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. 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. RAND noted that only lower-income states will benefit.
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.