An Economic and Policy Analysis of Medicaid Expansion in Virginia

In June 2012, the U.S. Supreme Court ruled unconstitutional those provisions of the Patient Protection and Affordable Care Act of 2010 (ACA) that deny federal matching funds for Medicaid to states that refuse to extend  eligibility to individuals and families with incomes up to 138 percent of the federal poverty level (FPL). As a result, Virginia and other states now have the opportunity to compare the costs and benefits of expanding Medicaid eligibility.

Virginians have an important choice to make. The state Medicaid Innovation and Reform Commission has until the end of 2013 to consider the issue and make its recommendation.2 A thorough discussion of the costs, obstacles, alternatives to and potential pitfalls of Medicaid expansion is critically important. Additional low- to middle-income individuals would qualify for a newly expanded Medicaid program. However, if Medicaid coverage were not available, many of them would qualify for generous federal subsidies for the purchase private health coverage in the ACA’s new Health Insurance Exchange.

The ACA was initially expected to provide coverage for 32 million uninsured individuals and families when fully implemented.3 About half of the newly covered were expected to obtain private coverage, while the other half would enroll in an expanded Medicaid program.4 The ACA contains financial incentives designed to encourage states to expand Medicaid eligibility.5

The Obama administration and advocates for the poor have touted the benefits of expanding Medicaid. In addition to health coverage and improved access to care for low-income, uninsured individuals, the federal government promises to pay most of the cost.6

Effect of the ACA on Virginia Medicaid Enrollment and Costs. There are about 1.7 million individuals living in Virginia with incomes under 139 percent of the federal poverty level, although only about 486,000 of them lack health coverage.7 Virginia Medicaid does not currently cover poverty-level, nondisabled adults. Many of these individuals – at least theoretically – would become eligible for Medicaid under an expanded program.

Of the nonelderly Virginia families and individuals with incomes under 139 percent of poverty, 423,200 million are already enrolled in Medicaid; 485,800 lack health coverage; 339,400 have employer coverage; and about 208,400 are covered by some other type of health insurance.8  Most of the newly eligible would be adults, whereas most children in families at this income level are already eligible.

Through 2016, the federal government will pay 100 percent of the cost of benefits for newly eligible enrollees.9 The enhanced federal match will drop to 95 percent of costs in 2017, 94 percent in 2018, 93 percent in 2019, and 90 percent in 2020 and thereafter.10 The federal government will also pay 100 percent of the cost of boosting low Medicaid reimbursements for primary care providers (not specialists) to the same level as Medicare physician fees – but only for a two-year period (2013 and 2014).11  After 2014, the cost of increasing primary care provider fees will fall to the states, as will the cost of boosting fees to specialists.

Effect of the ACA on Virginia’s Physician Supply. As in other states, Virginia’s physician supply is relatively “inelastic,” meaning the number of physicians cannot increase quickly to accommodate the rising demand for medical services an influx of newly insured Medicaid enrollees would create. Virginia physicians have little if any capacity to expand the number of patients they treat. Currently, there are about 29,472 physicians in Virginia, of whom an estimated 22,215 are actively involved in patient care.12  About 85 percent of Virginia’s active doctors work full time – so there is little excess capacity.

According to the Virginia Department of Health Professions Healthcare Workforce Data Center, two-thirds of Virginia’s active physicians are more than 44 years of age, while 20.1 percent are 60 or older.13  Thus, many of these physicians will retire in the next few years. A number of economic studies indicate the newly insured will nearly double their consumption of medical care.14 Yet the demand for health care will continue to rise. Furthermore, an aging population will require more medical care. Across the U.S. 78 million baby boomers are either retired or headed that way in the next decade.

Low Medicaid Provider Fees. Low reimbursement rates are one of several factors contributing to the shortage of physicians willing to treat Medicaid enrollees.15  On average, Virginia pays physicians participating in the fee-for-service state Medicaid program only 80 percent as much as Medicare pays for the same service – in other words, physicians treating Medicare patients get paid significantly more for the same services.16  For primary care, Virginia Medicaid only pays 74 percent as much as Medicare.17 For all services, Virginia’s Medicaid program pays less than two-thirds (65 percent) as much as a private insurer.18 [See Figure I.]  Low provider reimbursement rates make it more difficult for Medicaid enrollees to find physicians willing to treat them, limiting their access to care.

Poor Access to Care Under Medicaid. Nationally, about one-third of physicians do not accept new Medicaid patients.19 This is nearly double the proportion of doctors who have closed their practices to new Medicare patients (17 percent) and to new privately insured patients (18 percent).20 Physicians are four times as likely to turn away new Medicaid patients as they are to refuse the uninsured who pay out-of-pocket (31 percent versus 8 percent).21 Studies show it is easier for the uninsured to make doctors’ appointments than it is for Medicaid enrollees.22 

Medicaid enrollees’ access to physicians is only slightly better in Virginia. Nearly one-quarter (24 percent) of Virginia physicians refuse to accept any new Medicaid patients.23 Access to care for Virginia’s Medicaid enrollees will only get worse if more people are added to the rolls. 

How Medicaid Displaces Private Insurance. Most Americans incorrectly believe that none of the poor have private health insurance. However, many of the newly Medicaid insured will be those who previously had private coverage. Crowd-out (or substitution) occurs when people who are already covered by employer or individual insurance drop that coverage to take advantage of the public option. Crowd-out is likely to be a significant problem for states that expand Medicaid eligibility to adults who are not disabled. Estimates of crowd-out are controversial among analysts. Some researchers find a high rate of Medicaid substitution for private coverage, while others believe it is negligible. Estimates of crowd-out for diverse populations vary.

For instance, analysis of past Medicaid expansions to mothers and children in the early 1990s by economists and Obama administration advisers David Cutler and Jonathan Gruber found that when Medicaid eligibility is expanded, 50 percent to 75 percent of the newly enrolled have dropped private coverage.24 A recent analysis by Gruber and Kosali Simon estimated crowd-out for the Children’s Health Insurance Program averages about 60 percent.25

Working adults are the target of Medicaid expansion under the ACA. Academic researchers Steven Pizer, Austin Frakt and Lisa Iezzoni analyzed the likely effect of crowd-out on working adults, and estimated crowd-out could reach 82 percent.26 A conservative estimate indicates that Medicaid rolls might have to rise by 1.4 people in order to reduce the uninsured by 1 person.27

Health Outcomes and Medicaid. On paper, Medicaid coverage appears far better than what most Americans enjoy – with lower cost-sharing and unlimited benefits.28 But by almost all measures, Medicaid enrollees fare worse than similar patients with private insurance.29 Various academic researchers have found that Medicaid enrollees often fare worse than patients with private insurance and often worse than patients with no insurance.30  For example:

  • For instance, post-surgical individuals enrolled in Medicaid are almost twice as likely to die as privately insured patients and about 12 percent more likely to die than the uninsured, according to a University of Virginia study.31
  • Medicaid patients were 6 percent more likely to be diagnosed with prostate cancer at a less treatable, later stage than the uninsured, according to a study in the Journal of the National Cancer Institute.32
  • Further, Medicaid enrollees were nearly one-third (31 percent) more likely to be diagnosed with late-stage breast cancer and 81 percent more likely to be diagnosed with melanoma at a late stage.33 

Alternatives to Medicaid Under the Affordable Care Act. Under the ACA, starting in 2014, qualifying individuals who have no access to an employer-provided health plan or Medicaid can purchase federally-subsidized individual health insurance in health insurance exchanges set up by the federal government or the states.34 Those whose employers offer affordable health plans will not be eligible for federal exchange subsidies, but can still purchase coverage in the exchange if they choose.35

The share of premiums paid by enrollees in the exchange who earn 100 percent to 133 percent of the poverty level cannot exceed 2 percent of their incomes [see the table].36 Premiums are limited to 3 percent of income for those earning 134 percent to 138 percent of poverty.

Thus, their annual cost will often average less than $240 per covered individual, for coverage of a family of four potentially worth $15,000 [see Figure III].37  The amount an individual will receive in federal exchange subsidies will be based on a “Silver Plan” covering 70 percent of medical needs. Low-income families choosing less comprehensive “Bronze Plans” covering 60 percent of medical costs may have to pay nothing for their coverage.38 If Virginia wants to encourage this moderate-income population to enroll in private plans in lieu of Medicaid, it could pay the non-subsidized portion of the premiums. State taxpayers would bear the cost – around $17 million a year.39

How Would Private Coverage Affect Providers?  History shows that not all those who qualify for Medicaid will enroll.40 The rate at which they do enroll varies depending on a variety of conditions. Private coverage that allows individuals and families to see most physicians and utilize large hospital networks may further encourage the uninsured to obtain insurance, rather than to go without it. Virginia doctors and hospitals would benefit from policies that maximize the number of people with commercial insurance, because private insurance reimbursements are higher.41 Medicaid expansion would produce the opposite effect, because an estimated 30 percent of adults in the 100 percent to 138 percent poverty income range with private insurance will drop it in favor of Medicaid.

If Virginia does not expand Medicaid to those earning 100 percent to 138 percent of poverty, the state will forgo about $7.6 billion in additional federal Medicaid spending on that population over the next 10 years.42 However, if Virginia families use the generous federal subsidies for private insurance in the health insurance exchange, private insurers will spend approximately $10.3 billion on medical care for these enrollees.43 After accounting for Virginia”s share of new Medicaid spending, the $2.8 billion difference represents an additional infusion of nearly $300 million per year – including extra money for the state’s doctors and hospitals.

Does Medicaid Boost the Economy? Interest groups often tout the benefits of so-called “economic activity” that additional federal Medicaid funds might create within states.44 Yet, economists find it difficult to calculate the actual value of economic activity. Macroeconomic studies of the multipliers for increased government spending for the nation as a whole suggest that, since 1950, such “balanced-budget multipliers” have reduced national economic output below what it would be otherwise.45  If correct, these results suggest that the net effect of the new health law will be that gross domestic product (GDP) declines as the federal government consumes a larger share of national income to fund its programs. Basically, people will cut their other consumption to pay the increased tax burden. According to the RAND Corporation, most states can expect a net transfer of state resources to the federal government under the ACA.46 Only poor states will benefit.47

Is Federal Spending Sustainable? Medicaid isn’t the only commitment the federal government must fund into the future. At the federal level, the growth in health care expenditures is our most serious domestic policy problem, and Medicare is the most challenging component.48  For decades, annual Medicare spending has increased slightly more than 2 percentage points faster than GDP.49 If this country continues consuming products whose cost is growing faster than national income, that consumption will eventually crowd out every other thing we are consuming. For instance, the Congressional Budget Office found that if federal income tax rates are raised to allow the government to continue its current level of activity and balance its budget:50

  • The lowest marginal income tax rate of 10 percent would have to rise to 26 percent.
  • The 25 percent marginal tax rate – the tax of bracket many two-income families – would increase to 66 percent.
  • The 35 percent marginal tax rate would rise to 92 percent.

If the CBO’s projected marginal tax hikes occur, the federal government’s ability to raise sufficient tax revenue for its spending commitments is doubtful.

Conclusion. Medicaid comprises nearly one of every four dollars spent by the state of Virginia, with about one-third of general revenue dollars going towards Medicaid, and is growing at an unsustainable rate.51 Virginia would be better served to free those earning above 100 percent of the federal poverty level to seek subsidized coverage in the health insurance exchange. For families earning less than 100 percent of poverty, Virginia could tailor its Medicaid program in ways that make sense and meet Virginia residents’ specific needs. These services might include selectively covering some optional populations but not others. The program might also involve providing limited benefits rather than an open-ended entitlement to whatever health care is available. In any case, some of this spending would still qualify for federal matching funds – albeit at a rate of about 64 percent, rather than 90 percent.52 The amount of benefits – and the populations covered – should reflect the preferences and priorities of Virginia taxpayers.

Devon M. Herrick is a senior fellow with the National Center for Policy Analysis. Linda Gorman is director of the Health Policy Center at the Independence Institute.


1. Supreme Court of the United States, “National Federation of Independent Business, et al., v. Kathleen Sebelius, Secretary of Health And Human Services, et al.,” Certiorari to the United States Court of Appeals for the Eleventh Circuit, No. 11-393, Argued March 26, 27, 28, 2012, Decided June 28, 2012. Also see “Compilation of Patient Protection and Affordable Care Act [As Amended Through May 1, 2010] including Patient Protection And Affordable Care Act Health-Related Portions Of The Health Care and Education Reconciliation Act of 2010 Prepared by the Office Of The Legislative Counsel for the use of the U.S. House Of Representatives, May 2010. Available at

2.  The Medicaid Innovation and Reform Commission was established by the state legislature and tasked with the job of recommending whether to expand Medicaid in Virginia. information about the MIRC is available at

3.   The ACA was estimated to cover 32 million uninsured by 2016 and 34 million by 2021. See Douglas W. Elmendorf, “CBO”s Analysis of the Major Health Care Legislation Enacted in March 2010,” Congressional Budget Office, 2011, Table 3, p. 18, (accessed May 15, 2013). This estimate has been revised to 26 million in 2016. See Jessica Banthin, Holly Harvey and Jean Hearne, “Estimates for the Insurance Coverage Provisions of the Affordable Care Act Updated for the Recent Supreme Court Decision,” Congressional Budget Office, July 2012.

4. Ibid.

5. “Affordable Care Act,” Available at

6. Kyle J. Caswell, Timothy Waidmann and Linda J. Blumberg, “Financial Burden of Medical Spending by State and the Implications of the 2014 Medicaid Expansions, Urban Institute, April 2013. Available at

7. Kaiser Family Foundation.; see also and

8. Kaiser Family Foundation. Available at

9. Eligibility is technically cut off at 133 percent of FPL, but individuals with incomes up to 138 percent of poverty may be eligible, due to a 5 percent income disregard.

10. Future Congresses have the right to renew, alter or cancel the federal match.

11. The Obama Administration didn’t release guidance in time for states to incorporate the higher fees into their programs. See Phil Galewitz, “Most Doctors Still Waiting On Medicaid Pay Raise,” Kaiser Health News Blog, May 14th, 2013. Available at:

12. “Center Physician Facts and Trends: Virginia & US 2008,” Virginia Department of Health Professions, Healthcare Workforce Data, September 16, 2010. Available at

13. Ibid.

14. Jack Hadley and John Holahan, “Covering the Uninsured: How Much Would It Cost?” Health Affairs Web Exclusive W3.250, 2003. Available at For an actuarial analysis of how insurance effects the medical consumptions of diverse populations, see “Cost of the Future Newly Insured under the Affordable Care Act (ACA),” Society of Actuaries, March 2013. Available at

15. Peter J. Cunningham and Len M. Nichols, “The Effects of Medicaid Reimbursement on the Access to Care of Medicaid Enrollees: A Community Perspective,” Medical Care Research and Review, Vol. 62, No. 6, December 2005.

16. Physicians who participate in Medicaid managed care plans are not on the same fee-for-service fee schedule, but are also generally paid much less than treating Medicare enrollees with the same condition.

17. “Medicaid-to-Medicare Fee Index, 2012,”, Kaiser Family Foundation. Available at

18. Authors’ calculations using data from the Kaiser Family Foundation and the Lewin Group. See “Medicaid-to-Medicare Fee Index, 2008,”, Kaiser Family Foundation. Available at

19. Sandra L. Decker, “In 2011 Nearly One-Third Of Physicians Said They Would Not Accept New Medicaid Patients, But Rising Fees May Help,” Health Affairs, Vol. 31, No. 8, August 2012, pages 1,673-1,679.

20. Ibid.

21. Ibid.

22. Brent R. Asplin et al., “Insurance Status and Access to Urgent Ambulatory Care Follow-up Appointments,” Journal of the American Medical Association, Vol. 294, No. 10, September 14, 2005. Available at

23. Sandra L. Decker, “In 2011 Nearly One-Third Of Physicians Said They Would Not Accept New Medicaid Patients, But Rising Fees May Help,” Health Affairs, Vol. 31, No. 8, August 2012, pages 1,673-1,679. Some physicians will accept some, but not all, new Medicaid-enrolled patients who enquire about an office visit.

24. David Cutler and Jonathan Gruber “Does Public Insurance Crowd Out Private Insurance?” Quarterly Journal of Economics, Vol. 111, No. 2, May 1996, pages 391-430.

25. The actual rate varied depending on the conditions governing expansion and the populations covered. Jonathan Gruber and Kosali Simon, “Crowd-Out 10 Years Later: Have Recent Public Insurance Expansions Crowded Out Private Health Insurance?” Journal of Health Economics, Vol. 27, 2008, pages 201-217.

26. Steven D. Pizer, Austin B. Frakt and Lisa I. Iezzoni, “The Effect of Health Reform on Public and Private Insurance in the Long Run,” Health Care Financing & Economics, HCFEWP#2011-03, February17, 2011. Available at

27. A ratio of 1.4 new Medicaid enrollees to reduce the uninsured by 1 assumes a crowd out rate of 29 percent [1-(1/1.4)]. One analysis found about one-quarter of the newly insured children in families earning less than 200 percent of poverty had substituted public coverage for private coverage. See Peter J. Cunningham, James D. Reschovsky and Jack Hadley, “SCHIP, Medicaid Expansions Lead to Shifts in Children’s Coverage,” Center for Studying Health System Change, Issue Brief 59, December 2002, page 4. Available at

28. Evelyne P. Baumrucker and Bernadette Fernandez, &”Comparing Medicaid and Exchanges: Benefits and Costs for Individuals and Families Specialist in Health Care Financing,” Congressional Research Service, February 28, 2013. Available at

29. Kevin Dayaratna, “Studies Show: Medicaid Patients Have Worse Access and Outcomes than the Privately Insured,” Heritage Foundation, November 7, 2012. Available at

30. For example, see the discussion Avik Roy, “UVA Study: Surgical Patients on Medicaid Are 13 Percent More Likely to Die Than Those Without Insurance,” National Review, July 17, 2010. Available at

31. Damien J. LaPar et al., “Primary Payer Status Affects Mortality for Major Surgical Operations,” presentation to the 130th Annual Meeting of the American Surgical Association, 130th Annual Meeting Abstracts, April 2010. Available at

32. Richard G. Roetzheim et al., “Effects of Health Insurance and Race on Early Detection of Cancer,” Journal of the National Cancer Institute, August 18, 1999. Available at

33. Rachel Rapaport Kelz et al., “Morbidity and Mortality of Colorectal Carcinoma Surgery Differs by Insurance Status,” Cancer, Vol. 101, No. 10, November 15, 2004, pages 2187-2194. Available at

34. Chris L. Peterson and Thomas Gabe, “Health Insurance Premium Credits in the Patient Protection and Affordable Care Act (PPACA), Congressional Research Service, April 28, 2010. Available at

35. Ibid. If the employee cost exceeds 9.5 percent if wages, the worker will qualify for federal subsidies if wages are less than 400 percent of poverty.

36. Ibid. Those earning 133 percent and above would receive sliding-scale subsidies limiting premiums to no more than 3 percent of income (133 percent of the federal poverty level) to no more than 9.5 percent of income for those earning up to 400 percent of poverty.

37. Two percent of income for an individual earning 100 percent FPL is about $230; for an individual earning 133 percent of poverty, 2 percent of  income is $306. Two percent of income for a family of four earning 100 percent FPL is $118 per family member (.02 x $23,550 / 4). The same family earning 133 percent of poverty would pay premiums no higher than $157 per family member.

38. Chris L. Peterson and Thomas Gabe, “Health Insurance Premium Credits in the Patient Protection and Affordable Care Act (PPACA),” Congressional Research Service, April 28, 2010, page 7. Available at For examples of subsidies in the health insurance exchange, see the Kaiser Family Foundation Subsidy Calculator, available at

39. Authors’ estimates based on a take up of 83,000 enrollees at an average subsidy cost of $240 per year. 

40. Ben Sommers et al., “Understanding Participation Rates in Medicaid: Implications for the Affordable Care Act,” Office of the Assistant Secretary for Planning and Evaluation, Department of Health and Human Services, Issue Brief, March 16, 2012. Available at

41. Virginia Medicaid fee-for-service physician fees are only about 80 cents on the dollar of what Medicare reimburses a physician for the same service. Medicare reimburses physicians about 81 percent of what a private insurer reimburses physicians for the same service. See “Medicaid-to-Medicare Fee Index, 2012,” Family Foundation. Available at

42. Authors’ calculations based on 82,183 enrollment rising to 85,597 in 2023 with $4,898 (2014) in spending per enrollee adjusted annually for population growth and increases in the program costs.

43. Authors’ calculations using an index of Medicaid fees to private insurance as a proxy for spending by private insurers. Physician reimbursements from private insurers averages about 1.4 times what Virginia fee-for-service Medicaid would pay for the same service.

44. For instance, the argument follows that federal money is a multiplier of state spending. The effect ripples throughout the economy from health care providers to their vendors and employees. See “The Role of Medicaid in State Economies: A Look at the Research,” Kaiser Family Foundation, January 2009.

45. Robert J. Barro and Charles J. Redlick, “Macroeconomic Effects from Government Purchases and Taxes,” National Bureau of Economic Research, Working Paper No. 15369, September 2009.

46. Carter C. Price and Evan Saltzman, “The Economic Impact of the Affordable Care Act on Arkansas,” RAND Corporation, Research Report No. 157, 2013. Available at

47. Ibid.

48. John C. Goodman, “A Framework for Medicare Reform,” National Center for Policy Analysis, NCPA Policy Report No. 315, September 12, 2008. Available at

49. The Long-Term Budget Outlook, Congressional Budget Office, June 2009, Table 2-4, page 28.

50. Peter R. Orszag, “Financing Projected Spending in the Long Run,” Letter to the Honorable Judd Gregg, July 9, 2007. Available at

51., Kaiser Family Foundation and “State Expenditure Report: Examining Fiscal 2010 – 2012 State Spending,” National Association of State Budget Officers, 2012.

52. “Medicaid Financing: An Overview of the Federal Medicaid Matching Rate (FMAP),” Kaiser Commission on Medicaid and the Uninsured, Kaiser Family Foundation, Policy Brief No. 8352, September 2012. Available at