The Corner

The Medicaid Spending Explosion

This chart looks at the rapid rate at which Medicaid spending is growing according to the Congressional Budget Office’s (CBO) long-term projections.

Under the CBO alternative scenario, spending on Medicaid is projected to grow from roughly 3 percent of GDP today to about 5 percent of GDP 25 years from now. That increase is equivalent to about $848 billion in real 2010 dollars. Medicaid is now the single largest item in state budgets (constituting around 21 percent) and in most states, it has doubled as a share of state spending over the past few decades. If this spending trend persists, by 2080 Medicaid spending will be $4.3 trillion in real dollars — projected to be nearly 7 percent of GDP in 2080.

As Matt Mitchell at the Mercatus Center explained in this piece a few month ago, the main driver of the explosion in Medicaid spending is dramatically expanded eligibility:

From 2000 to 2007, the rate of Medicaid enrollment grew four times as fast as the general population. Once the recession hit, enrollment growth jumped to 8.5 percent in fiscal year 2010.

Enrollment is up because many have lost their jobs or have had their incomes cut. But enrollment is also up because states have expanded eligibility. Before the recession began, from 2000 to 2008, 24 states expanded their Medicaid eligibility requirements. According to researchers at the Urban Institute, “higher-income parents and childless adults have been the two major expansion groups.”

Of course, the underlying variable in that trend is the funding formula:

The program’s funding formula encourages this: Medicaid is financed by a federal matching grant. This means that for each dollar a state adds to its Medicaid budget, the federal government will kick in from 1 to 3 additional dollars. This gives states an incentive to expand beyond the point where additional costs begin to exceed benefits.

With this incentive structure, it is expected that many states will continue to expand eligibility for Medicaid. Why not spend more money, when most of the cost is paid for by the federal government? These states, predictably, are not the most fiscally sound states. Interestingly, other “more successful” states are thinking of opting out of Medicaid altogether because the formula used to determine funding is actually punishing them. Here is a comment from a reader from a few months ago:

Here in Texas, we considered opting out of Medicaid altogether because our success in the down economy means we’ll be getting $1B less to fund Medicaid. In the middle of our projected $18B budget shortfall for 2011-2012, Texas will also have to increase its share of the Medicaid burden from 30% to 40% because median incomes went up! As Texas continues to succeed, we’ll have to shoulder more and more of the burden ourselves and it simply won’t be sustainable without constricting eligibility (unpossible without Federal agreement).

Fiscally, Medicaid is a tar pit the states may never be able to escape from.

Here is the Washington Examiner’s David Freddoso on the issue and what states can do about it.

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