Medicaid Expansion Would Cost Us More

This op-ed was written by Dr. Eric Fruits and Dr. Oran Smith and was published in The Greenville News on 1/10/16.

With the 2016 election right around the corner, the candidates are searching for wedge issues to appeal to large swaths of the electorate. Nowhere is this clearer than in South Carolina, which hosts an early presidential primary in February.

Medicaid expansion, particularly in South Carolina and other states that have opted against broadening the federal health insurance program, is shaping up to be a hot-button topic.

The Affordable Care Act contains a provision that expands Medicaid coverage to nearly all individuals with incomes below 138 percent of the poverty line. But in the Supreme Court’s 2012 decision to uphold the ACA’s constitutionality, the court ruled that the federal government could not compel states to expand their Medicaid programs. At this point, 19 of them have joined South Carolina in saying no.

The arguments over whether to expand Medicaid vary state by state, but proponents often point to the federal government’s offer to foot almost the entire bill. For example, Ohio Gov. John Kasich supported Medicaid expansion as a way “to bring Ohio money back home” — that is, avoid bearing any of the cost.

But new research of ours suggests this argument may be lacking because it doesn’t account for associated increases in state and local spending.

Analyzing all federal funding to state and local governments shows each additional dollar of federal money sent to the states is associated with an average increase of 82 cents in new state and local taxes. Across all states, a hypothetical 10 percent increase in federal grants to state and local governments would be associated with approximately $50 billion in additional state and local taxes, charges or other revenue sources. In real terms this translates to an additional government burden of $158 per person. This is in line with existing peer-reviewed research that concludes each dollar of additional federal grants is associated with 54-86 cents in new state and local taxes.

Implementing the ACA’s Medicaid expansion in the remaining 20 states, which would cost the federal government an estimated $469.2 billion over the next decade, would therefore cost state and local governments an additional $318.4 billion. And this dubiously presupposes that the feds actually fund the full amount they have promised. If past is prologue, explosive program growth combined with a diminishing federal match would mean real trouble for states already struggling to balance their budgets and pay for existing education and infrastructure needs.

The fact that these 20 states have not expanded the programs reflects a realization that “free” federal money can be very expensive after all.

But why does federal government spending, which should theoretically crowd out state spending and taxes, in reality increase spending and associated taxes? The Government Accountability Office suggests two ways. First, federal grants usually require matching state spending, which is often paid for by increased taxes or fees. Many necessitate a dollar-for-dollar match in spending by state or local governments. Second, federal grants often have a maintenance of effort condition that requires states to prolong the funding after a certain time frame. In this way, the federal government guarantees that federal money adds to state spending rather than takes its place.

Yet even when the federal government promises to cover nearly 100 percent of the cost, like it has done with Medicaid through 2016, state taxes can still increase because of increased ancillary costs such as additional infrastructure and personnel. (Just think of the extra hospitals that must be built or additional nurses hired to accommodate more Medicaid users.)

In South Carolina, for instance, Medicaid expansion would force the state to pick up an estimated $130 million tab per year. And this almost certainly means tax hikes and added fees.

The research isn’t just relevant to Medicaid but all federal grants being considered by states. In South Carolina, a hypothetical 10 percent increase in federal spending would result in $780 million in additional federal funds to the state, which in turn amounts to $810 million in extra state spending costs. In real terms, each additional dollar in federal transfers to South Carolina amounts to a ratcheting of $1.03 in additional taxes, charges and other forms of revenue collection.

These findings shed new light on the potential consequences of accepting federal money. While Medicaid expansion might make sense in some states, South Carolinians should be hesitant about “free” federal money. It could cost billions.

Eric Fruits, Ph.D. is president of Economics International Corp. Oran Smith is senior fellow at the Palmetto Promise Institute.