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There are many good reasons to support full federalization of funding for Medicaid.  The most obvious is that it eliminates the Mississippi problem where Legacy Medicaid is skimpy as hell, and Expansion is not part of the conversation.  Federalization would dramatically improve the quality of life and health for hundreds of thousands of people in Mississippi and millions across the country.  This would be good in and of itself.

Almost as importantly, Medicaid demand is generally cyclical with the general economy.  Demand increases as the economy gets worse as people lose their jobs, lose their previous employer sponsored coverage and disability rolls increased.  At the same time, the states which pick up twenty-eight to fifty percent of the bill on average, see a massive revenue drop as their tax revenues tend to be extremely pro-cyclical as well.  A bad economy will see a state have a big budget hole that by law in forty nine states, it can’t paper over with deficit spending and a massive increase in eligible population for Legacy Medicaid.  Usually the response by the state is to cut Medicaid reimbursement, reduce what Medicaid will cover and reduce the number of people covered.  This is not a good thing from a minimizing human suffering perspective and it is not a good thing from the stabilization of macro-economic conditions perspectives.  The states make things worse when they cut back.  That is the story that Calculated Risk has been telling for years.

For the states that have elected to not be run by sociopathic assholes and thus expanded Medicaid, the expansion portion of the Medicaid budget goes from being a pro-cyclical to either neutral to slightly counter-cyclical.  When bad times hit and more people lose their jobs, see their hours cut back, or see their wages reduced so that they drop under 138% FPL, the federal government is picking up 100% of the initial tab and then at least 90% of the future tab.  This means the state would be receiving a big infusion of federal money in bad times, which acts as a counter-cyclical stimulus.  It is balanced out in good times when the Medicaid Expansion eligibility pool shrinks because wages are rising in the state.  It is not a pure long term counter-cyclical play as the states still have some temptation to reduce Medicaid expansion as they are on the hook for 10% of the costs and the incentives don’t change for cutting the Legacy Medicaid population (although I would suspect an amazing number of people claiming exactly 100% FPL plus a dollar as their income on their applications)  but Medicaid expansion paid for by the federal government now acts as an automatic stabilizer.

Charles Gaba does some yeoman’s work on figuring out what the current Federal committment to funding Medicaid expansion and produces a nice first cut at the stabilizer at risk:

That’s nearly $19 billionper year which would be required across those 27 states to cover the roughly 7 million people who only have Medicaid/CHIP coverage thanks to the ACA….

the states will still eventually be on the hook for 10% of these costs even with Obamacare in place…. What you can’t argue, with a straight face, is that you’d be able to keep the expansion in place without either a massive state tax hike or a massive state budget cut elsewhere.

That number for the current expansion states is probably a bit high as there were a number of Blue States that had expanded Medicaid to at least 138% of FPL for some populations pre-PPACA and had paid for that expansion with significant state funds.  They shifted those individuals that were state funded to the federally funded Medicaid Expansion pool to save state money.  I would assume that Massachusetts for instance would re-offer Medicaid eligibility with state dollars to people who lost Federal Expansion Medicaid if the Republicans repealed PPACA in its entirity.

But fifteen billion dollars a year in neutral economic conditions for slightly more than half the country’s population with up to twenty or thirty billion dollars a year in federal cash flows in down conditions is a significant automatic stabilizer.  Repealing PPACA and its Medicaid expansion is abhorrant from a moral point of view as well as counter-productive from a general economic stewardship point of view.  Automatic stabilization is a good thing as we saw most of ARRA’s net stiumulative effect (excluding the AMT patch etc) be cancelled by states slashing their budgets.

Even more effective stabilization could be achieved if the federal government took on either full funding of all Medicaid, shifting the costs from the states’ books to the federal budget where there is fortunately no balance budget constraint which enables counter-cyclical demand management policies or dramatically increasing the funding share of legacy Medicaid if full federal funding is not politically feasible.

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