A Forum on Medicaid and State Budgets: A Summary

By Mattoon, Richard H. | Chicago Fed Letter, May 2007 | Go to article overview

A Forum on Medicaid and State Budgets: A Summary


Mattoon, Richard H., Chicago Fed Letter


When it comes to state budgets, the Medicaid program is almost always the proverbial 800-pound gorilla in the room. On March 15, 2007, the Federal Reserve Bank of Chicago and the Civic Federation co-sponsored a forum to discuss the growing cost of Medicaid and how states are responding.

For almost every state in the U.S., the Medicaid program, which provides health care coverage to 41 million families and 14 million elderly and disabled people, is the largest single budget item. It is often seen as the source of considerable budgetary stress. This forum on Medicaid and state budgets brought together top researchers and government leaders to discuss funding and policy issues as well as best practices.

The first speaker, Robin Rudowitz, principal policy analyst, Kaiser Family Foundation, focused on the evolution of the Medicaid program and the impact of the most recent legislative changes. Each year, the foundation surveys all 50 states to track how they are managing their Medicaid programs and how these programs impact their budgets. Rudowitz noted that Medicaid costs are driven chiefly by elderly and disabled enrollees, who account for 25% of the total enrollees but 70% of the total expenditures. In fact, just 4% of the Medicaid population consumes 48% of all expenditures. Medicaid is the largest single source of federal funds to the states, representing 44% of the total.1 The states' own-source revenue to pay for Medicaid equaled 18% of their general fund spending in 2005.

In 2006, Medicaid spending growth was below state revenue growth for the first year in a decade (see figure 1). Rudowitz suggested three reasons for this: the low rate of growth in enrollment; the enactment of Medicare's Part D prescription drug program, which moved dual eligibles off of Medicaid and onto Medicare for drug coverage; and state cost containment strategies. Although total Medicaid spending growth was held to 2.8% in 2006, the state portion increased by 6.8%.

Rudowitz concluded that Medicaid costs will continue to be driven by increasing health care costs, as well as an increasing pool of the uninsured as employer health care coverage declines. Demographic changes also imply a rising number of aged and disabled people. Another trend fueling Medicaid growth is that states are looking to develop universal health care plans and are using Medicaid as a platform for expanded coverage. Finally, federal policy will play a role, particularly through the new requirements for citizenship documentation to qualify for Medicaid and the current debate in Congress to reauthorize the State Children's Health Insurance Program (SCHIP).

Time for a new approach?

Robert Kaestner, professor of economics, University of Illinois at Chicago, talked about the need for Medicaid and public health insurance to be redesigned. Kaestner noted that public spending is often allocated to provide health insurance coverage rather than to directly improve public health outcomes. This is in spite of the fact that most studies suggest a weak link between health insurance coverage and healthier people. Kaestner also noted that the fiscal burden of providing this coverage will continue to grow fast. In Illinois, Medicaid already accounts for 25% of all income and sales tax revenue and 20% of all state revenue.

A primary goal for any redesign would be to lower the rates of medical utilization by enrollees. In his own research on utilization of medical services based on insurance status, Kaestner has found that publicly insured individuals tend to use more health care than individuals with similar characteristics who are either privately insured or uninsured (figure 2). Given this, he noted that reform has focused on supply side rationing. One method is simply to offer low reimbursement rates for Medicaid providers, although this likely leads to a lower standard of care. A more positive approach is the increased use of mandatory managed care with full risk reimbursement and narrow provider networks. …

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A Forum on Medicaid and State Budgets: A Summary
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