Medicaid’s stimulative effect

July 10, 2012

Here's one factor governors may want to weigh as they consider participating in the health law's Medicaid expansion: Study after study has found that federal Medicaid dollars spur economic activity beyond the initial investment.

Researchers find that a dollar of Medicaid spending increases spending both in the health-care sector and in other industries.

"For every dollar that a state spends, federal funding filters through the state economies," says Robin Rudowitz, associate director for the Kaiser Commission on Medicaid and the Uninsured. "That tends to go both into health service vendors as well as other sectors."

Medicaid acts as a stimulus in two ways. First, increased federal spending on health care can, in tough budget times, free up state dollars for other spending. Medicaid spending can also ripple through the private sector, stimulating increased employment that leads to higher household spending.

Rudowitiz recently reviewed 29 state-level studies of Medicaid's stimulative impact. Across the board, she says, "it was pretty consistent that Medicaid spending did generate economic activity."

Much of the research has focused on the recent stimulus law, which increased Medicaid spending by about $88 billion between 2008 and 2010. For those three years, the federal government picked up a larger share of state Medicaid bills, freeing up state dollars to spend on other services.

One recent study found that every $100,000 in stimulus dollars increased employment by 3.8 job years. Each stimulus dollar had a multiplier of 2, meaning that every $1 of Medicaid spending resulted in a $2 increase in gross domestic product.

"We think Medicaid is particularly fungible," says study author Gabriel Chodorow-Reich, a graduate student at the University of California-Berkeley. "If the federal government takes up a larger share of the program, the state can use those dollars in a more effective way."

The vast majority of the employment gains in in Chodorow-Reich's study — 84 percent — were outside of the health-care and government sector. "In health and education, there was a direct effect on hiring," he says. " A large amount of it was also spillover to other sectors."

Chodorow-Reich is cautious in predicting how much his research says about the effect of the Medicaid expansion. Increased insurance coverage could reduce states' spending on uncompensated care, which came in at $10.5 billion in 2008. But if the economy gets stronger, states may not ultimately invest those savings back into other projects.

"States are already less constrained now than they were two years ago," he says. "If all this happens during a period where the money just goes into a rainy day fund, you're not really freeing up additional money for other projects."

Some of that stimulus ultimately finds its way back to the state government. Meghan Millea, an economist at Mississippi State University, studied the stimulative spending of Medicaid spending in her state. She found that the $1.98 billion that Mississippi received in 2002 increased the state's economic output by $2.69 billion.

All of that economic activity increased Mississippi's tax revenue  by $60 million, partially offsetting state's initial investment in the Medicaid program.

"The punchline of this report was that there are very large economic benefits to the state from the federal appropriations we receive," Millea says. "We wanted state legislatures to be aware of the huge impact that their decisions have."

Millea's findings — and other state-level studies — bolster one argument made by some of the health law's supporters: that on balance, the Medicaid expansion could actually save states money. The increased tax revenue is one element of that, alongside reductions in uncompensated care and new Medicaid payments for services such as mental health.

Mississippi, it's worth noting, would see the largest influx of federal dollars through the Medicaid expansion, when measured as a percent of gross state project. Annie Lowrey recently crunched the numbers and found that the expected influx of federal dollars — $9.8 billion between 2014 and 2019 — would be equal to 10 percent of the state's yearly gross state product.

"There are a lot of intangible benefits when you talk about having more money dedicated to the health-care system," Millea says.

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