Medicaid Expansion in Tennessee Will Produce Additional Revenues That Will More

The Supreme Court ruled in June that the new health reform law permits, rather than requires, states to expand their Medicaid programs to cover people with incomes up to 138 percent of the federal poverty line. Now, Tennessee must choose whether to expand Medicaid (TennCare). Some have argued that Medicaid expansion is too expensive. In fact, Medicaid expansion will not significantly increase costs for the state and will generate significant new tax revenues that will offset much or all of any additional costs through 2020.
  • Tennessee requires all health maintenance organizations (HMOs) doing business in Tennessee to pay a 5.5% tax on all premium dollars collected from or on behalf of enrollees.[1] Because all Medicaid enrollees in Tennessee are enrolled in HMOs (generally called Managed Care Organizations, or MCOs, in the TennCare context), Tennessee receives tax payments from TennCare MCOs from the premiums they collect on behalf of TennCare enrollees.
  • If Tennessee decides to expand Medicaid, the federal government will pick up all of the cost of the expansion for the first three years (2014-2016).[2] Depending on the number of newly eligible individuals who enroll in the first three years, this could bring between $1.5 and $1.9 billion additional federal dollars to Tennessee by 2016.[3] All of this federal money will be paid as premiums to TennCare MCOs and thus will be subject to the state?s 5.5% HMO tax. Medicaid expansion could generate between $85 million and $100 million in additional HMO tax revenues for the state by 2016 and will cost the state nothing until 2017.
  • Even in 2017, when the federal share of the cost of expansion is reduced to 95%, the state?s 5% share of the cost will still be more than offset by revenues from the 5.5% HMO tax. Again, depending on the number of newly eligible individuals enrolled, the state could see between $3.8 and $4.4 million in net revenues from the expansion in 2017.
  • After 2017, the state will face net costs from Medicaid expansion, but these net costs will still be significantly reduced by revenues from the HMO tax. So, after 2019, when the federal government?s share of the payment drops to 90%, Tennessee?s effective share of the cost will not be 10% but will be 4.5%, because it will recover the remaining 5.5% of the cost in taxes.
  • Because of the significant tax revenues that would be generated in the first four years of Medicaid expansion, only in 2021 would the cumulative costs for the state exceed the cumulative additional revenues generated by the HMO tax. In other words, Tennessee could expand Medicaid and cover as many as 330,000 additional people for seven years at no cost to the State.
[1] Tenn. Code Ann. 56-32-124(a).
[2] The federal government?s share of Medicaid costs for newly eligible enrollees will be reduced to 95% in 2017, 94% in 2018, 93% in 2019, and 90% thereafter.
[3] Note on method: The increase in Medicaid spending as a result of expansion is calculated by multiplying the number of newly eligible individuals expected to enroll in the program by the average annual cost per enrollee. While estimates of the number of individuals who will enroll vary significantly, the most commonly cited source for enrollment projections is John Holahan and Irene Headen, Medicaid Coverage and Spending in Health Reform: National and State-by-State Results for Adults at or below 133% FPL, Kaiser Commission on Medicaid and the Uninsured (May 2010) at 40, Table 7, available at Holohan and Headen project that Medicaid expansion in Tennessee would cover 330,000 individuals by 2019. Id.
 This analysis utilized two different participation rate models to estimate annual costs. The first model assumed a participation rate of 45% (where 100%=330,000) in 2014 and a 30% marginal increase each following year (.45, .615, .73, .81, .87, .90, .94). The second model assumed a participation rate of 45% in 2014, 75% in 2015, and 95% thereafter. See generally Ben Sommers, et al., ?Understanding Participation Rates in Medicaid: Implications for the Affordable Care Act,? U.S. Department of Health and Human Services, Assistant Secretary for Planning and Evaluation Issue Brief (March 2012), available at  The Bureau of TennCare uses $3656.39 as the average annual cost per enrollee for pharmacy, MCO and dental services. See TennCare Quarterly Report, July 13, 2012, at 12 n. 14, available at According to the CMS Office of the Actuary, however, the per enrollee costs of new enrollees who were formerly uninsured and are without other forms of insurance are estimated to be about 70 percent of those for current beneficiaries enrolled for the entire year by eligibility group. 2011 Actuarial Report on the Financial Outlook for Medicaid, at 32.

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