Confusion in the Capitols

It was just a quarterly meeting, with top state health officials from around the country gathered in Washington, D.C.’s Fairmont Hotel the last weekend of March. On the agenda: Cindy Mann, director of the Center for Medicaid and State Operations at the U.S. Department of Health and Human Services.

But this meeting was not routine. It came less than a week after President Obama signed into law the federal health care overhaul, a measure seen by supporters as his signature domestic policy initiative but by critics as an expensive, cumbersome and, at worst, unconstitutional piece of legislation. On this day, political rhetoric gave way to technocratic questioning on some of the most intricate details of the law. “There’s a lot about this bill that’s yet to be determined,” said Washington State Medicaid Director Doug Porter, who was at the meeting.

The session exemplifies the overwhelming sense of confusion among state lawmakers and health care officials around the country as they scramble to figure out what exactly health care reform means for their governments, their citizens and, not least of all, their budgets. With estimates ranging from state savings of $1 billion to $27 billion in additional costs, the one thing clear about health care reform is that little, if anything, is actually clear.

“It’ll probably be 10 years before it all shakes out,” says Chris Whatley, of the Council of State Governments, only half-jokingly. “This will push the fabric of the state-federal relationship in new directions, and we don’t know how it will all come out.”

A primary source of the confusion is the law’s interaction with 50 very different situations around the country. Many state officials have labeled the entire initiative an unfunded mandate that will stress state fiscal systems already weakened under the weight of falling tax revenue.

Winners and losers

The health care overhaul uses states as a vehicle for approaching universal health coverage, and what’s most important is the law’s Medicaid expansion. Requiring states to enhance Medicaid coverage will cost them $20 billion, according to the Congressional Budget Office, and cost the federal government hundreds of billions, in the next decade.

States will be required to set their Medicaid eligibility level at 133 percent of the federal poverty level — about $14,404 for one person and $29,327 for a family of four as of 2009 — for everyone, including childless adults and parents. For some states, this will represent a doubling of Medicaid rolls, as well as the incorporation of previously excluded groups into the program. States that have had Medicaid programs below the new threshold will see the entire expansion paid for by the federal government from 2014 to 2016, although that aid will taper off to a 10 percent share by 2020.

But not all states are equal under the new rules. Some, known as “expansion states,” already allow Medicaid participation above the 133 percent of poverty limit in the new law. For them, the initial level of federal funding will be much smaller. Therefore, it will make a huge difference whether a state is treated as an expansion state. It will mean the difference between the federal government spending billions to fund the beginning of Medicaid expansion and a more phased-in approach where a state will be required to provide more funding early on, although its share of the cost for a certain population will diminish over time. For the most part, it’s better to be a non-expansion state.

Minnesota is a good example. It currently has two state-run programs that cover low-income parents and childless adults up to 250 percent of the federal poverty level. Minnesota funds much of the cost of both with its own dollars through its health care access fund, which currently has a deficit. The uncertainty comes because Minnesota covers its population like an expansion state, but doesn’t have a federal Medicaid waiver, meaning the programs are not a “state plan,” as defined by the law.

Brian Osberg, Minnesota’s Medicaid director, says the way the law is written the state shouldn’t be an expansion state. If it isn’t, many covered by the state-funded programs, particularly childless adults, would be covered under the mandated Medicaid expansion. That means Minnesota could conceivably get federal funds to cover all the costs of insuring a population now covered solely by state funds, removing a significant fiscal burden from its budget.

But others, including state lawmakers and some policy experts, have said Minnesota will be considered an expansion state. If it is, the state would have to match federal funds with additional spending. “If we become an expansion state, and we’re not entitled to the 100 percent, we’re in a real big problem,” Osberg says. “It would be a huge financial hit for us.”

Osberg says the state has asked the federal government for clarity, but until he hears otherwise will assume Minnesota is not an expansion state. Still, the uncertainty underscores the stakes amid the confusion. “If we’re wrong about that,” Osberg says, “this is a whole different set of financial problems.”

An unfunded mandate?

One of the common charges against the health care overhaul, particularly from Republican governors, is that it is an unfunded mandate on the states. From insurance exchanges and administrative costs to the Medicaid expansion, it’s clear there will be an increase in government dollars — both state and federal — going toward health care in the years to come.

But is it an unfunded mandate? Much of the criticism comes from states that are going to see the largest Medicaid expansion. Texas, for example, currently has one of the strictest Medicaid eligibility limits in the country for parents, at 26 percent of the federal poverty level, or just $5,733 for a family of four in 2009. And, like many other states, Texas offers no coverage to childless adults regardless of income.

Because of that, the state is expected to see an additional 2 million people on its Medicaid rolls under health care reform, according to the Texas Health and Human Services Commission and Governor Rick Perry. The latest estimate of the cost to Texas, according to the commission, is a staggering $27 billion between 2014 and 2023. That’s $7 billion more than the $20 billion Congressional Budget Office estimate of the cost to all states combined between 2010 and 2019.

But some contend that Texas has an inflated estimate. For example, Anne Dunkelberg at the Texas-based Center for Public Policy Priorities points out that the Texas commission price tag includes a reduction in federal payments to hospitals that cover a large proportion of uninsured patients. But with more people insured than at present — one in four Texans is currently uninsured — uncompensated care is expected to decline. “The real take home is how inflated the governor’s big scary number is,” Dunkelberg says.

Still, it’s true that the Medicaid expansion will cost Texas additional money. Even 10 percent of the estimated cost of the Medicaid expansion in the state would be $370 million for a state facing a dire budget situation. On a smaller scale, Alabama, which has an even stricter Medicaid program than Texas, estimates the law will cost that state “anywhere between $60 million to $100 million” each year, says Carol Steckel, the state Medicaid commissioner.

While there’s no shortage of cost estimates, Judy Solomon, a health policy expert at the Center for Budget and Policy Priorities, says it’s still early to be putting any sure price tags on individual states. “It’s not a question that’s easily answered,” she says. “When our state groups come to me and want an estimate, I really can’t give them one.” In Solomon’s view, there are simply too many variables to allow confident prediction.

But one state that’s already feeling the fiscal pinch of the health care overhaul is Arizona.  Republican Governor Jan Brewer and state lawmakers have had to circle back on their plan to close a projected $2.6 billion budget deficit. Brewer had signed an austerity budget ending the state’s children’s health care program and removing 300,000 adults from its Medicaid rolls. But a maintenance of effort clause in the federal law dictates that such a move will cost the state significant amounts of federal money in the coming years.