Hold-Out States Will Expand Medicaid – Just Ask History

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Richard Evans / Scott Hinds / Ryan Baum

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@SSRHealth

November 17, 2014

Hold-Out States Will Expand Medicaid – Just Ask History

  • The original Medicaid program was passed in ’65, going into effect in ’66 – and only 26 states joined the program in that first year. By 1970 all but Alaska and Arizona had joined; Alaska held out until ’72, Arizona until ‘82
  • As with any large social program, Medicaid was born into political controversy. Yet as the program’s date of passage fell into the past, the framing of the debate shifted – from national politics to state politics and economics. Ultimately all states chose not only to participate in Medicaid, but to expand their programs well beyond the federal minimums – at an average marginal cost of $0.43 per $1.00 of Medicaid spend
  • As the current Administration winds down, the Medicaid expansion debate again moves from national politics to state political economics. States can expand their programs at a marginal cost of $0.10 per $1.00 of Medicaid spend – good economics for even the most reluctant Keynesian. On average, states can expand to eligibility to 100FPL by raising their total state budgets by only 0.2%, or to 138FPL by raising total state budgets by 0.4%
  • We expect most ‘non-expansion’ states to expand to at least 100FPL in or around 2016; this raises enrollment by 6%, and total Medicaid spending by 4%. Full expansion to 138FPL would raise enrollment by 11%, and total Medicaid spending by 7%
  • Medicaid HMOs (e.g. CNC, MOH, WCG) are the primary beneficiaries of further expansion; of these CNC is by far the most exposed to the non-expansion states, and would benefit most from growth in these states’ programs
  • Hospitals (e.g. CYH, HCA, LPNT, UHS, THC) also are beneficiaries of further Medicaid expansion, mainly because of reduced costs for uncompensated care; of these HCA has the greatest share of its beds (86%) in states that have not yet expanded, and presumably would benefit most

Where we’re BULLISH: Biopharma companies with undervalued pipelines (e.g. VRTX, BMY, SNY): Biopharma companies with pending major product approvals (e.g. TSRO, ALKS, HLUY, EBS, BMY, BVRX, CBST); ABBV and ENTA on sales prospects in Hep C; CFN, BCR, CNMD and TFX on rising hospital patient volumes; XRAY and PDCO on rising dental patient volumes and rising average dollar values of dental products and services consumed per visit; CNC, MOH and WCG on bullish prospects for Medicaid HMOs; and, DVA and FMS for the likely gross margin effects of generic forms of Epogen

Where we’re BEARISH: Biopharma companies with overvalued pipelines (e.g. GILD, ALXN, SHPG, REGN, CELG, NVO, BIIB); PBMs facing loss of generic dispensing margin as the AWP pricing benchmark is replaced (e.g. ESRX, CTRX); Drug Retail as dispensing margins are pressured by narrowing retail networks and replacement of AWP (e.g. WAG, CVS, RAD); and, suppliers of capital equipment to hospitals on the likelihood hospitals over-invested in capital equipment before the roll-out of the Affordable Care Act (e.g. ISRG, EKTAY, HAE, VOLC)

Background

In the wake of Republicans’ midterm gains, we wanted to revisit the question of whether (and when) those states that have not yet participated in the ACA’s Medicaid expansion might ultimately chose to expand their programs

As context, it’s worth remembering how long it took for states to sign on to the Medicaid program after it was first passed in 1965, and first went into effect in January of 1966 – only 26 states[1] joined the Medicaid program in that first year. Eleven[2] more states joined in 1967; South Carolina and the District of Columbia joined in 1968; Colorado, Tennessee and Virginia joined in 1969; and all but two (Alaska and Arizona) of the remaining states[3] joined in 1970. Alaska held out until 1972, and Arizona held out until 1982 – and at that point restricted its participation to acute care services only

At its birth, Medicaid pressured state budgets and challenged stakeholders’ views of government’s role in healthcare – just as the ACA broadly, and the ACA’s Medicaid expansion specifically, still do today. The headlines from that era could have been printed yesterday: “Medicaid is Off to a Slow Start[4]; “House Committee Agrees on New Plan to Cut US Funds for Medicaid[5]; and “Governor Swings Hard … Attacks Rival on Taxes, …, Medicaid[6]

Yet despite a politically tumultuous beginning, all of the states and territories eventually adopted the program, and all states expanded their programs beyond the federal minimums (Exhibit 1), at an average cost to the states of $0.43 per $1.00 of total Medicaid spend. This latter point is key – all states, at their own initiative and of their own choosing, not only adopted Medicaid but made their programs larger and more generous than is required at a marginal cost of $0.43 per $1.00 – far higher than the $0.10 (of state spend) per $1.00 (of total program spend) now required of them to further expand Medicaid under the ACA. On average, the hold-out states could expand Medicaid eligibility to 100FPL[7] by increasing their total (all spending, not just Medicaid) state budgets by 0.2%, and could expand to 138FPL by increasing state budgets by 0.4% (Exhibit 2)

Just as happened in the 1960’s, we expect national R versus D politics to give way to state politics, and more importantly to state economics – at which point even solidly Republican states are likely to expand their programs. We see this happening in or around 2016, for two reasons. First, the Obama administration will have left office, at which point opposing an Obama administration policy offers less of a political foothold to Republican governors with national political ambitions. Second, at that point former HHS Secretary Sebelius’ policy of only funding expansion enrollees at $0.90 of federal contribution per $1.00 of total Medicaid program spend in states that expand fully to 138FPL will expire. Secretary Sebelius crafted this policy in the wake of the SCOTUS ruling that made states’ participation in the Medicaid expansion optional, in an attempt to force the expansion. The policy plainly hasn’t worked – the hold-out states by and large are still holding out. We expect HHS to ease the policy, and allow the $0.90 federal contribution per $1.00 of Medicaid spend in states that expand partially – for example to 100FPL

Because persons above 100FPL are eligible for subsidized health insurance on the health insurance exchanges (HIEs), and because the net federal inflows (about $6,640) per beneficiary buying on the HIEs are far larger than the net federal inflows (about $2,700) to households made newly eligible for Medicaid, it’s in states’ best economic interests to expand their Medicaid programs to 100FPL only, leaving those above 100FPL to enroll in federally subsidized coverage on the HIEs[8]

As of August, Medicaid enrollment has grown by 8.6M persons, 7.5M from the expansion states and the balance from non-expansion states (Exhibit 3). If the non-expansion states expand their programs to 100FPL – which we believe they will ultimately do at a minimum, this would produce a further gain of at least 4.2M enrollees, driving total national Medicaid spending 4.0% higher, and total national personal healthcare spending (all payors) 0.7% higher (Exhibit 4). If the non-expansion states expand their programs to 138FPL, we would see at least an additional 7.6M enrollees, a 7.1% jump in Medicaid spending, and a 1.2% gain in total national personal healthcare spending (all payors, Exhibit 4, again)

The primary beneficiaries of the expansion are the Medicaid HMOs (e.g. CNC, MOH, WCG). The Medicaid HMOs are capturing a growing share of an expanding market, and stand to see average contract values rise as dually-eligible (Medicare / Medicaid) beneficiaries begin to enter the program as the current demonstration projects wind down. CNC has a particularly large percentage of its premium base in the non-expansion states, and so is likely to benefit most from these states’ expansions (Exhibit 5)

Hospitals (e.g. CYH, HCA, LPNT, THC) would benefit from reduced uninsured costs primarily and improved patient flows secondarily; of these names HCA has the highest percentage of its beds in non-expansion states, and presumably would benefit most (Exhibit 6)

  1. Hawaii, Illinois, Minnesota, North Dakota, Oklahoma, Pennsylvania, California, New York, Connecticut, Idaho, Kentucky, Louisiana, Maine, Maryland, Nebraska, Ohio, Rhode Island, Utah, Vermont, Washington, West Virginia, Wisconsin, Massachusetts, Delaware, Michigan, and New Mexico
  2. Kansas, Iowa, Montana, Nevada, New Hampshire, Oregon, Wyoming, Texas, Georgia, Missouri, and South Dakota
  3. Alabama, Arkansas, Florida, Indiana, Mississippi, New Jersey, and North Carolina
  4. New York Times, August 26th, 1966
  5. New York Times, October 6th, 1966
  6. New York Times, October 28th, 1966 … what’s particularly entertaining is that this headline refers to a Republican governor (Nelson Rockefeller) attacking his Democratic challenger for opposing the state’s (NY) newly-minted Medicaid program
  7. I.e., 100 percent of the Federal Poverty Level
  8. See “Why Medicaid Eligibility Will (Still) Level Off at 100 FPL”, SSR Health LLC, December 17th, 2012
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