Friday, November 8, 2013

Medicaid Expansion Was (and Is) Affordable

I’ve made this point before: if Republicans in the 2013 Legislature thought that expanding Medicaid coverage would wreak havoc with the state’s current biennial budget, they were barking up the wrong tree. Fred Thomas tries to make that case in a recent Missoulian column, but he has to use bogus accounting to get there. He argues that when we were building the budget, projected spending on Medicaid expansion 8 years in the future would eat up a pretty big chunk (88%) of the increase in revenue we expected to receive this biennium compared to the prior one (2012-13).  But that number doesn’t mean much. If there was anything we should have been worried about, it was the cost of Medicaid expansion now. But that, it turns out, was pretty small.

But maybe Thomas has a point, and it’s this: even if the cost of expanding Medicaid was modest this biennium, we knew that for a variety of reasons it was projected to rise over time. So the question is, even though we could have easily afforded Medicaid expansion this time around, could paying for it in the future have gotten beyond our reach? In Thomas’s words, "blown a hole in the budget"?

To answer that question we need to compare the growth of Medicaid expansion spending with the growth of state General Fund revenue, and that, though it involves a little guesswork, is not too hard to do.
In the case of Medicaid expenditures, we have Gregg Davis’s projections of the annual cost to the state of expansion, from 2014 through 2021.* The annual increase in Medicaid expansion costs is just the year to year difference in Gregg’s projections.

Projecting the growth of General Fund revenue, particularly 8 years out, is a little trickier. The way I’ll do it here is to start with 2013 actual revenue, and grow it every year by 4.64%. That’s the average annual rate that General Fund revenue has grown at since 1988. Obviously sometimes growth is a little faster, and other times it’s slower, but those variations are hard to predict and are just as likely to be in one direction as another.** So I’ll stick with the 4.64%, project revenue out to 2021, and take the year to year change in that number as the annual dollar growth in revenue.

So now take a look at the chart. The red line shows the annual growth in spending from 2014 to 2021 that would have occurred due to Medicaid expansion (if the Legislature had agreed to it!). You can see it sort of jumps around, but over the 8 year period averages about $17 million. That $17 million a year is what we were supposed to be worried about: the increasing cost we would have been locked into had we expanded Medicaid.

The blue line shows projected annual growth in revenue over the same period. It grows steadily (each year the number of additional dollars available is more than the year before) but averages out at about $114 million.

The bottom line here is pretty clear: if we had decided to expand Medicaid, we would have had to commit about 15% of future revenue growth to paying for the increasing costs of the program. Looked at the other way around, 85% of future revenue growth would have been available for increased spending on schools, the University system, other social services, and the like. It may be a matter of opinion, but I don’t see any budgetary crisis lurking in those numbers.

A word of caution here: it’s not correct to take these numbers, which refer to the situation we were in in the legislature 7 months ago (when we were building the budget and expanding Medicaid this fiscal year was still an option), and use them to describe where we will be if we expand Medicaid now or next year. For one thing, we have lost the opportunity for one year (2014) of expansion entirely paid for by the Federal government. But the point still stands: the cost of Medicaid expansion, if we ever take it on, is going to increase in the future. But we will be able to afford those increases because in a growing economy, state revenue will rise as well.

* By “cost to the state” here I am referring to budgetary outlays. Gregg calculates another, lower cost figure that includes the effect of both reduced uncompensated care costs and increased taxes stemming from a very large infusion of Federal Medicaid spending. See An Estimate of the Economic Ramifications Attributable to the Potential Medicaid Expansion on the Montana Economy. This report should be available either from the Bureau of Business and Economic Research at UM or from the State Auditor’s office.

** I got these figures from a report by the Governor’s Budget Office. Click here for the full report.

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