Understanding Medicaid Expansion:

Wait, It’s Actually Good for Business?

When business owners discuss the Affordable Care Act, they tend to fixate on the pay-or-play mandate that will require firms with 50 or more full-time employees to offer health coverage or pay penalties. What they might not know is that they may be able offset new costs by taking advantage of another controversial aspect of the law: the expansion of Medicaid.

But only if they live in the right place.

As signed by the president in 2010, the ACA would have forced the states, by January 1, 2014, to expand eligibility for Medicaid to nearly all people under age 65 with income below 133 percent of the federal poverty level, including—for the first time in most states—adults who do not have dependent children. Previously, the median income limit for working parents was 64 percent of the federal poverty level, with individual states setting the bar anywhere from 17 percent to 200  percent.

The higher eligibility threshold could be a boon for employers of low-wage workers. “The primary advantage is getting a larger number of people off your responsibility list,” says Michael A. Bodack, president of York International Agency, an insurance broker in Harrison, New York. Adds Andrew Greenblatt, cofounder of Benestream, an online service that aims to help businesses to identify and enroll Medicaid-eligible employees: “A larger employer can take a $2 million problem and turn it into a $800,000 problem. That could be a huge deal for hotels, restaurant chains, home-healthcare services.”

Unfortunately, many businesses won’t be able to catch that break. That’s because the Supreme Court, in its June 2013 decision that affirmed the constitutionality of most of the ACA’s major provisions, ruled that states can opt out of the new Medicaid requirements. And it appears that many of them will.

So far, 14 Republican governors have already said no, and at least three more are likely to join them. The issue, they say, is cost. The feds will pick up 100 percent of Medicaid costs of newly eligible adults, but only for two years. In 2017, states will gradually assume a share, leveling off at 10 percent of costs in 2020.

In states where governors opt out of Medicaid expansion [you can see where your state stands here: http://www.advisory.com/Daily-Briefing/2012/11/09/MedicaidMap],

employers could take a double hit—not only will they have to purchase insurance for their low-wage workers, but they could face penalties if that coverage is not up to ACA standards. Under the law’s affordability rule, employees cannot contribute more than 9.5 percent of their W-2 income towards healthcare premiums. Currently, monthly premiums average about $500 a month. As a result, says Bodack, “an employer will be bearing at least $400 a month on a guy making eight bucks an hour. That’s a margin killer for a sandwich shop, a food manufacturer, any kind of widget maker.”

Meanwhile, employers that opt not to offer coverage at all will face a $2,000-per-employee penalty (excluding the first 30 employees). If they offer coverage that doesn’t meet the law’s affordability requirements for even one employee—and if that employee qualifies for a premium tax  credit—they could face a penalty of $3,000 per qualified worker.

In Texas, for example, the state’s refusal to expand Medicaid could cost employers as much as $448 million in “shared responsibility” penalties, according to a recent report by Jackson Hewitt Tax Service. Nationwide, the cost to employers could hit $1 billion. “It’s ironic that governors who call themselves pro-business are declining Medicaid expansion—which will have a huge positive benefit for employers,” says Greenblatt.