How Much Would a State Lose If It Opts Out of the Expansion of Medicaid under the ACA?

The Affordable Care Act seeks to achieve universal health care coverage by expanding Medicaid and by granting funding to low income persons and families to purchase health insurance. In NFIB v. Sebelius decided June 28, 2012, the Supreme Court ruled that the states must be given the opportunity to "opt out" of the expansion of Medicaid contained in the Affordable Care Act. How much money would a state lose if it chooses this route? It appears that it would cost the average state about $1 billion annually to forego expanding Medicaid. What else would it lose? Competitive advantage.


The Affordable Care Act expands Medicaid by making everybody earning under 138% of the federal poverty level eligible for Medicaid. This means that individuals earning less than $15,000 and families earning less than $30,000 annually would qualify for Medicaid. Low-income people who are not on Medicaid are eligible for federal subsidies to purchase private health insurance on the Exchanges - but only if they earn more than 100% of the federal poverty level. If a state chooses not to expand Medicaid, then the state would lose funding for all of the persons who might have been newly eligible under the expanded program. On the other hand, those persons within the state earning 100% or more of the federal poverty level would then qualify for subsidies.

In this report issued July 24, 2012, the Congressional Budget Office assumes that six million American citizens would be denied Medicaid if several states opt out of the Medicaid expansion. The CBO estimates that the federal government would save about $6,000 for every person who is not covered by Medicaid, but would pay an additional $9,000 for every person who is denied Medicaid but who qualifies for federal health insurance subsidies. The CBO estimates that only about one-third of Medicaid recipients who are denied eligibility by the states refusing to expand Medicaid would qualify for the federal subsidies. Accordingly, the federal government would save more than $80 billion over ten years if a several of the states decline to join the Medicaid expansion.

American Action Forum, a conservative think-tank, came to the opposite result. See this executive summary from the AAF and Sarah Cliff, The Cost of Medicaid Opt-Outs, Washington Post (July 24, 2012). The AAF concluded that the federal government would lose money if the states opt out of Medicaid. They arrived at this result by assuming that three-fourths of persons who are denied Medicaid coverage by the states would qualify for federal subsidies and that the average cost of federal subsidies would be over $15,000 per person. Neither of those assumptions seems at all realistic.

However, both reports agree that states themselves would lose about $6,000 in Medicaid funding for every person whom they choose not to cover by expanding Medicaid. The American Action Forum estimates that in just six states - Florida, Mississippi, Louisiana, Nebraska, South Carolina, and Texas - federal funding for Medicaid would be reduced by over $12 billion in 2014 and that this loss in funding would rise to over $16 billion by 2018. That's a lot of money for those states to leave on the table.

Some of that funding would be returned to individuals and families earning between 100% and 138% of the federal poverty level in the form of subsidies for private health insurance; but according to the CBO, that is likely to be no more than half as much as the state lost by not expanding Medicaid. Using the AAF's estimates regarding state participation and the CBO's estimates on the cost of not participating, on average each of those six states would lose more than $1 billion annually in federal funding by foregoing the Medicaid expansion.

The loss in funding would in turn affect the state's economy. The federal funding for Medicaid and health insurance subsidies doesn't just disappear after it is spent on health care. That money is injected into the state's economy where the multiplier effect expands its citizens' income and wealth in innumerable ways. A billion dollars can go a long way within a state - especially a poor state.

And it's not as if the states would save significant amounts of money by electing not to expand their Medicaid programs. For the first four years the ACA is in effect the federal government will pick up 100% of the increase in the cost of expanding Medicaid. Thereafter the federal government will pay 90% of the cost of Medicaid, compared to an average of 57% under existing Medicaid. Furthermore, the Affordable Care Act will terminate Medicare funding for care for the uninsured; it was expected that hospitals would make up the difference through the expansion of Medicaid. If a state elects not to expand Medicaid it will have to find other sources of funding for its hospitals to serve the indigent - on its own. Nor should the states that refuse to expand Medicaid expect the federal government to refund any federal revenues that are generated by the Affordable Care Act, including a nine-tenths of one percent Medicare tax on persons earning in excess of $250,000 annually. The states that do elect to expand Medicaid will be only too glad to spend that money.

No state can afford to fund health care for the indigent on its own, nor is any state an economic island that is immune to competitive pressures from other states. States that forego this funding will quickly find themselves at a competitive disadvantage in comparison to other states with respect to both the health of their economy and the health of their workforce. Like good roads and good schools, access to good health care is rapidly becoming part of the infrastructure of a community. Businesses will increasingly gravitate towards states and communities where government bears more of the cost of providing health care. It won't take long for every state to get on board.