Does Medicaid Boost the Economy?

Interest groups often tout the “economic benefits” that additional federal Medicaid funds might create within states.[*] Yet economists find it difficult to calculate the actual value of economic activities that are generally assumed to have beneficial spillover effects in industries far removed from the initial spending. For instance, a macroeconomic study published by the National Bureau of Economic Research indicates that since 1950, government defense spending has actually reduced national economic output below what it would have been otherwise.[59] Such results suggest that the net effect of the new health law will be that the national gross domestic product declines as the federal government consumes a larger share of national income to fund its programs. Basically, people will cut their other consumption to pay the increased tax burden.

State officials should keep in mind that models that predict large economic increases from reallocated federal spending generally ignore the fact that the money must come from somewhere. The ACA includes substantial tax increases that potentially reduce federal and state revenues needed to finance both existing Medicaid and any Medicaid expansion. For many years, Michigan has paid more in federal taxes than it has received in federal spending, suggesting that Michigan might end up paying more for any national program than it receives in benefits.[†] According to the RAND Corporation, most states can expect a net transfer of state resources to the federal government under the ACA.[60] RAND noted that only lower-income states will benefit.[61]

Nor would Medicaid expansion bring only new dollars to Michigan’s health care sector. As discussed earlier under “Medicaid and Displacement of Private Insurance,” an estimated 29 percent of those enrolling in a Medicaid expansion would be dropping their current private insurance. Private insurance reimbursements are generally higher, however, and they typically provide more income per patient to the state’s health care sector.[‡] Medicaid expansion would produce less of this higher rate of spending, reducing the benefits that the expansion might have otherwise been expected to generate for the health care sector.

The costs in taxes and redirected health care spending suggest why a Medicaid expansion, like many other forms of targeted spending, could easily fail to generate a net benefit for the state’s economy, even if it did provide new cash for some segments of the state’s health care sector.

[*] For instance, the argument follows that federal money is a multiplier of state spending. The effect ripples throughout the economy from health care providers to their vendors and employees. See “The Role of Medicaid in State Economies: A Look at the Research,” (The Henry J. Kaiser Family Foundation, 2009), (accessed May 20, 2013). For an example of an advocacy report touting Medicaid expansion in Michigan, see “The ACA’s Medicaid Expansion: Michigan Impact,” (Center for Healthcare Research & Transformation, 2012), (accessed May 20, 2013).

[†] “Federal Taxes Paid vs. Federal Spending Received by State, 1981-2005,” (Tax Foundation, Oct. 19, 2007), (accessed May 24, 2013). While the ratio may have shifted since this data was collected, it seems unlikely that Michigan has become the kind of low-income state that would benefit from the ACA.

[‡] Authors’ calculations using an index of a ratio of Medicaid fees to private insurance fees as a proxy for spending by private insurers. Michigan Medicaid fee-for-service physician fees are only about 51 cents on the dollar of what Medicare reimburses a physician for the same service. See “2012 Medicaid-to-Medicare Fee Index,” (The Henry J. Kaiser Family Foundation), (accessed May 16, 2013). Medicare reimburses physicians about 81 percent of what a private insurer reimburses physicians for the same service. Sheils, “The Cost and Coverage Impacts of a Public Plan, Testimony before the Ways and Means Committee,” (The Lewin Group, 2009), (accessed May 16, 2013). Physician reimbursements from private insurers may thus average about 2.42 times what Michigan fee-for-service Medicaid would pay for the same service.