Recently, the Supreme Court upheld most of the Patient Protection and Affordable Care Act. But one provision — the part expanding Medicaid, the health care plan for low-income families, to all adults and children below 133 percent of the poverty line — was weakened. States that decline to participate in this expansion won’t lose all the funds the federal government currently give them for Medicaid, as the law specified; they’ll only have to give up the money that would have paid for the expansion itself.
Already, some conservative governors are claiming they plan to turn the money down. But most states can be expected to take the expansion because it’s a great deal: The federal government will pay for all of it in the first year, and will continue to pay for 90 percent of the expansion costs in 2019 and thereafter.
In Massachusetts, the deal looks even better. Even though the state already has near-universal health coverage, Obamacare — if all goes well — will reduce the financial pressure on Massachusetts and give the state some room to make its economy more competitive. The challenge to Beacon Hill is to use this opportunity wisely.
MassHealth, the Medicaid program in Massachusetts, already has extremely broad eligibility standards, so unlike in most states the new federal standards won’t mean that new beneficiaries will be allowed to enroll. They do mean the federal government will start paying a larger share of the costs for people who already participate.
That should save Massachusetts somewhere between $600 million and $1.3 billion through 2019, the Kaiser Family Foundation has estimated. And because of the way the formula is designed, those savings will escalate gradually through 2019, meaning that the recurring savings will be a few hundred million dollars a year thereafter.
And that’s just the savings in Medicaid. Massachusetts also spends about $800 million a year to subsidize health coverage for low- and middle-income people through Commonwealth Care. Much of that cost will be shifted to the federal government after 2014, also creating big savings in the state budget. All told, implementation of the federal law should save Massachusetts hundreds of millions of dollars a year.
Of course, federal spending is not free. It’s financed with federal taxes, mostly on income, and because Massachusetts is a high-income state, it can expect to pay more than its share of the national total. Bay State residents would save money if each state paid its own way to universal health care and the federal government stayed out.
But there are other reasons for Massachusetts to prefer federal finance of health care. The federal government can use deficits to get through recessions, when tax receipts dip and demand for Medicaid rises. Coping with rising health care costs during a recession has been a strain for Massachusetts, and was one of the drivers of the sales tax hike in 2009. Shifting health care responsibilities to the federal government will provide the state, and taxpayers, with more fiscal certainty.
Furthermore, when Massachusetts chooses to offer especially comprehensive health coverage, and to collect the taxes necessary to finance that, it must compete with states like New Hampshire that choose a low-tax, low-services model. Individuals can then move with their feet — those who will use the benefits into the generous states, and those who won’t into the low-tax states. Obamacare will provide national consistency on health spending that should make Massachusetts more competitive.
The question still remains: What should state lawmakers do with all the money they’ll save on health care? The temptation will be simply to spend the money on something else, but that would be a mistake. Obamacare came with federal tax increases and, given the persistent federal budget gap, more are likely to come in the future; offsetting tax relief at the state level is called for.
A lot of tax relief is possible. The savings are enough to lower the sales tax back to somewhere close to 5 percent — which would be fitting, since that was the tax rate when Massachusetts took on the responsibility of ensuring universal health coverage. In a state where there are relatively few uninsured residents to expand coverage to, a substantial tax cut could be the most tangible gain from the federal health care law.
Josh Barro blogs about economic and fiscal issues for Bloomberg View.