LONG-TERM ECONOMIC REASONING &

ARKANSAS MEDICAID EXPANSION

"As part of the Patient Protection and Affordable Care Act (ACA) that President Barack Obama signed into law in 2010, states now have the option to expand their Medicaid programs so that the programs provide health coverage to people making up to 138 percent of the federal poverty level. The federal government will pay 100 percent of the costs for the expansion in 2014, 2015 and 2016, and then slowly decrease the portion it pays to until it is at 90 percent federal funding and 10 percent state funding." (Arkansas Department of Human Services)¹

"Arkansas policymakers have been slow to recognize or comprehend the unfunded liabilities ... of the state’s Medicaid program." Policy Foundation, January 2013

(January 2014) Arkansas Medicaid's unfunded liabilities are an overlooked issue in the current controversy around expanding the program. The state Department of Human Services (DHS) terms Medicaid “a pay-as-you-go program for which budgets and appropriations are done each year."² Yet Medicaid's unfunded liabilities, in terms of economics, cannot be ignored.

Unfunded liabilities represent the fiscal cost of future commitments. They are routinely reported by trustees of federal programs, including Social Security and Medicare.³ Medicaid's true cost is not DHS' annual "pay-as-you-go" amount. It is the multi-year fiscal cost of Medicaid programs until eligibility ends. Expansion proponents have failed to calculate this true cost.

Expansion Proponents Fail At Long-Term Economic Reasoning

The consequence of failing to reason in the short- and long-term, in the field of economics, can also be illustrated by the following non-textbook episode:

A government spent on a short-term, annual basis but fell far short of its revenue projections because it ignored a long-term economic phenomena.

The government, in this example was the state of Arkansas, which experienced revenue shortages early in the 21st century after legislators and their advisers reasoned in the short-term, while ignoring the long-term.

Policymakers ignored the business cycle, a long-term phenomenon that dates to 1854 in a widely-recognized economic chronology.⁴ The duration of U.S. expansion, in the postwar cycle, is about five years,⁵ i.e., the long-term. The consequence is that economic activity contracts in the recession phase of the cycle, affecting households, businesses and governments.

Arkansas policymakers were caught by surprise. Their economic reasoning was short-, not long-term.⁶ They were forced to cut $142 million in 2001-02 from Arkansas' discretionary budget. DFA Director Dick Barclay observed, "It's obviously going to be worse than what we originally forecasted."⁷ Policymakers temporarily increased the state income tax to address the revenue shortfall. They were able to repeal the hike after the economy entered another expansion, and revenues increased with economic activity.

Policymakers aware of long-term economic phenomena develop contingency plans. The failure of Medicaid expansion proponents to acknowledge, let alone prepare for another cycle illustrates their short attention span, and failure to engage in long-term economic reasoning.⁸

Expansion proponents have emphasized the Obama Administration's promise to pay 100 percent of the expansion's cost for three years, and 90 percent afterward. What is their contingency plan for the next recession?

Conclusion

Medicaid expansion proponents engage in short-, not long-term economic reasoning. Two examples are their unwillingness to calculate Medicaid's unfunded liabilities, and their failure to develop contingency plans to address revenue shortfalls around the business cycle's recession phase.

--Greg Kaza

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¹ Arkansas DHS, "Private Health Insurance for the Medicaid Expansion Population," http://humanservices.arkansas.gov/dms/

² DHS communication to Policy Foundation, July 11, 2012.

³ Arkansas public retirement systems, to their credit, also calculate and report unfunded liabilities on an annual basis.

⁴ National Bureau of Economic Research, http://www.nber.org/cycles/cyclesmain.html. For a discussion of the pre-1854 business cycle see Kaza, Greg, "The Austrian School in the NBER's Business Cycle Studies," QJAE, Vol. 13, No. 2 (Summer 2010), 79-94.

⁵ NBER, business cycle chronology, Previous trough to peak: 58.4 months (1945-2009)

⁶ The Policy Foundation warned in a February 2001 newspaper column that the U.S. economy was in recession, and that Arkansas policymakers were unprepared.

⁷ Arkansas Democrat-Gazette, Oct. 3, 2001

⁸ Corporate annual and quarterly reports are replete with examples of other long-term phenomena including the incidence of inflation and deflation.