Spillover Effects of State Medicaid Expansion Decisions on Private Health Insurance Markets

States’ decisions regarding whether to expand Medicaid under the Affordable Care Act (ACA) could have implications for private, exchange risk pools. As originally written, the ACA expanded Medicaid to all adults with incomes below 138 percent of the federal poverty line ($15,856 for an individual).  Adults with incomes above 138 percent of FPL without affordable coverage from an employer were eligible for generous tax credits to purchase private coverage on the newly-created health insurance exchanges.  When the Supreme Court made Medicaid expansion optional for states, low income adults became candidates for enrolling on the health insurance exchanges.  Without Medicaid expansion, adults with incomes between 100 and 138 percent of the federal poverty become eligible for exchange tax credits and cost-sharing subsidies, which substantially reduce the out-of-pocket costs for exchange enrollment.  Although adults with incomes below 100 percent of the federal poverty line are ineligible for tax credits and subsidies, some may nevertheless enroll in private plans (for example, if they have accumulated wealth that enables them to purchase coverage despite low incomes).

In this paper, we explore the effects of the state Medicaid expansion decisions on private health insurance premiums and exchange enrollment.  The analysis is based on the COMPARE microsimulation model, which uses a utility maximization approach to predict how individuals will respond to the new health insurance options offered under the ACA.  Data for the model come from the 2008 Survey of Income and Program Participation, along with the Medical Expenditure Panel Survey (MEPS), and the Kaiser/HRET Survey of Employer Benefits.

We find that failure to expand Medicaid results in higher exchange premiums, due to two major factors:

• Socioeconomic gradients in health: Individuals with incomes below 138% of FPL tend to be less healthy, conditional on age, than individuals with incomes above 138% of FPL, and are therefore estimated to have higher health spending conditional on insurance status.
• Adverse selection: Individuals with incomes below 138% of FPL who opt to enroll in exchange plans tend to be less healthy than their counterparts who do not enroll; this result is compounded by the fact that adults with incomes below 138% of the federal poverty level are not subject to individual mandate penalties.

While all simulations predicted an increase in private exchange premiums if Medicaid is not expanded (relative to the full expansion case), the results are sensitive to assumptions regarding the degree to which very low income individuals—who are not eligible for tax credits—will enroll. Nationally-representative surveys such as the SIPP, the Current Population Survey, and the MEPS all suggest that very low income individuals participate in the non-group market, although part of this result is likely due to misreporting.  We perform sensitivity analyses to understand the implications of this issue.

The analysis suggests that states’ Medicaid expansion decisions may have spillover effects on private health insurance markets.  States wishing to promote the lowest possible premiums on the exchanges might consider Medicaid expansion as one policy lever to further this goal.