(January 15, 2013) Policymakers across the Arkansas political spectrum agree that a proposed Medicaid expansion is the biggest issue in the legislative session that began this week.  Democratic Gov. Mike Beebe told the General Assembly today, “(I)t is clear that Medicaid will receive the lion’s share of attention, and rightfully so.”2 “Medicaid is certainly the biggest elephant in the room,” Republican House Speaker Davy Carter of Cabot said recently.  “That issue is going to drive almost every other monetary issue.”3  Republican Senate President Michael Lamoureux of Russellville said last November, “My position is that if we can get an Arkansas plan, an Arkansas agreement — bi-partisan in the legislature with the cooperation of the Governor – we’re going to lean on him to sell it to the federal officials.”4  Arkansas policymakers are debating Medicaid expansion, yet a number of key issues have been overlooked by observers.


Medicaid Dates to 1965, Includes More Seniors


Democratic President Lyndon B. Johnson signed Medicaid, a social welfare program, into law July 30, 1965 as part of his Great Society.  U.S. Rep. Wilbur Mills of Arkansas played a major role in enactment.5 Johnson, in signing the law, said, “There are more than 18 million Americans over the age of 65.”6  The percentage of the U.S. population aged 65 or older was less than 10% in 1965.  Today, 13% of the U.S. is composed of seniors, the Census Bureau reports. This percentage will increase significantly by 2050.  Arkansas has a higher percentage (14.6%) than the U.S., Census data shows.7 This demographic has been overlooked in the Arkansas Medicaid expansion debate, which has focused on only the next three fiscal years.


Nationalized Medical Insurance and Federalism


Nationalized medical insurance,8 an Obama administration initiative produced the expansion debate.  Gov. Beebe and most Democrats support Medicaid expansion.  Republicans have generally opposed expansion, though some have voiced support for smaller growth in the program.  Republican Gov. Mike Huckabee (1996-2007) expanded Medicaid in Arkansas through ARKids First, a children’s health insurance program.


The issue of federalism has been obscured in the Arkansas Medicaid expansion debate. Federalist systems divide authority between central governments and states.  The U.S. is an example yet federal officials have insisted on dictating the terms of the expansion debate.  They refuse to seriously consider the idea of Medicaid block grants, an example of federalism preferred by some states and U.S. Rep. Paul Ryan, R-WI.


Potential Deficit, Pre-Expansion


Another overlooked issue is the potential $1.3 billion Medicaid deficit Arkansas faces despite $1 billion in federal stimulus funds for “health and human services” since 2009.9 Federal law requires Arkansas and other states to “cover certain population groups (mandatory eligibility groups),” but gives them “flexibility to cover other population groups (optional eligibility groups).” States “set individual eligibility criteria within federal minimum standards,” but can apply for waivers “to expand health coverage beyond these groups.”  ARKids is an example. Arkansas Medicaid, as a result, has already expanded. There were 778,997 Arkansas Medicaid enrollees in 2010, a figure equal to 27 percent of the population.10  By contrast, 21.5% of the U.S. was enrolled in 2010.11 Federal payments in Arkansas totaled $3.1 billion, or 81% of the cost. Arkansas’ share, $737 million, was 19%.  In sum, there is a potential deficit, and it was incurred before the expansion debate.


Unfunded ARKids Liabilities, Pre-Expansion


Unfunded liabilities are another overlooked issue. Arkansas policymakers have been slow to recognize or comprehend the unfunded liabilities of ARKids, about 49 percent of the state’s Medicaid program.12 Unfunded liabilities represent the fiscal cost of future commitments. The true cost of ‘ARKids’ and other Medicaid programs is not the annual “pay-as-you-go” amount cited by DHS.  It is the fiscal cost of future commitments to age 19 when ‘ARKids’ eligibility ends. ARKids enrolled 356,010 in 2011. The Medicaid program’s unfunded liabilities are estimated at $3.5 billion, based on enrollment, federal reimbursement and average annual cost data.13  The estimate is conservative, i.e., it assumes no medical inflation and does not include the other 51 percent of Arkansas Medicaid spending. Unfunded liabilities will expand if inflation occurs under nationalized medical insurance.


Spending Inflation, Pre-Expansion


Spending inflation is another overlooked issue. Arkansas Medicaid spending exceeded the U.S. average and inflation rate14 before the expansion debate. Arkansas spending increased annually at an 8.4% rate (FY2007-10) versus 6.8% for the U.S., Kaiser Family Foundation data shows.  Spending also exceeded CPI in the same period. Arkansas spending inflation is a long-term problem, tripling between 1996 and 2010, from $1.3 to $4.1 billion.15


The Knowledge Problem


The knowledge problem identified by Dr. Friedrich A. Hayek, the 1974 Nobel Economics laureate has also been overlooked in the expansion debate.  Hayek spent part of 1950 at the Univ. of Arkansas in Fayetteville, and argued in a seminal 1945 essay in The American Economic Review that government central planners lack the knowledge to engage in rational economic calculation.


Hayek described the problem faced by planners as follows:


The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate “given” resources—if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.16


One application of Hayek’s knowledge problem to the expansion debate is central planners’ inaccurate forecast of the demand for high-risk insurance.


Three years ago, the U.S. Department of Health and Human Services estimated “the creation of a national high-risk insurance pool would result in roughly 375,000 people gaining coverage in 2010, increasing national health spending by $4 billion.”17  But enrollees totaled only 94,458 on Oct. 31, 2012 including only 798 in Arkansas.18


Conclusion: A Narrow Debate


The ongoing Medicaid expansion debate in Arkansas has been conducted, to date, within narrow parameters.  Overlooked issues in the popular press include demographics, federalism, a potential deficit, ARKids First’s unfunded liabilities, spending inflation and the knowledge problem identified by Nobel laureate F.A. Hayek.  A broader debate would better inform the people of Arkansas about Medicaid expansion.


1   Third part of a three-part series.  Part one (November 2012) examined fiscal policy, and part two (December 2012) reviewed education reform.

2  http://governor.arkansas.gov/newsroom/index.php

3  “Medicaid the biggie.” Arkansas Democrat-Gazette. January 13, 2013

4  “Senate President Wants Bipartisan Medicaid Agreement, Sees Larger Tax Reform.” Talk Business. December 16, 2012

5  http://www.hendrix.edu/academics/academics.aspx?id=1828

6  http://www.lbjlib.utexas.edu/johnson/archives.hom/speeches.hom/650730.as

7  http://quickfacts.census.gov/qfd/states/05000.html

8  Patient Protection and Affordable Care Act of 2010

9   Policy Foundation research memo (June 2012), “Arkansas Medicaid Crisis Looms Despite $1 Billion in Stimulus Funds”

10  Centers for Medicare and Medicaid Services:


11  http://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-State/By-State.html

12  The Policy Foundation has published research on this issue since 2006.

13 Foundation research memo (August 2012), “ARKids First Unfunded Liabilities Estimated at $3.5 Billion”

14 Foundation research memo (September 2012), “Long-Term Arkansas Medicaid Spending Growth Greater Than U.S. Average, CPI”

15  Foundation research memo (March 2011), “Arkansas Medicaid Costs Triple Since Mid-1990s”

16 Friedrich A. Hayek. 1945. “The Use of Knowledge in Society,” American Economic Review (September) 519-30.  Hayek’s essay was later named one of the 20 most important articles in the American Economic Review’s first century of publication.

17 Centers for Medicare & Medicaid Services:


18 “State by State Enrollment in the Pre-Existing Condition Insurance Plan, as of October 31, 2012”