Advocates of the Obamacare Medicaid expansion have produced a number of studies in various states that project significant economic benefits if states adopt the expansion. However, most of those studies omit one or more key factors that, when included, make expansion scenarios look considerably less rosy.
- Job creation. Many state-level studies project that adopting the Medicaid expansion will generate new jobs and other favorable economic effects. However, those studies don’t measure the countervailing economic drag that will result from funding the expansion through increased taxation and borrowing. That drag will come both locally—from increased state taxes to pay the state’s share of expansion costs as well as the share of Obamacare’s new federal taxes paid by individuals and businesses in the state—and nationally from increased federal taxes in all the other states and increased federal borrowing.
- State savings. The increased federal contribution percentage for the expansion is stepped down in future years. That means that, over time, state costs grow faster than state savings in all but a handful of states. Thus, even if a state is projected to achieve significant savings in the first few years, within ten years the trend lines for projected cost versus projected spending cross. From that point on the expansion becomes an ever-growing net fiscal burden on the state. Studies that use a budget window of less than 10 years, or provide only aggregated multi-year estimates obscure the reality that the fiscal trends are unfavorable to states. Indeed, even a 10-year window doesn’t fully capture the long-term costs to states. Studies that cut the budget projection window to as little as five years, or even eight years, produce a highly distorted picture of the true costs to states.
- State tax revenues. Many of the studies projecting increased state tax revenues from the expansion do not subtract from the new federal funds the portion that will replace existing state spending. That amount represents a cost shift from the state to the federal government. As such, it is the source of all of a state’s “savings,” but it will generate neither new economic activity nor new state tax revenue. In addition, the ability of states to continue using “provider tax” schemes to draw down additional federal funding is highly questionable. Should the federal government disallow more of those claims, the share of federal funding for the state’s Medicaid program would decline.
Advocates of the Medicaid expansion like to claim that states would be turning down “free money” if they don’t agree to expand their program. However, there is no such thing as “free money.” Rather, it really is “hidden cost” money. It is only by not looking at all the costs that the illusion is created that the money is “free.”