Medicaid Eligibility Capped at 100 FPL: The Logical Outcome of the SCOTUS ACA Ruling

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Richard Evans / Scott Hinds / Ryan Baum


203.901.1631 /.1632 / .1627 richard@ / hinds@ /


July 27, 2012

Medicaid Eligibility Capped at 100 FPL: The Logical Outcome of the SCOTUS ACA Ruling

  • When (if) the Affordable Care Act (ACA) is put into effect, states will be free to disenroll beneficiaries to the federal minimums (in many cases < 30 FPL), expand to (or beyond) the ACA’s original target of 138 FPL, or anything in between
  • Despite this range of options, we expect most states to adopt 100 FPL as their upper limit of Medicaid eligibility (for non-dually eligible, non-pregnant adults), for a very simple reason: the closer states bring their eligibility thresholds to 100 FPL, the better off they are; conversely the further (above or below) they move from 100 FPL, the worse off they are
  • A state with current eligibility < 100 FPL who disenrolls the marginal beneficiary saves $0.43 in budgetary terms, but in economic terms loses the $0.57 federal match (and associated multiplier effects) and incurs costs for uncompensated care. If instead the state enrolls the marginal beneficiary who lies above the current eligibility standard (but < 100 FPL), the state spends $0.10 for a $0.90 (plus multiplier effects) gain. In budgetary terms it’s easier to go backward, but in economic terms it’s far better to go forwards – at least until you hit 100 FPL
  • Likewise the state with current eligibility > 100 FPL who disenrolls the marginal beneficiary above this limit also saves $0.43 in budgetary terms, and loses the $0.57 federal match. However if that person – who at >= 100 FPL is eligible for federally subsidized coverage on the exchanges – enrolls on the exchange, the gross federal dollars entering the state for that beneficiary increase by 185%. As long as >= 75% of those affected go to the exchanges (the true breakpoint is probably lower), it is to this more generous state’s economic (and budgetary) advantage to lower its eligibility threshold to 100 FPL
  • In reality most states would have to expand eligibility (for non-dually eligible, non-pregnant adults) to reach 100 FPL, so we expect a net expansion (23% increase in enrollees and 15% in spending v. current eligibility standard), though this is roughly half the size we would have expected if states had all expanded to 138 FPL as originally called for by ACA
  • Republican states have nearly two-thirds of the enrollees who would be picked up in a nationwide expansion to 100 FPL, though most of these can’t be relied on until after the general election, and also after any attempts at repeal in the event of a Romney presidency. Thus the risks to our sizing of the expansion are to the downside, particularly in the first few years following 2014
  • 100 FPL as a likely equilibrium points to a net expansion, which eases our concerns regarding the Medicaid HMOs. Of these, AGP stands to see the largest enrollment gains, MGLN and MOH the least
  • Hospitals lose a fair bit of reform-related upside if eligibility stops at 100 FPL; mainly because of collections problems (low income persons covered on the exchanges are less able and less likely to honor out-of-pocket cost obligations) and higher rates of un-insurance, hospital revenue from a low-income beneficiary on the exchange is about 25% less than if that person were covered by Medicaid. UHS is most negatively affected, HCA least affected
  • Because persons above 100 FPL who might otherwise have been Medicaid beneficiaries can buy federally subsidized coverage on the exchanges, total federal subsidy spending is likely to be much greater than originally forecast – so much so that the ACA’s cap on subsidies as a % of GDP should be breached in or just after the exchanges’ first year of operation
  • This implies the ACA may immediately need additional budget authority; in light of the House’s power over budgetary matters and the high likelihood the House remains in Republican hands even if President Obama is re-elected, the subsidy cap may be a large but under-appreciated weakness of the Act

The Supreme Court’s Affordable Care Act ruling has made states’ participation in the ACA Medicaid expansion optional; still unclear is when and under what circumstances states have the option to reduce current enrollment levels, and whether any take this route

The Court ruled that all of a state’s Medicaid funding cannot be withheld as a penalty for not participating in the expansion; because this same penalty applies to states that reduce Medicaid eligibility to levels below those in effect on the date of the Act’s passage, the Act’s maintenance of effort (MOE) provisions also may be constitutionally invalid

However even if the MOE provisions withstand legal challenge, the portion of the MOE provision that applies to adults expires on the date that a given state’s health insurance exchange is certified by the HHS Secretary[1], and adults are 25M of the 30M persons whose current enrollment is protected by the provision

How, exactly, did we get here?

In framing what states may do with Medicaid eligibility, it’s crucial to bear in mind that states’ current eligibility thresholds are by no means a natural point of equilibrium. Current thresholds reflect pre-recession economics, having been set when states had substantially higher revenues and substantially smaller numbers of beneficiaries. All else equal eligibility thresholds would have fallen during the recession; however these were frozen in place first by the ARRA[2] and subsequently by the ACA. Because the expansion is no longer mandatory states no longer are required to increase eligibility thresholds in 2014; and because the adult MOE provision will be invalid in 2014[3] — procedurally if not legally – the entire set of incentives and penalties that have carried pre-recession eligibility through the depths of the recession will expire. States are then (if not before) free to do whatever they choose across a spectrum of Medicaid eligibility from federal minimums (contraction) at one extreme to full expansion at the other. The states have an enormous range of options; few if any will simply hold their eligibility thresholds at current levels

Two sticks, a carrot, and an attractive alternative

For illustration more than anything else, we show what would happen if all ‘R’ states fell back to the federal minimums and all ‘D’ states expanded Medicaid fully (Exhibit 1). This framing is far too simplistic; by putting each state at one or the other extreme (expand fully or contract fully) it ignores any likelihood of compromise, and by sorting states purely according to politics ignores the considerable relevance of each states’ economic circumstances. Far more realistically, states’ political / ideological preferences will be tempered by fiscal / economic realities; and, state and federal governments may compromise on at least some of the relevant questions raised by the Court’s verdict

In (or before) 2014 the two sticks (you may not contract; you must expand) will be gone. States then have an economic (but perhaps not budgetary) incentive to expand as their marginal cost of bringing in a dollar of Medicaid spending falls from $0.43 (on average) to exactly $0.10. For beneficiaries above 100 FPL states have a new choice – between continued expansion on the one hand, and relying on these households’ access to federally subsidized coverage[4] on the other

Where to now?

Exhibit 2 shows Medicaid as a percent of states’ total spending[5] (exclusive of federal matching dollars); Exhibit 3 shows the percentage of current Medicaid beneficiaries with incomes above the federal minimums, and the percent of states’ Medicaid spending represented by these beneficiaries; conversely Exhibit 4 shows the percentage change in enrollment, federal, and state spending if states expand coverage fully to 138 FPL. Exhibit 5 shows the same figures for a middle-case scenario in which states expand coverage only to 100 FPL. State by state versions of each of these exhibits are provided in the appendices

We’ve established that states are unlikely to keep eligibility thresholds where they are, leaving only the options of expansion or contraction. Yet for economic reasons neither full expansion nor full contraction strike us as a likely outcome for any states – much less most – irrespective of state politics

Full speed ahead …?

Full expansion means covering persons between 100 and 138 FPL under Medicaid, rather than letting these persons enroll (or not) for federally subsidized coverage on the exchanges. Assuming Medicaid eligibility is expanded, at average per-beneficiary[6] spending of $3,000[7], the states pay $300 (their 10% share) to ‘bring in’ $2,700 (the feds 90% share) of Medicaid spend. We believe around 90 percent of the spending stays in the state, thus ignoring multiplier effects the net gain to the state economy is $2,400[8]. The states’ alternative for persons between 100 and 138 FPL is not to offer coverage, in which case these persons become eligible for federally subsidized coverage on the exchanges, and federal subsidies to persons in this income range should be roughly $5,000[9]. Because of the ACA’s small group MLR[10] floor of 80, at least $4,000 of the $5,000 in federal subsidy will be spent on care. Returning to our assumption that 90 percent of spending on care stays in the state and again ignoring multiplier effects, the state sees an economic gain of $3,600. And, because a significant portion of the plans’ gross margin will be spent on administrative costs, much of which also stays in the state, the total economic gain to the state is closer to $4,100 for each person between 100 and 138 FPL enrolled in federally subsidized coverage. Nevertheless despite having access to zero premium cost coverage[11] on the exchanges not all persons who would have taken Medicaid coverage if they had been eligible will enroll on the exchanges. Those who do not will create uncompensated care costs, which have to be counted as losses to the state economy. We estimate these costs as no more than 75% of average per-beneficiary[12] Medicaid spending, or roughly $2,250[13]. In the case of a state capping Medicaid at 100 FPL, the net economic impact is then driven by the relative proportion of persons between 100 and 138 FPL who either enroll on the exchanges ($4,100 gain) or become uninsured and create uncompensated care costs ($2,250 loss). As long as no more than 25% of persons between 100 and 138 FPL who would have been Medicaid eligible become un-insured, the state may be better off capping Medicaid eligibility at 100 FPL[14],[15]

At the very least we can say that expanding Medicaid eligibility to income levels above 100 FPL is not a clearly better economic alternative than capping eligibility at 100 FPL, and that capping at 100 may well be the better choice. Economics (momentarily) aside, because capping at 100 FPL is obviously the path of least resistance in state budgetary terms; and because there is no deadline for participating in the expansion, capping eligibility at (or reducing eligibility to) 100 FPL seems an inherently more likely outcome than expanding (or continuing) Medicaid eligibility in excess of 100 FPL. States can always expand (or re-expand) coverage if uncompensated care costs for persons above 100 FPL outweigh the benefits

… or full reverse?

A state with eligibility cut-offs below 100 FPL can save an average $0.43 on the dollar ($1,290 / beneficiary) by disenrolling its beneficiaries whose incomes exceed the federal minimums, or spend $0.10 on the dollar ($300 per beneficiary) by adding expansion beneficiaries with incomes above that state’s current eligibility cut-off. If the state chooses to reduce eligibility, its $1,290 in budgetary savings is offset by the loss of $1,710 in federal match, roughly $1,540 of which would have stayed in the state. The resulting $250 per beneficiary net economic loss ignores both multiplier effects and the resulting costs of uncompensated care incurred by former beneficiaries (who with incomes < 100FPL are ineligible for exchange subsidies). Thus even though reducing eligibility is tempting in simple budget terms (Exhibit 3, again), the marginal economic effect of reducing eligibility (at thresholds < 100 FPL) is almost certainly negative. Moreover narrowing eligibility implies the state has chosen to forego the economic gains associated with expansion enrollees subject to the more beneficial 90/10 federal/state cost share, which we previously estimated at $2,700 per beneficiary

Why not meet in the middle?

A state with Medicaid eligibility thresholds below 100 FPL sees economic gains by moving its thresholds closer to 100 FPL, or economic losses by lowering eligibility further below 100. Conversely a state with Medicaid eligibility above 100 FPL[16] probably gains by reducing eligibility down to 100, and loses by raising eligibility further beyond 100. Thus in purely economic terms setting Medicaid eligibility thresholds to 100 (whether this means expanding or contracting) is any state’s apparent path of least resistance, which argues for 100 FPL as the (post-2014) point of equilibrium for Medicaid eligibility

For both practical and political reasons, to the extent current eligibility standards for pregnant women and children exceed federal minimums, we assume the states leave these unchanged. Thus the eligibility question reduces to non-dually eligible, non-pregnant adults. Very few states have current eligibility standards for this population in excess of 100 FPL (Appendix 5), thus relative to current standards getting to 100 FPL is much more commonly a question of expansion than of contraction

For ‘D’ states then, the question becomes why expand to 138 FPL when this implies considerable spending increases (Exhibit 4, again) in exchange for uncertain economic gains (and in fact likely economic losses), and modest social gains (persons above 100 FPL have a viable alternative source of coverage, though out-of-pocket costs are much higher and not all will enroll). And, because whether to expand to 100 FPL or 138 FPL is not a one-time irreversible decision, the logical path – particularly in light of state budget pressures – is to expand to (or hold at, or reduce to) 100 FPL in 2014, saving the option to expand beyond 138 if (budgetary, economic, and social) factors eventually warrant

For ‘R’ states, expanding to 138 FPL is unlikely for any combination of political, economic, and budgetary reasons. However as we shift the political framing away from the general election (and repeal attempts in the case of a Romney presidency), and especially if at least modest economic growth eases state budget pressures generally (and Medicaid pressures specifically) the concept of R states expanding to 100 FPL is at a minimum easier to accept, and to our minds the most likely scenario

Investment relevance of 100 FPL as the high-end of Medicaid eligibility

If all states were to set 100 FPL[17] as a Medicaid eligibility threshold, we would expect 23% growth in enrollment and 15% growth in spending versus current levels; this contrasts with 48% enrollment growth and 28% spending growth if all states had participated in the full Medicaid expansion as originally envisioned in the ACA. More simply, the actual expansion looks to be about half as large as it could have been

We suspect ‘D’ states will be relatively quick to expand, but that most ‘D’ states ultimately stop at or near 100 FPL. Conversely ‘R’ states – who collectively contain the majority of enrollees (9.4M of the 14.6M, or 64%) that would be gained in an expansion to 100 FPL – will take longer to reach 100 FPL in light of political and budgetary pressures. Thus risks to our enrollment and spending estimates are to the downside, particularly in the first several years.

Considering the Medicaid HMOs broadly, growth prospects in dual eligibles are unaffected by the broader uncertainties over enrollment thresholds, and duals are plainly at the heart of the Medicaid HMO investment case. Total non-dual enrollment will be lower than under a full expansion scenario, though share prices ahead of and (ignoring acquisition premia) to an extent since the Court’s ruling have allowed for uncertainty with respect to total enrollment, so cutting the potential expansion in half ultimately is not a drastic change in the broader Medicaid HMO investment case. More narrowly, individual names will be more or less exposed to states that are more or less likely to expand or contract; assuming states all shift eligibility thresholds to 100 FPL, of the Medicaid HMOs AGP would see the most premium growth (26%) and MGLN the least (11%, Exhibit 6)

Hospitals are somewhat worse off with Medicaid eligibility capped at 100 FPL than they would have been under full expansion. Medicaid payment rates are lower than commercial rates, meaning hospitals enjoy higher payment rates on persons covered under the exchanges. However because commercial deductibles and copayments also are much higher, hospitals’ collection rates will be much lower in the case of low-income beneficiaries covered on the exchanges. And, hospitals also will (continue to) directly face uncompensated care costs from persons without Medicaid eligibility who chose not to buy coverage on the exchange. In the case of beneficiaries between 100 and 138 FPL whose only option is to buy coverage on the exchanges instead of enrolling in Medicaid, we estimate hospitals’ revenues associated with these beneficiaries are roughly 25% lower than would have been the case if these beneficiaries had been eligible for Medicaid (Exhibit 7). To be clear, we’re not saying hospitals see revenues fall in 2014, since very few states have currently have eligibility levels in excess of 100 FPL for non-pregnant adults. Rather we’re saying that hospital revenues will expand much less than if states had expanded eligibility to 138 FPL. Exhibit 8 summarizes Medicaid as a percentage of publicly traded hospitals’ 2011 revenues

Finally, where we had originally expected federal spending to be higher if Medicaid were capped at 100 FPL than if expanded to 138 FPL, having done the math there’s actually very little federal spending difference between the two scenarios. More important is that capping Medicaid at 100 FPL raises federal spending on exchanges subsidies, which are capped by an ACA fail-safe at 0.504% of GDP. Because subsidies for persons between 100 and 138 FPL were never anticipated when the cap was set, federal subsidy obligations likely will breach the cap straight out of the box (Exhibit 9). The fiscal relevance of the cap is negligible (total federal spending by our estimates is the same whether the states cap eligibility at 100 or 138 FPL), but its political relevance is potentially enormous, as the ACA may require a large and immediate budget re-authorization to keep the exchanges operating. Given the House’s considerable power with respect to funding, and the likelihood the House remains Republican even if President Obama is re-elected, the ACA subsidy cap may become a potent source of anti-ACA political leverage, and thus further uncertainty

  1. We appreciate the controversies surrounding whether states will create exchanges and whether federal subsidies can be paid to persons enrolling on federally (not state) created exchanges. Why is beyond our immediate scope, but barring repeal of ACA (which we do not expect) we do eventually expect exchanges in all states, and further expect all federal subsidies will be payable on all exchanges
  2. Under the American Reinvestment and Recovery Act the federal government covered a higher than normal proportion of total Medicaid costs; these (once extended) provisions expired in June of 2011
  3. We fully expect the actual implementation date for the exchanges to be pushed back; however this has no bearing on the main thrust of our arguments in this note
  4. Once health insurance exchanges begin operating, persons with incomes at or above 100 FPL will be eligible for federal subsidies that offset premium costs for plans purchased on the exchange. The benchmark (2nd cheapest ‘silver’ or 70 actuarial value) plan cannot cost persons between 100 and 133 FPL more than 2 percent of income, and the resulting subsidy is sufficient to buy the bronze (60 actuarial value) coverage with no premium contribution made by the beneficiary
  5. Exhibits 2 through 5 are calculated from 2009 spending figures, as these are the most recent figures available at a sufficient level of detail (by state and enrollee group). Because we’re expressing the results in terms of percentage change from baseline (i.e.current coverage levels), the 2009 figures are fully applicable. The exhibits express changes to state spending on the assumption that states’ share of costs for expansion enrollees immediately becomes 10%; in reality states’ share grows gradually from 0% to 10%; however by showing the effect at a full 10% cost share we hope to give a more accurate picture of structural changes to state spending under each scenario
  6. Non-dually eligible and non-pregnant adults
  7. For simplicity we’re using estimated 2014 dollar amounts, and ignoring the transition period during which the federal / state share of spending goes from 100/0 to 90/10
  8. ($3,000 *90%) – $300
  9. Among other considerations, Medicaid payment rates are three-quarters the average commercial rate
  10. Medical Loss Ratio
  11. Ibid 4
  12. Non-dually eligible, non-pregnant adults
  13. We have every reason to believe uncompensated care costs are considerably lower. Charges for care provided to Medicaid beneficiaries are roughly 4x the charges for care (including uncompensated care) provided to uninsured persons of similar age and health status
  14. (75% * $4,100) – (25% * $2,250) = $2,500, as compared to the $2,400 net gain per beneficiary to states offering Medicaid coverage above 100 FPL
  15. To be clear we’re not saying 75% of persons who would have been eligible for Medicaid go to the exchanges; rather we’re saying 75% of persons who would have enrolled in Medicaid go to the exchanges. The number who would have been expected to enroll is the number eligible times the state’s Medicaid participation rate (which is on average 84.8%)
  16. For non-dually eligible non-pregnant adults. We assume eligibility thresholds for duals, pregnant women, and children remain unchanged. Duals’ eligibility is unaffected by the changes that drive potential eligibility changes elsewhere, and for both practical and political reasons we assume states leave thresholds for pregnant women and children unchanged
  17. Again ignoring dual-eligibles, pregnant women and children
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