The Hidden Subsidy of the Affordable Care Act

TL;DR

The paper reveals that Medicaid expansion under the ACA led to widespread reclassification of enrollees, significantly inflating federal costs due to states' strategic enrollment practices.

Contribution

It provides empirical evidence that states reclassified Medicaid enrollees to maximize federal funding, revealing a hidden subsidy mechanism.

Findings

Reclassification affected 4.4 million enrollees in 2019.

Federal costs increased by 18.2% due to reclassification.

States saved up to 100% of original enrollee costs through reclassification.

Abstract

Under the ACA, the federal government paid a substantially larger share of medical costs of newly eligible Medicaid enrollees than previously eligible ones. States could save up to 100% of their per-enrollee costs by reclassifying original enrollees into the newly eligible group. We examine whether this fiscal incentive changed states' enrollment practices. We find that Medicaid expansion caused large declines in the number of beneficiaries enrolled in the original Medicaid population, suggesting widespread reclassifications. In 2019 alone, this phenomenon affected 4.4 million Medicaid enrollees at a federal cost of $8.3 billion. Our results imply that reclassifications inflated the federal cost of Medicaid expansion by 18.2%.