M. Ray Perryman. (File photo: RGG/Steve Taylor)

WACO, March 21 - While the Medicaid system and Affordable Care Act (ACA) are not perfect, they are key aspects of the current health care environment in which Texas must function. 

In a recent study, we looked at the economic effects of expanding Medicaid coverage in Texas under the ACA and found that the benefits are substantial. (By the way, all of our Medicaid-related studies are available to download on our website at www.perrymangroup.com.) This analysis and extensive additional research demonstrated conclusively that Texas should participate; in fact, the State government even receives back in dynamic revenue more than its required contributions.

In our original study, we identified three major sources of economic gains from covering the expanded Medicaid-eligible population under the ACA: increasing health spending generates gains in business activity, reducing uncompensated care frees up private funds for other purposes, and having health insurance increases productivity. Not expanding coverage involves significant economic fallout, particularly given the federal matching levels available under the ACA. Despite these findings, some leaders have expressed concerns about putting more resources into Medicaid due to its current limitations.

As various states have crafted their programs, however, federal regulators have demonstrated flexibility in allowing them to be tailored to specific local needs and priorities. In fact, one potential option that has surfaced involves using Medicaid funds to buy private insurance for newly eligible persons through the private exchange that is being set up in another segment of the ACA. As a result, considerable discussion is occurring regarding the possibility of formulating a private, market-driven “Texas Solution” which provides health insurance availability for the newly eligible indigent population without expanding the Medicaid program.

We looked at the economic and fiscal effects of a representative “Texas Solution” which incorporates elements of a market-based, private exchange approach. While the final structure is not yet determined, the analysis provides a benchmark and perspective on a viable option.

The Texas Health and Human Services Commission (HHSC) has estimated substantial new Medicaid enrollment over the next few years in response to the mandate in the ACA, irrespective of whether Texas adopts expanded coverage for those newly eligible. This group merely opts to participate in a plan for which they already qualify, and it is assumed that these individuals will be a part of the current Medicaid system. For the newly eligible group (primarily adults without children with incomes below 133 percent of the Federal Poverty Level as well as a broader group of indigent parents and aged and disabled individuals), the Medicaid funds will be used to purchase private insurance policies on a market-based exchange.

A private exchange option offers a number of advantages. Newly eligible recipients would have regular private insurance policies rather than Medicaid. Because private insurance sometimes involves coverage better able to meet individual needs than Medicaid, improved health outcomes would likely result. In addition, health care providers are reimbursed at private-sector rates which are above those available through Medicaid. Because of this more favorable situation, doctors and other health care professionals would be more likely to see the new patients, thus alleviating potential capacity issues (only about 30 percent of physicians presently accept new Medicaid patients).

The Perryman Group found that during the first ten years after implementation, the total cumulative net benefits to the state economy from both higher enrollment in the existing Medicaid program and the use of the private exchange for the newly eligible population include $300.8 billion (in 2012 dollars) in output (real gross product) and 3,562,589 person-years of employment. These gains are approximately 17.5 percent higher than those observed in the traditional Medicaid structure and are spread across industries and throughout the state, with thousands of jobs at stake in every legislative district.

This incremental economic activity also generates additional tax receipts to the State and to local government entities. In fact, for every dollar the State spends for Medicaid expansion under the ACA with the option of a private insurance exchange for newly eligible adults, $1.60 is returned in dynamic State government revenue. For those able to take advantage of the private exchange, the return is even higher ($2.56 in dynamic State revenue per $1.00 of direct State outlays). Simply stated, the math is overwhelming.

In addition to the clear economic benefits described above, high rates of uninsured or underinsured individuals can have a detrimental effect on future economic development. Texas already compares poorly to other areas in certain measures, and will lose ground as other states expand their Medicaid programs. Certain industries which are desirable from an economic development standpoint, such as biosciences, are also affected by a poor environment for health care. If major competing states invest in expanding their provision of health care at rates well in excess of Texas, then it is economically rational for collateral investment to migrate to other areas. 

Adding an option to insure newly eligible persons with a private insurance exchange enhances the already substantial outcomes and economic benefits of expanding Medicaid under the Affordable Care Act. Such an exchange is truly a private-market solution where competition among insurance providers will stimulate innovation and cost reduction measures and is not subject to the flaws of the Medicaid program. It is a “game changer” for the health and well-being of a sizable segment of the Texas population, defusing a demographic time bomb and providing an enormous catalyst for future economic prosperity.

Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.

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