Why Medicaid Eligibility Will (Still) Level Off at 100 FPL

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Richard Evans / Scott Hinds / Ryan Baum


203.901.1631 /.1632 / .1627

https://twitter.com/images/resources/twitter-bird-blue-on-white.pngrichard@ / hinds@ / baum@sector-sovereign.com


December 17, 2012

Why Medicaid Eligibility Will (Still) Level Off at 100 FPL

  • States’ economic interests are best served by capping Medicaid eligibility at 100 percent of the federal poverty level (FPL), as opposed to the 138 FPL cap called for by the ACA
  • If the state covers 100 – 138 FPL residents under Medicaid it nets $2,700 per beneficiary in federal inflows; if the same residents go to the exchanges (which requires they not be eligible for Medicaid) the state nets about $6640 per beneficiary
  • This assumes the states can expand partially (only to 100 FPL) and still enjoy the higher federal matching rates (or ‘FMAP’, the percent of Medicaid costs paid by the federal government) the ACA provides for ‘expansion’ beneficiaries. The current average FMAP is about 57 percent; the ACA provides a 90 to 100 percent (depending on year) FMAP for expansion beneficiaries
  • Last week HHS Secretary Sebelius established a policy that the enhanced 90 – 100 percent FMAP would only be available to states expanding Medicaid (all at once, gradual expansions are excluded) to 138 FPL
  • At first glance this spoils the otherwise optimal strategy of expanding Medicaid to 100 FPL and sending everyone else to the exchanges; however the all-or-none expansion requirement only extends through 2016; after this point CMS has not ruled out giving the enhanced FMAP (by then 90 – 95 percent) to states expanding partially or gradually
  • As long as the ban on enhanced FMAPs for partial expansions appears temporary, states’ economic interests are best served by putting 100 – 138 FPL residents on the exchanges as soon as these are operating, and waiting until 2017 (when the all-or-none requirement is expires) to expand Medicaid to beneficiaries with incomes below 100 FPL
  • On net, the near term effect of the all-or-none policy is likely to be that many states delay covering sub-100 FPL expansion beneficiaries before 2016 – in particular this affects the 10M potential expansion beneficiaries with sub-100 FPL incomes living in Republican-controlled states. In the longer-term, we still expect most states – Republican and Democrat – will cap Medicaid eligibility at 100 FPL
  • This is mildly bearish for Medicaid HMOs, particularly those with larger exposures to Republican states (see Exhibit 4). Ultimately Medicaid HMOs can produce attractive growth by taking over the care of dual-eligibles, who are unaffected by the all-or-none policy; however large-scale enrollment of duals won’t take place until the current demonstration finishes; in the meantime non-dual enrollment gains may be below expectations
  • This is also mildly bearish for Hospitals – patient volume gains and bad debt reductions from Medicaid expansion may be further delayed, and this particularly affects hospitals with larger Republican state exposures (see Exhibit 5). Despite this we still see Hospitals as a good value – we believe concerns surrounding Medicare rate reductions are over-done, and that rising demand from improving employment more than offsets delays to the Medicaid expansion

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In simple economic terms, states’ best Medicaid expansion strategy is mix-and-match: expand Medicaid to 100 FPL only (instead of the 138 FPL called for by the Affordable Care Act), and leave persons with incomes from 100 to 138 FPL to acquire federally subsidized coverage on the exchanges. The logic is simple and Keynesian – states receive about $2,700 in net federal inflows per new Medicaid beneficiary, but around $6,640[1] in net federal inflows for every beneficiary[2] that goes[3],[4] to the exchanges

Last week however, HHS Secretary Sebelius conveyed that CMS will offer enhanced federal matching[5] for expansion beneficiaries only in states that expand fully to the income limit (138 FPL)[6] specified under ACA[7]. If this policy were permanent, it would spoil the otherwise optimal mix-and-match strategy for most states – however the requirement to expand fully (and all at once, rather than in phases) only extends to 2016. After 2016, states that had not by then fully expanded may petition for waivers; CMS has not ruled out enhanced federal matching for post-2016 expansions that are gradual, and/or stop short of 138 FPL. Even if CMS were to alter the policy such that the all-or-none expansion criteria for the enhanced match were declared permanent, it would be difficult for any HHS Secretary — irrespective of the Administration’s party — to genuinely convince states the policy decision would remain in effect after that Administration left office

As long as states believe the enhanced federal match ultimately may be available for partial expansions, they’re almost certainly going to wait for it. The probable result is very little or no (at least Republican state) expansion through 2016. Republican states hold 18.6M of the 30M potential expansion beneficiaries; of these 10.1 M are between current eligibility standards and 100 FPL (Exhibit 1). There’s no reason to expand to 100 FPL before 2017 at the prevailing match; this would increase the average Republican state’s direct Medicaid spending by 20.9%, and its overall state budget by 1.4%, as opposed to 5.6% and 0.4% under an (eventual) enhanced match (Exhibit 2). Rather than encouraging (particularly Republican) states to expand to 138 FPL, we think the all-or-none policy substantially limits the number of sub-100 FPL expansion beneficiaries that are enrolled until the all-or-none policy either expires, or is withdrawn. Ultimately this outcome runs counter to CMS’ interests; accordingly there’s some likelihood the all-or-none policy is removed before 2016

In the meantime we continue to expect a national Medicaid expansion that is smaller and more gradual than the all-at-once 2014 expansion to 138 FPL called for in the ACA – ultimately an expansion to 100 FPL brings in only half as many Medicaid beneficiaries as an expansion to 138 FPL. If last week’s all-or-none policy remains intact through 2016 we would expect an even more gradual crawl to 100 FPL

This isn’t just about Red state v. Blue state …

The states – regardless of the political party in control – have a long tradition of prioritizing their economic interests over the intent of federal Medicaid rules. Two examples are particularly prominent. Dual-eligible beneficiaries are admitted to hospitals far more frequently than is necessary – the uncomfortable truth is this occurs in large part because state officials are in control of care patterns for their states’ dual-eligibles, and steering duals to hospitals saves the states money, since Medicare (which costs the states nothing directly) pays 100% of hospital charges. This happens despite the fact that hospital-based care is substantially more expensive, and in many cases less medically appropriate, than care in other settings where the states are exposed to direct costs, since Medicaid is responsible for payment. Provider taxes are a second example – states pay Medicaid providers, then tax providers on the Medicaid payments – the effect is to reduce the state’s share of direct Medicaid costs. For example, a state with a 60 percent federal match (FMAP) might pay a provider $1.00 but tax that provider $0.20, creating an ‘effective FMAP’ of 75 percent ($0.60 / $1.00 – $0.20). As of last year 46 states and the District of Columbia had provider taxes in place; only Alaska, Delaware, Hawaii and Wyoming did not[8]

Ignoring state politics and focusing only on states’ economic self-interests, we note that several very large Medicaid states are actually better off economically, even if last week’s policy remains intact, ignoring the Medicaid expansion so that their 100 – 138 FPL citizens wind up on the exchanges. Exhibit 3 compares net federal inflows to the state in either of two scenarios: expansion to 138 FPL per the ACA v. a no expansion scenario in which we assume 75 percent of 100 – 138 FPL residents go to the exchanges, and further assume states’ direct costs per un-insured resident are $750. We recognize half of these states (CA, HI, DE, VT) have committed to the expansion – the point of the analysis is to show that the Secretary ultimately has few obvious options for convincing even the bluest of states to permanently expand their Medicaid eligibility above 100 FPL – thus our enduring conviction that 100 FPL ultimately is the ‘equilibrium’ max-income point for Medicaid eligibility in most states

Investment Relevance


This is mildly bearish for Medicaid HMOs. Ultimately these stocks should see considerable growth as dual-eligible beneficiaries are more routinely HMO-managed; however only a limited number of duals can be enrolled over the next several years, and during this time non-duals enrollment trends are likely to be disappointing. Exhibit 4 provides a summary of HMOs’ relative levels of exposure to Republican states, where non-dual enrollment is likely to be the slowest

This is also mildly bearish for Hospitals; volume gains and bad-debt relief arguably come more slowly to chains with higher Republican state exposure (Exhibit 5). Despite this, we continue to believe Hospitals are undervalued; improving commercial pricing power and demand growth on eventual employment gains are more than sufficient to offset the effects of a slower Medicaid expansion[9]

More information …

The Appendix provides a state-by-state summary of: total Medicaid spending, state Medicaid spending, state Medicaid spending as a pct of state budget, numbers of beneficiaries, and each state’s beneficiaries as a percent of total national beneficiaries. All of these figures are provided in each of 5 scenarios: reduction of Medicaid eligibility to minimum federal standards; status quo eligibility; expansion to 100 FPL at the state’s current match rate (‘FMAP’); expansion to 100 FPL at an enhanced 90 percent FMAP; and expansion to 138 FPL at an enhanced 90 percent FMAP. Please email the healthcare team for a Microsoft Excel copy of the Appendix table

  1. This is larger than our previous estimate of $5,000; the reason is we had not previously included the dollar value of cost-sharing subsidies given to exchange-based beneficiaries in this income range
  2. In the 100 – 138 FPL income range – absolute dollar subsidies are larger for beneficiaries with lower incomes
  3. Obviously not everyone will go to the exchange – but it’s reasonable to believe that most do. The annual premium cost for silver coverage is less than $500 for persons in this income range; bronze coverage is in all likelihood free. And, cost-sharing subsidies limit out-of-pocket costs for actual care; these are sufficiently generous to make the effective actuarial value of a silver plan 94 percent for persons in this income range, as opposed to 70 percent for persons that don’t receive subsidies for cost-sharing. (Actuarial value is the percentage of allowable costs paid by the plan)
  4. Assuming states’ cost per un-insured person are $750 annually, states are better off enrolling beneficiaries between 100 and 138 FPL in exchanges than in Medicaid as long as at least half of the affected beneficiaries in fact go to the exchanges and acquire coverage. Because out-of-pocket (for both premiums and care) costs for this income range are so low on the exchanges, there is every reason that states can expect exchange participation rates substantially above 50 percent – particularly if the states actively promote enrollment, as they would have every incentive to do
  5. Federal matching refers to the percentage of any given Medicaid beneficiary’s costs that are paid by the federal government. At present, the average rate across all states is approximately 57 percent. The ACA calls for enhanced matching on expansion beneficiaries of 100 percent in 2014 thru 2016, 95 percent in 2017, 94 percent in 2018, 93 percent in 2019, and 90 percent in 2020 and thereafter
  6. 138 percent of the federal poverty level
  7. Full text can be found here: http://cciio.cms.gov/resources/files/exchanges-faqs-12-10-2012.pdf
  8. Kaiser Commission on Medicaid and the Uninsured, May 2011, Medicaid Financing Issues: Provider Taxes. Available here: http://www.kff.org/medicaid/upload/8193.pdf
  9. Please see: “Hospitals Stable to Improving Net Pricing Power” SSR, llc; January 24, 2012
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