New Medicaid Donut Hole: Update

By John V. Jacobi
In Medicaid
July 12, 2012
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jacobi_john1I recently wrote about the plight of poor adults in states that reject “Medicaid 2.0″ — that is, the expansions of Medicaid contained in the ACA.  Just to recap, the Supreme Court upheld the constitutionality of the expansions, but held that Medicaid’s historical power to enforce state uniformity — sanctioning states up to and including the withdrawal of some or all of their federal funding — could not be used to require states to adopt the ACA expansions.  Thus, Medicaid was conceptually split between Medicaid 1.0 (existing Medicaid) and Medicaid 2.0 (ACA expansion Medicaid), and a state could not lose Medicaid 1.0 funding if it declined to participate in Medicaid 2.0 funding.   Several governors have expressed the intent to refuse to participate in Medicaid 2.0.

My previous post highlighted Kevin Outterson’s observation of an under-appreciated effect of a state’s refusal to participate in Medicaid 2.0.  Of course, people living below the poverty level who were ineligible for Medicaid 1.0 will be shut out of Medicaid in refusing states.  But they’re also ineligible for any subsidies to purchase coverage under the exchanges.  Why?  Because Congress assumed that states would participate in Medicaid 2.0, and didn’t provide seemingly redundant subsidies.  These poor residents of refusing states will fall into a Medicaid donut hole — ineligible for Medicaid, but shut out of exchange-based subsidies.

Secretary Sebelius, in a letter dated July 10, implicitly acknowledged this problem.  After reiterating previous offers to work with states flexibly in health reform matters, and expressing hope that states would take up the federal funds available for Medicaid expansion, she addressed a donut hole question: would poor residents in refusing states be subject to a triple whammy of (1) no access to Medicaid; (2) no access to subsidies for coverage through the exchanges; and (3) penalties for not having qualifying coverage?  Sebelius couldn’t offer much on the first two — refusing states won’t offer Medicaid coverage to many of their poor residents who would be eligible for Medicaid 2.0, and subsidies are simply not available (for reasons I explained in my previous post) for persons living below poverty.  But on the third, she promised that the very poor uninsured would at least escape sanction for noncompliance with the ACA’s individual responsibility provision: Sebelius assured the governors that she would use her authority to provide a “hardship exemption” from penalties for these uninsured folks where needed.   That may be snow in January for these disenfranchised folks, but those seem to be the tools left to Sebelius.

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