Guest Commentary: A Win for States

July 2, 2012

CSPR: Colorado and other states face the daunting challenge of maintaining a balanced budget with diminishing revenues and rapidly growing Medicaid costs

The recent decision by the Supreme Court of the United States to uphold the individual mandate has received an overwhelming share of attention from the press and pundits as it has been by far the most debated feature of President Obama’s health care law. The clash over the individual mandate and its lasting impact on America going forward will undoubtedly continue throughout November’s election and beyond.

The other major ruling within the decision, that received support from seven of the nine Justices, is an important win for cash strapped states.  The federal government currently matches state dollars at varying levels to fund Medicaid so long as the states meet federal guidelines.  As crafted, the health care law would have required states to expand eligibility levels for Medicaid, a joint state-federal program that offers care for lower income and disabled people, beyond current requirements. The ruling makes the decision to expand state Medicaid eligibility, and thus expenditures, optional.

Many states, including Colorado, are facing the daunting challenge of maintaining a balanced budget with diminishing revenues and rapidly growing costs of Medicaid. Last fall, in our report The Medicaid Crisis and the Urgent Need for Reform, we highlighted that state lawmakers across the nation have been forced to reduce funding for K-12 education, higher education, and other important state priorities at the same time increasing spending levels for Medicaid. Initial estimates suggested that over the first six years the new healthcare law would be in place as originally drafted, states would have incurred an additional $32 billion in new Medicaid costs – Colorado alone would have seen an increase of $72.5 million by 2020.

With a sluggish economy and recovery still beyond the horizon, states will be greatly limited in their ability to cover any new costs that would come as a result of expanding their Medicaid rolls. A state’s first option would be to continue the disappointing trend of reducing spending on education, transportation and other funding priorities. In our 2011 study we pointed out that in this year alone, states will spend an additional $15.9 billion on Medicaid while reducing K-12 funding by $2.5 billion and higher education by $5 billion. The second option would be for states to raise taxes on families and businesses who are still struggling to find solid footing.  For us at the Common Sense Policy Roundtable, a free-enterprise think tank that is focused on the protection of the economy, the specter of an increased tax liability is unsettling.

In their ruling, the Court stipulated that Washington cannot coerce states into expanding their existing Medicaid eligibility by threatening to reduce current levels of federal funding. While this will be seen as a huge relief to some state policymakers, it doesn’t completely eliminate the Medicaid problem. Governors and state legislators ultimately still have the option to chase the carrot and expand their Medicaid Program with the federal government footing one hundred percent of the bill for the first three years. This may sound enticing to states as the all-expense paid coverage from Uncle Sam helps increase access to a significant portion of uninsured citizens without saddling new costs onto the state.  The downside of pursuing this short-term bait comes starting in 2017 when the costs begin to shift back to the states and in 2020 when an even greater percentage of the new liability is passed to them.

There is no question that the Court’s decision immediately eases the pressure for states, but we have to realize that in practical terms all it has done is give state lawmakers the option of a small or large mouth shovel to continue digging. Even without the federal health care law being enacted, Medicaid is rapidly crowding out important state funding priorities as it continues to consume a greater share of state revenue. In order to stop digging all together and begin to make our way out of the hole, states will need greater flexibility to manage and reform their Medicaid program.

We believe it would be sensible for Governor Hickenlooper and the General Assembly to pass on the proposed expansion and resist the lure of new federal money, and instead pursue a Colorado solution that seeks to address the immediate challenge of reducing Medicaid costs without adding future liabilities.

Lou Hutchison is a board member of the Common Sense Policy Roundtable, a non-profit, free-enterprise think tank dedicated to the protection and promotion of Colorado’s economy

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