That makes today’s report from the State Budget Crisis Task Force incredibly timely. The report takes a deep dive into the finances of Medicaid and what they mean for state budgets. It has some great charts that show how Medicaid’s costs are rising, where that might edge out other programs and why states keep participating.
No surprise here: Medicaid is getting more expensive. Ever since it launched in 1965, Medicaid costs have grown faster than the rest of the economy. Here’s a look at the overall Medicaid budget–including both state and federal spending–mapped against the annual growth rates for national health expenditures.
Medicaid costs usually grow faster than state tax revenue. Over the past decade, Medicaid costs have grown at an average rate of 7.2 percent annually. State tax revenues, meanwhile, have grown much slower, increasing by 3.9 percent each year. Looking even further back, Medicaid costs generally tend to grow faster than state tax revenues:
This is another element of how Medicaid challenges budgets: Its costs are growing quickly. If the trends of the past decade continue, the gap between growth of state tax revenue and Medicaid costs will grow by $23 billion over the next five years.
Spending growth has primarily been driven by higher enrollment. Health care costs do tend to grow faster than the rest of the economy. But the biggest driver of Medicaid spending is not the cost of medical care. Its caseload, which has spiked in the last two recessions. Persistent, long-term unemployment meant “the increases in Medicaid spending were greater than in previous recessions.”
Medicaid is a big cost for states, but it’s also a huge source of federal funding. Medicaid is by far the federal government’s biggest spend in grants to states. In 2012, federal spending on Medicaid and CHIP added up to $265 billion – about 45 percent of all federal grants to states.
This helps explain why Medicaid is so difficult for states to cut, even as it eats up a growing chunk of their budgets. It’s also responsible for drawing down a huge amount of federal funding. States have to essentially spend Medicaid dollars to get Medicaid dollars.
States have to make trade-offs between Medicaid spending and other budget items, such as education. Numerous studies have found that when Medicaid spending goes up, spending on education goes down (here’s one from Thomas Kane, Peter Orszag and David Gunter looking at trade-offs between the entitlement program and higher education). That’s a phenomenon that looks to have been occurring across states, as enhanced stimulus funding for Medicaid dropped off in 2010:
How can states make Medicaid more affordable? They have mostly attempted to do so by freezing or cutting how much the program pays health care providers. Those changes usually need a sign off from the federal government, and often run into obstacles from the health provider groups who would be taking a pay cut.
Others have looked to have private insurance companies run their programs, with the thinking they know how to better coordinate and manage care, although savings have proved elusive. No state has, so far, cracked the Medicaid cost code, although plenty are trying to do so.