The New Medicaid Donut Hole: Turning Down Medicaid 2.0

By John V. Jacobi
In Health Reform
July 8, 2012
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jacobi_johnNow that Medicaid 2.0 is optional, what are the effects of a state’s accepting or rejecting the Affordable Care Act’s Medicaid expansion?  Much of the commentary, naturally, has discussed how many potential new Medicaid enrollees a state could add — or not — depending on whether it accepted “Medicaid 2.0,”  and how much it would cost a state to embrace the full expansion.   But states opting out of Medicaid expansion may be buying into a problem they haven’t considered: the Medicaid donut hole.  That new donut hole, created by the Court’s approval of private health insurance reform but mixed review of Medicaid expansion, could leave millions of single, very low income people out in the cold.

Many states are suggesting that they may turn down Medicaid 2.0 for budgetary reasons, even though the ACA places the lion’s share of the cost on the feds through 2022.  Surely, some states are making a calculation that they’d rather turn down the feds’ offer to pick up about 93% of the expansion’s cost through 2022,   because the remaining state costs in this economy are significant, and there remains uncertainty in the out years.

But wait — the Supreme Court upheld Title I of the ACA (the private insurance reforms); aren’t the folks excluded from Medicaid at least eligible for subsidies (made up of federal funds) through the exchanges?  Put another way, could a Medicaid-expansion-refusing state off-load to the feds the subsidy costs of their poorest single adults?   No.  That’s where the Medicaid donut hole comes in.

As Kevin Outterson has observed at The Incidental Economist, a state refusing Medicaid 2.0 could be creating a group of very poor residents unexpectedly excluded from any access to health insurance.  How is that possible?  Don’t the subsidies available through exchanges support private market insurance for low-income people?  Not if they’re very poor.  The simple fact is that people not covered by Medicaid 1.0 with income below 100% of the FPL are out of luck in states that reject Medicaid 2.0.

The reform provides insurance subsidies through tax credits.  The credits are calculated on a sliding scale, according to household level, for people with income up to 400% of FPL — subsidizing more generously someone earning 200% of FPL, for example, than someone earning 350% of FPL.  But, under 26 USC 36B(c)(1), credits will not be distributed to those with incomes below 100% of the FPL.  Why?  Because Congress assumed states would take up the Medicaid expansion, obviating the need for exchange-based subsidies for the very poor.

Bottom line:  states rejecting Medicaid 2.0 will not only forego about 93% federal funding for the program between 2014 and 2022, but they could also be depriving the poorest of the uninsured from any shot at coverage — potentially affecting millions nation-wide.  And with DSH funding decreasing, hospitals may have concerns if states voluntarily opt out of coverage for those likely to impose uncompensated care costs.  States, then, won’t be pushing costs to the feds– they’ll be denying available coverage to their own residents and making life difficult for their hospitals.

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2 Responses to “The New Medicaid Donut Hole: Turning Down Medicaid 2.0”

  1. dennis says:

    in effect the surpreme court repeal the health care law for people earning less 100% of the fpl if they want qualify for medicaid under their state law. the people that need the premium credit and cost sharing the most. hopefully this well be changed if obama is re-elected by letting claim the premium credit and cost sharing subdisies.

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