Policy Documents

Final Notice: Medicaid Crisis

Jagadeesh Gokhale –
December 10, 2010

Final Notice: Medicaid Crisis, A Forecast of Texas' Medicaid Expenditures Growth, is a paper that contends that the Patient Protection and Affordable Care Act of 2010 (ObamaCare) expands Medicaid eligibility and intro- duces an individual mandate for all U.S. citizens and legal permanent residents to purchase health insurance. Under the new law—which will become fully effective in 2014—the federal government will almost fully cover the cost of those newly eligible for Medicaid through 2019, with federal financial support expected to be ex- tended thereafter. However, additional federal financial support is not provided for new enrollees among those eligible for Medicaid under the old laws. The individual health insurance mandate makes it virtually certain that many more “old-eligibles” will enroll in Medicaid and increase states’ Medicaid financing burden significantly. This study examines the potential increase in Medicaid costs from ObamaCare for the State of Texas—one of several states that have challenged the validity of the individual health insurance mandate in court. This study constructs Texas’ Medicaid spending projections under ObamaCare to reveal the implied increase in that state’s Medicaid spending commitments from the new health care law. More importantly, through the spending pro- jections without ObamaCare, this study shows that the Medicaid program could not be sustained for too much longer without imposing crushing new financial burdens on state residents. ObamaCare makes the situation even worse.

Under pre-ObamaCare laws, projected total Medicaid spending in Texas over the period 2014-23 would have increased by $44 billion on the General Revenue (GR) basis and by $112 billion on the All Funds (AF) basis (which includes federal grants) compared to keeping nominal Medicaid spending constant during that period. This projected increase—excluding the effects of ObamaCare—arises primarily because of rising health care costs; and some of it because of higher projected enrollments. The introduction of ObamaCare is estimated to increase Texas’ GR funded Medicaid costs by an additional $31.2 billion during the first 10 years of its implementation by spurring enrollments among old-eligibles. Medicaid costs on an AF basis are projected to increase by an additional $198 billion during the first 10 years of implementing ObamaCare. Thus, GR funds’ cumulative Medicaid spending growth is projected to be 71 percent larger; and AF Medicaid spending is pro- jected to be a whopping 177 percent larger under ObamaCare during 2014-23. Given the strain being placed on the federal budget by deficits, debt, and the unfunded liability for Social Security and Medicare, the pros- pect for pushing more responsibility to the states for Medicaid seems likely. Under the assumption that the enhanced federal cost sharing rate will be reduced for newly eligible Medicaid enrollees back to the current, lower rate for old-eligibles, the 10-year Texas GR funding cost of Medicaid would increase to $38.6 billion be- cause of ObamaCare. The sizable prospective increase in Medicaid costs under ObamaCare may prompt Texas and other similarly affected states to consider alternatives to Medicaid in providing basic health care support to their low-income and medically needy populations. 


Jagadeesh Gokhale, Senior Fellow at the Cato Institute, conducted for the Texas Public Policy Foundation.