Medicaid Expansion: Tracing the True Value of a Free Lunch

This article first appeared in the 2012 Annual Review of the State Bar of California, Business Law News.

By 2014, the Affordable Care Act will rely heavily upon Medicaid as the program continues to evolve from its humble origins in 1965 to become part of the new foundation of a restructured American health care system. In the three short years since the passage of the Affordable Care Act, Medicaid has become the “dark horse” successor to Medicare in its attempt to reform a rapidly failing system while at the same time expanding health care to the nation’s estimated 50 million uninsured. Nearly five decades since its creation by an act of Congress, Medicaid is at last poised to steal the spotlight away from Medicare and change the course of modern American health care for decades to come.

The last fifty years have seen Medicare emerge to find itself the basic blueprint upon which the nation’s health care system rests. Its passage in 1965[1] expanded the already-existing federal and state welfare structure in the United States by providing coverage to 19 million persons aged 65 and over in its inaugural year alone.  Simultaneously, but with far less fanfare, Medicaid offered similar access to health care on a state level for qualifying low-income individuals. Both Medicare[2] and Medicaid[3] have evolved considerably over the past 47 years, responding to changes in the nation’s economic, social and political climate over time, with the most recent iteration of Medicare starting to take shape under the Value Based Purchasing Programs for hospitals[4] and physicians.[5] However, the new and improved Medicaid[6] has been enjoying its own growth spurt of late.  Having long since outstripped its role as insurance for low income individuals, Medicaid stands ready to replace Medicare as modern health care’s weathervane, assuming it can overcome the burden of its historical societal stigma and the general disdain with which the vast majority of health care providers across the nation currently regard it.[7]

In addition to Medicaid’s main statutory authority under federal law,[8] necessary clarification for all practitioners exists within Title 42 of the Code of Federal Regulations, Part 433 (State Fiscal Administration), 438 (Managed Care), 441 (Services) and 447 (Payments), to name but a few.  And yet, for most Californians the term “Medicaid” existed outside ordinary healthcare vernacular prior to the Affordable Care Act, as the delivery of care to residents who qualify financially, as well as families with dependent children, the aged, blind or disabled, falls under the aegis of the state’s “Medi-Cal” program.[9]

Medi-Cal Takes California a Step Further

As early as 1850, California had confirmed its commitment to state hospitals by granting public health authority (including quarantine) for its leadership and imposing a mandatory pre-paid plan upon immigrants who arrived by sea, not to mention designing other public programs for those who arrived from the north, south and east.[10]  By 1917, the California District Court of Appeals confirmed the state’s conviction[11] to addressing the needs of public health by stating:

It has never been, nor will it ever be, questioned that, among the first or primary duties devolving upon a state is that of providing suitable means and measures for the proper care and treatment, at the public expense, of the indigent sick, having no relatives legally liable for their care, support, and treatment, those who are infirm and helpless from the ravages of advancing years and without means of their own. . . . Nor can it for a moment be doubted that it is the duty of the state to take all necessary steps for the promotion of the health and comfort of its inhabitants and to make such regulations as may be conceived to be essential to the protection of the state and the people thereof, so far as such result may be attained, against the visitations and prevalence of deadly epidemical and endemical diseases, and to take and prosecute such health and sanitary steps and measures as will result in stamping them out. . . . These are duties which the state owes to its inhabitants for the . . . preservation of their general happiness and welfare; and, as is true of the duty of the state in the matter of taking proper care of the impecunious or indigent who are afflicted with disease and who have no means for caring for themselves or relatives legally responsible for such care, they are duties which the state may perform in the exercise of its sovereignty, even in the absence of direct constitutional authority therefore – indeed, duties which it may discharge under its inherent power of police.[12]

After Congress passed Medicaid, California’s leadership created the Medi-Cal program during its 1965 Second Extraordinary Session “in order to establish a program of basic and extended health care services for recipients of public assistance and for medically indigent persons . . . and, by meeting the requirements of federal law, to qualify California for the recipt [sic] of federal funds made available under title XIX of the Social Security Act.”[13]  Since then, Medi-Cal has existed throughout different parts, chapters and articles of the California Welfare and Institutions Code.[14]

Medi-Cal’s Struggle to Survive

While California has generally supported the Medi-Cal program since its inception, those financing the state’s commitment to public health have been both tenacious and creative in their attempts to provide care for the estimated 9.2 million beneficiaries[15] who make up nearly 25% of the state’s population that were enrolled in the program by Fiscal Year 2010.[16]  Over time, this has included the Medi-Cal Disproportionate Share Program,[17] the Private Hospital Supplemental Fund,[18] the Distressed Hospital Fund,[19] the Construction and Renovation Reimbursement Program,[20] the Hospital Quality Assurance Fee Program,[21] and most recently stabilization funding,[22] among other similar programs.[23]

Medicaid Expansion Under the Affordable Care Act

Regardless of California’s decades of tireless efforts to increase the scope and stability of coverage for Medi-Cal beneficiaries, the recent proliferation of the use of the term “Medicaid” is largely a result of the effects of the Affordable Care Act.  Across the nation preparation has begun for an unprecedented expansion of Medicaid within a regulatory system already riddled with complexity and questionable financial stability.  If that were not enough, last summer’s landmark United States Supreme Court decision[24] not only cemented the nation’s familiarity with the term “Medicaid Expansion,” but it also sparked a constitutional battle that combined health care and federalism in ways reminiscent of the party divisiveness seen between the states preceding the American Civil War. In deciding that Congress has the authority to offer funding for states to expand Medicaid by 2014 without imposing retroactive financial conditions,[25] the Supreme Court created a federal chasm that at least four of the Justices did not believe possible.[26]

The resultant cracks are already beginning to form, though not because the four dissenters simply miscalculated the will of the individual states.  Even after recognizing the historical importance of Medicaid, Congress and the Judicial Branch perhaps failed to embrace just how fundamental the program may soon become. To be sure, Medicaid is but one of several theoretical options for the estimated 50 million Americans without health insurance who intend to avoid a $695 penalty/tax beginning in 2016.[27] However, it is certainly on the short list of practical solutions for the tens of millions who are left without health insurance if and when their employer chooses a $2,000 fine per employee rather than bear the cost of providing health care benefits in the workplace.[28]  With a proven 47-year track record, the Medicaid program appears to be the frontrunner when compared with the Affordable Insurance Exchanges[29] and the Consumer Operated and Oriented Plans (also known as CO-OPs).[30]  When history is taken into account, Medicaid Expansion emerges as potentially the most reliable solution starting January 1, 2014.

Too Good to Be True?

As health insurance goes, Americans could do worse than Medicaid. Those who qualify for coverage under Medicaid Expansion in 2014 will have affordable access to 29 different types of medical care, ranging from inpatient hospital services and outpatient care to dental services and certain defined forms of respiratory care.[31] Moreover, for all 50 states and the District of Columbia, the Federal Government has offered to bear 100% of the added expense for newly eligible Medicaid beneficiaries through 2016, 95% in 2017, 94% in 2018, 93% in 2019 and 90% in 2020 and thereafter.[32]  To most observers, including the U.S. Supreme Court,[33] this financial incentive alone would seem likely to ensure the success of Medicaid Expansion throughout the states.

At first blush it also follows that primary care and other qualifying physicians would champion Medicaid Expansion, as the Affordable Care Act requires states to increase the professional Medicaid rate so that it is equal to Medicare’s level of reimbursement for these same basic services, subject to certain conditions.[34]  To help ensure the access needed to meet the expected higher demands for care in Medicaid, the Affordable Care Act requires states to pay “qualified” physicians Medicaid fees at least equal to Medicare rates for primary care services, beginning in 2013.  Such an action has the dual goal of boosting physician participation in Medicaid and providing increased support for those physicians who already participate and may wish to expand their Medicaid services.

Likewise, few should complain about the fact that the fee increase is federally funded. Family physicians, internists and pediatricians qualify, as well as certain specialists, provided (1) they are Board-certified, or (2) at least 60% of the Medicaid codes they billed in the previous year were primary care codes identified in the Affordable Care Act. These corresponding 146 services include visits and other care-related functions central to primary care practices. Services provided by non-physicians under the supervision of qualified physicians are eligible for the higher fees.[35] This also applies to physicians in managed care organizations as well as the coinsurance to which physicians may be entitled for treating dual eligible beneficiaries.[36]

While Medicaid is poised to rise to the occasion afforded it by changes to the nation’s health care structure under the Affordable Care Act, only time will tell if it has the necessary strength to do so. Even with the wealth of financial promises at the ready, industry experts speculate that a significant number of physicians will not accept new Medicaid patients under the program’s expansion for a number of reasons. The primary concern, at least for now, remains the historically low levels at which the program reimburses.[37] Under Medicaid Expansion, the rate increase physicians are due to receive[38] means little if Medicare reimbursements plummet due to partisan politics.[39] Hospitals, too, are wary, as they are required to treat emergency Medicaid patients under the Emergency Medical Treatment and Active Labor Act (“EMTALA”),[40] but are not always thrilled with the reimbursement structure for treating patients who fall in this category.[41]

In addition to financial concerns, the historical stigma attached to Medicaid beneficiaries, who prior to 2012 were known simply as Medicaid recipients,[42] has also been a deterrent to the widespread acceptance of this patient population among physicians, the degree to which has varied from state to state.[43]  While Medicaid has at long last matured into a program with which to be reckoned, it must yet contend with a new crop of regulatory, economic and social hurdles, and its success will depend on whether it is fluid enough to adapt to the needs of these rapidly changing times.


[1]          Originally Title 19 of the United States Code.

[2]          In its initial form, Part A of the Medicare Act provided coverage for inpatient hospital costs and other similar expenses, while Part B created a voluntary program for beneficiaries to insure against costs from physician and other specific outpatient services and supplies. See Pub. L. No. 89-97. In 1997, Congress enacted the “Medicare Advantage” option for beneficiaries (see Pub. L. No. 105-33), sometimes referred to as “Part C” and previously known as “Medicare + Choice.” In 2003, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (sometimes referred to as “Part D”) made even more changes to the Medicare program. See Pub. L. No. 108-173.

[3]           See, e.g., Pub. L. 103-448, Pub. L. 104-226, Pub. L. 105-12, Pub. L. 105.33, Pub. L. 106-113, Pub. L. 106-169, Pub. L. 108-448, Pub. L. 109-91, Pub. L. 110-90, Pub. L. 111-3, Pub. L. 111-5, Pub. L. 111-148, Pub. L. 111-152, Pub. L. 111-309, Pub. L. 112-78.

[4]           See 42 U.S.C. § 1395ww.

[5]           See 77 Federal Register 68892-01 (Nov. 16, 2012) (to be codified at 42 C.F.R. Parts 410, 414, 415, 421, 423, 425, 486, 495).

[6]          As of February 2012, Title 42 of the United States Code, Chapter 7 (Social Security), Subchapter XIX (Grants to States for Medical Assistance Programs) contains the primary federal statutes.

[7]          See, e.g., Sandra Decker, In 2011 Nearly One-Third of Physicians Said They Would Not Accept New Medicaid Patients, But Rising Fees May Help, 31:8 Health Affairs (Aug. 2012); David Orentlicher, Rights to Healthcare in the United States: Inherently Unstable, 38 Am. J. L. & Med. 326, 332 (2012); Jennifer Kincheloe, E. Richard Brown, et al.Can We Trust Population Surveys to County Medicaid Enrollees and the Uninsured? 25 (4) Health Affairs 1163, 1164 (July/Aug. 2006) (noting that impact of stigma associated with Medicaid participation on the accuracy of surveys); William Julius Wilson, The Truly Disadvantaged: The Inner City, The Underclass and Public Policy 119 (1987) (recognizing the perceived nexus between Medicaid coverage and services provided to welfare recipients).

[8]           42 U.S.C. § 1396d.

[9]       Medi-Cal is California’s version of Medicaid.  See also 2011 Kan. House Bill No. 2619 (May 18, 2011) (“KanCare”); Okla. Stat. tit. 63, § 5009.4 (“SoonerCare”).

[10]         See, e.g., Jaobus tenBroek, California’s New Medical Care Law and Program, 46 Cal. L. Rev. 558, 559 (1958).

[11]         County of Sacramento v. Chambers, 33 Cal. App. 142 (1917).

[12]         Id. at 147.

[13]         Morris v. Williams, 67 Cal. 2d. 733, 783 (1967).

[14]        See, e.g., Cal. Welf. & Inst. Code § 14000 (“The purpose of this chapter is to afford to qualifying health care and related remedial or preventative services, including related social services which are necessary for those receiving health care under this chapter.”).

[15]         Last Spring the Federal Government replaced the term “recipient” with “beneficiary” throughout the Code of Federal Regulations to describe those who receive assistance from Medicaid, because the previous term was considered “unflattering.” See 42 C.F.R. Ch. IV; 42 C.F.R. §§ 400.200 through 400.203.

[16]         See State of California, Department of Health Care Services, Medi-Cal Program Enrollment Totals for Fiscal Year 2010-11 (July 2011).

[17]         See Cal. Welf. & Inst. Code § 14105.98.

[18]         See Cal. Welf. & Inst. Code § 15166.12.

[19]         See Cal. Welf. & Inst. Code § 14166.23.

[20]        See Cal. Welf. & Inst. Code § 14085.5.

[21]         See, e.g., Cal. Welf. & Inst. Code § 14169.31.

[22]         See Cal. Welf. & Inst. Code § 14166.20.

[23]         This list does not exhaust California’s resources directed at the Medi-Cal population, nor does it include the numerous county and local programs that also target funding for the benefit of Medi-Cal beneficiaries. See, e.g., Cal. Rev. & Tax Code § 30122(a)(3) (the Tobacco Tax and Health Protection Act of 1988, which provides “funding for medical and hospital care and treatment of patients who cannot afford to pay for those services, and for whom payment will not be made through any private coverage or by any program funded in whole by the Federal Government”); Alameda County, Cal., Ordinance 2004-32 (imposing a transactions and use tax for the purpose of providing additional support for emergency medical, hospital inpatient, outpatient, and public health care, as well as other services).

[24]        National Fed. of Indep. Bus. v. Sebelius, 132 S. Ct. 2566 (2012).

[25]        Id. at 2606-07.

[26]       See id. at 2665 (Scalia, Kennedy, Thomas and Alito, JJ, dissenting) (“Congress never dreamed that any State would refuse to go along with the expansion of Medicaid.  Congress well understood that refusal was not a practical option.”).

[27]        26 U.S.C. § 5000A(c)(3)(A).

[28]      See 26 U.S.C. § 4890H(c)(1).  The payment amount for “large employers” (defined as those with an average of 50 full-time employees, see id. § 4890H(c)(2)(A)) does not apply to the first 30 employees, however.  Id. § 4890H(c)(2)(D)(i).

[29]      See 77 Federal Register 18310 (Mar. 27, 2012) (to be codified in 45 C.F.R. Parts 155, 156 and 157); Cal. Health & Safety Code § 1366.6 (California Health Benefit Exchange); but see Robert Pear and Abby Goodnough, States Decline to Set Up Exchanges for Insurance, N.Y. Times (Nov. 16, 2012), available at http://www.nytimes.com/2012/11/17/us/states-decline-to-set-up-exchanges-for-insurance.html?_r=0.

[30]     See 45 C.F.R. §§ 156.500 (basis and scope of CO-OPs), 156.505 (definitions), 156.510 (eligibility), 156.515 (standards) and 156.520 (loan terms) (effective Feb. 13, 2012); see also Cal. Health & Safety Code §§ 1399.80 et seq. (effective Jan. 1, 2013); but see Sarah Kliff, The Fiscal Cliff Cuts $1.9 Billion from Obamacare, Wash. Post (Jan. 2, 2013), available at http://www.washingtonpost.com/blogs/wonkblog/wp/2013/01/02/the-fiscal-cliff-cuts-1-9-billion-from-obamacare-heres-how/.

[31]         42 U.S.C. § 1396d(a).

[32]         42 U.S.C. § 1396d(y).

[33]         See supra n. 26.

[34]         See Federal Register 66670 (Nov. 6, 2012) (to be codified in 77 C.F.R. Parts 438, 441 and 447).

[35]         See id.  The following chart is contained within the Federal Register:

Provision Description

Total Costs

Total Benefits

Payments to Physicians for Primary Care Services The overall economic impact of this final rule is an estimated $5.600 billion in CY 2013 and $5.745 billion in CY 2014 (in constant 2012 dollars). In CY 2013, the federal cost for Medicaid and CHIP is approximately $5.835 billion with $235 million in state savings. In CY 2014, the federal cost for Medicaid and CHIP is approximately $6.055 billion with $310 million in state savings. The associated impact of this final rule requiring states to reimburse specified physicians for vaccine administration at the lesser of the Medicare rate or the VFC regional maximum during CYs 2013 and 2014, is estimated at an additional $975 million in federal costs. Specifically, this reflects federal costs for CYs 2013 and 2014 of $495 million and $480 million, respectively. The overall benefit of this rule is the expected increase in provider participation by primary care physicians resulting in better access to primary and preventive health services by Medicaid beneficiaries.

[36]         See id.; For California, see Cal. Welf. & Inst. Code § 14132.275(c)(3) (effective Sept. 22, 2012) (“‘Dual eligible beneficiary’ means an individual 21 years of age or older who is enrolled in the demonstration project under the capitated payment model.”).

[37]        See supra n. 7.

[38]       See supra n. 34.

[39]       See, e.g., Mary Agnes Carey, “Doc Fix” in “Fiscal Cliff” Plan Cuts Medicare Hospital Payments, Kaiser Health News (Jan. 2, 2013), available at http://capsules.kaiserhealthnews.org/index.php/2013/01/doc-fix-in-senate-fiscal-cliff-plan-cuts-medicare-hospital-payments/.  Had congress not averted the scheduled 26.5% payment reduction for physicians by this last minute compromise, an increase in the Medicaid rates to match Medicare, see supra note 34, would be a pyrrhic victory at best.

[40]       See 42 U.S.C. § 1395dd.

[41]       See, e.g., David Orentlicher, Rights to Healthcare in the United States: Inherently Unstable, supra n. 8 at 330; Abigail Moncrieff, Payments to Medicaid Doctors: Interpreting the ‘Equal Access” Provision, 73 U. Chi. L. Rev. 673 (2006); Sidney Watson, Medicaid Physician Participation: Patients, Poverty, and Physician Self-Interest, 21 Am. J.L. & Med. 191, 196 (1995).

[42]         See supra n. 15.

[43]         See supra n. 7.

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