Is the Medicaid Bubble Ready to Pop?

Bubble pop dog. Photo by Carterse.

The majority of controversial issues involving the Affordable Care Act (ACA) have stemmed from its mandate that all people have health insurance or else face a fine (or is it a tax?) and ACA’s transformation of the U.S. health insurance system from a largely private marketplace to a government-manipulated, exchange-based market. While both of these issues are tremendously important, one of the most damaging Obamacare provisions – the expansion of Medicaid – has largely gone unnoticed by the general public.


One of Obamacare’s chief initiatives is providing for the expansion of Medicaid. The legislators who wrote ACA understood taxpayer subsidies alone would not be enough to cover the roughly 30 million Americans who did not have health insurance at the time of the law’s passage, so they created a provision in Obamacare that incentivizes states to expand Medicaid programs by offering to pay 100 percent of the cost from 2014 through 2016. The law requires the national government to gradually reduce its share down to 90 percent by 2020. The remaining 10 percent of costs will be covered by the states.

In theory, shifting the expansion burden to the states slowly allows state governments the time necessary to increase tax revenues or make budget cuts to cover the additional expenses. In practice, this works only if the number of people who enroll in Medicaid matches states’ expectations. If too many people enroll in Medicaid, the burden on the states will be too costly and could cause significant budgetary and health-care-related problems.

Unfortunately, dramatic and unexpected Medicaid enrollment increases is precisely what has occurred in many of the states that have chosen to expand. For instance, in Colorado the number of additional people enrolled in Medicaid and the Children’s Health Insurance Program (CHIP), which is also receiving a significant and temporary federal funding boost, grew by 477,000 from 2013 to February 2015, according to the Centers for Medicare and Medicaid Services. That’s an increase of 60 percent, well beyond the growth state officials initially anticipated.

According to the Colorado Health Institute (CHI), more than 21 percent of all Coloradoans are now enrolled in Medicaid or CHIP, double the percentage of the population enrolled in 2009.

Exploding Medicaid and CHIP enrollment across the nation could mean states are going to end up on the hook for millions more than they can afford, and there’s no sign state governments are setting aside funds to prepare for what will likely be future budget shortages, and possibly even crises.

Making matters worse, the national government has committed to covering 90 percent of Medicaid costs only through 2022, which means states still have no way of knowing how much will be needed in less than 10 years to pay for state Medicaid programs.

The combination of these factors is creating a rapidly expanding Medicaid bubble for the states. If the national government decides to reduce its contribution toward covering expansion costs below 90 percent, the Medicaid bubble will pop, suddenly forcing states to pay for programs they cannot afford or slash budgets. This is particularly problematic now that there is a federal mandate requiring all Americans to have health insurance, because if state governments try to cut their Medicaid costs by adjusting eligibility requirements and forcing people off the rolls, those individuals will still need to purchase health insurance, which they can’t afford, or be forced to pay significant penalties, which they also can’t afford.

The reality is it will be politically difficult, if not impossible, to reduce Medicaid rolls once they have been expanded, regardless of whether the states can afford it.

Interestingly, the fallout of this potential disaster could lead to a greater role for the national government in health care. Faced with the decision of cutting government services, removing individuals from Medicaid rolls, or begging the national government for more cash, it’s easy to see how state legislatures would find it most politically expedient to ask for federal dollars rather than make difficult decisions that could cost them votes. It’s at this point we could see a major push for a national single-payer health insurance system, which will likely be viewed as a savior for states looking to escape their budget woes.

Many states have happily signed on to expand Medicaid, not because they believed it would be in the best interests of their citizens in the long-term, but rather because political opportunists in state capitals are using Obamacare to further their own ambitions. Meanwhile, taxpayers, newly enrolled Medicaid recipients, health care workers, and the rest of society will all be left with the consequences: a broken, failing health care system and massive budget shortfalls.

Bubble pop dog. Photo by Carterse.

Justin Haskins