A closer look at the House plan to close the coverage gap
The current House version of the Build Back Better (BBB) legislation, as posted by the Rules Committee, includes provisions that would close the health insurance coverage gap in states that have declined to expand Medicaid pursuant to the Affordable Care Act (ACA). The individuals who now are ineligible both for Medicaid and ACA subsidies would be enrolled into private plans offered on the exchanges, with the federal government paying the full cost of their premiums and most of their cost-sharing too.
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House leaders appear to have secured sufficient support among Democrats for this policy by tying it to newly drafted rewards and penalties for expansion and non-expansion states, respectively. The aim is to broaden insurance enrollment without incentivizing more states to follow the course set by the Medicaid hold outs. It remains to be seen if the current provisions, summarized below, will achieve that objective.
- ACA Subsidies for Poor Households in Non-Expansion States. Twelve states have declined to implement the ACA option to expand Medicaid to all adults with incomes below 138 percent of the federal poverty line (FPL). (The Supreme Court ruled in 2012 that Congress’ original intention at the enactment of the ACA — mandatory Medicaid expansion in all states — was constitutional).
The ACA allows individuals in the non-expansion states who have incomes above the poverty line but below 138 percent of it to get subsidized coverage through the ACA exchanges. However, the law does not provide this same option to persons below the poverty line. The result is that some very poor individuals in the non-expansion states can only buy individual coverage if they pay the full premium themselves – which is not a realistic option for most of them. Medicaid is also out of reach because, for poor adults without dependent children, the income threshold for eligibility is often near zero.
The current House version of the BBB bill would close the coverage gap by allowing individuals with incomes below 138 percent of the FPL to enroll in subsidized plans through the ACA exchanges. Persons eligible for Medicaid in the expansion states would be ineligible for this premium assistance.
The federal financial assistance planned for these individuals is generous. Eligible individuals would pay no premiums for their insurance, which in turn would be required to cover 99 percent of the actuarial value of covered services. The federal government would pay for all waived cost-sharing expenses. (The ACA currently caps cost-sharing for individuals with incomes between 100 and 150 percent of the FPL at 6 percent of the total actuarial value of the coverage).
This extension of ACA plan eligibility to individuals in the coverage gap would be temporary – running from 2022 to 2025 — to hold down the overall costs of the BBB legislation.
If the BBB legislation becomes law, it is possible the expanded ACA subsidies will be made permanent at some point in the future, as Congress is usually reluctant to pull back on assistance once it has been in effect for a few years. If that is the case, it is possible the states that have not yet expanded Medicaid will never do so.
- Cuts in Disproportionate Share Hospital (DSH) Payments. The coverage expansion is tied politically to a separate provision in the House BBB bill which would penalize states declining the ACA’s Medicaid expansion with new cuts in their allotments for disproportionate share (DSH) payments. Currently, Medicaid distributes DSH payments to states as a way of compensating hospitals for costs associated with uninsured patients and low reimbursement rates for some of the care they provide. Federal law includes state-specific caps on the total amount of allowable DSH spending each year, along with rules for limits to the total amount individual hospitals can receive. The House BBB bill includes a provision reducing the state DSH allotments that would otherwise apply by 12.5 percent for the non-expansion states, starting in 2023. As an example of what this might entail, Florida’s allotment in 2022 will be $390 million, which means the state’s hospitals could lose nearly $50 million annually in Medicaid support. Texas’ DSH allotment in 2022 will be $1.87 billion, which means the state’s hospitals could lose $230 million annually.
- Higher Federal Matching Rate for Expansion. The final piece of the plan is an enhanced incentive for states to adopt (or retain) the Medicaid expansion under the terms of the ACA. Under current law, states are now paying for 10 percent of the cost of covering adults made eligible for Medicaid by the ACA, with the federal government paying the other 90 percent. The American Rescue Plan, enacted in March of this year, increased the federal share to 95 percent for two years for any state that switches its position and agrees to the coverage expansion. The House BBB takes the further step of increasing the federal share to 93 percent for the years 2023 through 2025 for all the states that have already agreed to the expansion. House leaders probably expect that this provision would be extended beyond 2025 if the coverage gap provisions are also extended.
A shift of 3 percent of the total cost of Medicaid expansion onto the federal budget would be meaningful relief for many states. In 2018, total federal and state spending on the expansion population was about $80 billion, so a shift of 3 percent would relieve states of $2.4 billion in costs. In California alone, the shift would be worth more than $0.5 billion annually.
Absent more information, it is hard to judge if the net effect of these provisions would work as intended by their authors. This uncertainty is one reason the bill is unlikely to be finalized before the Congressional Budget Office (CBO) can fully assess all of its many implications.
States may also weigh other factors when deciding how to respond to the BBB coverage provisions. Among other things, some state leaders may prefer ACA coverage to Medicaid expansion, even if doing so is less advantageous financially.
James C. Capretta is a columnist for State of Reform and a senior fellow at the American Enterprise Institute.