The effects of Texas dropping out of the federal Medicaid program would be sweeping and to some populations devastating. But that doesn’t mean the current system is workable for Texas, according to a long-awaited report released today by the state’s Health and Human Services Commission and the Texas Department of Insurance.

Opting out of federal Medicaid, something Republican leaders have been considering as a method to wipe out Texas’ estimated $25 billion budget shortfall, would create major difficulties, the report states — not just for the millions of poor and vulnerable Texans covered by Medicaid, but for the county governments and public hospitals where much of the financial burden would be shifted.

Up to 2.6 million Texans — many of them children — could become uninsured. And hospitals would still be required by federal law to treat medical emergencies, potentially adding billions of dollars in annual uncompensated care costs funded at the local level. Meanwhile, Texans would continue to pay federal taxes to support other states’ Medicaid spending, the report notes.

Texas would "lose billions each year in federal funds; billions of dollars in indigent health care costs would shift from the state and federal levels to local governments, public hospital districts, medical providers, and the privately insured; and 2.6 million Texas residents could lose health insurance," the report states.

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Still, the escalating Medicaid costs facing the state — up 170 percent in the last 11 years, and accounting for a quarter of the state budget — have far exceeded the growth in state tax revenue, inflation and population, and are unsustainable, the report notes. The HHSC report says the best solution is for the federal government to give states greater responsibility over program costs, allowing them to design their own eligibility systems and benefit packages, and making it easier for them to get waivers. They also recommend reforming the new federal health care law, as well as revising how the federal government calculates the state vs. federal contribution to Medicaid.

“Virtually every state in the nation is facing a severe budget shortfall made worse by rising costs in Medicaid,” the report states. “… Without significant reform at the federal level, states are left facing a no-win dilemma.”   

Here are some of the report's other findings:

  • Agency officials cast doubt on a Heritage Foundation report that predicted Texas could save $8.7 billion a year by dropping Medicaid. The HHSC/TDI report notes that Heritage's findings were based on an assumption that Medicaid clients would become eligible for federal subsidies under new health insurance exchanges. "The final version of the federal law indicates that most Medicaid-eligible individuals up to 133 percent of the poverty level likely will not be eligible for these subsidies," the report notes. If the feds do interpret the law to allow those patients to get the subsidies, the HHSC/TDI officials say, that could alter their own analysis substantially.
  • Currently, federal funds cover about 60 percent of the cost of Texas Medicaid, and state funds cover the other 40. But the share of Medicaid financed by the feds is expected to drop by more than 2 percentage points in fiscal year 2012 — representing a decline of about $550 million that year, or $1.25 billion over that biennium. That's money Texas will have to come up with in a particularly tight budget. The irony here is that Texas' share of Medicaid costs is growing because so is Texas' per capita personal income — which is how the ratio of state to federal Medicaid costs is determined.
  • HHSC raised eyebrows earlier this year with its big-figure estimates for how much federal health reform was going to cost Texas. The latest agency estimate indicates health reform will cost the state quite a bit less — about $5 billion between 2014 and 2019. This estimate excludes nonmandatory rate increases that were included in the original calculation. And it includes roughly $760 million in state revenue from premium taxes expected to be paid by health plans that cover new Medicaid clients.

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