What Is the Macroeconomic Cost of Not Expanding Medicaid?: Thursday Focus: July 10, 2014

Let us focus on the macroeconomic costs of not expanding Medicaid. That is, let us leave to one side the question of exactly how much good getting people on Medicaid does for them. We know that it makes safety-net hospitals Financial stress level lower–there is less uncompensated care, and that flows through to corners that do not need to be cut. We know that it increases incomes of nurses and doctors somewhat. We know that patients on Medicaid go to the doctor more than the uninsured, and that by American standards at least the uninsured do not go to the doctor enough and do not take enough medicine. We know that the ex-uninsured are much happier, less stressed, and non-bankrupt.

We do worry that the money spent on Medicaid expansion might have had a bigger bang for buck had it been spent on barefoot doctors and free clinics. We fear that our fee-for-service acute-care medical system is the least efficient ever designed by the hand of human for dealing with an aging population suffering from chronic illnesses–stroke risk, sugar metabolism, and sludge in the arteries. (But we do recognize that the Republican wingnut howls against Obamacare as Kenyan Muslim socialism would have been much louder had Medicaid expansion been dropped for free clinics and barefoot doctors–which are, after all, socialistic in essence.)

But leave all that to one side.

Focus, instead, on the fact that so far Obamacare has been implemented in an economy with lots of slack where aggregate demand is scarce and a boost to spending is an unmitigated good to a local economy. How much of a boost to spending have the non-expanding states forgone, and what has been the impact on their economies? And focus also on the longer run: when the federal government spends money in some places and not others, the former places grow and become more prosperous and the latter places decline. Not expanding Medicaid is a way of telling the federal government anything that state politicians rarely do: that they do not wish the federal government to spend money in their region. What will be the effects of that?

Betsey Stevenson and company at the Council of Economic Advisers have just taken their cut at these issues…

I read the short-run macroeconomic costs of not-expanding Medicaid as likely to be close to double what the CEA does. Most of the non-expanding states are close to each other, and so much of the state-level demand spillovers flow to other non-expanding states. And all the evidence since 2007 suggests that the multipliers we had in our minds substantially understated the truth, at least at the zero lower bound.

And in the long run states that do not expand Medicaid will suffer more in terms of reduced economic activity–perhaps twice as much a relative GDP reduction as in the short run. Remember: only about 1/5 of jobs are regional-export jobs, and a regional-export job is anything that is paid for by a financial transfer into the region. Thus when the federal government pays for an extra nurse to see Medicaid patients, that is a regional export. When the same nurse has to be compensated by higher fees charged to local patients who do have insurance, that is not a regional export. Once labor and capital have moved and responded to the shift in demand, those states that have not expanded Medicaid will be short five jobs for each health-care job they did not let the federal government pay for through Medicaid.

Betsey Stevenson et al.: The Council of Economic Advisers: Missed Opportunities: The Consequences of State Decisions Not to Expand Medicaid: “24 States have not yet expanded Medicaid…

…The Urban Institute estimate[s] that… 5.7 million people will be deprived of health insurance coverage in 2016…. If the States that have not yet expanded Medicaid did so: 1.4 million more people would have a usual source of clinic care…. States that have already expanded Medicaid… 1.0 million…. 651,000 more people would receive all care they feel they need in a typical year….. States that have already expanded Medicaid will achieve this outcome for 494,000 people…. 829,000 people would receive cholesterol‐level screenings once expanded coverage was fully in effect. States that have already expanded… 630,000…. 214,000 women between the ages of 50 and 64 would receive mammograms…. States that have already expanded… 161,000 women…. 345,000 women would receive pap smears…. States that have already expanded… for 261,000 women…. 15.4 million physician office visits…. States that have already expanded… 11.7 million….255,000 fewer people will face catastrophic out‐of‐pocket medical costs in a typical year…. States that have already expanded… 194,000…. 810,000 fewer people will have trouble paying other bills due to the burden of medical…. States that have already expanded… 348,000…. 757,000 additional people would report being in excellent, very good, or good health… States that have already expanded… 575,000 people….

while the recovery from the 2007‐2009 recession…

…remains incomplete and slack remains in the economy, this increase in demand will boost overall employment and economic activity…. When a State elects to expand its Medicaid program, the Federal government finances additional payments to medical providers in the State in exchange for providing medical services to the new Medicaid enrollees. These additional Medicaid outlays are only partially offset by reduced Federal spending…. CEA estimates that if the 24 States that have not yet expanded Medicaid had done so as of January 1, 2014, that would have triggered an increase in Federal outlays in those States totaling $88 billion during calendar years 2014 through 2016. States that have already expanded Medicaid will generate additional Federal outlays of $84 billion during this period….

In order to quantify the effects of these additional Federal outlays on States’ economies and the economy of the Nation as a whole, CEA has undertaken a standard “fiscal multiplier” analysis. In brief, when the government purchases additional goods and services, that spurs hiring and purchases of investment goods and raw materials to produce those goods and services…. Increasing overall demand for medical goods and services… CEA uses a GDP multiplier of 1.5, consistent with CEA’s estimate of the multiplier for direct government spending…. For reductions in uncompensated care costs borne by State and local governments, CEA uses a multiplier of 1.1…. For other reductions in uncompensated care costs, CEA uses a GDP multiplier of 0.8, consistent with CEA’s estimate of the multiplier applicable to individual tax cuts…. A composite multiplier of 1.29….

State‐by‐State estimates of the effect on employment and total output if each State decides to expand Medicaid are reported in Tables 5 and 6….

While this subsection focuses on the short‐run macroeconomic benefits of expanded insurance coverage, States’ decisions to expand Medicaid could affect employment and economic activity over the longer run as well…