As budget-weary state officials contemplate dropping out of the state-federal Medicaid program, a potentially game-changing question has arisen in Washington: Would poor people who lose Medicaid be eligible for subsidies to buy private coverage in an insurance exchange beginning in 2014?

Cindy Mann, director of the federal Center for Medicaid and State Operations, last week said the U.S. Department of Health and Human Services was considering the question. The answer could determine whether states or the federal government will be responsible for the health care of millions of low-income Americans. Currently, states and the federal government share the cost of caring for 49 million low-income people in Medicaid, and the new health care overhaul law is scheduled to add another 16 million beginning in 2014.

Making many of those people eligible for federal subsidies to buy private insurance was never the intention of the drafters of the law, says Dr. Kavita Patel, who was director of policy for intergovernmental affairs at the White House when the law was written, and is now director of the health policy program at the New America Foundation. “It’s very important for HHS to offer guidance to put this to rest,” she said. “If it’s an option for states, we need to know this right away. It would change how everybody has thought about how we’re expanding the insurance programs across the board. If it’s not possible, we need to know that so we can put it to rest and move on with implementation.”

HHS officials declined to say whether or when the department would issue such a statement.

Lines Clearly Drawn?

Some Democratic supporters of the new law argue that the lines are drawn clearly between Medicaid and the exchanges. Anyone under 133 percent of the federal poverty level – $29,327 in annual income for a family of four – will go into Medicaid, as outlined in the new health care overhaul law, they say. The only exception is poor legal immigrants, who will get subsidies to buy private insurance.

Moreover, says Judith Solomon, co-director of health policy at the nonprofit Center on Budget and Policy Priorities, the law states that only “applicable taxpayers,” those with incomes above 100 percent of poverty, are eligible for subsidies.

That leaves one category of people – those whose incomes fall between 100 percent and 133 percent of poverty – who may be eligible for subsidies, people on both sides of the issue agree.

But there’s a catch: dropping out of Medicaid is an all or nothing proposition for states. The only way for a state to eject one particular group would be to secure a waiver from HHS. Whether that waiver would be approved might depend on who is elected president in 2012.

The subsidies question arose after Edmund Haislmaier, senior research fellow at the Heritage Foundation, a conservative think tank, began talking to states about how dropping Medicaid could work. He estimated that 40 states would come out ahead financially, if some poor people qualified for federal subsidies to purchase private coverage through insurance exchanges starting in 2014.

What’s Best For Patients?


Dennis Smith, who administered the Medicaid program for President George W. Bush, and is now managing director of the Medicaid practice at Leavitt Partners and Christie Herrera, of the American Legislative Exchange Council, an association for conservative state lawmakers, are also talking about this approach.

The concept, which some states are exploring, would give states full responsibility for Medicaid recipients who require nursing home and other long-term care, and for paying the premiums and deductibles for poor people who get Medicare. The remaining people under 133 percent of poverty – mostly children and non-disabled adults – would no longer be a state responsibility. Instead, Haislmaier says, they would get the subsidy and use the exchange.

There is also significant disagreement about what’s best for recipients. Smith argues that poor people would be better off getting insurance through the exchange. That’s because physicians would be paid better, he says, and more inclined to see low-income people.

But Medicaid can offer generous benefits, such as extensive coverage for kids with medical problems, and many states provide eyeglasses and transportation. Robert Reischauer, president of the Urban Institute and a former director of the Congressional Budget Office, predicts that some of that would be lost in the switch to private insurance.

Marilyn Werber Serafini is the Kaiser Family Foundation’s Robin Toner Distinguished Fellow based at Kaiser Health News. The fellowship honors the late Robin Toner, The New York Times’ long-time health and politics reporter whose work often framed the public debate on health issues.