It’s hard to turn down a free lunch. It’s perhaps a little harder still if you’re paying for the free lunches of others. Yet, a decade after the passage of the Affordable Care Act (ACA), that’s what is happening in some states. Legislatures opposed to the ACA are refusing federal dollars for Medicaid expansion; dollars that other states are hungrily using to their benefit. Two of the most populous states–Texas and Florida–are currently among those missing out on huge sums. And their dollars are effectively, albeit indirectly, supporting the efforts of states like California.
Federal taxes return money to states
A substantial portion of federal taxes are returned to the states and local governments. In 2019, the federal government received $3.5 trillion in revenue. It returned $762 billion to states in the form of grants-in-need for things like health care, income support, education and transportation. Over 60% of that money (about $454 billion) was for health care [pdf].
In 2010, the Affordable Care Act levied new federal taxes to help lower and middle-income people across the U.S. obtain insurance coverage. These taxes didn’t apply to most individuals. Rather, the taxes were levied on hospitals, medical device manufacturers, drug companies, employers and just the very wealthiest citizens. You may also remember that tanning salons were obscurely singled out for a sin tax (i.e., the “Snooki tax,” as it became known).
No organization loved the taxes. But most health care organizations expected to see their money essentially returned to them in new profits. Hospitals were able to bill tens of millions of newly insured people, returning an estimated $180 billion to their coffers over 10 years [pdf]. Medical device manufacturers and drug companies sold more drugs and devices. And even most state governments anticipated saving money with fewer outlays to pick up the tab for the uninsured.
Paying a lot and getting little
These taxes have been in place for the better part of a decade. And most states, and their respective budgets, are benefiting [pdf]. But in some places, controversial state health policy choices have meant a smaller return on investment.
For example, the way states choose to market and run their ACA health insurance exchanges–used by tens of millions of lower and middle income families nationally–makes a big difference in plans, prices and ultimately enrollments. States (like California) that operate their own exchanges (instead of relying on the federal platform) have more choices of plans and lower premiums [pdf]. Those increased enrollments directly return additional federal dollars in the form of subsidies. And as a result, some states are taking back control of their exchanges.
Even more federal ACA funds are available to states through Medicaid expansion. And for some states, this represents the largest pot of money voluntarily left on the table. Medicaid expansion became an option (rather than a mandate) because of a 2012 Supreme Court decision. And 38 states have now expanded eligibility, providing coverage to 14.8 million newly eligible individuals. Missouri became the latest state to implement its expansion because of a court ruling last week.
A big part of the reason that Medicaid returns so much funding to states is that the expansion comes with a 90% federal match. That means a state is given a whopping nine federal dollars for every one the state spends on the program. This is dramatically better than the 50-70% match that states get for their general Medicaid population. And it is as close to a dream deal (and free lunch) as states can get.
Yet, the resistance to Medicaid expansion in some places has been resolute
As of August 2021, twelve states–including giants Texas and Florida—have not expanded Medicaid. All twelve have faced extensive lobbying pressure to expand Medicaid from their hospitals and medical associations. But in spite of that, governors and legislatures have been politically recalcitrant to the ACA overall and to the Medicaid expansion in particular.
In Texas, the state’s former Medicaid director has highlighted the state’s refusal to bring home roughly $10 billion in federal funds per year. As recently as April 2021, Medicaid expansion in that state was considered “radioactive” and voted down. This is despite Texas having the nation’s highest uninsured rate among non-elderly adults (20.1% in 2020).
Similarly, Florida has the nation’s third highest uninsured rate (16.3%). Yet two governors and a Republican-controlled legislature have defeated all efforts at Medicaid expansion. The public supports the idea [pdf], however, and a ballot initiative effort is underway to force the hand of elected officials. By doing so, Florida could bring home an estimated $14 billion in federal funds over five years.
Given the money on the table, how long will these states continue to sit out the expansion? It’s difficult to predict, of course. But you can fill out a “Medicaid Madness” tournament bracket to wager on the next expansion states.
California and Texas are similar when it comes to federal taxes
The legislatures of Texas and California are nearly political opposites. But because of each state’s size and economic productivity, they pay among the largest shares of federal taxes in the nation. Together, they paid $764 billion in 2019 (or roughly 21% of all federal taxes). And yet, compared to the average state, neither California nor Texas have been large recipients of federal tax dollars in general [pdf]. In fact, California gets less back than it pays out.
For every federal tax dollar raised from Texas, the state received back $1.07 in federal spending the state in 2019 (vs. more than $2 in poorer states like Virginia and Kentucky). California, by comparison, received just $0.99. This means that federal dollars are, on balance, flowing out of California. This has led to it earning the title (like New York, New Jersey, and five other states) of being a “donor state“, a reflection of the redistributive role of the federal government.
California, unlike Texas, has refused to leave money on the table
But while Texas sits out parts of the ACA and leaves money on the table, California has been aggressively repatriating ACA tax dollars. It was among the first states to expand its Medicaid program. And it has worked hard to maximize subsidized enrollments through Covered California, its health insurance exchange.
For example, higher-income families have been able to get state help paying for coverage. This has attracted healthier people into the exchange and resulted in record-low insurance premium price increases in the state. As a result, it became more affordable for lower- and middle-income families to enroll, in turn drawing down more federal subsidies. California also joined five other states in enacting a state-level mandate for coverage in 2020, further stabilizing costs.
These actions likely kept enrollments higher than they would have been otherwise. And they helped keep federal ACA dollars flowing to California (an estimated $22 billion [pdf] in 2019 alone). While these ACA funds have not flipped the “donor” status of California, they have certainly made it somewhat less so.
Thank you
The federal dollars that California and other states receive were not paid directly by Texas, Florida, or any other state opting out of the expansion. And California continues to be a “donor” state even with the ACA dollars flowing in. But given the scale of these untapped funds, California is benefiting in other ways.
The money that Texas, Florida, and others are leaving on the table arguably reduces the short-term financial obligations of the ACA. And it reduces the need for further tax increases or federal borrowing to fund the ACA. Since fiscal impact continues to be a concern of opponent states, this reduced fiscal pressure may help erode opposition to the ACA.
The actions of states like Texas and Florida may continue to deprive the ACA of higher numbers of newly insured, which is a critical national metric. But they are also arguably paying a heavy price. There are at least 5 million people uninsured in the 12 non-expansion states who are missing out on coverage. And yet, their health care tab is still being picked up by state sources. At what point is the price too large to maintain political appearances?
By comparison, states are saving considerable money by embracing the ACA. In fact, some states are finding that the savings cover the cost of their portion of the Medicaid expansion. And expansion is proving to have other societal benefits. As more states come online, elected officials opposing the ACA may have to find alternate compelling arguments.
All things considered, California says thank you.
Gregory Stevens