Friday, February 15, 2013

Obamacare: the "Woodwork Effect" and State Government Medicaid

When one approaches the welfare state from a systemic perspective, one needs to note the participation rate of the various programs offered by the welfare state. A known-known, in the creation and subsequent maintenance of a welfare state, and the “use” thereof regarding welfare state programs, those myriad of programs, is that, in the main, such programs are not utilized by all that qualify. That is to say, if welfare state program X is available, the historical norm is less than all eligible participants will actually apply and gain the particular benefits of welfare state program X. An example is Medicaid where 61.7% of eligible participants actually enroll and gain access to benefits. (1)

An economics question that arises, specifically in political economy and especially in public choice theory is: does the introduction of a new welfare state program W increase the participation in an existing welfare state program X? Stated alternatively, will the historical participation rate of an existing welfare state program accelerate with the introduction of an additional program?

Why would one program increase the participation in another program? Answer: the eligible portion of non-participators in program X are exposed to social welfare program W and learn of eligibility for program X. Hence participant P signs up for W and X -or- enrolls in X rather than W.

A problem arises if government G has budgeted for particular participation rate regarding social welfare state program X. If newly created program W creates more participation in existing program X, then G is in deficit given the budget prediction based on a historical participation rate of program X.

Leaving the blackboard and arriving in real-life, one finds a perfect example in that the newly created welfare state program Obamacare interacts with the existing welfare state program Medicaid. Medicaid expansion and associated eligibility rules for access to the expansion is a center piece of Obamacare. When an eligible participant for Obamacare qualifies for Medicaid as their means to health insurance under the Obamacare scheme, there will be a universe of would-be enrollees that will find they are non-participating eligible under the existing Medicaid program. That is to say, the 38.3% of non-enrollees in original Medicaid (those eligible but not enrolled) will find they need to enroll in original Medicaid not the Obamacare sponsored expansion of Medicaid. Stated alternatively, the would-be enrollee find they qualified under the existing program and must enroll under the existing program not the new program. This particular phenomena has been deemed the “woodwork effect”. (2)

The observation arises that who really cares how participant P receives Medicaid…. as Medicaid is Medicaid. Yes and no. As with all schemes Obamacare creates cascading unintended negative consequences that were not sorted out in the central planning process by supposed experts. What consequence? The Obamacare scheme allows for 100% federal tax dollar reimbursement to state based Medicaid plans for new enrollees based on Obamacare eligibility guidelines for placing the previously uninsured into Medicaid. However, if the would-be enrollee is found to have qualified for original Medicaid, then the federal tax dollar reimbursement under existing Medicaid is only 57%. Ops!

The several and many states, the vast majority thereof, have budget problems of their own. Most states have had to cut back on programs and staff as they over expanded services in relation to revenue as well as promised too many unfunded or under-funded future benefits to existing and retired public sector employees. Further, most state budgets are strained to the maximum to provide current legislated Medicaid benefits. Any expansion of current state based Medicaid is a budget buster. For example, Obamacare Medicaid enrollee X, Y, and Z may find that only Y qualifies for Obamacare-based-Medicaid while X and Z qualify for original Medicaid and hence must enroll in the original plan. The existing state based Medicaid programs suddenly experience massive grown in the original Medicaid program and their budgets skyrocket with limited revenue. What do states cut next to accommodate the flood of enrollees?

The cascading unintended negative consequences created by schemes, Obamacare merely being a scheme, comes with the traditional political dupery and nitwitery. The federal government somehow makes available 100% reinbursement for particular state based Obamacare-Medicaid enrollees. How can 100% be reimbursed if the federal government borrows 40 cents on every dollar? Further, those federal tax dollars are not the government’s dollars and/or some magic pixie dust conjured up out of thin air. Rather the tax dollars are taxpayer dollars. Hence taxpayer D in North Dakota has his federal tax dollar sent to New York and taxpayer N in New York has his tax dollar sent to Nevada and so it goes. Yes, its political dupery and nitwitery to frame money as “federal government reimbursement” when in fact the “reimbursing” is not some third party that has its own revenue stream and then bestows exogenous resources of its own creation. The government creates nothing and merely acts as the transfer agent of your tax dollars. The federal government reimbursed nothing. The federal government merely took something from A and gave it to B.

Beyond the political dupery and nitwitery of the scheme, now comes forth “political patronage”. Governor GG of state S would have to increase taxes many fold to accommodate the new enrollees in Obamacare-based-Medicaid. Governor GG would become very, very unpopular straight away. However, through political patronage, governor GG of state S can align with the political aims of those in power of the central government, acquiesce as it were, and avoid raising state based taxes for Obamacare-based-Medicaid and merely rely on the diffused costs passed onto all fifty state federal tax payers with focused benefits upon his particular state constituents. Hence the political patronage becomes a political constituency building exercise through taxpayer dollars for both governor GG and those in power of the central government.

However, the puzzle palace on the Potomac forgot about the “woodwork effect”. Hence governor GG of state S is faced with raising taxes for the flood of new enrollees in original stated based Medicaid. Oh, the evil of it all! Hence governor GG rationally wants noting to do with political patronage in this particular episode as he can not depend on the purposeful political phenomena of diffused costs passed onto all fifty state federal taxpayers with focused benefits upon his particular state constituents.

Update: Medicaid: Don't Expand a Broken System, Hadley Heath, Independent Women's Forum, May, 2013, Volume 3, Number 5.[3].pdf


(1) Why States Have a Huge Fiscal Incentive to Opt Out of Obamacare's Medicaid Expansion, Forbes, 07/13/2012

(2) Why States Are So Miffed about Medicaid — Economics, Politics, and the “Woodwork Effect”, Benjamin D. Sommers, M.D., Ph.D., and Arnold M. Epstein, M.D., N Engl J Med 2011; 365:100-102 July 14, 2011 DOI: 10.1056/NEJMp1104948

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