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1 Center for American Progress | A Win-Win for Working Families and the Delaware Budget

A Win-Win for Working Families and


the Delaware Budget
Osetting Medicaid Costs by Increasing the Minimum Wage
By Rachel West August 27, 2014
Te historically low and declining purchasing power of the federal minimum wage has
led many state and local governments to raise minimum wages in their own jurisdictions
and to index wage rates to the cost of living. In Delaware, policymakers can use a mini-
mum-wage increase to simultaneously boost the incomes of low-wage working families
and reduce the states Medicaid costs. Tis issue brief leverages fndings of forthcoming
economic research from the Center for American Progress to estimate the extent to
which alternative minimum-wage policies could lower Delawares Medicaid costs.
Delaware and the minimum wage
Te primary objective of minimum-wage policy is to ensure a decent standard of living
for low-wage workers and to promote upward mobility among these workers and their
families. An extensive body of research examines the efects of minimum-wage changes
on earnings and employment among low-income workers. Recent economic studies
have shown that higher minimum wages lead to increased earnings and reduced poverty
among working families and have no negative efects on employment.
1

On June 1, Delaware increased its minimum wage to $7.75 per hour; the wage had been
fxed at the federal minimum level of $7.25 since 2010. A further increaseto $8.25 per
houris scheduled to take place next summer. Although these changes are steps in the
right direction, they are small, and a greater minimum-wage increase would have even
greater positive implications for Delawares working familiesand for the states budget.
In addition to afecting working families and businesses, minimum-wage policy also
afects taxpayer spending on public assistance programs. At todays low minimum-wage
rates, many low-wage employees are eligible for health, nutrition, and income-assistance
programs fnanced by state and federal governmentseven though many of them work
2 Center for American Progress | A Win-Win for Working Families and the Delaware Budget
full time, year round. For example, a Delaware worker who receives the minimum wage
would earn about $16,120 per year before taxes. If that worker were a single parent with
one young child, he or she would earn only slightly more the federal poverty level, or FPL.
In 2014, the FPL was $15,730 for a family of two. A single parent with two dependent
children would be $3,000 below the FPL. At such low pay rates, many families qualify for
taxpayer-fnanced public assistance programs such as Medicaid and the Supplemental
Nutrition Assistance Program, also known as SNAP and formerly known as the Food
Stamp Program.
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It goes without saying that when working families are pooror are at risk of falling into
povertythe support that such public programs provide is crucial. Nonetheless, Medicaid
expenditures represent a substantial cost to cash-strapped state governments. Raising
the incomes of low-wage workers by increasing the minimum wage is a win-win policy
decisionan opportunity to simultaneously increase the economic well-being of working
families and to relieve the strain on state budgets.
Delawares Medicaid program
Medicaid, which provides disadvantaged and low-income individuals access to health care
services, accounted for $415 billion in government spending in 2012the equivalent
of nearly 2.6 percent of the nations gross domestic product.
3
Te federal government
and the states jointly fund the program. In recent years, Delaware has received a Federal
Matching Assistance Percentage, or FMAP, of 54 percent, leaving the state responsible
for 46 percent of its Medicaid costs.
4
In 2012, Delaware spent about 16 percent of its
budget, or $705 million, on its Medicaid program.
5
Prior to January, Medicaid in Delaware was available only to select groups of low-income
individuals and families. Tese included certain individuals who were eligible under federal
mandate, termed categorically needy.
6
Delaware had also extended Medicaid coverage
beyond the federal requirements to other low-income individuals. Income thresholds,
measured relative to the federal poverty level, governed these populations eligibility.
7

Under the Afordable Care Act, or ACA, Delaware and 25 other states expanded their
Medicaid programs, efectively extending coverage to all individuals and families with
incomes under 138 percent of the FPL.
8
Importantly, funding for those who have become
newly eligible by virtue of the Medicaid expansion difers from funding for traditional
enrolleesthose eligible for Medicaid under the pre-ACA guidelines. Te federal
government will pay the full cost of coverage for newly eligible populations until the end
of 2016 and the lions share thereafer.
9
As noted above, Delaware remains responsible
for 46 percent of the care costs for its traditional Medicaid enrollees.
3 Center for American Progress | A Win-Win for Working Families and the Delaware Budget
Using the minimum wage to offset Medicaid costs
Delawares policymakers can leverage the minimum wage to ofset part of the cost of
Medicaid expansion. For most Medicaid recipients, eligibility for Delawares traditional
Medicaid program was directly determined by income. Tus, to the extent that the
minimum wage afects the family income of Medicaid participants, eligibility for Delawares
traditional program should respond when the states minimum wage changes. Under
Delawares Medicaid expansion, if a minimum-wage increase lifs some families income
above the traditional Medicaid income thresholdshifing them into the newly eligible
income rangethe large majority of their health care costs will be shifed to the federal
government. For this reason, a minimum-wage increase would simultaneously improve
working families well-being by increasing income and would relieve the state of most of
the direct cost of health coverage while sustaining these families access to health care.
How sensitive will expenditures on Delawares traditional Medicaid program be to changes
in the states minimum wage? A forthcoming study from Rachel West and Michael Reich
examines the empirical relationship between Medicaid and the minimum wage using
15 years of historical data from the Annual Social and Economic Supplement of the
Current Population Surveyofen referred to as the March CPS.
10
By taking advantage
of variation in binding state and federal minimum-wage changes from 1998 to 2012
and by controlling for state-level conditions such as unemployment rates, employment-to-
population ratios, and median family-income levelsthe study develops an econometric
model for anticipating the change in Medicaid enrollment that would result from a given
minimum-wage increase. Te fndings suggest that, when all other factors are held
constant, a 10 percent increase in the minimum wage leads to a 0.3 percentage-point
reduction in the Medicaid enrollment rate of non-elderly families.
One can thus estimate the number of families who would be shifed from traditional
Medicaid to the newly eligible categorythat is, from partially state-fnanced care to
primarily federally fnanced careif various minimum-wage levels were implemented
starting in 2015. Tis method presumes that minimum-wage policy primarily afects
those who are of working age and not disabled. Non-disabled, non-elderly individuals
represent about 88 percent of enrollees in Delawares traditional Medicaid program,
accounting for 43.7 percent of its cost in 2012.
11
For the purposes of the analysis
below, families in which at least one non-disabled, non-elderly member participates in
Medicaid at any time during the year are counted as enrolled.
As Table 1 shows, increasing the minimum wage to $10 per hour from the current $7.75
would shif 3 percent of non-disabled, non-elderly participating families from traditional
state-fnanced Medicaid to predominately federally fnanced care. By contrast, an increase
to $15 per hour would shif nearly 9,200 families. Tis represents 7.9 percent of the
non-disabled, non-elderly families enrolled in Delaware in 2012.
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4 Center for American Progress | A Win-Win for Working Families and the Delaware Budget
Table 1 also displays the single-year savings to Delaware taxpayers from reduced Medicaid
enrollment. Savings were calculated by applying the average cost to the state for each
family with at least one non-disabled, non-elderly Medicaid participant. Average annual
expenditures are about $5,952 for each family, of which Delaware is directly responsible
for $2,738. Assuming that Delawares FMAP remains at 46 percent, the states share of
the Medicaid cost reduction from a $10 minimum wage would be about $9.6 million
dollars. A $15 per hour minimum wage would result in a $25 million cost reduction
a decrease of 3.4 percent in Delawares overall Medicaid spending. If the minimum wage
were indexed to infation following the initial wage change, Delaware would incur roughly
the same amount of savings in each subsequent year, since the FPLand therefore the
income thresholds for traditional Medicaidis also tied to the infation rate.
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TABLE 1
Single-year changes to Delaware Medicaid under
alternative minimum-wage scenarios
Minimum wage
Enrollment
a

(non-disabled, non-elderly families)
State expenditures
b,c

(in millions of 2014 dollars)
Predicted Change
Percent
change Predicted Change
Percent
change
Recent level, 2012 116,954 $727.5
$10.00 113,408 -3,546 -3.0% $717.9 -$9.65 -1.3%
$11.00 112,082 -4,872 -4.2% $714.3 -$13.25 -1.8%
$12.00 110,872 -6,082 -5.2% $711.0 -$16.55 -2.3%
$13.00 109,758 -7,196 -6.2% $708.0 -$19.58 -2.7%
$14.00 108,728 -8,227 -7.0% $705.1 -$22.38 -3.1%
$15.00 107,768 -9,186 -7.9% $702.5 -$24.99 -3.4%
Note: Methodological details described in Rachel West and Michael Reich, A Win-Win for Working Families and State Budgets: Paying for Medicaid
Expansion with a $10.10 Minimum Wage (Washington: Center for American Progress, forthcoming 2014). Estimates refect a minimum-wage change
implemented at the start of 2015.
a. Enrollment measures the number of families with at least one non-elderly and non-disabled member participating in Medicaid at any time during
the calendar year.
b. Calculations assume that average Medicaid spending per non-elderly and non-disabled enrollee remains the same before and after the
minimum-wage change.
c. State expenditure reductions include only the share of costs paid by the state: 46 percent. The federally funded share of costs, 54 percent, is not shown.
Source: Authors calculations based on the Bureau of the Census, Current Population Survey, Annual Social and Economic Supplement, (19982012),
available at www.census.gov/hhes/www/poverty/publications/pubs-cps.html; Kaiser Family Foundation, State Health Facts: Federal and State Share of
Medicaid Spending (2012), available at kf.org/medicaid/state-indicator/federalstate-share-of-spending; and West and Reich, A Win-Win for Working
Families and State Budgets.
For three reasons, the estimates above likely understate the efect of a minimum-wage
increase on Delawares Medicaid expenditures. First, these calculations draw upon baseline
enrollment and expenditure information from 2012.
14
Expenditure data are adjusted
for infation between 2012 and 2014 but do not account for any further increases in
per-participant costs that may have occurred between 2012 and today. If real Medicaid
costs are higher than they were in 2012 afer accounting for infationor if traditional
program enrollment is greaterthen the state savings associated with any particular
minimum-wage increase will also be greater.
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5 Center for American Progress | A Win-Win for Working Families and the Delaware Budget
Second, the methods used in the forthcoming study only permit estimation for Medicaid
participants who would be shifed across the income threshold for traditional Medicaid.
Minimum-wage policy could also be expected to afect the earnings of some families whose
incomes are close to the current Medicaid eligibility threshold138 percent of the FPL.
Families who experience income increases that cause them to exceed this threshold will
lose Medicaid coverage. In the Medicaid expansion era, however, they will be eligible for
federal subsidies to purchase health insurance from the state health care exchanges. Because
these families are likely to fall into the newly eligible category prior to a minimum-wage
increaseand thus to have their Medicaid expenses primarily paid for by the federal
governmentthis will have no direct impact on Delawares budget before 2017. However,
afer 2017, when Delaware assumes a small share of Medicaid expansion costs, there will
be a small additional savings to the state associated with these families.
Finally, the recent surge of Medicaid enrollment has not been limited to newly eligible
individuals and families. Media coverage and outreach eforts surrounding the ACA
as well as the new legal requirement to carry insurance, the so-called individual mandate
have resulted in additional enrollments among those who were eligible under previous
Medicaid guidelines. Te health care community terms this increase the woodwork efect,
referring to individuals and families who come out of the woodwork to participate in a
program for which they were already eligible.
16
Although policymakers anticipated the
woodwork efect, its size and associated costs have exceeded expectations in many states.
17

Data from 2012, the most recent available, do not capture woodworkers. Like previously
enrolled families, however, a share of woodworkers would also be shifed from traditional
Medicaid to coverage under the Medicaid expansion, or from Medicaid eligibility to
subsidy eligibility. For all three of these reasons, the estimates above represent a lower
bound on the anticipated savings to the state.
While the chief goal of minimum-wage policy is to ensure a decent standard of living for
working families, raising Delawares minimum wage can also contribute to other state
goals. In particular, the potential of minimum-wage policy to reduce Delawares Medicaid
costswhile increasing earnings and preserving health care coverage for the states
lowest-paid workersshould be of great interest to fscally responsible policymakers.
Rachel West isa Senior Policy Analyst with the Poverty to Prosperity Program at the Center
for American Progress.
6 Center for American Progress | A Win-Win for Working Families and the Delaware Budget
Endnotes
1 For more information on earning and employment efects, see
Sylvia Allegretto and others, Credible Research Designs for
Minimum Wage Studies,Working Paper 148-13 (University
of California, Berkeley, Institute for Research on Labor and
Employment, 2013), available at http://www.irle.berkeley.edu/
workingpapers/148-13.pdf. For more information on the
efect of the minimum wage on poverty, see Arindrajit Dube,
Minimum Wages and the Distribution of Family Income
(unpublished, 2013), available at dl.dropboxusercontent.com/
u/15038936/Dube_MinimumWagesFamilyIncomes.pdf.
2 U.S. Department of Health and Human Services, 2014
Poverty Guidelines, available at http://aspe.hhs.gov/
poverty/14poverty.cfm (last accessed August 2014).
3 The Henry J. Kaiser Family Foundation, State Health Facts:
Federal and State Share of Medicaid Spending, available at
kf.org/medicaid/state-indicator/federalstate-share-of-
spending (last accessed August 2014).
4 Ibid.; National Association of State Budget Ofcers, State
Expenditure Report: Examining Fiscal 20112013 State
Spending (2013), available at http://www.nasbo.org/sites/
default/fles/State%20Expenditure%20Report.pdf.
5 Ibid.
6 As of 2012, categorically eligible groups included certain SSI
recipients, low-income pregnant women and their infants,
children in low-income families, select Medicare benefciaries,
and families with children who met the requirements of
certain other public assistance programs.
7 Working parents who have dependent children and incomes
less than 120 percent of the FPL qualifed for traditional
Medicaid in Delaware; jobless parents were eligible if their
income was less than 100 percent of the FPL. Unlike most
other states, Delaware also ofered Medicaid to low-income
childless adults, with eligibility capped at 110 percent and 100
percent of the FPL for the working and jobless, respectively.
8 The Henry J. Kaiser Family Foundation, State Health Facts:
Status of State Action on the Medicaid Expansion Decision,
available at http://kf.org/medicaid/state-indicator/
state-activity-around-expanding-medicaid-under-the-
afordable-care-act (last accessed August 2014).
9 The federal governments share of Medicaid expansion costs
will decrease between 2017 and 2020, but states will never
be responsible for more than 10 percent of the direct costs
from expansion.
10 Rachel West and Michael Reich, A Win-Win for Working
Families and State Budgets: Paying for Medicaid Expansion
with a $10.10 Minimum Wage (Washington: Center for
American Progress, forthcoming 2014).
11 The Henry J. Kaiser Family Foundation, Medicaid per Enrollee
Spending: Variation across States, available at http://kf.org/
report-section/medicaid-per-enrollee-spending-variation-
across-states-appendices-8550/ (last accessed August 2014).
12 Ibid.
13 Authors calculations based on the Bureau of the Census,
Current Population Survey, Annual Social and Economic
Supplement(19982012), available at www.census.gov/
hhes/www/poverty/publications/pubs-cps.html.
14 West and Reich, A Win-Win for Working Families and
State Budgets.
15 Preliminary evidence indicates that health care costs have
slowed in recent years. The White House Council of Economic
Advisers reports that between 2010 and 2013, health care
costs grew at just 1.3 percent per year, which is close to the
rate of infation. Thus, infation-adjusted 2012 expenditure
data may provide an appropriate approximation of per-family
Medicaid costs in 2014. See White House Council of Economic
Advisers, Trends in Health Care Cost Growth and the Role of
the Afordable Care Act (Executive Ofce of the President,
2013), available at http://www.whitehouse.gov/sites/default/
fles/docs/healthcostreport_fnal_noembargo_v2.pdf.
16 Benjamin D. Sommers and Arnold Epstein, Why States Are
So Mifed about MedicaidEconomics, Politics, and the
Woodwork Efect, New England Journal of Medicine 365
(2011): 100102, available at http://www.nejm.org/doi/
full/10.1056/NEJMp1104948.
17 Ibid. The woodwork efect is not confned to states that
expanded Medicaid: The Center for Medicare and Medicaid
Services reports that enrollment jumped in states that did
not expand Medicaid under the ACA. See Center for
Medicare and Medicaid Services, Medicaid & CHIP: June 2014
Monthly Applications, Eligibility Determinations and
Enrollment Report (U.S. Department of Health and Human
Services, 2014), available at http://medicaid.gov/
AfordableCareAct/Medicaid-Moving-Forward-2014/
Downloads/June-2014-Enrollment-Report.pdf.