ACA Medicaid Expansion Costs Falling, as Expected

State spending per person on adults who are newly eligible for Medicaid under the Affordable Care Act’s (ACA) Medicaid expansion fell by 6.9 percent in 2016 and will keep falling in future years, the Centers for Medicare & Medicaid Services (CMS) estimates. The report undercuts the argument for repealing the expansion based on states’ higher-than-expected costs in previous years.

Republican plans to repeal the expansion (as part of broader ACA repeal) would eliminate a pathway to coverage for over 11 million low-income people and harm the budgets of the 31 states (plus the District of Columbia) that have taken the option.

Covering adults eligible under the expansion still costs more per person than covering non-expansion adults in 2016, on average. But CMS expects expansion adults to become less expensive than non-expansion adults in 2018 and remain so through 2025.

The 2016 cost decline is exactly what CMS expected — unlike 2014 and 2015, when it raised its estimates for covering expansion adults. As we explained (see here and here), the higher costs of those years reflected higher-than-expected payments to managed care companies because states had little experience on which to base their rates for the newly covered adults.

States expected that previously uninsured enrollees would have pent-up demand for health care and that sicker enrollees would likely enroll first, so they made higher payments to health plans than CMS had assumed. But most states require health plans to return excess payments if costs turn out lower than assumed. CMS expects managed care plans to return some funds to the states, which in turn will return the federal share — $1.2 billion for 2016 and $7.5 billion for 2017, CMS estimates — to the Treasury. CMS’s latest cost estimates for covering expansion adults reflect these repayments.