Built to Fail: How North Carolina’s Medicaid Expansion Accelerated a Systemic Collapse

Background

Nationwide, the Medicaid program is facing significant challenges.¹ The Medicaid program was originally designed to provide a safety net for the truly needy—such as seniors, individuals with disabilities, and low-income children.² But the program has increasingly shifted away from its purpose.

The Affordable Care Act—more commonly known as ObamaCare—gave states the option to expand to an entirely new class of able-bodied adults.³ Many states chose to adopt expansion, clinging to false hope that was fueled by deceptive projections. As a result, these states are now grappling with surging enrollment and costs, putting their budgets under immense fiscal strain.⁴

North Carolina stood firm against ObamaCare expansion for nearly a decade, resisting the false promises and misleading claims that accompanied it. However, in 2023, the state ultimately gave in, expanding their Medicaid program despite longstanding concerns.⁵

Unfortunately for taxpayers, this has only exacerbated the challenges already plaguing the state’s Medicaid program.

North Carolina’s Medicaid program was in disarray long before expansion

While North Carolina’s decision to adopt ObamaCare expansion has led to disastrous consequences, the state’s Medicaid program had been faltering for years.

In the decade prior to expansion’s implementation, North Carolina’s Medicaid program consumed a devastatingly large share of the state budget, represented as a percentage of total expenditures—exceeding the national average in seven out of 10 years.⁶ This culminated in Medicaid accounting for roughly 34 percent of total state expenditures in 2023—14 percent higher than the national average and the eleventh highest in the country.⁷ By comparison, neighboring states like Georgia, South Carolina, Tennessee, and Virginia reported significantly lower figures, highlighting just how far North Carolina’s Medicaid program had veered off course.⁸

Unfortunately, staggering enrollment strained the already limited state resources. By November 2023—just one month before the implementation of ObamaCare expansion in North Carolina—enrollment sat just shy of three million.^9-10 At that time, roughly one in five North Carolinians were enrolled in the program.¹¹

Making matters worse, the vast majority of able-bodied adults on Medicaid in North Carolina prior to expansion reported no earned income—meaning more than 1.4 million able-bodied adults were not working at all, the highest rate of non-working, able-bodied adults on Medicaid in the country.¹²

These troubling trends were no accident, but reflected the state’s efforts to maximize enrollment, no matter the cost or long-term consequences. For example, during the pandemic, states that accepted enhanced Medicaid funding from the federal government were not allowed to remove enrollees from the program, even if they were ineligible.¹³ As that requirement ended, states were tasked with performing redeterminations to determine program eligibility.¹⁴

However, rather than using this opportunity to restore program integrity, 99.5 percent of North Carolina’s redeterminations were “ex parte” renewals, an approach that automatically renewed coverage using existing information rather than requiring enrollees to confirm eligibility.¹⁵ As a result, hundreds of thousands of potentially ineligible enrollees remained on the Medicaid rolls in the state, further fueling their enrollment surge.

North Carolina’s Medicaid program was already broken long before ObamaCare expansion, and the decision to expand did not fix these longstanding issues. Instead, it poured gasoline on an already raging fire.

ObamaCare expansion took a broken program and made it worse

In states that adopted ObamaCare expansion, shattered projections and busted budgets have become the norm. Initial state-level projections claimed that total enrollment across expansion states would reach a maximum of only 6.5 million able-bodied adults.¹⁶ However, by 2023, there were 23 million able-bodied adults enrolled through ObamaCare expansion—nearly quadrupling state-level projections.¹⁷ In the same year, nationwide expansion costs tallied in at $139 billion—a cost overrun of nearly 180 percent, as states projected costs of less than $50 billion.¹⁸ From 2014 to 2023, total expansion costs exceeded $1 trillion—$574 billion more than expected.¹⁹

Unlike many states that opted into expansion immediately, North Carolina had the opportunity to watch and learn from other states and their ObamaCare expansion experience, and they chose not to. This has resulted in North Carolina facing the same consequences as dozens of other states nationwide.

ObamaCare expansion advocates in North Carolina estimated that 478,000 able-bodied adults could be expected to enroll in the first two years after implementation.²⁰ They also claimed that after that initial two-year period, enrollment would “stabilize,” or even start to decline.²¹ Unsurprisingly, these projections badly missed the mark in North Carolina, just as they have in expansion states across the country.

In December 2024, just one year after implementation, North Carolina’s expansion enrollment had already reached 589,220 able-bodied adults, shattering the state’s two-year projections in just half the time.²² Today, expansion enrollment sits at 669,526 able-bodied adults—an enrollment overrun of nearly 200,000 just a year and a half into ObamaCare expansion.²³ Shockingly, there are nearly 100,000 more expansion adults covered by Medicaid in North Carolina than there are infants and children covered by traditional Medicaid.²⁴

The cost projections touted by expansion advocates were also wildly inaccurate. Advocates initially projected that the first year of implementation would cost taxpayers roughly $2.1 billion.²⁵ However, actual costs in fiscal year 2024 surpassed $3.1 billion, with cost overruns totaling  $1 billion or 47 percent.²⁶ Even more concerning, these excessive costs accumulated in just 10 months, as North Carolina did not implement expansion until December, at the end of the first quarter of fiscal year 2024.^27-28

Estimates for fiscal year 2024 indicate that Medicaid accounted for 40 percent of total state expenditures in North Carolina—four out of every 10 state dollars spent going directly to the program.²⁹ Less than a full year into the state’s expansion experiment, and Medicaid’s share of the budget had already increased by 19 percent.³⁰ This increased Medicaid spending comes at the expense of other state priorities. For example, K-12 education’s share of the budget decreased by 20 percent over the same period, with additional funding pulled from public safety and transportation to cover the rapidly rising costs of Medicaid.³¹

Despite this sharp rise in Medicaid spending, ObamaCare expansion has delivered little relief to North Carolina hospitals.^32-33

Medicaid expansion has left North Carolina’s hospitals worse off

Months after the passage of ObamaCare expansion, Martin General Hospital filed for bankruptcy and permanently closed its doors, leaving the 22,000 residents of Martin County without a local hospital.³⁴ Betsy Johnson Hospital announced the closure of its labor and delivery unit months after the passage of expansion, leaving Harnett County without a maternity facility.³⁵ Mission Health permanently closed the Asheville Specialty Hospital, the last remaining long-term acute care hospital in the western portion of the state.³⁶ Although still operational, Washington Regional Medical Center in northeastern North Carolina has filed for bankruptcy.³⁷

As access to critical care continues to vanish in rural areas, hospital executives have padded their salaries. A 2023 report exposed the excessive compensation practices of the state’s largest non-profit hospital systems. Between 2010 and 2021, the nine largest systems in North Carolina collectively paid their top executives more than $1.75 billion—nearly 20 percent of which went to just a handful of CEOs.³⁸ The report found that hospital executive pay not only continues to rise over time, but in many cases more than doubled in just a few years. Across the nine systems analyzed, executive pay in 2020 alone rose to $77.2 million.³⁹ Total executive pay is likely much higher, as an existing loophole in state law restricts public access to the tax filings of publicly owned hospitals in the state, including Atrium and University of North Carolina (UNC) Health.⁴⁰ The report also excluded the compensation hospital executives received from external sources. For example, UNC Health’s CEO was paid more than $5 million for sitting on the boards of outside organizations conducting business in the state.⁴¹

For more than a decade, expansion advocates have made sweeping promises to entice states to expand their Medicaid programs. But repeatedly, these assurances and guarantees have failed to materialize. In North Carolina, the consequences have been severe, as taxpayers are shouldering the cost as enrollment shatters projections, spending crowds out other priorities, and rural hospitals falter or shutter altogether.

North Carolina’s expansion failures stem from state choices, not the One, Big, Beautiful Bill

The North Carolina Healthcare Association made several false claims about the One, Big, Beautiful Bill, including that some of the provisions would force the state to end its expansion program.⁴² The core issues plaguing the state’s expansion program are not rooted in federal reform, but rather in how North Carolina has chosen to fund, operate, and maintain its program.

North Carolina’s expansion program heavily relies on the provider tax scheme. In short, North Carolina—like many states—taxes health care providers to fund the state’s portion of expansion costs, the state collects the tax revenue from providers, and then uses those funds to pay providers for Medicaid services.⁴³ The return of this money is counted toward the state’s share of Medicaid spending, which entitles states to more federal money.⁴⁴ Providers get what they paid in taxes back in payments, and states draw down more federal funding. 

North Carolina’s dependence on provider taxes creates a fragile funding structure, as they account for roughly 40 percent of total state Medicaid spending.⁴⁵ The state taxes health care providers and then returns those funds through Medicaid reimbursements—with many providers, particularly large hospital systems, receiving more in return than they paid due to the additional federal funding.⁴⁶ The One, Big, Beautiful Bill prohibits states from raising or creating new provider taxes, and North Carolina has a six-year runway to find more stable funding sources for their expansion program before the provider tax cap is eventually lowered to 3.5 percent.⁴⁷

Further complicating the situation is North Carolina’s Healthcare Access and Stabilization Program (HASP) and the way it manages state-directed payments, which are financed by provider taxes. Traditionally, Medicaid reimburses at much lower rates than the commercial rates paid by private insurance.⁴⁸ But under the HASP program, Medicaid reimburses providers at or near commercial rates for services delivered to Medicaid patients.⁴⁹ By trying to entice increased provider participation, the state has drastically inflated Medicaid costs, placing an unnecessary burden on taxpayers. This Medicaid reimbursement structure also incentivizes providers to raise commercial rates for services provided and can lead to prioritizing Medicaid patients over Medicare patients. Medicare reimbursements are lower than commercial rates, but traditionally higher than Medicaid reimbursement rates, which could jeopardize access to care for seniors.^50-51

Another problematic HASP provision requires hospitals to forgive, or donate, past medical debt for Medicaid enrollees or other low-income patients in exchange for enhanced Medicaid funding.⁵² Participating hospitals must forgive or donate any medical debt dating back as far as January 1, 2014.⁵³ Additionally, participating hospitals must offer financial assistance to patients with incomes up to 300 percent of the federal poverty level—$46,950 for an individual and $96,450 for a family of four.⁵⁴ The state also requires participating hospitals to automatically provide patients financial assistance if they are deemed “presumptively eligible” for it.⁵⁵ Taxpayers must foot the bill for more than $4 billion in medical debt by providing hospitals billions in state-directed payments.⁵⁶ This goes well beyond the purpose of state-directed payments, which is to supplement payments to providers.

Although North Carolina’s Medicaid woes are not a result of the One, Big, Beautiful Bill, the North Carolina Healthcare Association promulgated a recent report that falsely claims otherwise. This report excludes any projected savings, stating it does not incorporate any assumed enrollment reductions from other provisions.⁵⁷ The report also claims that Medicaid work requirements would create a heavy administrative burden, but this is simply not true, especially given their close alignment with the food stamp work requirements used by the state.⁵⁸ Additionally, the report fails to acknowledge the increased federal funding available to states for implementing work requirements.⁵⁹ Beyond that, the report highlights North Carolina’s excessive reliance on provider taxes, and the misuse of state-directed payments, underscoring the systemic issues prevalent within the state’s expansion program.

The structure of the state’s expansion program is unstable at best and irresponsible at worst. The eventual lowering of the cap on provider taxes does not necessitate that the state’s expansion program be eliminated altogether, as the state has alternatives. Lawmakers could redefine what qualifies as dedicated state revenue, allocate general fund dollars, or streamline HASP by eliminating high-cost components, such as medical debt forgiveness. States like Alaska, New Mexico, South Dakota, and Virginia minimally rely on provider taxes to finance their expansion programs.⁶⁰

The issues plaguing the state’s expansion program are not rooted in the One, Big, Beautiful Bill, but rather in how North Carolina has chosen to fund and operate its Medicaid program.

The Bottom Line: North Carolina’s Medicaid program was teetering long before expansion and ObamaCare accelerated its collapse.

North Carolina’s Medicaid program was in a state of disarray long before lawmakers caved on ObamaCare expansion. For years, Medicaid has consumed a disproportionately large share of total state spending, diverting resources from other priorities and bleeding taxpayers dry.

Expansion took a broken system and amplified its worst flaws. Enrollment has shattered projections and spending has skyrocketed. Rather than acknowledging internal failures, former Governor Roy Cooper and the North Carolina Healthcare Association have chosen to point fingers, blaming provider tax caps and political opponents. The reality is that North Carolina built its expansion program on a crumbling foundation—this is not a policy failure, it is a collapse by design.

DOWNLOAD PAPER [PDF]