Health-Care Reform: About the 'Opt-Out' Compromise

If you look at the Senate Finance Committee's health care bill (PDF), you'll see that it substantially increases eligibility for Medicaid.

Starting in 2014, nonelderly people with income below 133 percent of the FPL would generally be made eligible for Medicaid; the federal government would pay a share of the costs of covering newly eligible enrollees that varies somewhat from year to year but ultimately would average about 90 percent. (Under current rules, the federal government usually pays about 57 percent, on average, of the costs of Medicaid benefits.) In addition, states would be required to maintain current coverage levels for children under Medicaid and CHIP through 2019.

Beginning in 2014, states would receive higher federal reimbursement for CHIP beneficiaries, increasing from an average of 70 percent to 93 percent. CBO estimates that state spending on Medicaid would increase by about $33 billion over the 2010–2019 period as a result of the specifications affecting coverage.

The key here is that $33 billion number. We all know that state budgets are in complete disarray, and here comes the government with a substantial unfunded bill for them to pay. But that number is deceptive. What happens when a person moves from employer-based health care to one of the regional exchanges? One thing that happens is that their employer pays a fee (this is to dissuade them from dumping their employees). But the other thing that happens is that the employee's compensation moves from untaxable health care benefits to taxable wages or salary. The states will see a spike in income tax revenue.

Now, let's think about something. What would happen if a robust public option was added to the SFC bill, but it came with an opt-out clause for the states? Here is how Sam Stein explains the proposal: