A Yardstick for Medicaid Costs/Savings Projections
Under the Affordable Care Act
September 2012
Federal health reform gives states the opportunity to close the health insurance coverage
gap through the Medicaid program-- which is jointly funded by the states and the federal
government. Under the provisions of the law, the federal government will pay 100% of the
cost through the first three years and 90% from 2020 on.
As Pennsylvania assesses the federal opportunity, which could affect as many as 680,000
residents projecting the potential costs or savings associated with this expansion, will be a
critical factor in the decision-making. Several states have undertaken studies to determine
costs and benefits associated with the opportunity. With that in mind, we offer a set of
questions to help understand and evaluate any analysis that may be undertaken in
Pennsylvania.
1. What participation rate does the analysis use?
The participation rate is a key element is projecting costs. No public program, including
the highly popular Medicare program, enrolls 100% of the eligible population.
Currently in Pennsylvania, the estimated Medicaid participation for children and adults
is 60 to 69%1. National studies of enrollment and cost use experience- based estimates.
For example, the Congressional Budget Office enrollment at approximately 57% of the
eligible population, while the Urban Institute estimates an uptake rate of 75%. While
the actual up-take will vary by state, it is unrealistic to assume than 100% of eligible
individuals will enroll.
Any analysis that uses a participation rate of 100% will vastly overestimate the
costs.
2. What does the analysis assume about the rate of enrollment of people who
are already insured?
Based on the experience of the CHIP program, “crowd-out”, that is the dropping of
private insurance for publicly funded programs, is not likely to be significant.
Nationally, only between 10 and 20% of new CHIP enrollees previously had private
coverage. Further, the vast majority of adults newly eligible for Medicaid, whose
income is less than 133% of the poverty guidelines, do not have access to employerPennsylvania Health Law Project
September 2012
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based, private coverage. Low-income wage earners are far more likely to be employed
part-time, are more likely to work for small businesses that do not offer insurance, and
are less likely to be able to afford insurance if it is offered.
Any analysis that uses a “crowd-out” rate of more than 20% will vastly
overestimate the costs.
3. What is the estimated per enrollee cost for those who will be newly eligible?
There is not significant experiential data related to the costs of covering the broad
spectrum of adults whose income is less than 133% of the poverty level. However,
research conducted by the Urban Institute indicates that the cost of covering childless
adults is likely to be similar to that of covering parents of children enrolled in Medicaid.
Additional research indicates that the population who would benefit from the
expansion is younger, somewhat healthier and would be less costly than those currently
enrolled.2 For FY 2009, Medicaid payments per enrollee in Pennsylvania were $21,268
for the aged, $12,883 for an adult with disabilities, $3,692 for non-disabled adults
(including pregnant women) and $2,748 for a child (including children with
disabilities). The benefit package for newly eligible adults will be based on a benchmark
pegged to commercial insurance, so is likely to be no more costly than insurance
available to people above the 133% poverty limit.
Pennsylvania’s experience in enrolling childless adults through the adultBasic program
should not be used as a benchmark. Those adults enrolled in adultBasic were less
healthy than the general population with comparable incomes and were likely to be
enrolled precisely because they had unmet health care needs.
Any analysis that uses the Medicaid cost per disabled adult, the Medicaid cost per
elderly adult, or the adultBasic cost per enrollee will vastly overestimate the
costs.
4. What is the expected increase in administrative costs?
Administrative costs for Medicaid average between 3 and 8% of medical costs. This is
substantially lower than those for private insurance. While people eligible for Medicaid
will use the Health Insurance Exchange, the marketplace for purchasing individual
insurance coverage, any estimate should apportion the administrative costs for
Medicaid enrollees carefully. Any valid estimate of the increase in administrative costs
should be based on Medicaid enrollment and not include other administrative costs for
the operation of the Health Insurance Exchange. Moreover, since the administrative
costs are calculated as a percentage of the medical costs, if the medical costs are inflated
based on questions 1, 2, and 3, this will also overstate the administrative costs.
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Through the Medicaid program, the federal government will fund 46% of the
administrative operations costs for the new enrollees. In addition, there are enhanced
matching rates for Information Technology (IT) improvements to the Medicaid systems.
Any analysis should also clearly explain the state share of the administrative costs, the
matching rate expected from the federal government and enhancements for the IT
systems.
Any analysis that bases administrative costs on inflated utilization will vastly
overestimate the costs.
5. What timeframe does the estimate cover?
Cost estimates can vary greatly depending on the time period covered, and longer
timeframes will produce higher costs estimates. Using one timeframe to measure
Medicaid enrollment and another to estimate increases in utilization or medical costs
will not allow an apples-to-apples comparison. Comparing estimated data with actual
data, which creates an apples-to-lawn furniture comparison, should not be used.
Any analysis that uses longer timeframes to estimate costs than the timeframes
used to estimate savings will overestimate costs.
6. Does the analysis calculate cost savings to the state and what offsets are
considered?
Every state has state-specific programs that provide health care services using stateonly funds. With additional Medicaid coverage, states will accrue savings by
substituting Medicaid funds for state dollars. Some examples in Pennsylvania are
county-based mental health services, Disproportionate Share payments to hospitals
serving uninsured patients, free immunizations, and special health care programs
serving people with chronic illness or injury. In addition, the state provides health care
coverage using only state dollars through General Assistance Medical Assistance. The
cost of all or a portion of these services will be borne by the federal government,
resulting in cost savings to the state budget. For example, in the State Budget enacted
for Fiscal Year 2012-13, funding allocations are:
In the Department of Public Welfare
County-based mental health services
County-based behavioral health services
$662 M
$43 M
In the Department of Health
Special health care programs
$2.8 M
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September 2012
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Any analysis that does not include offsets in current state funding will vastly
overestimate the costs.
7. What revenue estimates does the analysis use?
According to the Urban Institute, Pennsylvania could draw down an estimated $17 to
$19B in new Medicaid funding between 2014 and 2019 if the state takes up the
opportunity to raise eligibility to 133% of the poverty level. The impact of new federal
dollars will clearly benefit Pennsylvania’s economy, particularly in the next few years as
the overall economy remains weak. These dollars will generate economic activity
including new jobs in the health care sector, an increase in demand for prescription
drugs, medical equipment and other products, many of which are produced in the
Commonwealth.
Any analysis that does not include the impact of additional federal funds on the
Pennsylvania economy will vastly overestimate the costs.
1 Benjamin D. Sommers1, Meredith Roberts Tomasi, Katherine Swartz and Arnold M. Epstein, Reasons
For The Wide Variation In Medicaid Participation Rates Among States Hold Lessons For Coverage
Expansion In 2014, Health Affairs, May 2012
John Holahan, Genevieve Kenny and Jennifer Pelletier, The Health Status of New Medicaid Enrollees
under Health Care Reform, Urban Institute, August 2010
2
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