(Archived document, may contain errors)

December 18,1995

UPDATED ESTIMATES OF THE COSTS TO THE STATES OF NOT REFORMING MEDICAID AND THE ADDITIONAL COSTS OF ADOPTING PER CAPITA CAPS

William W. Beach Visiting Fellow in Tax Analysis

The Congressional Budget Office revised its seven-year projections of federal Medicaid outlays on December 12, 1995. CBO made these revisions in order to reflect how the effect of lower fore- casted inflation will reduce the federal government's Medicaid obligations. These lower inflation numbers also reduce the additional revenues the states must find over the next seven years (1996 through 2002) in order to meet their Medicaid obligations. The accompanying table shows The Heri- tage Foundation's revised estimates of these additional state Medicaid obligations. I 0 If no changes are made to current law, the states and the District of Columbia probably will need to raise taxes or cut other spending by $146 billion over seven years in order to meet their mandated obligations. This estimate is $27.8 billion less than the earlier Heritage estimate of $174.2 billion. 0 If the Congress and the Administration adopt the "per capita cap" proposal advanced by a group of moderate Democrats, the preliminary Heritage analysis indicates that states may need to raise an additional $47.4 billion in new revenues or spending cuts on top of the $146 bil- lion increase. 0 The total cost to the states of the current law plus "reforms" made on a per capita cap basis is likely to be $193.8 billion. The projections of additional state obligations under current law were prepared jointly by Heri- tage and Wharton Econometric Forecasting Associates, a nationally known economic consulting firm that maintains detailed models for each state. In these state-by-state Medicaid models, total Medicaid program spending is a function of that state's historical Medicaid expenditures and ex- pected demographic and economic change. The baseline models were then adjusted to reflect CBO's forecasts of federal Medicaid outlays. Heritage's estimates of additional per capita cap costs are preliminary results of adaptations made to the baseline state models.