Two sides of the Medicaid expansion coin

Is it possible for more Republican-led state governments to expand their Medicaid programs without politically endorsing the extension of ObamaCare under the Affordable Care Act (ACA)? Indiana Gov. Mike Pence (R) says he can, but he hasn’t convinced a number of conservative Republican critics.

Last month, the state of Indiana unveiled its latest request for a federal Medicaid waiver from the Centers for Medicare and Medicaid Services (CMS) that would allow it to expand its Healthy Indiana Plan (HIP) to cover as many as 559,000 uninsured Hoosiers. For several years, Pence has been seeking Obama administration approval of a modified (HIP 2.0) version of the much smaller HIP experiment that was first launched in 2008.

{mosads}The original HIP was quite popular in the state and received positive evaluations by several outside reviewers. It was constructed very differently from traditional Medicaid, relying on a combination of a high-deductible health insurance policy (HDHP) and a generously funded individual Personal Wellness and Responsibility (POWER) account for participating enrollees. The coverage package was somewhat akin to private-sector HDHPs combined with tax-advantaged Health Savings Accounts (HSAs), but with more state government money on the table.

Healthy Indiana Plan members demonstrated decreased levels of inappropriate hospital emergency care use. They increased utilization of primary and preventive care. Average per-member, per-month costs grew at a slower rate than projected Medicaid spending and met the initial waiver’s requirement of five-year budget neutrality.

The proposed HIP 2.0 waiver would be on a much larger scale. The original HIP (as subsequently amended to gain an earlier waiver extension) targeted non-elderly, non-disabled adults with household incomes less than 100 percent of the Federal Poverty Level (FPL) and who were not otherwise eligible for Medicaid. Enrollment also was capped to stay within the limits of Indiana’s own funds (from an increased cigarette tax) needed to finance the enhanced coverage expansion.

The Indiana proposal needs to be placed within an updated political context. Although the Affordable Care Act aimed to mandate all states to expand their Medicaid program eligibility up to 138 percent of the FPL, the Supreme Court ruled in June 2012 that each state must be allowed to choose whether it will do so, without being penalized for opting out. As of earlier this year, up to 24 states had declined the ACA’s Medicaid coverage offer. For many states led by Republican governors and/or Republican state legislatures, expanding Medicaid in compliance with the Obama administration’s wishes was seen not just as a bad deal that their future state budgets could not afford, but also little more than a negotiated surrender after years of pledging opposition to, and eventual repeal of, ObamaCare as a whole.

Nevertheless, the Obama administration has pressed forward this year to try to expand its ACA-brand of-Medicaid’s “market share” in Republican-leaning states. Several states have warmed to the idea of Medicaid waivers that would allow them to increase subsidized healthcare coverage for their citizens in a manner that looks a bit more like private insurance than traditional Medicaid. In states like Arkansas, Iowa and Michigan, Republican state lawmakers have signed on to Medicaid expansions, even though they appear to offer less market-based, private option reform than promised.

Will Indiana’s HIP 2.0 be different? As a former chairman of the House Republican Study Committee and the House Republican Conference, as well as an outspoken opponent of ObamaCare, Pence certainly brings strong conservative credentials to the table.

However, gaining a federal waiver for his state’s Medicaid expansion requires working within the boundaries set by Obama administration officials. Hence, Medicaid’s mandatory benefits must be guaranteed for HIP 2.0 enrollees (and even sweetened further). Medicaid’s cost-sharing restrictions are maintained for those with incomes up to the FPL, and they remain unlikely to be collected in any case. Moreover, some of HIP’s strongest incentives for beneficiaries to monitor their healthcare utilization closely had to be watered down. Copayments for improper use of hospital emergency department care are limited, and forfeiture penalties for not contributing to one’s POWER account with personal funds apply only to enrollees between 100 percent and 138 percent of the FPL.

A proposal to link HIP 2.0 funding to premium assistance subsidies for employer-based coverage and add some soft-work requirements still lacks much evidence of past success elsewhere and may, in the immortal words of the late Sen. Daniel Patrick Moynihan (D-N.Y.), mostly constitute “boob bait for the Bubbas.” Finally, the HIP 2.0 promise of budget neutrality appears to be, in a May 14 draft analysis, back-loaded toward the end of its five-year waiver period, and relies to some extent on enrollees’ annual rollovers of first-year POWER account contributions from taxpayers, with potential loss of remaining balances when the waiver ends.

The positive case for the Indiana experiment begins with acknowledging that the ACA remains at little risk of full repeal, particularly for the next two and a half years. If one assumes that its Medicaid expansion will become increasingly entrenched, and extended, into the future, the political challenge becomes how to make somewhat privatized lemonade out of another health entitlement’s lemons. Although one might accuse some would-be conservative policy advocates as believing that healthcare reform sentences consist only of a noun, a verb and “HSA,” the Indiana plan may offer a more credible approach to improving Medicaid than thinly structured block-grant proposals alone provide.

Of course, the political reality is that at least some conservative state policymakers prefer to use “Other People’s Money” via the federal Treasury rather than reallocate funds within their less open-ended state budgets. Although Indiana funded a good bit of its initial HIP experiment with an increase in its cigarette taxes on state residents, there just aren’t enough smokers there to hit more ambitious enrollment goals. The state’s hospital industry has been willing to kick in more funds through a special tax assessment, but only within the limits of getting even more revenue back in newly insured patients.

The overriding judgment call is whether Indiana is sending a signal of counterrevolutionary resolve, or disguised take-the-money-and-run capitulation, to the remaining states holding out against Medicaid expansion as part of broader efforts to overturn ObamaCare. The evidence for the former would be stronger if Indiana officials truly were still prepared to walk away from a bad waiver deal. But at this point, it appears that Pence and his state allies need even a watered down version of HIP 2.0 more than the Obama administration needs to add another red-state political trophy to its list of ACA-compliant jurisdictions. Moreover, assurances that the state later can back out of the expansion if federal funding comes up short ring hollow, as a matter of either current law or practical politics.

The HIP 2.0 Medicaid expansion does mean a substantial expansion of the ACA coverage entitlement to a broader slice of the “able-bodied” lower income population (it also conveniently excludes the most costly “medically frail” from its non-disabled-population eligibility criteria). Will it provide a new pathway both to better health and heightened cost consciousness? Or just the lure of an HSA-like wrapper to sell an additional layer of dependency on politically mediated benefits?

Indiana is flipping the Medicaid expansion coin and hoping its latest bet with taxpayer dollars pays off.

Miller is a resident fellow at the American Enterprise Institute.