Obamacare Medicaid Expansion Would Hurt Oklahoma’s Economy

December 13, 2013

There is currently a debate raging in state capitals across the country as policymakers dispute the merits of expanding Medicaid under the provisions of the Affordable Care Act (Obamacare). At first glance, expanding Oklahoma’s Medicaid program looks like “free” money since Uncle Sam is promising to pick up the entire tab for the first three years. Who doesn’t like free money?

In reality, Oklahoma has already been growing increasingly dependent on Medicaid and paying a steep economic price. Listening to Obamacare’s siren call to expand Medicaid will only serve to deepen Oklahoma’s dependency. In fact, according to a recent study by the Henry J. Kaiser Family Foundation, such an expansion would add 261,000 Oklahomans to the Medicaid rolls!

The expansion of Medicaid will come at the expense of long-run economic growth by shrinking Oklahoma’s private sector. A smaller private sector results from two negative impacts of Medicaid expansion.

First, Medicaid expansion will have to be paid for by higher federal and state taxes, leaving less money in the pockets of individuals and businesses and reducing their ability to invest for the future.

Second, greater public spending will crowd out the private sector in competition for scarce labor and capital.

Oklahoma’s policymakers should be very concerned about this “crowding out” of the private sector by government spending. Personal income comes from two sources: the private sector and the public sector. The distinction between the two sectors is important because only the private sector creates new income. The public sector, in contrast, can only redistribute income through taxes and spending. More specifically, public-sector spending consists of personal current transfer receipts (Medicare, Medicaid, Social Security, etc.) and government employee compensation (federal, state, and local).

As a consequence of expanding Medicaid, Oklahoma’s taxpayers will pay a steep price with higher tax bills, lower incomes, and fewer jobs. (See our sidebar for methodological details.)

Table 1 shows the negative economic impact of Medicaid expansion on the average Oklahoma household. Over the next couple of years, Oklahoma’s economy will suffer a drop in personal income of $3.9 billion. The drop in personal income can manifest itself in one of two ways—lower household income for everyone, or fewer jobs (though the reality will lie somewhere in between). The economic cost of this tax hike ranges from:

• $2,634 less personal income for all households with no private-sector job loss; or,
• no change in personal income but the loss of 76,011 private-sector jobs.

In conclusion, Medicaid expansion is not “free,” as there would be economically devastating repercussions to the health of Oklahoma’s economy at a time when the recovery from the “Great Recession” has been tepid.

Clearly, the better option is to shelve Medicaid expansion and reduce government spending, which would, in turn, expand the private sector. The private sector could then get back to work increasing incomes and creating new jobs.

Research Notes

Data for the number of Oklahomans impacted by Medicaid expansion can be found at: http://kff.org/interactive/zooming-in-health-reform-medicaid-uninsured-local-level/

The economic loss estimates in this study are derived from the significant positive correlation between per-household personal income with the private-sector share of personal income for 2012, as shown in Chart 1. Put simply, the bigger the private sector, the greater the per-household personal income.

States with larger private sectors will grow faster over time than states with smaller private sectors. For example, let’s compare two states that are virtually identical in every way except for the size of the private sector—New Hampshire and Maine. In 2012, New Hampshire had the largest private sector (76.7 percent) and the 12th highest per-household personal income ($122,943), whereas Maine had only the 40th largest private sector (65.8 percent) and the 41st higher per-household personal income ($94,296). As such, New Hampshire’s per-household personal income is 30.4 percent higher, or $27,357, thanks to a more vigorous private sector.

The personal income data are from the Bureau of Economic Analysis (www.bea.gov) and are adjusted into “per household” using data from the Census Bureau (www.census.gov). The increased Medicaid spending under Obamacare was estimated by multiplying the increased number of individuals enrolled in Medicaid (261,000) by the average Medicaid payment per enrollee ($4,782), equaling $1.2 billion. Data for the average Medicaid payment per enrollee can be found at: http://kff.org/medicaid/state-indicator/medicaid-payments-per-enrollee/.

This analysis does not necessarily mean income or employment will decline from present levels, but rather the economic losses will more likely manifest themselves as a reduction in long-run economic growth.

OCPA research fellow J. Scott Moody (M.A., George Mason University) has worked as a public policy economist for more than 13 years. Formerly a senior economist at the Tax Foundation and a senior economist at the Heritage Foundation, he has twice testified before the Ways and Means Committee of the U.S. House of Representatives. His work has appeared in Forbes, CNN Money, State Tax Notes, The Oklahoman, and several other publications.

OCPA research fellow Wendy P. Warcholik (Ph.D., George Mason University) formerly served as an economist at the U.S. Department of Commerce’s Bureau of Economic Analysis, and was the chief forecasting economist for the Commonwealth of Virginia’s Department of Medical Assistance Services. She is a co-creator (with J. Scott Moody) of the Tax Foundation’s popular “State Business Tax Climate Index.”