SHARE Report Bad Case for Medicaid Expansion

On November 26, 2014, the Wyoming Department of Health presented its SHARE report, a 32-page long argument for Medicaid expansion. The report makes a pro-expansion case that appears to sprawl in all directions, but perhaps the biggest selling point is that Medicaid expansion will create hundreds of new jobs and add millions of dollars to the state's GDP.

More specifically, the alleged economic gains depend entirely on the inflow of $100-120 million in new, annual federal funds. The jobs gain is estimated at 800 and the growth in Wyoming state GDP is calculated to $50 million.

This sounds good, does it not?

The problem is that the Department of Health provides absolutely no explanation of how they reached their conclusion regarding new jobs and higher GDP. Assuming the omission of a methodological explanation is an editorial oversight, it is only reasonable that the Department will provide a good explanation very soon.

However, until they do I have to question the veracity in their conclusions on jobs creation and GDP growth. Given the importance that they place on their macroeconomic argument for Medicaid expansion, this raises a fairly big question about the expansion itself. Part of the reason is that more jobs in the state means more tax revenue for the state and local governments; with more taxpayers the fiscal price that the state has to pay for the expansion is significantly reduced.

The SHARE report does not explicitly make this argument, but it is implied in the section that reports the macroeconomic findings. It is therefore reasonable to ask the Department of Health for clarification on their macroeconomic analysis. There are primarily two points where such clarification is needed.

The first point has to do with the general methodology used to estimate job gains. To find out how much more activity the spending increase is going to generate, the department must have used so called multipliers. They are standard variables in macroeconomic analysis and help provide a reasonable image of how much more economic activity will come from an extra $100 worth of spending in the economy. But multipliers are normally used in calculations of just that – extra spending – through the so-called spending approach to GDP. Yet the Department of Health claims to use the less common value-added approach to GDP. Estimating multipliers based on value added is an unusual choice; why did the department choose this particular methodology?

The second point is about a rather surprising element in the report, namely the forecasted $50 million in increased GDP. The report states that it takes $100 million in new federal spending to add $50 million to GDP.

This has got to be one of the strongest arguments against government spending I have come across during my entire career as an economist. Even the simplest possible macroeconomic models include at least one multiplier. When households see an increase in their income they spend a portion of it, which then in turn increases someone else's spending. Since the increase in spending is always less than 100 percent of the new income, the process eventually comes to a halt. When it does, though, the result is a total rise in GDP four to five times the initial increase in spending.

If we make an extreme assumption and say that consumers do not respond at all to an income increase, then the initial $100 will become the entire rise in GDP. The multiplier value will be one instead of four or five.

But to make the end result negative – in other words to end up with a GDP increase that is smaller than the original rise in spending – one would have to assume that money vanishes somewhere. Either consumers respond to an income increase by reducing spending, or the government is losing loads of money on the way from taxpayers to health care providers under Medicaid expansion.

Not even the most inefficient European welfare states are that wasteful.

The only plausible explanation is that the Department of Health treats the $100 million of new federal funds as an insurance payment. But that is not how it is presented in the SHARE report, and even if that is actually how their model is set up, they would have to separate the financial payment – the insurance cost – from the actual spending on health care. That has not been done.