State Budgets

Medicaid Expansion: The Wrong Prescription for Virginia

Virginia must reject Medicaid expansion under the Affordable Care Act in favor of better reforms and alternatives

Virginia is one of the last states to decide if it will participate in the Medicaid expansion as prescribed in the landmark 2009 federal law, the Affordable Care Act (ACA). The Virginia General Assembly assigned the duty of studying Medicaid expansion to the Medicaid Innovation and Reform Commission (MIRC).1 The 12-member commission brings together five members each from the House and Senate and two members of the executive branch to review a number of proposals to change or reform Medicaid and other health services options in the Commonwealth.2

The rising cost of Medicaid is a serious concern. In a letter to U.S. Health and Human Services Secretary Kathleen Sebelius, Virginia Governor Bob McDonnell noted that Medicaid spending takes up nearly 21 percent of Virginia’s general fund spending.3 Virginia’s current Medicaid enrollment exceeds one million residents.4 The state spends over $3 billion per year for its share of Medicaid, and costs have been increasing at a rate of over nine percent per year.5

Virginia enjoyed some relief in fiscal years 2009 and 2010 when the federal government increased its share of funding for Medicaid services, lowering the Commonwealth’s share to just under 40 percent.6 That number has now fallen back to pre-recession levels, with Virginia once again picking up half the tab for Medicaid.7 It’s no surprise that state leaders want to return to a time of receiving more “free money” to cut the state’s share of health care costs.

While there are many questions about the best way to proceed, one thing is certain: ACA Medicaid expansion would give Virginia billions of federal dollars per year to provide government insurance to many more of its residents. The assumption is that when more low income residents have medical insurance coverage, care and access for those residents will improve and costs for uncompensated care will be reduced. In reality, the results are counterintuitive. Medicaid has fallen short of delivering proper health care to low income residents, and other expansions of Medicaid, done in a similar fashion to what is provided in the ACA, have fallen short of delivering the promised cost reductions.

This paper will summarize some of the current problems with Medicaid coverage, anticipated problems with accepting Medicaid expansion and discuss alternatives and reforms that will better serve Virginians.

Unproven Health Benefits

A study published in the New England Journal of Medicine earlier this year explains why expanded Medicaid does not guarantee that new enrollees will actually receive effective health care. In 2008, Oregon expanded Medicaid coverage for low-income residents, but because of cost restrictions, the state used a lottery to choose who would get coverage. This gave researchers an opportunity to conduct the gold standard of tests: a randomized, controlled study. This would make it possible to determine the effects of Medicaid coverage on eligible residents.

After two years, there were no significant improvements in the health of the lottery “winners” in hypertension, cholesterol levels and glycated hemoglobin, compared with the other eligible residents who did not receive coverage. There were some positive results for mental health–new recipients had lower rates of depression. Yet even this result is unexplained, as there is no correlating increase in the use of antidepressant drugs.8 Recipients also had no feeling of financial strain despite using more health services than those who did not receive coverage.

In essence, the Oregon study showed that although recipients of expanded Medicaid felt better about having coverage, they were not physically healthier than the low income residents who did not receive Medicaid care.

A University of Virginia study also presents alarming results for those in favor of Medicaid expansion. The paper, “Primary Payer Status Affects Mortality For Major Surgical Operations,” presented to the American Surgical Association in 2010, found that the in-hospital mortality rate for Medicaid recipients who went under the knife was 13 percent higher than those patients who had no insurance at all. The study also stated that “controlling for age, gender, income, geographic region, operation, and 30 comorbid conditions, Medicaid payer status was associated with the longest length of stay and highest total costs.”9

Even with government insurance coverage, Medicaid-eligible residents may not actually be able to receive care. Virginia is facing a serious doctor shortage that is expected to worsen when the ACA goes into full effect.10 Furthermore, reimbursement rates for Medicaid care have been only temporarily increased for 2013 and 2014, and may return to their original, abysmal rates in 2015.11 That means that fewer doctors will be able to accept Medicaid insurance. Health insurance is of little use to the patient if he or she cannot find a doctor who accepts that insurance. Legislators must recognize the difference between “insurance” and “care” and determine if having Medicaid insurance would even increase accessibility to care.

The Financial Burden
False promise of savings

The goals of reducing the number of uninsured and therefore, lowering uncompensated care, are unlikely to be met with Medicaid expansion. Researchers from Boston University and Harvard Medical School found that the ACA’s Medicaid expansion will not only drive up the percentage of people receiving public insurance from six percent to 14 percent by 2030, but will also shift people away from private insurance and into public insurance. This movement would occur “without reducing the number of uninsured very much.”12

Arizona’s experience bears out this conclusion. In 2000, Arizona requested and received a federal waiver to expand its Medicaid system to allow enrollment of childless adults and parents that earned under the federal poverty level.13 Arizona expected to reduce state spending by lowering the costs for uncompensated care. The problem, however, was that the estimates were all wrong and predicted benefits were nowhere to be found. Rather than saving millions per year, costs jumped; instead of decreasing the uninsured rate, it ticked upwards; private insurance enrollment dipped and Medicaid enrollment was far greater than expected. Eight years after expansion, Arizona had spent four times as much as expected–$8.4 billion.14 With the arrival of the Great Recession, Arizona was forced to cut benefits to Medicaid recipients. With its waiver about to run out, and with the unlikely chance that the federal government would renew it, Arizona had little choice but to accept the ACA’s Medicaid expansion.15

The story was not much different in Maine, Delaware or Oregon, where costs exceeded predictions.16 The projected savings stemming from reduction in the uninsured population are unreliable based on real-world application of Medicaid expansion.

A recent survey gives us some insight that Virginia could experience that same private-to-public shift. The Virginia-based Thomas Jefferson Institute for Public Policy found that of the survey respondents who said they were on Medicaid, 43 percent said that in the six months before they signed up for the program, they had either private insurance through their employer or had personal private insurance.17

Reliance on federal support

Virginia already relies on a significant amount of federal government support to finance the state budget. In 2011, Virginia received nearly 27 percent of its general funds from the federal government.18 Although this puts the state at a low ranking nationally and in comparison to its neighboring states (which range from 34 percent to 44 percent), Virginia relies on the federal government more now than it did merely three years ago. In 2008, only 20.5 percent of Virginia’s general budget funds came from Washington.19 Medicaid expansion would force Virginia to lean harder against the federal funding crutch.

Federal funding within the state budget is not the only way that Virginia relies on Washington. Due to the growth in the federal government, particularly in the defense and tech sectors, Virginia has enjoyed an economic boom. In a decade, federal government spending has almost doubled and national defense spending has increased 129 percent.20 Virginia has been one of the biggest beneficiaries of the federal government’s spending spree. In 2011, the money received from federal contracts made up 13.7 percent of the gross state product, and more federal contract money was spent in Virginia than in any other state. Contract awards in Virginia have increased from fiscal year 2001 to 2011 by 188 percent. This outpaced the overall gross state product increase in that same period–53 percent.21

Due to mounting federal debt, that bubble may be ready to burst. Virginia has already been one of the states most affected by sequestration. Early estimates predicted that Virginia could lose $838 million in federal spending this year.22 The State Council of Higher Education for Virginia (SCHEV) estimates that sequestration will reduce federal support of Virginia education by as much as $94 million in 2013.23 And Virginia is expected to suffer almost 90,000 Defense Department furloughs, making up 2.4 percent of all jobs in the Commonwealth.24 For a time, economists feared that employment could actually shrink in Virginia and lead to recession.25 That now appears unlikely in the short term, through sequestration will continue to have a serious effect on recovery.26

The Commonwealth’s economic fate is tied closely with the fiscal health of the federal government. This becomes problematic when typical state politicking overshadows fiscal realities. A common attitude among political leaders, in any state, is that one of their duties is to get more federal funding as a means of “returning” federal tax revenue to the state residents. This shortsighted political goal ignores the greater problem of federal debt that will eventually lead to major cutbacks in state revenue. The small cutbacks already in place affect the Commonwealth directly. The continued debt problems of the federal government will affect Virginia like no other state.

Future uncertainty

The federal government attempts to preserve equity between the states when it comes to federal programs. Medicaid is no different. The law dictates that no state will pay more than 50 percent, but many states pay less than that. The federal government’s share of the costs is known as the federal medical assistance percentage, or FMAP. The FMAP percentage is calculated by factoring the per capita income of state residents as compared to the national average.27 One advantage of Medicaid expansion is that the FMAP rate for the newly eligible Medicaid recipients will be 100 percent for the first three years. This will increase the overall FMAP rate for the state. Proponents of the expansion, particularly the hospital lobby, have insisted that the short-term savings make expansion worthwhile.28 But in 2017, the rate will drop to 95 percent and by 2020, the FMAP rate for the Medicaid expansion population will be 90 percent. That means that Virginia will be on the hook for 10 percent more Medicaid funding than it is today.

While the newly-eligible recipients FMAP decreases over the next six years, there is yet another serious threat to the standard FMAP rate. The federal government could alter the law to change the multiplier by which the federal government determines the FMAP rate. It is not a far-fetched idea: the Obama administration has already proposed doing just that, on several occasions,29 and a report by the Congressional Research Service released in January 2013 notes that such proposals have arisen as a way to reduce the national deficit.30

An Irreversible Decision

In a recent opinion article, Senator Emmett Hanger, chairman of the MIRC, stated his desire to expand Medicaid in Virginia. Hanger wrote, “We can accept expansion with the understanding that we have the option to reverse course if the federal government does not honor its commitment.”31 The legal opinion that turned Medicaid expansion into an option, however, suggests that this is not the case.

In National Federation of Independent Business (NFIB) v. Sebelius, the U.S. Supreme Court upheld the ACA and its individual mandate for health insurance.32 But part of the decision, with seven of the nine justices in agreement, determined that the federal government could not expand Medicaid in the way the ACA prescribed. As written, the ACA would have forced states to accept Medicaid expansion or face losing all federal matching funds for Medicaid. In Virginia, this would have meant a loss of over $3 billion.33 The Supreme Court ruled that this was unconstitutional because the federal government’s actions were too coercive. Such a major change to the program was unpredictable and the federal government could not take back previously promised funds in order to force its will on the states.

The seven justices signed on to opinions that noted there are some predictable outcomes in taking on federal matching funds for programs, including the reduction of funding for the program, leaving states with an unfunded mandate. In the context of Medicaid, this could include a reduction of FMAP. Ultimately, the Supreme Court preserved Medicaid expansion, which, de facto, amended the ACA to allow states to decide whether or not they want to expand without putting current Medicaid funds in jeopardy. This does not mean that if the federal government changed its funding levels a state could exit Medicaid expansion only. It is far more likely that the federal government could revoke all Medicaid funding.34 This view garnered the support of seven of nine justices, a rare feat for the contentious Court, on such a divisive issue.

The Supreme Court altered the ACA so that states were not pushed through the door of Medicaid expansion. The Court’s decision does not, however, stop the federal government from locking that door behind a state once it voluntarily walks through.

Alternatives and Solutions

Medicaid is a failing government program. The problems of rising cost and limited access and care for low-income residents will not go away whether Virginia accepts Medicaid expansion or not. There are several alternatives that Virginia can pursue that have proven more effective than Medicaid. This is not meant to be an exhaustive or exclusive list, but rather clearly different paths that resulted in far better outcomes than Medicaid expansion has done in other states or will do in Virginia.

Block grants

In 2008, Rhode Island faced Medicaid costs that took up 30 percent of the state budget. The state received a federal waiver for Medicaid. Rhode Island agreed to have its expenditures capped at just over $12 billion for five years. In exchange, the federal government permitted the state to change some of the rules and regulations involving Medicaid, with the major exception of promising to maintain the same Medicaid population under federal rules. State officials said that in 18 months, Rhode Island slowed the growth of Medicaid spending from its expected $3.8 billion to $2.7 billion.35 Some opponents of the program question the total savings,36 but in the least, this reform controlled what would have been a completely unsustainable program.

Medicaid Cure

The Medicaid Cure program (or “Cure”) has been up and running as a pilot program in Florida for several years. Rather than give all eligible residents the same Medicaid coverage, Cure allows recipients to choose from at least four plans. In Florida, patients in the pilot areas were able to choose from up to eleven plans. Patients can switch plans if desired. The funding available through Cure allows residents to purchase private insurance as well. Plans in the Cure program can negotiate special rates with specialists to allow patients to see the proper medical professionals when necessary. Reimbursement rates to physicians are also higher, giving doctors greater incentive to accept new patients on Cure, as opposed to old Medicaid. Plans can also be customized to deal with copay waivers, preferred drug lists, and additional benefits. Custom plans can also be made for specific health needs, such as pregnancy or complex physical problems. And even though more and better care is provided to patients, these reforms allow the state to control Medicaid costs.

In Florida, the plan has been so successful that in 2011, the state legislature voted to extend Cure to the entire state. The plan will be fully implemented in 2014. When that happens, cost savings are projected to be $1 billion a year. The results for patients have been astounding as well. On 30 measurable health outcomes, Cure bested old Medicaid in 19 categories. Many plans provide incentives for healthy lifestyle changes, which put cash in patients’ pockets and ultimately drive down the cost of care. Estimates based on 2009 figures show that Virginia could have saved $1,678,557,067 had Medicaid Cure been in effect, which comes out to a 53 percent savings of related Medicaid spending.37


The question of whether to expand Medicaid presents a unique opportunity for Virginia, so long as leaders in the Commonwealth know how to properly respond. Unlike most actions by the federal government, Medicaid expansion allows states to consider the program and weigh the risks and benefits. Usually, the federal government will simply pass a mandate, and may not even properly fund it, leaving the states no choice by to accept it. The MIRC has more than enough information to recognize that Medicaid expansion is not right for Virginia. Time and again, in state after state, promised savings and better health outcomes have never been accomplished. The Commission should finally end the debate and start spending its valuable time on considering alternatives, rather than continuing to trap the Commonwealth in a perennial, growing, fiscal burden that fails to improve the health care outcomes of residents.

  1. The authority of the commission to decide on Medicaid expansion has been questioned. SeeKathryn Watson, Cuccinelli: Medicaid decision still unconstitutional,, (Mar. 26, 2013),
  2. Medicaid Innovation and Reform Commission,
  3. Letter from VA Gov. Robert McDonnell, to Kathleen Sebelius, Secretary of Health and Human Services (Mar. 5, 2013) (available at
  4. State Health Facts, Kaiser Family Found., (available at
  5. Id.
  6. Id.
  7. Id.
  8. For a theory as to why this may be, see Megan McArdle, Study: Giving People Government Health Insurance May Not Make them Any Healthier, Daily Beast, (May 1, 2013),
  9. Damien J LaPar, et. al., Primary Payer Status Affects Mortality For Major Surgical Operations, Am. Surgical Ass’n 130th Annual Meeting, (2010),
  10. Health care reform may worsen doctor shortages, Rich. Times-Dispatch, (June 23, 2013),; Chelyen Davis, State’s doctor shortage hard to measure, Free Lance-Star, (June 22, 2013),
  11. Teresa Breen, Overview of the 2013-2014 Medicaid payment increase for primary care services, Advisory Board Company, (2013),
  12. Steven D. Pizer, Austin Frakt & Lisa Iezzoni, The Effect of Health Reform on Public and Private Insurance in the Long Run, (Mar. 9, 2011), (available at
  13. John Davidson, The future of Medicaid expansion is Arizona’s past, Daily Caller, (Mar. 21, 2013),
  14. Id.
  15. Joe Luppino-Esposito, Arizona’s Medicaid Mistake-Take Two, Federalism in Action, (May 16, 2013),
  16. Jonathan Ingram, Medicaid Expansion: We Already Know How the Story Ends, Found. for Gov’t Accountability, (Mar. 11, 2013),
  17. Virginia Medicaid Expansion Survey Among 6 Counties Topline Results, Thomas Jefferson Inst. for Pub. Pol’y, (July 15, 2013),
  18. Kristen De Peña, Federal Aid to the States 2008-2011, State Budget Solutions, (Feb. 21, 2013),
  19. Id.
  20. Virginia Economic Forecast 2013-2014, Thomas Jefferson Inst. for Pub. Pol’y, (June 2013),
  21. Id.
  22. Sen. Tim Kaine Discusses Budget Cuts That Will Affect Va., WUSA-9, (Mar. 1, 2013),
  23. Letter from Peter Blake, Director of the State Council of Higher Education for Virginia, to VA Sen. Walter Stosch, Chairman of the Senate Finance Committee and VA Del. Lacey Putney, Chairman of the House Appropriations Committee, (July 1, 2013), (available at
  24. Trip Gabriel, Virginia’s Feast on U.S. Funds Nears an End, N.Y. Times, (Mar. 2, 2013),
  25. Christine Chmura, Economic Impact: Virginia still could get impact from sequestration, Rich. Times-Dispatch, (Feb. 19, 2013),
  26. Mike Thompson, Slower Recovery due to Sequestration, Jefferson Policy Journal, (June 27, 2013),
  27. Alison Mitchell & Evelyne P. Baumrucker, Cong. Research Serv., R42941, Medicaid’s Federal Medical Assistance Percentage (FMAP), FY2014 (Jan. 30, 2013) (available at
  28. Michael Martz, Study: Va. would pay more if Medicaid not expanded, Rich. Times-Dispatch, (Jan. 5, 2013),
  29. Drew Gonshorowski, Medicaid Expansion Will Become More Costly to States, Heritage Found., (Aug. 30, 2012),; Jason Millman, What Medicaid cuts might look like, Politico, (Dec. 9, 2012),; Avik Roy, Governors’ Worst Nightmare: Obama Proposed Shifting Costs of Obamacare’s Medicaid Expansion to the States, Forbes, (July 19, 2012),
  30. Alison Mitchell & Evelyne P. Baumrucker, Cong. Research Serv., R42941, Medicaid’s Federal Medical Assistance Percentage (FMAP), FY2014 (Jan. 30, 2013) (available at
  31. Emmett Hanger, Op-Ed, Virginia can control its destiny with Medicaid expansion, Roanoke Times, (June 30, 2013),
  32. 132 S. Ct. 2566 (2012).
  33. State Health Facts, Kaiser Family Found., (available at
  34. SeeRobert Alt & Dan Greenberg, Can Arkansas Escape from Medicaid Expansion if the Federal Government Breaks Its Commitments?, Advance Ark. Inst., (Apr. 16, 2013),; Robert Alt, Expanding Medicaid The Wrong Policy for Ohio, Testimony before the Health and Human Services Subcommittee, Finance Committee, Ohio House of Representatives, (Mar. 13, 2013), Alt Testimony House HHS 3-13-13(Edited) (1)(1).pdf.
  35. Editorial, Rhode Island’s Medicaid Lesson, Wall Street Journal, (Mar. 28, 2011),
  36. SeeJanet Roberts, Rhode Island’s Medicaid Experiment Becomes a Talking Point for Budget Cutters, N.Y. Times, (May 15, 2011),; Avik Roy, How Rhode Island Reformed Medicaid, Forbes, (Apr. 26, 2011)
  37. Tarren Bragdon and Christie Herrera, Big Taxpayer Savings for Every State, Found. for Gov’t Accountability, (Oct. 5, 2012),

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