and $70.4 million. For every Scenario PCG modeled, Utah’s likely annual Medicaid costs will be significantly higher than the 10-year estimates PCG presented.
In determining whether Utah should expand Medicaid, this analysis is critical, because the state balances its budget every year. Any savings the state may have from a full Medicaid expansion in 2014, 2015 or 2016 is irrelevant to the state’s budget in 2023. Policymakers need to appreciate Medicaid’s realistic long-term annual budget costs associated with expansion. Unfortunately, PCG’s 10-year annual estimate does not help them see that.
Are even these revised Medicaid costs realistic?
As the analysis in PCG’s report and in the previous section notes, Obamacare will significantly increase Utah’s annual Medicaid costs at full implementation, even if Utah does not expand Medicaid more than federal law requires. However, even this analysis relies on unrealistic assumptions.
As the Eberstadt analysis presented in the first section of this this article shows, the current fiscal parameters of federal entitlement spending are not sustainable. And the ability of the federal government to keep its promises of paying 100% of the newly-eligible population’s Medicaid costs for the first three years, and 90% at full implementation, hinge on the federal government being able to sustain that level of spending.
That is an absurd assumption, if only because we will be in other wars, which will prevent the federal government from cutting non-healthcare spending. We may wish it isn’t true, but the history of American foreign policy notes that American involvement in one war or another is nearly as regular as a heartbeat: Spanish American War, WWI, WWII, Korea, Viet Nam, Grenada, Iraq, Kosovo, Iraq, Afghanistan, etc. Budgeting with a realistic eye on taxpayer costs demands that policy makers assume the federal government won’t keep all their spending promises.
Unfortunately, that assumption has a solid foundation. Just this year federal budget cuts associated with sequestration lowered the PILT and mineral lease payments the federal government makes to rural counties throughout the country.
Even in healthcare, the federal government has failed this year to keep its promises. In 2010, the federal government promised to support Utah’s high-risk insurance pool, HIPUtah. HIPUtah provides otherwise uninsurable individuals (i.e., those with cancer, diabetes, heart disease and other chronic illnesses) who leave the group insurance market and want to purchase insurance in the individual market.
Without a larger healthy population in this market or taxpayer backing of an insurance pool for uninsurable patients, the costs of insuring these chronically sick patients would overwhelm the individual insurance market. The same sequestration cuts that lowered PILT and mineral lease payments also forced them to stop supporting new enrollees.
Given the foreseeable state of the federal treasury, it is unrealistic to expect that the federal government will follow through on its promises to cover 90% of the costs of newly eligible Medicaid enrollees once Medicaid expansion is fully implemented. Assuming that’s true, if Utah lawmakers expand Medicaid now, at some point they’ll have to either cut Medicaid benefits or raise taxes. Neither of those options are palatable.