September 26, 1995

September 26, 1995 | FYI on

The Cost to States of Not Reforming Medicaid

(Archived document, may contain errors)

September 26, 1995


William W. Beach Visiting Fellow

"We must, however, continue to express our concerns about mandated Medicaid ex- pansions. States do not have the luxury of operating a budget deficit. Every man- dated dollar that we spend is a real dollar that has to be taken from another program." Governor Bill Clinton of Arkansas, June 7, 1990 While attention recently has focused on the problems of the Medicare system, Congress shortly will try to tackle another health care financial time bomb in the form of Medicaid, the health care program serving the nation's poor. If significant reforms are not enacted, states will face a heavy in- crease in spending and a rise in the proportion of their projected revenues that must be dedicated to Medicaid. And because the rate of growth in state Medicaid spending will exceed the rate for total state spending, states will be forced either to increase taxes or to divert money from other programs. Medicaid is a state-administered program that operates under federal guidelines. Federal and state governments jointly fund the program. Federal reimbursement to the states is based on a statutory formula designed to give a higher matching rate to states with lower per capita incomes. Matching rates for these services range from 50 percent to 83 percent and are adjusted annually. The cost of Medicaid to the federal government has been growing at double-digit rates in recent years. The Congressional Budget Office (CBO) projects that annual federal Medicaid costs will al- most double by 2002. Although the financial impact on the federal government under current law is alarming, the future impact on states could be even more severe: a remorseless growth in the share of their own pro- jected revenues going to Medicaid. States can make some cost-saving reforms in the program, but only subject to federal rules requiring that certain levels of coverage be provided to certain popula- tions.

To examine the probable future budget impact on states, The Heritage Foundation analyzed the likely trend using certain assumptions to forecast the state share of Medicaid payments for the pe- riod 1995 through 2002. First, the Heritage analysis assumes no change in the current Medicaid pro- gram. Hence, the following charts and tables project the future state-level Medicaid burden if Congress does nothing to reform this program. Second, where possible, a state's Medicaid spending trend is adjusted by expected changes in state economic activity, by forecasted changes in the eligi- ble population, and by the trend in federal Medicaid transfers to the state. The forecasts for future state Medicaid spending were prepared jointly by Heritage and by Whar- ton Econometric Forecasting Associates (VVEFA), a nationally known economic consulting firm that maintains detailed models for each state. For 47 states, WEFA found a significant relationship between historical Medicaid spending changes and fluctuations in the state's economic activity and Medicaid-eligible population. In four cases, however, the relationship was sufficiently weak that WEFA simply projected the historical trend in spending; these are identified with an asterisk on Ta- ble 1. This table shows the additional state revenues or program cuts needed if the states are to meet their projected Medicaid expeditures. Annual

Federal Medicaid Costs (billiQns of dollars) Fiscal Years Annual Federal Medicaid Costs 1995 $89,216

1996 99,292

1997 110,021

998 122,060

1999 134,631

2000 146,116

2001 162,600

2002 177,800 7-Year Total 1,041,736 Source: Congressional Budget Office

Highlights Between 1995 and 2002, if no reforms are enacted, states will have to spend $688 billion of their own money on Medicaid. Total state Medicaid spending over this period is projected to be $1,730 billion, of which $1,042 billion will be supplied by the federal government (if CBO's forecasts of federal spending prove correct). The difference between federal and state spending on Medicaid means that states will have to devote an average of 8 percent of their non-federal revenues to the program. Among the hardest hit states, Pennsylvania will have to devote 19 percent of its revenues to the health care program. As Chart 1 shows, the amount of state Medicaid payments alone steadily increases between 1995 and 2002. In 1990, the states spent just $32 billion of their non-federal funds on Medicaid. These un- funded payments are projected by our analysis to grow to $69 billion by 1995 and $104 billion by 2002. In other words, the Medicaid amount paid by the states will have increased by 225 percent over the twelve-year period between 1990 and 2002. Some individual states will be particularly hard hit. For example, California will need to raise $21.5 billion in new revenues or in budget cuts to pay its part of Medicaid growth between 1996 and 2002. Similarly, New York will need to raise $20 billion; Florida, $15.2 billion; Pennsylvania, $13.7 billion; and Texas $8.6 billion. If these states choose to raise taxes to meet their Medicaid ob- ligations, then California will have to increase the average taxpayer's bill by $294 per year; New York, by $427; Florida, by $441; Pennsylvania, by $427; and Texas by $211.

This rapid growth in the state's Medicaid Chart 1 share is reflected in the Medicaid Expenses Paid With State annual percentage Revenues, 1990-2002 change in state-level Medicaid spending as $120 Billions of Dollars compared with total state spending, which in- 100 cludes support of such things as education, so crime control, and trans- 60 portation infrastructure (see Chart 2). The Heri- 40 tage analysis anticipates 1995 state Medicaid 20-1 spending that is growing I at a rate of I I percent, 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 while total state spend- Source: \\AIEFA State Medicaid Forecast September 1995. ing should grow at an 8 percent rate.'This higher rate of change for Medicaid means that states either must raise taxes or must take funds away from other state programs. The forecast suggests that state spending on Medi- caid will continue to keep pace with total spending. Over the forecast period (1995-2002), Medicaid spending is projected to grow at an 8 percent rate. Again, some states will be hit particularly hard. Chart 3 shows those states that are forecasted to have increases in Medicaid spending from their own revenues that are greater than 50 percent.

TechnIcall Assumpdons The Heritage Foundation and Wharton Econometric Forecasting Associates used state models of economic activity to develop state-by-state estimates of Medicaid spending and the additional funds states would need to

Z: raise to meet their fu- Chart2 ture Medicaid obliga- tions. Relationship Between Total Expenditures We assumed no and Medicaid Spending Percentage Change,, 1990 - 2002 change in the current S Medicaid eligibility 35% rules and allowed fed- 30% A eral Medicaid transfers State Medicaid Spending to the states to grow at 25% the rates implied by the 20% history of this program. Total Medicaid pro- 15% Total State Spending\\. grwn spending in each 10% state is a function of 5% that stat''s historical Medicaid expenditures and expected demo- 1990 1 1 1992 1"3 1994 199S 1996 1997 1996 1999 2000 2001 2002 graphic and economic Source: WEFA Trend Forecasts, lu@/ 1995.

About the Author

William W. Beach Director, Center for Data Analysis and Lazof Family Fellow
Center for Data Analysis