Opting for a Medicaid Donut Hole Makes State Budgets the Biggest Loser

by Sally Tyler  |  September 07, 2012

We periodically feature analysis of the day’s news by experts from inside and outside AFSCME. This entry comes from Sally Tyler, AFSCME’s senior health policy analyst.

Have you heard about the Medicaid donut hole? It carries a more devastating health impact than wolfing down an entire box of Dunkin Donuts Munchkins, and by making a bad policy decision, Florida, Iowa, Louisiana, Maine, Mississippi, South Carolina and Texas may very well choke on it.

(A donut hole, by the way, is economic-speak for a gap in coverage.)

Back in the days of the Bush Administration, a so-called Medicare donut hole opened up a gap in prescription drug coverage for seniors. Now, the Supreme Court’s decision on the constitutional challenge to the Affordable Care Act (ACA) has created a new Medicaid donut hole which could be bad for the health of low-income people and state budgets alike.

Here’s how it works: The Affordable Care Act expands coverage to create a national safety net of Medicaid eligibility set at 133 percent of poverty (that’s any individual making $14,856 or a family of three with $25,390 in income). The Act’s expansion also includes sliding scale subsidies to help uninsured people purchase private health insurance through state health insurance exchanges, which are being developed now.

A sizable subsidy would exist for working individuals just barely over the limit for Medicaid eligibility and decrease as individuals and families move up in income. This would create a bedrock of coverage for those who cannot afford to buy insurance, overlaid by subsidies for workers and families who could use some additional help.

But the Supreme Court held that, although the Affordable Care Act’s Medicaid expansion is constitutional, penalizing states that don’t want to participate in the expansion by denying them Medicaid funds isn’t. This basically made the Medicaid expansion an option for states.

The state decision to participate in Medicaid expansion should be a no-brainer. The federal government will assume 100 percent of the cost for the new population in the first three years of the initiative, and will cover at least 90 percent of the cost permanently. (The Congressional Budget Office projects that the federal government will assume 93 percent of the expansion costs from 2014 to 2022.) This represents a tremendous boost in federal funding for states, as the current median for federal Medicaid funding to states is 57 percent. 

How would the denial donut work in a state such as Florida, where Gov. Rick Scott has been on a mission to deny his state’s residents any of the Affordable Care Act’s benefits? Currently, states set their own Medicaid eligibility limits for non-disabled adults, and they vary widely. Florida sets its rate for jobless parents at 20 percent of poverty (approximately $4,000 annually), and that is where eligibility would remain if Florida chooses not to participate in the expansion. And so, in states that opt out, the Medicaid donut hole is born. Scott’s comments that the expansion would cost the state too much have been debunked by leading economists, who have said that the bad decision would cost Florida billions in badly-needed federal funds.

Governors in several states have said they are assessing the effect of expansion on state costs before they make a final decision. Advocates for healthy state budgets can weigh in with facts about why Medicaid expansion makes sense.

It probably comes as no surprise that most of the governors who have rejected the Medicaid expansion (Scott in Florida, Terry Branstad in Iowa, Bobby Jindal in Louisiana, Paul LePage in Maine, Haley Barbour-Mississippi, Nikki Haley-South Carolina, and Rick Perry-Texas)  are from right-to-work states, and all have opposed efforts to raise revenue.

The bottom line is that governors bingeing on a Medicaid donut hole while starving their state of revenue is the type of yo-yo dieting that none of us can afford.