Medicaid Expansion’s Three Flaws – Part III


This is the third in a three-part series on the flaws in the ObamaCare expansion of Medicaid. Part I addressed The Enhanced Federal Matching Rate. Part II addressed the Failure to Alter Medicaid’s Open-ended Matching Rate Structure. Today we will address The Lack of Integration with Private Health Insurance.

It is established fact in academic circles that private health insurance is superior to Medicaid in terms of access to care and health outcomes. The reasons for this is beyond the scope of this post but can be found in my book, The ObamaCare Reality, and in others such as Priceless by John C. Goodman.

With this in mind, Chris Conover, Duke economist, asks an important question:

“Why do we believe in separate but equal in health care when we long ago abandoned that notion in education?”

If we want to provide equal treatment in healthcare, Conover says we must address three issues that are relevant in evaluating Medicaid:

  • Medicaid Crowd-Out
  • Medicaid Churn
  • Perverse Work Incentives


Medicaid Crowd-Out

The first issue is that Medicaid tends to crowd out private coverage, meaning that many people effectively trade superior private coverage for inferior Medicaid coverage. How big is this problem?

The Urban Institute, a liberal think tank, has estimated that if Medicaid expansion occurred in all 50 states, instead of just 31, there would be an additional 13.4 million people enrolled in Medicaid. But, 2.1 million of these already have private insurance on the ObamaCare exchanges and 6.4 million others have either employer-provided or non-group private insurance.

In other words, crowd-out of private health insurance exceeds 60% under the Medicaid expansion. If the Supreme Court had failed to strike down the mandatory expansion of Medicaid, about 8.5 million Americans would have been stripped of their private insurance and dumped on Medicaid!

This phenomenon is not new. The RAND Corporation estimated nearly 40% of the Medicaid expansion population ended up dropping other forms of health insurance to be enrolled in Medicaid. ObamaCare architect Jonathan Gruber even stated:

“Our results clearly show that crowd-out is significant; the central tendency in our results is a crowd-out rate of about 60%.”

Conover asks the relevant question: “So why are we so eager to shovel 8.5 million Americans into second-class coverage?” He calls for a system designed to integrate Medicaid with private insurance instead of replacing it. This is currently happening in states that received waivers including Florida, Texas, and Indiana.

Medicaid Churn

ObamaCare actually disallowed enrollment for subsidized private insurance if your income fell below the Federal Poverty Level (FPL) – even in states that declined to expand Medicaid. The Obama administration used this lever and the attempt to force all states to expand Medicaid in a deliberate effort to move people from private insurance to Medicaid.

In doing so, they created a “coverage gap” for those unfortunate Americans who found themselves just above the poverty level but living in states that declined to expand Medicaid. These people received neither Medicaid nor subsidies to purchase ObamaCare Exchange insurance. This decision created a coverage gap for 2.6 million people. This is depicted in the graphic below:

However, a much larger group is affected routinely by Medicaid Churn, where they move back and forth between private insurance and Medicaid depending on their fluctuating income. Any change that puts them above 138% of FPL causes them to fall off Medicaid and requires them to enroll in ObamaCare Exchange insurance. Likewise, any fall below that level dumps them back onto Medicaid.

It is estimated that each year approximately 6.9 million Americans are affected by churn. Even liberal economists Benjamin Sommers and Sara Rosenbaum have estimated that over a given year, 50 percent of adults below 200 percent of FPL (28 million individuals) would experience a shift from the exchanges into Medicaid or vice versa. Clearly this is not a trivial problem.

Perverse Work Incentives

Lastly, we must consider the perverse work incentives of Medicaid. A National Bureau of Economic Research study calculate that if 21.3 million additional adults gain Medicaid coverage following the ObamaCare expansion, approximately between 511,000 and 2.2 million fewer individuals will be employed as a result of the labor supply response.

Conover summarizes: “In short, for every 1,000 people who gain Medicaid expansion coverage, anywhere from 24 to 103 end up losing their job. This is a tragic loss to the economy as well as the self-esteem of Medicaid recipients.”

Stanford economist Lanhee Chen put it this way: “This research provides strong evidence for the contention that enrolling in Medicaid traps people in poverty and makes it harder for them to make their way into the middle class.”

What Does AHCA Do About Medicaid’s Lack of Integration With Private Coverage?

The AHCA gives states flexibility in administering their Medicaid programs. If a state chooses to maintain eligibility for the expansion population, any new enrollees in that eligibility category after January 1, 2020 will receive the state’s matching rate computed according to traditional rules. That means reverting to the pre-ObamaCare matching rate.

Those who previously qualified for the expansion will be grandfathered in. However, due to the churn we discussed above, eventually most of these people will revert to the traditional matching rate like the newly eligible. Thus the AHCA will likely dramatically reduce the adverse effects of Medicaid on work effort and crowd-out of private insurance coverage.

The flexibility of the AHCA will incentivize states to enhance the integration between Medicaid and private insurance. This is already happening in many states that requested ObamaCare waivers (see Democratic Demagoguery Over Medicaid). This will allow states to experiment with new programs that adjust cost-sharing requirements allowing higher co-pays for ER visits that should decrease the over-utilization of these facilities for primary care visits. It will also allow states to introduce work requirements without federal approval to motivate able-bodied adults to reduce their dependency on the government.


The AHCA has been criticized by proponents of ObamaCare, but it substantially improves upon the status quo. It does so in the following ways:

  • Abolishes the enhanced federal matching rate of ObamaCare
  • Redresses many of the most severe problems with Medicaid’s matching rate structure
  • Increases state flexibility to offer improvements to reduce the lack of integration of Medicaid with private insurance


No system is perfect but the AHCA will be a big improvement over ObamaCare.

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