This afternoon, Gov. Chris Christie reversed course and announced that New Jersey would expand the state's Medicaid program in conjunction with ObamaCare. The health law originally required states to expand eligibility for Medicaid, a shared federal-state program, but the Supreme Court struck down that provision, making it optional for states to participate. Christie's action brings to 25 the number of states that have agreed to the Medicaid expansion. So far, 13 states have rejected the expansion, while the other states have yet to make their decision. In taking this decision, Christie, as well as the other Governors, now own a chief provision of ObamaCare.
Currently, states have some flexibility in establishing Medicaid eligibility. The federal government then matches, with a premium, state spending on the program. This funding mechanism has created perverse incentives for states to increase Medicaid spending. The average state receives about $1.40 from the federal government for every dollar it spends.
Correspondingly, it has fueled huge growth in Medicaid, the fastest growing program on the federal books. In 1969, soon after the program was first created, the federal government spent about $2 billion on Medicaid. In 2012, the feds spent $251 billion. Since it was created, Medicaid spending has increased by an annualized 11% a year. ObamaCare's expansion of the program will propel program spending higher.
Under ObamaCare, states can expand eligibility to all adults who earn less than 133% of the federal poverty line. Currently, with the exception of senior citizens, eligibility is generally restricted to adults with children. To encourage the states to expand the program, the Feds pay 100% of the first-year costs. In later years, until 2017, the feds will cover 90% of the costs. New Jersey is expected to collect $15 billion in new federal funds while spending just $1.4 billion of its own.
There are a couple wrinkles, however that may cause Christie and the other governors to regret their decision. First, if someone who newly enrolls in Medicaid was actually eligible under the old rules, the feds will only reimburse the state at the normal match rate. Second, the new enrollees will increase the states' administrative costs, which usually equals around 5.5% of total Medicaid spending. The special fed reimbursement for expansion doesn't apply to administrative costs. Worse, though, is that it isn't likely the special 90% reimbursement will last forever.
In its 2013 budget, the Obama Administration proposed changing the 90% reimbursement provision after 2017 into a "blended formula" that covers all of Medicaid spending. It is probable that the feds will lower the 90% reimbursement to a much lower rate, increasing the burden on state taxpayers to shoulder the burden of the expansion.
Their bigger regret, however, may be that these Governors are now formal partners in ObamaCare's implementation. Next year, all Americans will be required to have health insurance. Companies with more than 50 full-time employees will be required to provide health insurance or pay a fine. It is unclear how companies will comply with this mandate. It is possible they alter their businesses to either escape the mandate or minimize their costs by dropping health insurance coverage and paying the fine. Either would increase public opposition to the law. Christie may find himself on the wrong side of history.
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