Notion of Medicaid cost crisis disputed
Notion of Medicaid cost crisis disputed
A new study of Medicaid future funding requirements by the Kaiser Commission on Medicaid and the Uninsured projects a less dire situation than often suggested by conventional wisdom. Published in the Feb. 21, 2007, web-exclusive edition of Health Affairs, the study by Richard Kronick, of the University of California, San Diego, and David Rousseau of the Kaiser Commission on Medicaid and the Uninsured, concluded that expected growth in government revenues is likely to be large enough to sustain Medicaid spending increases over the next 40 years while allowing substantial real growth in spending for other government services.
The authors say there has been no careful look at long-term Medicaid spending and the availability of government revenues to support it comparable to the annual examination of Medicare's financial status in the Medicare trustees' report. Mr. Kronick and Mr. Rousseau say their analysis fills that gap by providing a detailed forecast, based on historical trends, of projected spending over the next 40 years, 2005-2045, for Medicaid as currently structured and comparing projected Medicaid spending to projected overall health spending and federal and state revenue growth.
"Even under pessimistic assumptions, the study provides a new perspective on Medicaid's future financing," Mr. Kronick says. "While a substantial component of state government spending, Medicaid is not likely to be the financial burden squeezing out other public priorities that some policy-makers fear."
After accounting for demographic and health coverage trends such as an aging population and declines in employer-sponsored insurance, the study found that Medicaid's share of national health expenditures is expected to remain at an average 16.6% from 2005 to 2025 and slowly rise to 19% by 2045. However, as overall health spending increases as a share of gross domestic product from 2005 to 2045, there will be a commensurate increase in the share of gross domestic product (GDP) represented by Medicaid spending, according to the study. Thus, the authors said, "there is little that is special about Medicaid spending: It is likely to increase with health spending more generally, neither much more quickly nor much more slowly."
Surprising findings
In an interview recorded for the Kaiser Family Foundation, Mr. Kronick says he was surprised to run the numbers and not find that Medicaid spending would continue to increase as a share of health spending as it has over the last 10 years. "The projection of relatively flat spending as a share of national health spending was somewhat of a surprise," he said.
Kaiser Commission on Medicaid and the Uninsured executive director Diane Rowland said Medicaid, which covers 55 million people as an integral part of the nation's health care system, "experiences the strains and pressures of the overall health system. This first-of-its-kind study of Medicaid makes it clear that the growth over the next 40 years in Medicaid spending will largely be driven by the growth of health spending as a share of the economy. If there is a culprit in the room, it is not Medicaid but ever-rising health costs that threaten future sustainability. Efforts to reduce the growth in Medicaid without shifting costs or threatening coverage will ultimately require better controlling the rate of growth of health spending overall."
The study projects that as overall health spending grows in the next 40 years, Medicaid also will grow, but will stay at roughly the same share of national health spending in the coming decades due to three factors:
1. Although many adults are expected to lose employer coverage, few of them are eligible for Medicaid under current rules, and although more children are expected to enroll in Medicaid, the program's low per-capita spending for children limits the impact of that higher enrollment.
2. The increase in the number of Medicaid disabled enrollees drove growth in the program's spending historically, but growth in this population has slowed in the past decade and is projected to remain slow over the next 25 years.
3.The projections assume that nursing home and home health prices will grow roughly at the rate of growth of wages (which grow far slower than health care spending), meaning that while elderly people will need long-term care, Medicaid long-term care spending as a share of overall health spending is not likely to increase significantly.
Revenue growth analysis
Mr. Kronick and Mr. Rousseau say that if Medicaid spending and state and federal revenue growth continue to follow long-term historical trends, then state revenues available for non-Medicaid public priorities are projected to grow at an inflation-adjusted 2.5% per year through 2025, roughly the projected rate of inflation-adjusted (GDP) growth. And even in a scenario in which state revenues do not increase as a share of GDP and state Medicaid spending grows more quickly, state revenues for non-Medicaid services still would increase through 2025. Spending pressures will be somewhat greater in the two decades following 2026, but under all but the most pessimistic scenarios, states still can expect substantial revenue growth for services other than Medicaid.
"While some states in some years will no doubt experience significant fiscal strain due to Medicaid spending growth, particularly during periods of recession, the long-range scenario for Medicaid's impact on state revenues is not calamitous," Mr. Rousseau said. And the study shows a similar picture for federal revenues, with growth in revenues for non-Medicaid services averaging an inflation-adjusted 2.3% annually from 2006 to 2025, slightly lower than the inflation-adjusted 2.5% if Medicaid spending had remained constant as a share of GDP for the period.
Mr. Kronick and Mr. Rousseau report that state revenues raised from sources within the state, excluding intergovernmental transfers, increased steadily from 6.4% of GDP in 1977 to 7.4% in 2000. The recession and dot.com bust of 2000 resulted in a sharp break from the 1997-2000 trend line, they say, reducing state revenues to 7% of GDP in 2003. State tax revenues rebounded in 2004 and 2005 and reached some 7.3% of GDP in 2005.
The authors say their analysis of the pattern of state revenue growth from 1997 to 2005 leads them to expect that state revenues will continue to grow modestly as a share of GDP from 2005 to 2045. If they continue their historical pattern of growth, they say, they will grow from 7.3% of GDP in 2005 to 8.9% in 2045, an average real growth rate of 2.8% per year from 2006 to 2025 and 2.5% from 2026 to 2045. If, alternatively, state revenues stay constant at 7.3% of GDP from 2006 to 2045, then real state revenues will grow at the rate of real GDP growth, estimated to be 2.3% per year from 2006 to 2025 and 2.0% from 2026 to 2045.
"Even assuming that Medicaid spending grows as a share of GDP, real state revenues for services other than Medicaid are projected to grow as well, although the level of growth depends on the level of state revenue growth, the level of Medicaid spending growth, and the time period under consideration," Mr. Kronick and Mr. Rousseau say. "If, as seems most likely, state revenues continue to grow modestly and Medicaid spending follows our intermediate projections, real growth in state revenues for services other than Medicaid will average 2.5% per year for the next 20 years. This is lower than the real growth rate of 2.8% per year that states would enjoy if Medicaid spending remained constant as a share of GDP, but still is well above zero and is slightly higher than the projected rate of GDP growth.
"If state revenues remain constant as a share of GDP, or if Medicaid spending grows more quickly than in our intermediate projections, state revenues for services other than Medicaid will grow more slowly, but in all scenarios, states are expected to enjoy real revenue growth for services other than Medicaid for the next two decades."
The authors conclude that despite fears about declines in employer-sponsored insurance, increases in the number of disabled people, and the long-term care needs of baby boomers, it appears that there is little that is special about Medicaid spending: It is likely to increase with health spending more generally, neither much more quickly nor much more slowly. "Short of pushing beneficiaries into the ranks of the uninsured or greatly reducing Medicaid benefits, there is little that can be done to greatly reduce Medicaid spending growth in the medium term except to do something about reducing overall health spending growth," they say. "Medicaid is one purchaser in a larger health care market, and with payment rates already much lower than those of other payers and with an overall populations far more costly than that covered by private insurance, the most effective way to control Medicaid spending growth is to pursue strategies to control overall health care cost growth….We hope that this work makes clear that there is no need to rush headlong into changes in Medicaid for fear that Medicaid is unsustainable or will bankrupt state and federal taxpayers. A measured and careful approach makes much more sense."
Mr. Kronick said there are two main policy implications to his study. First, it needs to be recognized that Medicaid is not the Pac-Man that ate state budgets, as it is sometimes described, and that governors and state legislatures and federal policy makers have the luxury of taking a measured and reasoned approach to Medicaid program changes. "We don't need to rush headlong and make major changes in Medicaid because of the fear that it is going to bankrupt the public sector. That would be the first major policy implication. And then the second is that, to the extent that we are and should be concerned about the future of Medicaid and the fiscal pressures that it will create, the main area we should be focusing on is the overall rate of growth of health care. We need to do something about slowing the rate of growth of health spending more generally, which will also then have an effect on the Medicaid rate of growth. But there's relatively little that could be done other than throwing people off the program or slashing benefits that would significantly reduce the rate of Medicaid spending growth over the next 40 years, other than changing the rate of growth of overall health care spending."
Authors' conclusions questioned
Responding to the analysis, National Association of State Budget Officers (NASBO) executive director Scott Pattison tells State Health Watch his organization has questions about the assumptions the authors used to reach their conclusions. "We do not often hear the claim that governments can sustain Medicaid increases plus infrastructure, universities, corrections, transportation, and the list goes on and on," he says. "It is not clear what assumptions the authors are making about all of these other services. Does it include capital investment for transportation and/or funding liabilities in pensions and other employment costs?"
Mr. Pattison says that while the authors suggest that Medicaid as a percentage of health expenditures and GDP will not change substantially over the 40-year study period, NASBO would want to know how that relates to the reality that Medicaid has become an increasingly larger share of state spending over the last 20 years and why they think that trend will not continue.
He notes that when the Urban Institute's John Holahan presented his Medicaid reform ideas, he referred to Medicaid costs as "a growing burden to states," and asks whether that notion fits the report's conclusion.
"During the last economic downturn, states were aggressive in cost containment in Medicaid and would have had to make further reductions without the federal fiscal relief package," Mr. Pattison recalled. "In addition, states made many cuts or had no increases to a variety of other programs. During the 40-year projection period, we would want to know what are the assumptions about downturns in the economy. During another downturn, we would expect this same scenario, where many spending cuts are made even with state rainy day funds, etc."
CMS: Spending takes 20% GDP
Meanwhile, Centers for Medicare & Medicaid Services (CMS) analysts say that over the next decade America's spending on health care is expected to double from today's level, reaching $4.1 trillion and consuming almost 20 cents of every dollar spent. Spending in 2006 is projected at $2.1 trillion or 16% of GDP.
The analysis published in the Feb. 21, 2007, web-exclusive edition of Health Affairs says the average annual growth in health care spending is projected to remain relatively steady at 6.9% from 2006 through 2016. The growth in health spending is expected to drop slightly from 6.9% in 2005 to 6.8% in 2006, marking the fourth consecutive year of a slowdown in spending, according to preliminary data.
CMS National Health Statistics Group deputy director John Poisal and his colleagues said the addition of the Medicare drug benefit, slower projected growth in Medicaid, and slower growth in private health care spending are among the factors contributing to the trends.
"Although recent changes in health care spending growth have been modest, some of the most dramatic changes taking place are the shifts in payment distribution in Medicare, Medicaid, and the private insurance industry as Medicare Part D is fully implemented," Mr. Poisal said. "As the nation moves from more traditional sources of insurance, such as employer-based coverage, to more federal- and state-provided health care, we will continue to face tough questions about how we finance our health care bill."
Total Medicare spending growth is expected to reach $417.6 billion in 2006 with the addition of the Part D drug benefit, up from $342 billion in 2005. Medicare spending growth in 2007 is expected to slow to 6.5%, in part because of legislated Medicare cuts in payments to managed care plans and reductions in payments to physicians. By 2016, Medicare's spending is expected to more than double from the 2006 level to nearly $862.7 billion.
Medicaid spending is expected to reach $313.5 billion in 2006, virtually the same as in 2005 as a result of a slower growth in enrollment and deceleration in payments to physicians and hospitals. Medicaid drug spending is expected to drop 36% between 2005 and 2006 as low-income recipients who are also eligible for Medicare start to get their drug coverage through Medicare Part D.
The analysts say that although Medicaid is seeing its lowest growth rate since the late 1990s, state and federal Medicaid spending is expected to rebound to 7.3% in 2007 and grow at an average of 8.1% per year throughout the rest of the projection period.
Contact Mr. Kronick at (858) 534-427 or e-mail [email protected]. Contact Mr. Rousseau at (202) 347-5270. Access the article by Mr. Kronick and Mr. Rousseau at http://content.healthaffairs.org/cgi/content/abstract/26/2/w271. Access Mr. Poisal's analysis at http://content.healthaffairs.org/cgi/content/abstract/26/2/w242.
A new study of Medicaid future funding requirements by the Kaiser Commission on Medicaid and the Uninsured projects a less dire situation than often suggested by conventional wisdom.Subscribe Now for Access
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