Medicaid expansion's tax implications

This Labor Day, with unemployment stuck above 7% in most parts of the country and good jobs remaining a scarce commodity for many people, especially those without advanced education, let us pause to reflect on the trials and tribulations of the millions of our fellow Americans who struggle to make ends meet in part-time and near-minimum wage jobs that do not provide them or their families with health insurance.

Millions of such people already rely on Medicaid for coverage. Millions more could if they availed themselves of the program—about one-third of eligible people do not sign up. And millions more will become eligible Jan. 1 in some parts of the country because the Patient Protection and Affordable Care Act expanded Medicaid to cover people up to 138% of the poverty line: $15,415 for an individual or $26,344 for a family of three in 2012.

Last week, Michigan became the 25th state to embrace that expansion, made optional by the U.S. Supreme Court's June 2012 decision upholding the law. A bipartisan coalition in the state's Republican-dominated Legislature joined with Republican Gov. Rick Snyder to overcome opposition that came not only from conservative legislators, but from many hard working Americans who resent the fact their tax dollars will go to pay for something that they themselves have difficulty affording.

Opponents of expanding Medicaid in Michigan and elsewhere have relied heavily on the tax angle in making their case against the expansion. They point out the federal dollars, which will cover 100% of the costs in the first three years, are not free but come from the current or future taxes needed to pay off a federal debt that continues to grow.

They further argue that the state share eventually grows to 10%, which will put a heavy obligation on future taxpayers in their states. And they legitimately worry about the “woodwork” effect: Millions of already Medicaid-eligible people are likely to get sent the program's way after attempting to buy plans on the new exchanges. States inundated with these new enrollees in traditional Medicaid will receive only the usual 50% federal match—not the 100% contained in the ACA.

But this focus on direct taxes ignores the underlying economics of providing care for the uninsured. We thankfully live in a society that requires providers to provide healthcare services for the indigent who show up on their doorsteps. This uncompensated and charitable care isn't free. It gets passed along to those who pay for their healthcare in the form of higher prices, which translates directly into higher insurance premiums.

These rising insurance premiums, paid mostly by employers but also by the growing copays and deductibles assessed employees, are no different than a tax. Every economist knows a dollar paid by an employer for health insurance is a dollar that is taken straight out of wages.

Moreover, taxing insurance through this cost-shifting method is the least efficient way to pay for care. The near-poor uninsured invariably wait until the last minute to take care of their chronic conditions, which often lead to catastrophic events—the most costly form of healthcare.

Given those realities, it's no wonder the 30-member coalition backing Medicaid expansion in Michigan included not only the Michigan Health & Hospital Association and Blue Cross and Blue Shield, but the state's Chamber of Commerce, which is hardly a bastion of hand-wringing liberalism. They recognized that given the cutbacks in payments to hospitals for covering the poor over the next decade (nationwide, the ACA cuts $56 billion from disproportionate-share payments), failure to expand Medicaid will only increase the amount of cost-shifting that goes on.

And that, in turn, will only raise the wage tax that takes the form of higher private insurance premiums. In those states still contemplating expanding Medicaid, the argument shouldn't be about taxes. It should be about the fairest and smartest way to pay for healthcare that people who work already receive.

Merrill Goozner is the editor of Modern Healthcare

Follow Merrill Goozner on Twitter: @MHgoozner