Medicaid, State Finances, and the Bottom Line for Businesses: Business Burdens Are Likely to Increase despite Efforts to Control Costs

By Rossiter, Louis F.; Neice Randy F. | Business Economics, July 2006 | Go to article overview

Medicaid, State Finances, and the Bottom Line for Businesses: Business Burdens Are Likely to Increase despite Efforts to Control Costs


Rossiter, Louis F., Neice Randy F., Business Economics


Current Medicaid expenditures account for about nine percent of the federal budget and almost a quarter of state budgets and are growing rapidly. State Medicaid budgets are especially vulnerable to recession since states cannot incur large and sustained fiscal deficits. Without change, Medicaid burdens will cause state finances to be diverted from infrastructure and education, with negative effects on the costs and productivity of business. Also affecting business are the state governments experimenting with policies that shift Medicaid burdens to private employers. Simultaneously, the states are initiating efforts to ease Medicaid's relentless cost increases and address its long-run problems.

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Any way you measure it--covered lives, dollars spent, or historical spending growth rates--Medicaid is huge and important to the U.S. healthcare system (Bond, 2003). The only coverage for most low-income adults and children, Medicaid pays nationally for one out of five children, 37 percent of births (as many as 55 percent of births in some states), and two-thirds of nursing home residents (Kaiser Family Foundation, 2006). Only Medicare, with its new prescription drug coverage for the elderly and disabled, will soon spend more than Medicaid (Borger et al., 2006).

The growth of Medicaid spending is receiving attention from policy makers on behalf of the state and federal taxpayers who share in the costs of the program. While the federal government struggles with Medicaid's costs, the states struggle even more. Medicaid now eats up nearly a quarter of state budgets, so Medicaid matters a lot to state fiscal officers. By contrast, Medicaid makes up only about nine percent of the total federal outlays (Office of Management and Budget, 2006). This percentage will gradually move upward over the next two decades, but will probably not rise any higher than 15 percent of the federal budget. Because the states are closer to the practical and political realities of the local health care delivery system, they are forced to deal more acutely with cuts or expansions to the rolls and to benefits. The paths that they take will affect business through taxes on firms and their customers and through initiatives to shift Medicaid expenditures to employers.

The purpose of this paper is to examine the recent path of Medicaid toward expenditures, the prospects for state budget deficits driven by rising Medicaid spending in any future recessions, and the cost-shifting implications for employers.

The Recent Record on Spending

Private expenditures on health services have increased by seven percent per year on a consistent basis since at least the early 1990s. Yet expenditures for Medicaid from public sources have outpaced that growth every year (Table 1). For example, state Medicaid spending increased ten percent in 2004 and 11.8 percent in 2005 (versus 7.6 percent and 6.9 percent growth for spending from private funds). Even in the earlier period, 1970-1993, Medicaid spending growth was double digit and exceeded that of Medicare or private payers.

The actuaries at the Centers for Medicare and Medicaid Services (CMS), who made the projections in Table 1, foresee lower Medicaid spending growth rates in coming years (8.9 percent in 2010 and 8.3 percent in 2015). Yet these rates are higher than those forecast for Medicare and for private insurance. Even this rosier scenario puts the states on a continued path of Medicaid spending growth.

Figure 1 shows that CMS actuaries forecast a slight shift away from private sources toward public sources for health services, but still not veering very far from the 50 percent mark. All the while, health services are projected to consume almost 20 percent of gross domestic product in 2015.

What about recessions?

The possibility of recessions adds uncertainty to these projections. During recessions, tax revenues decline while Medicaid rolls swell with people who lose their jobs or are newly eligible due to reduced income.

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Medicaid, State Finances, and the Bottom Line for Businesses: Business Burdens Are Likely to Increase despite Efforts to Control Costs
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