RD453 - Estimating the Impact of Virginia’s Increasing Minimum Wage on Medicaid Costs – June 30, 2021

Executive Summary:

In 2020, the Virginia General Assembly passed and the Governor approved legislation to increase the Commonwealth’s minimum wage in a series of steps until reaching $15 per hour in 2026. The substantial increase in the minimum wage will improve the financial circumstances of lower-wage workers across the Commonwealth, including healthcare workers providing essential services to Medicaid enrollees. Recognizing that higher wages will increase Medicaid providers’ costs, the Assembly directed the Department of Medical Assistance Services (DMAS) to study the potential impacts. DMAS contracted with the Burns & Associates division of Health Management Associates (HMA-Burns) to assist with the study.

This study included several key topics:

Researching the impacts of an increasing minimum wage. In addition to the obvious impacts on the wages of lower-income workers, this research also considered other impacts to these workers, such as access to health insurance, as well as larger societal benefits such as improved public health and reduced reliance on public benefits.

Quantifying the impact of a rising minimum wage on current wages. Research has consistently found that an increasing minimum wage does not only affect those workers earning the minimum wage. There are also ‘spillover’ effects as the wages of lower-income workers earning above the minimum wage are increased to remain competitive.

Projecting the costs of Virginia’s rising minimum wage. This analysis considered increased costs both by provider type and for the Medicaid program in total.

Virginia’s Medicaid program covers a wide range of healthcare services such as in-home personal assistance, inpatient and outpatient hospitalization, office-based physician services, community-based behavioral healthcare, nursing facilities and other residential care, and prescription drugs. Services are delivered through a diverse network of thousands of providers that range from large hospital systems to independent practitioners. The impact of the increasing minimum wage will vary by provider type based on the extent to which a provider relies on lower-wage workers. For example, the additional expense will be significant for a personal assistance provider where most caregivers earn low wages, but the cost will be modest for a therapy practice where most employees are highly paid.

To accommodate the diversity of providers, the study separately analyzed the impact for different types of providers. Information was collected through a provider survey and supplemented by other available data, such as cost reports or published wage data.

Figure 1 (see page 2 of the report) presents the results of this analysis, reporting the total estimated increase to providers’ costs for each scheduled minimum wage increase.

The table demonstrates the large variation in projected impacts based on provider type, ranging from less than five percent for physician practices, hospitals, and several other provider types to more than 40 percent for personal care and home health aide services. Based on current spending levels, Medicaid providers’ costs are projected to increase by more than $740 million annually once the minimum wage reaches $15 per hour. In addition to differences in the size of the estimated cost increase, provider groups vary in several other ways that should be considered when determining whether and how to adjust provider rates, including a provider group’s reliance on Medicaid funding (i.e., do providers have access to other revenues) and current policies related to payments (i.e., are rates tied to other benchmarks and/or do providers receive supplemental payments).