Most of Medicaid’s $829 million in savings comes from taxes on insurance premiums

By Len Lazarick

Most of the state’s estimated $829 million in “savings” on Medicaid spending from federal health care reform comes not from reduced costs, but from taxes on new insurance coverage generated by the new law.

A study by the Hilltop Institute found that the state government would come out $829 million ahead over the next 10 years because the new law would help cover 358,000 uninsured people, and this would produce $576 million in new premium assessments.

“The new revenue is essentially more volume of people,” said Chuck Milligan, executive director of the Hilltop research institute based at the University of Maryland Baltimore County. “It’s not a new tax, it’s just an increase in volume in an existing tax.”

The state currently charges a 2% “assessment” on most insurance premiums. With more newly insured people, those tax revenues would go up.

About 171,000 people would be newly covered by Medicaid, generating premiums to managed care organizations. Those premiums would be paid by the state, but half the cost of the premiums would be subsidized by the federal government.

In a way, the state gets a 2% kickback on premiums it pays. But “half of the tax liability is underwritten by the federal government,” said Milligan, an expert on the intricacies of Medicaid.

Another 185,000 residents would earn too much money to qualify for Medicaid. They will qualify for the new health insurance exchanges, which will offer stripped-down, basic coverage that will also be subsidized by the federal government. The state will get its 2% tax on those federally subsidized premiums.

Asked how revenues could be described as savings, Milligan said: “We didn’t describe it as savings. We described it as new revenues.” That’s how they are shown in the chart on page F-23 of the interim report of the Health Care Reform Coordinating Council.

Summarizing its complicated estimates of the impact of the law, Hilltop found nine categories in which state costs will go up – increasing $1.8 billion over 10 years – and seven categories in which the state Medicaid program can save money — $2.1 billion in “programmatic savings” over the same time period.

That’s a net saving of $253 million over 10 years. By adding the $576 million in new revenues, the state has a net gain of $829 million. That in itself is the midpoint between the low estimate of $621 million and the high estimate of $1 billion.

Hilltop Institute based the figures on assumptions about population, participation rates, employment, drug costs and federal matching rates. Most of the changes related to Medicaid do not start until Jan. 1, 2014.

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