When Indiana expanded Medicaid, as allowed by the federal Affordable Care Act, it was touted as a “conservative” alternative to traditional expansion because the Indiana program included modest work and cost-sharing requirements for participants.

But today the rising cost of Indiana’s Medicaid program is creating budget challenges for that state that have prevented lawmakers from addressing other needs, including schools.

“Medicaid expansion sounds like a great deal, but in the end it’s really a lot like a bad timeshare offer,” said Jameson Taylor, who as vice president for policy at the Mississippi Center for Public Policy has studied Indiana’s Medicaid expansion and its outcomes.

In Indiana’s 2019 legislative session, the rising cost of the state’s Medicaid program consumed much of available new revenue.

In an April 2019 column, Larry DeBoer, professor of agricultural economics at Purdue University, noted that Indiana’s two-year fiscal forecast predicted state government would see revenue increases from $16.1 billion in 2019 to $16.6 billion in 2020 and then $17 billion in 2021.

“The economic forecast said that inflation would run a little more than 2 percent per year, which means that added revenue covered inflation, but not much more,” DeBoer wrote. “That’s one reason why it was hard for the legislature to find money for things like added teacher pay and child welfare programs.

“Here’s another reason,” DeBoer continued. “Spending on Medicaid is expected to increase a lot.”

In Indiana, he noted the state portion of Medicaid costs was expected to total $2.2 billion in fiscal 2019, then $2.5 billion in 2020 and $2.6 billion in 2021. Thus, while Indiana was expected to generate more than $400 million in new revenue for each of the coming two years, DeBoer added, “Rapid growth of Medicaid costs means an added $270 million will be needed in 2020, and $120 million will be needed in 2021. So Medicaid will require about 66 percent of all the new revenue in 2020, and 30 percent in 2021.”

In a July 18, 2019 editorial, the Fort Wayne News-Sentinel said the “lack of a pay increase for teachers” during that year’s legislative session “was disappointing” and linked the lack of teacher pay raises to Medicaid. The editorial stated that “late in the legislative session lawmakers discovered they would have about $100 million less to work with because of a revised revenue forecast that decreased by $33 million and an anticipated increase of $65 million in Medicaid spending through 2021. That scrapped chances for teacher pay increases in the new budget.”

Since 2015, when Indiana’s Medicaid program was expanded to include able-bodied adults, the Mississippi Center for Public Policy found that Indiana’s general fund spending on Medicaid has increased by 26.9 percent.

According to the State Health Access Data Assistance Center (SHADAC) at the University of Minnesota, Medicaid expenses consumed a larger percentage of Indiana’s state budget than all but seven states in 2018.

As Medicaid consumes more state revenue, it means less funding for other needs.

“The more that you expand Medicaid, the more crowd-out there is going to be,” Taylor said.

When Indiana lawmakers passed a two-year state budget in 2019, Chris Watts, president of the Indiana Fiscal Policy Institute, wrote that one of the two “biggest fiscal issues facing Indiana” was “the inexorable growth of Medicaid as a share of the state budget.”

When Indiana expanded Medicaid in 2014, then-Gov. Mike Pence said the expansion would be paid for using the state’s existing tobacco tax and a hospital “fee” program. But by 2019, the Indiana Hospital Association was calling for a tobacco tax increase of up to $2 per pack to fund the expansion program, saying, “The hospitals’ share is increasing at an unsustainable rate, and increasing the cigarette tax can help provide necessary relief to hospitals.”

The hospital fee Pence touted is used in many states, but is also widely considered a “gimmick,” Taylor noted. Such “provider taxes” are used to obtain additional federal matching funds. The increase in federal matching funds is then used, in theory, to repay the hospitals for the amount provided upfront through fees with any extra money accruing to the hospitals’ bottom lines. Because the Affordable Care Act provided a federal match for the Medicaid expansion population of $9 for every $1 state dollar, the incentive to use such financing gimmicks is greater than in many other instances.

“But at some point, even for the hospitals, this has become a bad deal,” Taylor said. “And that’s because Medicaid expansion is costing much more than anyone anticipated and, as they themselves mentioned, their share of even this 10-percent tax—which you would think would be such a great deal—is increasing at an ‘unsustainable rate.’”

At the same time, Medicaid expansion has failed to produce many promised outcomes in Indiana. Health care costs for the privately insured remain much higher in Indiana than in surrounding states, hospitals continue to close or face the threat of closure, and health outcomes remain largely unchanged or have grown worse.

Despite the financial strains created by Medicaid expansion, Indiana lawmakers chose not to increase tobacco taxes in 2019. DeBoer said that decision may have been driven, in part, by lawmakers’ concern that Medicaid expansion could involve even larger costs in the future.

“The Legislature was reluctant to raise the cigarette tax now, kind of wanted to keep that in their back pocket in case some real health care revenue need comes up, some change in the Affordable Care Act or something like that that requires the states to come up with more money,” DeBoer said. “I think they’ve been keeping that kind of in their back pocket, saying, ‘Well, if the time comes we need this money, here it is, we’ll use it.’”