State House Report

The High Cost of Saying No

Rejecting Medicaid Expansion Dollars Will Hurt, Experts Say

By Andy Brack
Wednesday, April 23, 2014

Up to eight rural hospitals across the Palmetto State are threatened with closure or outside takeover because the state is not accepting billions of federal dollars to expand Medicaid to almost 200,000 of the state’s neediest, according to health policy experts.

The head of the state agency that runs Medicaid, however, disagrees.

Experts say rural hospitals face possible closure or loss of local control due to purchases by outsiders, including hospitals in Abbeville, Allendale, Barnwell, Dillon, Edgefield, Fairfield, Florence, Hampton and Union counties.

“There will be some hospitals that will sustain such significant financial harm that they will be purchased by for-profit health systems or out-of-state, not-for-profit systems,” says health economist Lynn Bailey. “There will be a shift to more for-profit health care and out-of-state controlled facilities.”

But Tony Keck, head of the state Department of Health and Human Services, points to the $20 million-a-year state Healthy Outcomes initiative. Started in October, it is paying for free care given by 19 rural hospitals across the state as a lifeline for those hospitals, most of which have bed occupancy rates of less than 30 percent.

“Since South Carolina Medicaid has agreed to cover the uncompensated care cost of rural hospitals, we are in fact paying for the full cost of care for the uninsured that use these hospitals,” Keck tells Statehouse Report. “The primary reason rural hospitals are struggling are the significant decreases in volume they are experiencing that is (a) part of a larger national trend of decreasing admissions and (b) the result of shifting referral patterns where local residents use larger hospitals.”

Battle over Obamacare

During the 2013 legislative session, hospitals fought hard to get the General Assembly to accept billions of federal dollars to expand Medicaid to about 200,000 of the state’s poorest residents. Advocates came up short. This year, they focused their efforts on fixing a state Certificate of Need program for which Gov. Nikki Haley vetoed funding last year. Earlier in the week, the S.C. Supreme Court overturned the governor’s veto.

Caught in the middle in the battle over Obamacare are two groups: the poor and hospitals.

Because of the way the complicated Affordable Care Act (ACA) is constructed, adults who are not elderly and who are at the federal poverty level or below generally don’t qualify for any federal health insurance subsidies if a state does not accept Medicaid expansion money, projected to be $11.2 billion between 2014 and 2020. Oddly, those who are above the poverty level do qualify for subsidies up to a certain point. Since October, almost 100,000 South Carolinians have signed up for Obamacare through a federal exchange, since the state hasn’t started its own due to rejecting Medicaid expansion dollars.

Also left in the lurch are hospitals. In the past, they’ve received “disproportionate share” payments from the federal government through the state for free care they provide, such as emergency room visits by the poor for routine health needs. As a lure to encourage states to expand Medicaid, those payments are being cut off under the presumption that the funding would be covered through new health insurance provided through Medicaid. In states that didn’t expand, the payments will end, although the cutoff has been delayed in recent months.

For and Against

Those who believe it is in the state’s best interest to expand Medicaid point to a number of benefits associated with the Affordable Care Act:

Jobs. An estimated 44,000 new jobs would be created in South Carolina with a third of them outside the health care sector, according to a 2012 report by USC’s Moore School of Business for the state hospital association.

Return on investment. For a state that invests millions in luring big companies like BMW and Boeing, investing in the state’s poor would have a dramatic economic benefit statewide, according to the South Carolina Hospital Association. Expansion would generate $3.3 billion in economic output in the state by 2020 and enough tax revenue to cover the state’s 10 percent share of expanding Medicaid, according to the Moore study.

Keeps tax dollars here. Proponents say if South Carolina continues to reject the money, it will be used to pay for insurance coverage in other states. Expanding Medicaid keeps tax dollars here that are already being paid by South Carolina taxpayers.

Higher business costs. Businesses and individuals will pay higher premiums because the state won’t get the cost savings available through Obamacare. A 2013 Jackson Hewitt study showed failure to expand Medicaid could expose employers to extra payments of $30 million to $46 million.

Competitiveness. Experts also say if South Carolina doesn’t accept Medicaid money and another state in the region does, then it will be more competitive to businesses interested in relocating. In other words, regardless of any tax incentives, the state’s failure to embrace Obamacare will make it less competitive and it won’t achieve the economic growth it could.

Increased productivity. Bailey, the economist, adds that the state would become more productive if more people had health insurance. She quotes from a soon-to-be-published study that says: “In addition to the economic activity associated with Medicaid expansion, about 500,000 South Carolinians would gain health insurance coverage, leading to improvement in their health status and improved labor productivity.”

Those who don’t want to accept Medicaid expansion money offer several reasons:

Mandate. They don’t like the program being thrust down their throats as a kind of federal mandate. The first half of this year’s session in the state Senate found many conservative senators trying to figure out a way to nullify or bypass Obamacare.

We can handle it. Opponents also say the state can handle its own health insurance needs without a state-run exchange. They point to the Health Outcomes initiative as a response.

Federal exchange is there. They also say the federal exchange remains an option for those who want insurance. Keck has said that about half of 433,000 eligible for subsidized health insurance would sign up within three years, but that number actually might cripple hospitals because they were sicker and had expensive pre-existing conditions.

Match is too much. Opponents also say they worry the long-term costs to the state will be too much because there’s no guarantee of the level of the required state match, which will be 10 percent (to the feds’ 90 percent) in 2020. Expansion calls for no state match until 2017, when it will phase in over four years to 10 percent, which is one-third of what the match is for all other federal Medicaid funds administered by the state.

The Cost of Saying No

In all the hubbub about whether to take billions of federal money to expand Medicaid, there’s been relatively little attention paid to the costs — particularly to taxpayers — of not expanding the program. In other words, if the state doesn’t take the federal money, will it incur other costs that could actually be more than the 10 percent match required by expansion?

Here are some of those costs:

State health plan. Almost 450,000 state residents get their health insurance through the state health plan administered by the Public Employee Benefit Authority. Because the state isn’t accepting expansion dollars, it is not expected to get the cost savings generated through Obamacare, which means that insurance costs will continue to rise for the state. In 2015, costs are projected to rise 4.5 percent, which means that state will have to spend $83 million to meet increased costs, or $61 million if it makes those on the health plan pay more, according to PEBA figures.

Rural hospital spending. The Healthy Outcomes program costs $20 million in the current year and is projected to cost $25 million next year. This money likely wouldn’t have to be spent if Medicaid expansion dollars were accepted.

Uncompensated costs. A June 2013 RAND study in the Health Affairs journal estimates the 14 states that do not expand will have to pay $1 billion more to health care providers who treat uninsured patients. A basic extrapolation for South Carolina reveals the uncompensated costs would be about $56 million. Subtracting the rural hospital spending above leaves about $36 million in more uncompensated costs that the state would have to pay. A July 2013 study by the Urban Institute suggests a similar annual overall amount of $61.2 million averaged over 10 years in net spending to pay for indigent care.

Lost tax revenue. The Moore study suggested the state would lose $45.6 million in income, sales and other tax revenue from not generating expansion’s new jobs in 2014. By 2020, that loss would grow to $105.7 million.

Hospital funding. Not only will disproportionate share funding be cut off in two years but hospitals in states that don’t expand Medicaid face losses of future Medicare fee-for-service rate increases, according to the Urban Institute study. In South Carolina, that translates to a whopping $6.7 billion in federal and state Medicaid payments from 2013-2022.


What’s Next?

In the 2015 legislative session, Medicaid expansion advocates are expected to ramp up efforts to pressure the state legislature to accept the federal dollars to cover the South Carolina’s poorest.

But if Haley remains governor, she is not expected to change her position of being against Obamacare, despite some who wonder whether there will be a “January surprise” — a sudden post-election deal that will find the state in a position to accept the money.

“We’ve said that we can and should get care to people in need, but we don’t need ACA Medicaid expansion to do that,” Keck says. “We are rearranging our current financing for the uninsured ($500+ million) to cover people in need more effectively than currently and will be applying for ACA, waivers which begin in 2017.”

“There will be no January surprise,” Keck says. 

Andy Brack is editor and publisher of Statehouse Report; reach him at .(JavaScript must be enabled to view this email address).

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