Whose Gun, Whose Head? Gaming Out The Medicaid Expansion

Joseph Fishkin

In NFIB v. Sebelius, Chief Justice Roberts told a tale of coercion with some harrowing imagery.  “[I]t is a gun to the head,” the Chief said.  But whose gun, and whose head?  To the Chief, it was obviously the overbearing federal government telling the states, “[y]our money or your life.”  I think it’s not that simple.

In the Chief’s view, the Court’s Spending Clause holding “limits the financial pressure the Secretary may apply,” so that states are free to say either “yes” or “no” to the Medicaid expansion.  A genuine choice.  But what if it’s not really about a simple “yes” or “no” at all—but instead, about leverage in a more complex game?

A series of conversations is about to begin, or may already have begun, between states, especially Republican states, and the Department of Health and Human Services (HHS).  In these conversations, the states are essentially saying to HHS: “We want certain changes to the Medicaid expansion in our state.  If you do not give us the changes we want, we will opt out of the whole Medicaid expansion.”  In particular, some states may be tempted to demand: “we want to expand Medicaid only partway—to 100% of poverty, not all the way to 138%.”  For somewhat wonky reasons I’ll discuss below, changing Obamacare in that particular way might enable states to extract more money from the federal government and/or pay less themselves.  A new CBO report out this week suggests that HHS will take this kind of exit threat very seriously—and may well cave.

Now step back a moment.  Counterfactually, imagine that the Spending Clause holding had gone the other way.  Essentially the same conversation would be taking place right now between a state like Texas and HHS.  The difference is that the state’s only exit option in that case would be to abandon the Medicaid program entirely—a kind of nuclear option.  But for some states, including Texas, that nuclear option would most definitely have been on the table.  If Governor Rick Perry had started making threatening noises about ending Medicaid entirely if HHS didn’t allow Texas to make the expansion smaller, one way to describe the situation is that HHS has a gun to Texas’ head.  The other way of describing the situation is that Governor Perry is the one with the gun, and he is pointing it at the heads of millions of Texans who are uninsured or on Medicaid.  (There's a third party here; it’s not a mugging, but a hostage situation.)  The Governor is saying to HHS: “give me the changes I want, or I drop coverage for all these people—and oh by the way, if I do that, then President Obama’s signature achievement will be a sharp reduction, instead of an increase, in coverage for the poor in Texas.  You wouldn't want that, I'm sure."

These two conversations, the real one and the counterfactual one, are surprisingly similar.  Either way, the ultimate equilibrium—how much of what Texas wants will HHS end up giving—depends on the same basic variables.  How serious is Texas about shooting the hostage (i.e. opting out of either the expansion, in the real conversation, or the entire Medicaid program, in the counterfactual)?  How willing is HHS to risk allowing the hostage to be shot?  In both cases, it seems to me, HHS might be very inclined to strike a deal.  If I were Secretary Sebelius, in a game of chicken with Rick Perry, with poor people’s health care hanging in the balance, I would not underestimate the Governor’s resolve.

But the Court’s Spending Clause holding does change one big thing.  It makes Texas’ threat far more credible (since shooting the hostage is a somewhat smaller and therefore more plausible thing to threaten).  Thus, the Spending Clause holding will give more negotiating leverage to states like Texas and help them get exactly what they want.

In other words, far from preventing a mugging of the poor defenseless states (“[y]our money or your life”), what the Court has really done is give states the leverage to make more credible threats of their own—taking a more realistic hostage—so that they can more thoroughly restructure the Medicaid expansion to wheedle more money out of the federal government.  It's a ransom that the federal government will likely pay.

I. Policy-wise, why on Earth would a state aim to expand Medicaid only partway, and not all the way?

This week, the CBO scored the new, post-NFIB v. Sebelius version of Obamacare.  The new estimate takes into account for the first time the possibility that some states may opt out.  The CBO predicts that some states will opt out—and that even more will strike deals with HHS to expand Medicaid only partway.  Because of this, the CBO predicts that more people will end up uninsured.  The federal government will, bottom line, save a substantial amount of money.

Nobody seems to be writing about this (since the CBO report is about the federal fiscal impact), but there is a flip side to those federal savings.  In states that don’t expand Medicaid, there will be more uncompensated care.  Someone will have to pay for that: specifically, some combination of the state government, localities, and everyone in the state who pays insurance premiums.  The new CBO estimate thus underscores the fact that choosing to opt out of the Medicaid expansion entirely is, in fiscal terms, an extremely bad move for states and their people.

But for a state that opts out of the expansion, there is one silver lining.  Some of the people who would have been covered under Medicaid will instead end up buying coverage through the health insurance exchanges, with government subsidies.  And if you’re a state, those people are great news: (a) they’re insured, so you’re not stuck with the bill for uncompensated care, and (b) the entire subsidy is paid for by the federal government, so you, the state, pay nothing.  Let’s make this concrete.  In ballpark figures, one person just above the poverty line, on Medicaid, costs the federal government $6000/year, the state $700/year, and the individual almost nothing.  If that person instead goes out and buys insurance on the exchange, the federal subsidy is $9000/year (private insurance is more expensive than Medicaid), and the individual will have to pay $500+ on top of that, but now the state pays nothing.

Not bad—if you are the state.  You saved $700.  In fact, Douglas Holtz-Eakin has suggested that this is the secret rationale behind Republican governors’ coming out against the Medicaid expansion: they’ve figured out this ingenious trick to shift the costs to the federal government.  I don’t think Holtz-Eakin has correctly identified the motivations of these governors, but in any event there is a big problem with this plan from a state budgetary point of view: not everyone who would have been covered by the Medicaid expansion will actually get health insurance on the exchanges.  Far from it.

Most of these people—two thirds, says CBO—won’t even be eligible to participate in the exchanges.  This is because you need to be earning more than the federal poverty line to buy insurance on an exchange.  So let’s be clear: if a state like Texas says “no” to the Medicaid expansion, a childless, non-elderly, non-disabled adult earning less than the poverty line is not going to have any realistic way to get health insurance in the state of Texas.  She's just out of luck.

The people who might get shifted onto the exchanges are the next group up, those just over the poverty line at 100%-138% of poverty, the so-called “near poor” (a bit of a misnomer—they are pretty darn poor).  [note: why 138%?  The statute and the Court say “133%,” but the CBO reminds me that because 5% of your income is disregarded, it’s really 138%.]  Some people in this “near poor” group will buy insurance on the exchanges, but others will not.  Even if it only costs $480/year after subsidies for the premiums (CBO’s figure), some will say, “sorry, I’d love to, but that’s $480 I don’t have.”  For others, the co-pays and deductibles and so on may be too daunting even after further subsidies; they’ll refuse to buy insurance they can’t “afford to use.”  Bottom line, only some who lose out on Medicaid when states opt out will end up with insurance from the exchanges.  Everybody else will be uninsured.  For all those uninsured people, the state and its citizens will have to pay the full costs of their uncompensated care one way or the other, either through jacked-up insurance premiums or through property taxes and other state and local taxes.  That could be a couple thousand dollars per person—and no help from the federal government.  Given that, there is simply no way a state can come out ahead by opting out entirely from the Medicaid expansion.

But now you probably see where this is headed: what if a state could expand Medicaid only part way—say up to 100% of poverty?  Now that’s a different and more interesting proposition.  This approach shifts the “near poor” on to the exchanges, saving the state roughly $700 per person, but keeps the Medicaid expansion to cover the poor (up to the poverty line).  It’s hard to know whether this is a net winner or loser for the state in fiscal terms.  It depends how many people actually buy insurance on the exchange (good) and how many end up uninsured (bad).  But it’s conceivable that the state could come out narrowly ahead, tweaking the Obamacare structure in a way that could conceivably make the federal government pay more and/or the state pay a little less—and hopefully, if enough people sign up for the exchanges, more total federal dollars would end up flowing in to the state’s medical system and its economy.  More exchanges, less Medicaid.  To be clear, no one yet knows if this option even exists—whether HHS would accept it or whether HHS even believes it has the authority to cut such a deal.  But the CBO’s estimate predicts that HHS will go for it.

II. The politics of half a loaf of Medicaid

Everything I have just said assumes that the state is essentially aiming to cut its own costs and bring in more federal dollars.  It’s kind of a naïve rational-actor model. 

The trick is this: that model bears no resemblance to the stated views of the Republican governors and legislators who are actually in charge in the states in question.  I’m talking about Republican governors like my own, whose letter to HHS ends with the peroration, “the PPACA’s unsound encroachments will find no foothold here."  For Perry and other Republican officials, a new message of “let’s expand Medicaid—but not quite as much as Obama wanted—and instead shift more people onto these new exchanges” is, to put it mildly, quite a climbdown from “I oppose both the expansion of Medicaid…and the creation of a so-called ‘state’ insurance exchange, because both represent brazen intrusions into the sovereignty of our state.”  Would Republican governors who vehemently opposed both the Medicaid expansion and the exchanges be willing to pivot to the position that we should have a little less of the former and a little more of the latter?  Maybe.  Or maybe they will attempt to extract other concessions from HHS that I have not thought of.

There are some powerful players who would favor half a loaf of Medicaid expansion.  The main ones are private insurers.  They would get more customers—customers with $9000 federal subsidies in hand.  (Hospitals, I imagine, would be less excited.  They don’t want to be stuck with more uninsured.  They’d probably prefer a full expansion.)

So what does the CBO predict?  Its predictions are stunning.  The CBO’s usual approach is to report “middle range” predictions of what it thinks will happen.  As of 2022, the CBO predicts:

• One sixth of the potential newly eligible population will live in states that opt out of the Medicaid expansion completely.  The full Rick Perry.
• One third of this population will live in states that fully implement the Medicaid expansion as Congress intended.
• HALF of this population will live in states that negotiate successfully for the middle option, expanding Medicaid but not all the way (with the vast bulk of this group settling at the 100% threshold, for the reasons discussed above).

Yikes!  It’s worth keeping in mind when looking at these numbers that they’re talking about population, not states.  Most of the “newly eligible population” lives in red states.  Even leaving aside Massachusetts, a number of blue states like New York have already expanded Medicaid so they don’t have as many people left to enroll.  It's possible that Texas and Florida alone contain a sixth of the relevant population, so just two governors who really stick to their guns could get us to the first bullet point above.  Still, I’m a little shocked that the CBO thinks half of the entire newly eligible population is going to live in states that get HHS to give them this the mysterious middle option.  (Perhaps the CBO is pricing in the chances of a Romney victory, followed by an HHS actively encouraging states to opt for less Medicaid and more exchange subsidies?) 

Bottom line, the CBO is predicting that a number of states will stick to their ideological guns and opt out of Medicaid entirely—even in 2022—while numerous other states will reach a different equilibrium, striking deals with HHS that result in expanding Medicaid only part of the way.  The result: 6 million fewer people on Medicaid, 2 million more people on the exchanges, and 4 million more uninsured in 2014, as compared to if the Court had not reworked the Affordable Care Act to give states an easier path to opting out.

III. So whose gun, and whose head?

For Chief Justice Roberts and his law clerks, who reworked the Act to give states a choice, I can only imagine that this is a somewhat surprising result.  (It’s really too bad that the Court did not have the benefit of a CBO to score their proposal before they enacted it into law!)  The Chief thought he was giving states the power to say “no.”  “States may now choose to reject the expansion,” he wrote, “that is the whole point.”  But the Chief didn’t game it out in a sophisticated enough way.  It’s not really as simple as “yes” or “no.”  Instead it would seem that the main thing the Chief did was strengthen the states’ bargaining position in negotiations with HHS.

In fact he has strengthened their bargaining position so much that the states can now reshape the entire program in a direction that neither Congress nor the Court ever contemplated, recalibrating the balance between Medicaid and the exchanges in a way that leaves more people uninsured, but also pulls in extra federal subsidy money, emphasizing the exchanges and de-emphasizing Medicaid.  It’s not an exaggeration to say that this change has reverberations throughout the statutory scheme: for instance, prices for everyone on the exchanges are supposed to go up by 2%, the CBO says, because the “near poor” people joining the exchanges have “somewhat poorer health.”

All because the CBO projects, probably correctly, that HHS will fold in the face of pressure from states that threaten to opt out of the Medicaid expansion entirely unless HHS will agree to half a loaf.  Moral of the story: if you’re wondering who’s got the gun, don’t count out my governor.  And if you’re trying to figure out who, if anyone, is being coerced, keep this in mind: in a hostage situation, the one who has the upper hand is the one who is more willing—or is perceived to be more willing—to let the hostage die.
Posted 8:02 AM by Joseph Fishkin [link]