New Health Care Law Cripples State Budgets

America’s fiscal crisis is about to explode. In 2010 state budget deficits reached an all-time high of $191 billion. Former New York Lt. Gov. Richard Ravitch has predicted that state deficits could reach a staggering $500 billion this year when the stimulus funds propping up state budgets run out in July.

And it’s only going to get worse for the states under ObamaCare.

A recent study by the Rand Corp. confirms that the states simply can’t afford the dramatic expansion of Medicaid mandated by the Patient Protection and Affordable Care Act.

Medicaid was created as a safety net for the truly poor to be administered by the states with federal financial support. The new health care law requires all states to provide Medicare coverage for everyone who earns up to 133% of the federal poverty level.

As of June 2010 Medicaid covered 50.3 million people, or about 16% of the population. Under the new law it will soon cover more than 60 million at a cost of at least $410 billion.

Rand found that the health care law’s Medicaid expansion would cost California alone $2 billion more per year when the health care bill goes into full effect in 2016. The costs would top $4 billion more annually by 2020.

California is already struggling to close a $26.6 billion deficit and has $535 billion in unfunded public pension liabilities. How is the state going to undertake billions in brand-new, federally mandated health care spending?

But California isn’t alone. The Rand study looked at Medicaid spending in four other states–Connecticut, Illinois, Montana and Texas–and found that it would hike Medicaid enrollment by a staggering amount in every state, ranging from a 30% increase in Connecticut to a whopping 80% increase in Texas.

As you might expect, this Medicaid expansion has significant costs attached. On average states spend about 22% of their budgets on Medicaid. Rand projects that state spending on health care in California, Illinois, Montana and Texas will increase by 7%, 10%, 3% and 10%, respectively.

Illinois and Texas are already running deficits well into the billions. Montana, which had been one of only two states not running a deficit, is projected to go into the red on June 30, just as the stimulus funds begin to run out.

Believe it or not, the Connecticut state government’s health care spending will actually decrease 10% because the federally mandated Medicaid expansion is likely to replace an existing state health care program. However, if you think this is good news for Connecticut’s taxpayers–think again.

Medicaid expansion is almost certain to raise health care costs everywhere. That’s because the program routinely underpays doctors and hospitals for the services its beneficiaries consume.

A study in the journal Health Affairs found that, nationally, Medicaid pays 92 cents for each dollar its beneficiaries consume. Total underpayments to hospitals rose from $3.8 billion in 2000 to $32 billion in 2008.

To make up the losses health care providers shift costs onto those with private insurance. The independent consulting group Milliman crunched the numbers and found that the cost shift adds $1,512 annually, or 10.6%, to the premium of a family of four with private health insurance.

In California the number of people offered health insurance by employers will drop 2% because of Medicaid expansion, according to the Rand study. This is likely to worsen the Golden State’s cost-shifting problem.

Further, expanding Medicaid coverage may make life harder for the program’s existing beneficiaries. Government underpayments have caused many doctors to refuse to see Medicaid patients. Indeed, a 2009 survey by Merritt Hawkins and Associates found that over half of all specialists in seven major metropolitan areas were refusing to take on new Medicaid patients.

So ObamaCare may extend Medicaid coverage to millions of folks–but they may not be able to use it.

ObamaCare’s expansion of Medicaid is destined to blow a hole in already reeling state budgets. State leaders must push back against this federal effort to consign them to the poor house.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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