Hoosier Economy A closer look: The cost and benefits of expanding health care coverage...

A closer look: The cost and benefits of expanding health care coverage in Indiana


Let’s talk about cost: Expanding health care coverage in Indiana

As lawmakers debate whether to implement a part of the federal health care law that expands Medicaid coverage to 400,000 more Hoosiers, they frequently bring up the cost of expansion. A number of factors must be considered when breaking down the cost of expansion, including additional Medicaid enrollees as required by federal law, how the state will draw down federal funding for expansion and other offset funding.

Jump to the bottom line>>

What is Medicaid?

Medicaid is a federally-mandated program administered by the states providing health care coverage to low-income adults and children. States have the ability to determine eligibility and benefits based on income levels. Indiana currently provides Medicaid coverage to those making 24 percent or less of the federal poverty level (FPL), a yearly income of less than $4,200 for a family of four.

In a presentation before the State Budget Committee, Milliman, an actuary hired by the state to assess the costs of expansion, noted in Fiscal Year (FY) 2012 Indiana covered on average a total of 819,622 adults and children every month. The large majority of those covered were children, 552,300. Including coverage for the aged, blind and disabled, Medicaid covered 1,091,592 Hoosiers on average every month in FY2012.

Average monthly Medicaid enrollment FY2012demographics

How does the federal health care law change Medicaid?

The Patient Protection and Affordable Care Act (ACA) and the subsequent Supreme Court ruling gave the states the option to expand their Medicaid coverage to 138 percent of the federal poverty line or a yearly income of about $33,000 for a family of four. The federal government currently pays 67 cents on every dollar of Medicaid spending. Under the ACA, the federal government would fully fund the cost of extending coverage to an estimated 400,000 Hoosiers through FY2016, then taper down their support to 90 percent, or 90 cents on the dollar, in FY2020 and beyond.

What is the “woodwork effect”? How does it impact the cost of expansion?

A component of the ACA requires individuals to obtain health insurance with assistance being provided in the form of tax credits for those earning an income between 100 and 400 percent of the federal poverty line, about $23,000-$92,000 for families of four.

The so-called “woodwork effect” refers to those currently eligible for Medicaid, those families earning less than $4,200, but who are not currently enrolled. Milliman estimated 92,000 Hoosiers are currently eligible and not enrolled.

Like in previous budgets, both the governor’s proposed FY2014-15 budget and the budget passed by the Indiana House of Representatives fully funds the Medicaid forecast, a key part of the equation when determining the cost of expanding coverage.

Governor’s FY2014-2015 proposed budget>>

House-passed FY2014-2015 proposed budget>>

How will the federal government fund expansion?

The federal government will provide significant funding support for states wishing to expand Medicaid. In fact, between FY2014 and FY2016, the federal government will pay 100 percent of the cost to cover new enrollees. For three years, the state will incur zero costs to cover the estimated 400,000 Hoosiers who would be eligible for coverage under the expansion.

Between FY2017 and FY2019, funding support from the federal government tapers down to 95 percent in FY2017, 94 percent in FY2018 and 93 percent in FY2019. For every one dollar of Medicaid spending in Indiana in FY19, the federal government covers 93 cents of the cost.

Federal support for Medicaid levels off at 90 percent in FY2020 and will remain at that split. That means the state will kick in the remaining 10 percent to cover the costs of expansion.

What revenue sources and cost offsets are available at the state level?

There are potential revenue sources to help offset the cost of expansion. For example, a portion of revenue generated by the sale of cigarettes is earmarked to pay for the state’s Healthy Indiana Plan (HIP). If the state were to expand Medicaid, many of the Hoosiers on HIP would be covered by the expansion, thus freeing up some of the revenue used to fund the current program. The state’s high-risk insurance pool, the Indiana Comprehensive Health Insurance Association (ICHIA), would also be absorbed by an expansion, freeing up additional revenue. Other offsets, like some of the costs to provide hospital care to the state’s prison population, mental health and substance abuse treatment and other state spending on public health services could result in additional revenue.

Medicaid Expansion Costs and Potential Funds


Source document: FSSA’s presentation to the Health Finance Commission on Sept. 19,2012.

*Cost of expansion to 138 percent does not include the cost of currently eligible individuals who are not enrolled, because those costs are included in Milliman’s Medicaid forecast.

Download the slides from FSSA’s presentation to the Health Finance Committee>>

A more complete funding picture

Utilizing a presentation given by the Family Social Services Administration (FSSA), the above chart lays out the cost of expanding Medicaid against potential revenue sources and offsets. A full expansion, resulting in health care coverage for an additional 400,000 Hoosiers, would be cost-neutral to the state through FY2019.

To help offset future costs, the state could adopt a trust fund mechanism similar to the one in place for the Healthy Indiana Plan, banking savings to pay costs down the road. Additional realized savings could also be funneled to the trust fund.

Are there other benefits to expanding Medicaid?

Besides providing health care coverage to 400,000 Hoosiers currently forgoing care, expanding Medicaid would inject billions of dollars into local economies, protect our rural health care providers, drive down health care costs for all Hoosiers and create tens of thousands of jobs.

In a study released by the Indiana Hospital Association, as much as $10.4 billion in federal funding could flow into the state by 2020, generating as much as $3.4 billion in new economic activity in Indiana. To meet the increased demand for medical services, the report estimates the creation of 30,000 jobs through 2020 at a time when Indiana’s unemployment remains above 8 percent.

Expanding coverage to more Hoosiers means less use of emergency rooms as primary care and a reduction in uncompensated care. The cost of uncompensated care – mandatory care provided to those who can’t pay – has traditionally been absorbed by hospitals in part and passed onto all Hoosiers in the form of higher health insurance premiums.

By reducing the number of uninsured people, the report estimates individuals could save as much as $236, families as much as $677, in annual health insurance premiums beginning in 2014.

Read the Indiana Hospital Association’s full report>>

What’s the bottom line?

The federal government will fully fund the cost to expand coverage to 400,000 more Hoosiers through FY2016. Including revenue sources and potential offsets, the cost of expansion to the state is neutral until FY2020. The cost may be even further reduced in the out years as additional savings are realized and if the state adopts an innovative trust fund like the one currently in use to fund the Healthy Indiana Plan.ACAgraphic

When considering expansion, the short-term economic benefits, like the creation of 30,000 jobs, a healthier workforce and lower health insurance premiums for all Hoosiers must also be considered.

How to show my support for issues before the General Assembly>>