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Daily Journal

About Those Medicaid Jobs Claims

Mar. 8th, 2013
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RALEIGH — On Wednesday, Gov. Pat McCrory signed legislation that declines Medicaid expansion under the Affordable Care Act. Much of the press coverage once again repeated two key claims about the decision: that it leaves some 500,000 uninsured North Carolinians out in the cold, and that it rejects billions of federal dollars on the table that would otherwise circulate through the state’s economy and create 25,000 jobs.

Neither of these claims is correct. State lawmakers and the McCrory administration know that these claims aren’t correct. That’s one reason why they decided against Medicaid expansion. It’s a shame that their constituents will never understand why these claims are incorrect as long as they rely on fallacious media reporting. I’ll try once again to correct the record here at Carolina Journal.

Under the Affordable Care Act, there are two separate and somewhat-competing provisions intended to increase health-insurance coverage for low-income individuals. One is Medicaid expansion. The other is a federal tax subsidy for purchasing private plans within new insurance exchanges. In the latter case, individuals with household incomes between 100 percent and 400 percent of the poverty line will receive federal subsidies, with the most generous amounts reserved for those on the lower end of the scale.

As the Obama administration has subsequently interpreted the law, the Medicaid expansion is a take-it-or-leave-it proposition. States must expand Medicaid eligibility up to 138 percent of poverty-line income for all individuals to draw down the full federal subsidy for the first three years, and the 90 percent subsidy after that. States are not allowed to expand Medicaid for uninsured adults up to 100 percent of poverty (which is about 350,000 North Carolinians) at the higher federal match while allowing uninsured adults with incomes between 100 percent and 138 percent of poverty (about 180,000 North Carolinians) to enter insurance exchanges.

So if North Carolina had expanded Medicaid under Obamacare, Medicaid would have been the only way for those individuals to obtain generous federal subsidies for health insurance. Because North Carolina didn’t expand Medicaid, that second group – the near-poor with incomes up to 138 of poverty – will now be eligible to enter the exchanges with federal subsidy.

It’s not reasonable to expect all 180,000 individuals in that group to do so. Some will pass on the opportunity or fall through the cracks. The same could be said about Medicaid expansion, however. While there are about 538,000 uninsured North Carolinians in the target range for Medicaid expansion, only 494,000 were projected to get coverage under the expansion in 2014, according to the North Carolina Institute of Medicine.

To claim that McCrory’s decision leaves those 494,000 people out in the cold, then, is to describe an impossible scenario. Some percentage of that population, perhaps as many as one-third based on prior estimates of North Carolina’s uninsured, will end up on subsidized private insurance within the exchange.

Now here’s where things really get interesting. As Duke University health policy expert Chris Conover points out, this dynamic is one reason why studies purporting to show big job gains from Medicaid expansion are off the mark. They compare the impact of new federal Medicaid funds on a given state’s economy against the impossible scenario – no new federal funds. Even if you accept the Keynesian assumptions of such studies, they could only be valid if they compared the Medicaid-expansion scenario against the federally subsidized insurance exchange scenario that North Carolina has just opted for.

Furthermore, because exchange health plans will be more expensive than Medicaid on a per-capita basis – due to Medicaid’s low reimbursement rates and the heavy regulations on private plans within exchanges – North Carolinians between 100 percent and 138 percent of poverty will actually draw down larger federal subsidies in the exchange than they would have as new Medicaid enrollees.

Since the exchange plans don’t yet exist, there is no hard number on the difference. Conover cites a CBO estimate that, on average, exchange plans will be about 50 percent more expensive than Medicaid. (The gap wouldn't be as large in North Carolina, which has a relatively expensive Medicaid program per recipient. Also, other analysts believe the 50 percent figure to be inflated.) Those from 100 percent to 138 percent of poverty will be eligible for federal tax subsidies covering all or the vast majority of the cost of an exchange plan.

Therefore, Conover argues, if those near-poor individuals make up a large share of the Medicaid-expansion pool, a state could break even or came out ahead on federal ACA funding if it says no to Medicaid expansion, depending on how many near-poor individuals comply with the individual mandate by entering the insurance exchange. If the uninsured poor vastly outnumber the uninsured near-poor, however, then Medicaid expansion will clearly maximize federal funding.

North Carolina is probably somewhere in between these two poles. Still, the difference couldn’t be large enough to translate into 25,000 federally subsidized jobs in the state. In fact, if you read the Regional Economic Models Inc. (REMI) study conducted for the N.C. Institute of Medicine from which that job-creation number was lifted, the author went out of his way to point out that he was modeling only the gross effect of new Medicaid spending on North Carolina’s economy – not the net effect after accounting for the economic cost of Obamacare as a whole, and certainly not the net effect of North Carolina choosing Medicaid expansion over federally subsidized insurance exchanges. In other words, the study considered only one side of the ledger. It was not a cost-benefit analysis of Medicaid expansion, as its author was careful to note.

Moreover, the 25,000-jobs estimate is for the third year of the proposed expansion, 2016, and is actually an approximate average of two alternative scenarios (25,684 jobs if you assume non-North Carolinians will enter the state to fill new health-care jobs and 24,846 jobs if you assume that most surrounding states will end up expanding their own Medicaid programs, thus reducing such migration to North Carolina). After 2016, as the state budget starts to absorb more of the cost of the expansion, the job estimates decline to an average of about 19,000 by 2021.

This is a critical point: there is no free lunch here. Paying for Medicaid expansion has an economic cost. An expansion financed by a combination of federal tax hikes, Medicare cuts, and state tax or budget changes means that some jobs will be created among providers serving Medicaid patients and other jobs will be lost. As Conover notes, nationwide the result will be worse than a wash – the Medicaid expansion will reduce net employment nationwide. But for individual states, the extent of that job loss will vary according to circumstances and level of participation.

In effect, the debate about Medicaid expansion and jobs in North Carolina is a debate about reducing our net job loss from Obamacare. It’s not about increasing employment from current levels. The only way to get a real increase in employment would be to repeal and replace the law.

Here’s the bottom line. Obamacare as currently constituted is a horrible mess. Whatever North Carolina does, it will remain a mess until a future Congress and president rewrite the law. In the meantime, North Carolina isn’t sacrificing 25,000 jobs by saying no to Medicaid expansion. A large amount of federal subsidy will flow to the state anyway for near-poor households who will now enter the exchange. How that federal exchange subsidy compares to the federal subsidy North Carolina would have pocketed from Medicaid expansion is impossible to pin down right now. We don’t know how aggressively the individual mandate will be enforced on low-income households, for example, and how expensive insurance policies within the exchange will be.

But we do know that the federal exchange subsidy won’t be zero – which is the figure you have to assume if you claim that Medicaid expansion would create 25,000 jobs, or you claim that half a million people are left uninsured by North Carolina’s decision not to expand. Obviously, neither figure is credible.

Next time, ladies and gentlemen, please read the fine print and do some independent thinking before passing along half-baked talking points as fact.

Hood is president of the John Locke Foundation and a contributor to First in Freedom: Transforming Ideas into Consequences for North Carolina.