September 10, 2014
Negative Impact of Medicaid Expansion on Utah’s Families and Private Sector
By J. Scott Moody, Chief Executive Officer and Chief Economist
Utah is known for its sound fiscal policies. Some of Utah’s policymakers, however, including Governor Gary Herbert, have bought into the myth that Medicaid expansion will improve health outcomes for Utah residents and have no negative fiscal repercussions for the state. These politicians claim that they can expand Medicaid with “free money” for the first three years because the federal government, through the provisions of the Affordable Care Act—commonly known as “Obamacare”—has promised to pick up the tab.
Nothing is free. If Utah expands its Medicaid program, it will become increasingly dependent on Uncle Sam, who is already straining under unsustainable budget deficits for as far as the eye can see. Utah will also pay a hefty economic price as public sector spending via transfers and government compensation crowds out the private sector. Utah currently has a relatively large private sector, but Medicaid expansion will change that.
This report, the second in a series, evaluates how Medicaid expansion will undo the recent post-recession growth in Utah’s private sector, which will directly impact the pocketbooks of Utah’s families by the reduction of personal income and the loss of jobs.
Impact of Obamacare’s Expansion of Medicaid
Despite Utah’s well-known reputation for sound fiscal policies, Utah will risk becoming overly dependent on the federal government for financial support if Utah expands its Medicaid program. An increase in public sector spending will cause economic instability. Through transfers (Social Security, Medicare, and Medicaid) and government compensation, government spending crowds out the private sector (see Appendix for details). Only the private sector is able to generate new income and wealth in an economy. If Obamacare’s Medicaid expansion blocks the private sector from expanding, Utah’s long-run economic growth will suffer.
Chart 1 indicates this crowd-out over time and, in particular, shows Utah’s private sector already reduced by 21.6 percent—from 91.9 percent in 1929 to 72 percent in 2013. Utah’s private sector currently ranks as the 14th largest in the country (see Table 1).
Someone must pay for the high cost of Obamacare’s Medicaid expansion on Utah’s private sector. Most likely, this will come in the form of either higher taxes and/or borrowing at the federal level. This leaves less money in the pockets of Utahns and businesses. Ultimately, it will dramatically reduce the state’s ability to invest and plan for the future.
This is even more concerning coupled with the projected growth of the federal budget deficit over the next ten years: an expected 34 percent increase —from $537 billion in 2014 to $722 billion in 2024. This growing deficit is unsustainable given that in 2024 the interest payment on the national debt ($799 billion) is projected to exceed the budget deficit ($722 billion). Simply put, this means that the federal government will be borrowing in order to pay only the interest on the debt.
According to estimates from Governor Herbert, Medicaid expansion will help to boost transfer spending, mostly from the federal government, by $258 million in its first full year. If this occurred in 2013, that additional public spending would have crowded out and decreased the private sector by up to 0.25 percentage points. Even more troubling, as Chart 1 displays, Medicaid expansion will reverse the growth in the private sector following the “Great Recession” and put the state on a downward trajectory.
Utah’s policymakers should not take these numbers lightly and should be concerned about government spending crowding out the private sector. As Chart 2 reveals, there is a significant correlation between the size of the private sector and household income. As a
negative result of Obamacare’s Medicaid expansion, Utah’s taxpayers will pay a steep economic price resulting in significantly reduced personal incomes and even fewer jobs.
Table 2 shows the negative economic impact of Obamacare’s Medicaid expansion on the average Utah household. Overall, Utah’s long-run economic growth will suffer; resulting in a downshifting of personal income growth of $749 million. The downshifting from expansion will impact the state in two ways—reduced household income for everyone or fewer jobs. In reality, the solution will likely lie somewhere in between. We can calculate this economic cost in one of two ways:
• $805 reduction in personal income for all households with no private sector job loss
• The loss of 14,125 private sector jobs but no change in personal income.
In Table 1 and Chart 2, we display how Utah’s private sector would lose ground relative to the other states. The Beehive State’s ranking would drop from having the 14th largest private sector in the country to the 16th largest—all else being equal.
Remarkably, a Brigham Young University economist recently stated that bringing Obamacare’s Medicaid Expansion to Utah will have, “. . . minimal risk to state budgets and at considerable gain to the state economy.” In essence, he is simply parroting the “free money” mantra. Yet, as our research clearly shows, there is nothing “free” at all; there will be serious economic repercussions for the long-term prosperity of Utah’s economy. Medicaid expansion will ensure that all Utah residents will be poorer as a result.
Policymakers should ignore the siren call of “free money” and carefully reconsider Governor Herbert’s proposal to expand Medicaid. The answer to helping more Utah families is not to accept more money from the federal government, already hemorrhaging red ink, through Obamacare. Instead, Utah must focus on the same self-reliance that has made the state a national leader—as witnessed by having the 14th largest private sector in the country. Instead, policymakers should work to further reduce government programs, especially dependency on federal funds. In fact, the future prosperity of Utah’s citizens and the health of its economy depends on it.
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).
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 2013 as shown in Chart 2. Put simply, the bigger the private sector, the greater per household personal income. When examining the lower 48 states, the analysis finds that, on average, a 1 percentage point decrease in the size of the private sector yields a decrease in per household income of approximately $3,273.
Expanding Medicaid in Utah by $258 million will shift the composition of Utah’s personal income toward public sector spending and shrink the private sector by up to 0.25 percentage points. That means in the next few years, the average household in Utah would see its income drop by up to $805, or the number of jobs in the state will be reduced by 14,125. The overall loss in personal income will be up to $749 billion ($805 multiplied by 930,700 households).
This analysis estimates a reduction in the long-term growth in the economy and does not necessarily mean the elimination of existing household income or jobs. It does mean that future income increases and job creation will be lower than they would be in the absence of higher taxes and spending. Also, the analysis underestimates the long-term decline in the private sector that will occur because of a slower private sector growth rate.
Of course, correlation does not equal causation. Fortunately, there are two states that allow for a very strong natural experiment to better show causation—New Hampshire versus Maine. These two states are alike in many ways—geography, climate, demographics, and culture. Yet, there is one area where the two states diverge greatly—public policy.
As shown in Chart 3, between 1929 and 1950, Maine and New Hampshire had similar per household incomes (adjusted for inflation) and private sectors (as a percent of personal income). In 1951 Maine enacted the sales tax, which led to increased public sector spending and crowded-out the private sector. Consequently, New Hampshire’s per household income began to steadily pull away from Maine.
This trend accelerated in 1969 when Maine enacted their income tax—a few years after the federal government enacted Medicaid. With this new source of revenue, Maine was able to dramatically expand its welfare system, especially Medicaid. In fact, as of FY 2010, Maine had the third highest percentage of population on Medicaid at 31 percent.
This difference in public policy has resulted in dramatic differences in the size of each state’s private sector. Between 1929 and 2013, Maine’s private sector shrank by 21.8 percent to 65.9 percent from 92.4 percent and is now the 41st ranked private sector in the country. New Hampshire, on the other hand, has seen its private sector shrink by a much smaller 15.7 percent to 76.6 percent from 90.8 percent and is now the third largest private sector in the country.
Overall, New Hampshire’s private sector in 2013 is 16.2 percent larger than Maine’s—76.6 percent and 65.9 percent respectively. Consequently, New Hampshire’s per household income is now 30 percent higher than Maine’s—$124,734 and $95,747, respectively. By taking the bait in Obamacare’s Medicaid expansion scheme, Utah will be following Maine’s downshifted economic path rather than New Hampshire’s—and all Utahns will be poorer as a result.
This negative economic impact due to Obamacare’s Medicaid expansion is not unique to Utah. This analysis has also examined expansion in Indiana (proposed), New Hampshire (enacted) and in Maine (defeated).
Indiana’s long-run economic growth will suffer a drop in personal income of $9.5 billion. The economic costs range from:
• $3,721 less personal income for all households with no private sector job loss; or,
• No change in personal income but the loss of 176,928 private sector jobs.
New Hampshire’s long-run economic growth will suffer a drop in personal income of $593 million under Medicaid expansion. The economic cost ranges from:
• $1,123 less personal income for all households with no private sector job loss; or,
• No change in personal income but the loss of 10,180 private sector jobs.
Maine’s long-run economic growth will suffer a drop in personal income of $1.5 billion. The economic costs range from:
• $2,638 less personal income for all households with no private sector job loss; or,
• No change in personal income but the loss of 30,988 private sector jobs.
 Laffer, Arthur B., et. al., “Rich States, Poor States: 2014 Edition,” American Legislative Exchange Council, April 15, 2014. http://www.alec.org/publications/rich-states-poor-states/
 Congressional Budget Office, “An Update to the Budget and Economic Outlook: 2014 to 2024,” August, 2014. http://www.cbo.gov/sites/default/files/cbofiles/attachments/45653-OutlookUpdate_2014_Aug.pdf
Roche, Lisa Riley, “Gov. Gary Herbert Offers ‘Utah Solution’ to Medicaid Expansion,” Deseret News, February 27, 2014. http://www.deseretnews.com/article/865597533/Gov-Gary-Herbert-offers-Utah-solution-to-Medicaid-expansion.html?pg=all
 Wilson, Sven E., “The Economics of the Healthy Utah Plan: A Preliminary Analysis,” Notalys, August, 2014. http://le.utah.gov/interim/2014/pdf/00004061.pdf
 Alaska and Hawaii are excluded, as is common practice in state analysis, due to their unique economic characteristics.
 The Henry J Kaiser Family Foundation, “State Health Facts,” Medicaid Enrollment as a Percent of Total Population. http://kff.org/medicaid/state-indicator/medicaid-enrollment-as-a-of-pop/
 Moody, J. Scott, “Expanding Medicaid Will Hurt Indiana’s Families, Lower Income and Reduce Jobs,” Federalism In Action, August 5, 2012. http://www.federalisminaction.com/resources/studies/study-2
 Warcholik, Wendy, “Expanding Medicaid Will Hurt New Hampshire’s Families with Lower Income and Fewer Jobs,” New Hampshire Center for Economic Policy, February 17, 2014. http://nheconomics.org/publications/volume-2-issue-1/
 Moody, J. Scott, “Expanding Medicaid Will Hurt Maine’s Families with Lower Income and Fewer Jobs,” The Maine Heritage Policy Center, February 20, 2014. http://www.mainepolicy.org/2014/02/expanding-medicaid-will-hurt-maines-families-with-lower-incomes-and-fewer-jobs/
State Budget Solutions
J. Scott Moody is the Chief Executive Officer and Chief Economist at State Budget Solutions. He may be reached at email@example.com
Scott has over 17 years as a public policy economist. He is the author, co-author and editor of over 170 studies and books. He has testified twice before the House Ways and Means Committee of the U.S. Congress as well as various state legislatures. His work has appeared in Bloomberg, Forbes, CNN Money, State Tax Notes, The New York Post, Portland Press Herald, Bangor Daily News and others.
His professional experience includes positions as CEO of The Maine Heritage Policy Center, Senior Economist at The Tax Foundation and Senior Economist at The Heritage Foundation. Scott received his Bachelor of Arts in Economics from Wingate University (Wingate, N.C.). He received his Master of Arts in Economics from George Mason University (Fairfax, VA).
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