Association for Public Policy Analysis & Management

On March 23, 2010, President Obama signed into effect one of the largest overhauls of the U.S. healthcare system in history: The Patient Protection and Affordable Care Act (ACA). In addition to numerous other clauses, the ACA mandated for the expansion of Medicaid eligibility requirements to allow many low-income Americans access to the program. This expansion raised the income ceiling of Medicaid eligibility from 100% to 138% of the federal poverty line and allowed childless adults with income below this line access to Medicaid; potentially extending coverage to more than 20 million Americans. To ensure compliance, the ACA permitted the Secretary of the Department of Health and Human Services to withdraw existing federal Medicaid funds to states failing to adopt the new federal eligibility requirements. In response, many states brought suit questioning the constitutionality of the act. These cases merged together into National Federation of Independent Business v. Sebelius which was heard before the U.S. Supreme Court in March, 2012. While the majority of the ACA held up to judicial scrutiny, the Supreme Court ruled that mandatory expansion of Medicaid was unconstitutional. This allowed states the option of "opting out" of the Medicaid expansion. Initially, 25 states opted out. Six of those states have since expanded.

The debate over the Medicaid expansion focused on the direct costs and benefits of such an expansion -- lawmakers weighed the direct benefits of increasing insurance coverage versus the accounting cost of doing so. We examine another avenue through which Medicaid expansion may impact the U.S. healthcare market: the potential effects on premiums in the individual market for health insurance. Since individuals are mandated to have health insurance, in the states where the Medicaid expansion was refused there exists a coverage gap that the private market will, at least partially, pick up. This gap, and the portion picked up, are not random and systematically exhibit higher expected costs. This raises prices for everyone taking part in the health insurance exchanges. In order to fully assess the welfare implications of Medicaid refusal, the "crowding in" effects on the private markets must be considered. We find that expanding Medicaid reduces average monthly premiums by $32.40; a decrease of 11.86%. This finding is robust across different identification strategies.