Medical economics confirm wisdom of Jindal opt-out choice

Among others, to date exclusively Republican state chief executives, Gov. Bobby Jindal has declared that his state will not pursue expansion of Medicaid coverage mandated without penalty by the Patient Protection and Affordable Care Act (“Obamacare”). While uncertainty surrounds the law’s implementation, from a financial standpoint Jindal’s decision will save Louisiana money without impacting the level of care delivered.

As of yet the state has not been able to estimate how many residents would be newly covered if the expansion went through so that the bare minimum required, those families making 133 percent of the poverty level, would be put on state insurance rolls that currently are not covered, but one private sector entity has estimated the figure at 337,000 by 2019. Nor have the additional costs to the state been calculated by it, but the same group estimates that in 2017-19 prior to 2020 when the state must bear 10 percent of the costs the cost will be $337 million, thus presumably over $125 million a year from 2020 on.

Jindal says this is too much yet others argue that to forgo the expansion could cost the state more. They contend that these people will remain uninsured, who will be forced to pay a penalty incorrectly labeled as a “tax” by the U.S. Supreme Court if they don’t get insurance, and then rely upon hospitals and their emergency rooms, which either the state must pay for or it comes out of the pockets of those providers. The federal government subsidizes a lot of this through its Disproportionate Share (DSH) program in Medicaid, but Obamacare ratchets down these payments, staring slowly in 2014 at $500 million across all states but by 2019 hitting $5.6 billion (half the current level) before a reduction of $4 billion a year from current levels hits in 2020 and beyond. Louisiana hospitals, with much of this going to the state’s charity system, got about $732 million of these in 2011, or about 6.5 percent of the nation’s total, ranking it fourth overall in total dollars received and the highest per capita.

Thus, at first glance, it might appear that Louisiana, because it relies so heavily on these funds, might in fact be a net loser by opting out of the expansion. Assuming equal application of the cuts, the state would be out about $270 million or over twice its extra cost associated with the expansion, justifying the opposing argument. But in studying the economics of health care and veracity of assumptions made about Obamacare, the reality is Louisiana still will end up saving under the course Jindal intends to set.

First, the reduction in DSH money should not be uniform. It varies from state to state, and depends upon factors such as the proportion of uninsured and per capita income in states. That methodology means Louisiana should see less reduction. And if continues to get out of the charity hospital business as a natural outgrowth of its Bayou Health initiative, the negative impact on state finances would be reduced further.

What that amount cut will be is unknown, because rulemaking by the federal government will determine the final parameters. It is certain that under a Mitt Romney presidency that states that refuse the expansion would not see punitive measures taken against them by the issuing of regulations disproportionately reducing their DSH funds. By contrast, a second Obama Administration may be crass enough to try that, but the political costs to them in what could be termed a war against the poor’s health care would be significant. Chances are, DSH payment reductions to Louisiana will not be draconian and may not exceed the $125 million.

Second, as it does in so many areas, Obamacare make erroneous assumptions about human beings and their behavior. The whole notion of the expand Medicaid/contract DSH payments as fiscally workable relies upon the assumption that the expansion reduces use of hospitals by the uninsured meaning reduced need for DSH funding. But historical data show the opposite. Emergency room visits continue to rise even as the levels of uninsured decline, and Romney’s health care reforms in Massachusetts predicted the same dynamic yet visits to emergency rooms also increased even after those reforms that have dropped the number of uninsured there from the million-mark to the 20,000-range total.

This occurs because Medicaid relies upon private providers, yet its low reimbursement rates, which if anything will be exacerbated by Obamacare, discourage their participation in it, especially at the specialty end of the spectrum. The pool will shrink further precisely because  enacting the law will encourage some providers to leave the field over other, non-monetary concerns. Thus, more people will descend upon fewer providers for care, and the bottleneck created will have them head to the emergency rooms that must accept Medicaid patients. Those visits will increase and put more, not less, demand on DSH payments. Obamacare will not put a lid on them and politics will force reconsideration of DSH payment reductions.

Third, this will be compounded further by the fact that the law will not provide and cannot compel universal insurance and coverage. An estimated 23 million, even if every state pursued expansion, still would remain uncovered because they would prefer to pay the penalty. At the 100-133 percent level some will find it economically rewarding to pay the penalty that begins for individuals in 2014 at $95 and rises to $695 in 2016 and goes up by the rate of inflation from there. And then when they want care they’ll hit the emergency rooms, too, with much of the cost of that care not being picked up by the one getting it.

So, in essence Jindal factors in that the state is going to see greater utilization of emergency rooms under the law, so why pay twice for the same thing in many cases when the federal government, absent some draconian and vindictive impulse, will continue to pick up costs almost at the same level as before? This reality will be denied by crony capitalists in health care who want more state spending forwarded their way and by self-appointed “advocates” of the poor both in and out of government, but it does not change the reality of economics on this issue that Jindal’s decision not to seek expansion will save the state money over the long run.