Though tempting, many say not cutting costs is the road to economic recovery for the states

While most agree that the impact on the health is the biggest ramification of state Medicaid cuts, a Families USA study points out that cuts in Medicaid spending hurt state economies because of the "multiplier effect."

Kathleen Stoll, associate director of health policy analysis for Families USA in Washington, DC, defines it as state actions to cut Medicaid that would cause significant reductions in their state’s jobs, wages, and business activity.

"Cuts to the Medicaid program are shortsighted," says Families USA executive director Ron Pollack. "Medicaid is a powerful stimulus to state economies, and Medicaid cutbacks will exacerbate states’ economic problems."

Ms. Stoll says that while many people are aware of the health impacts of Medicaid cuts, less understood is the unique role that Medicaid plays in stimulating state business activities and state economies.

"Every dollar a state spends on Medicaid pulls new federal dollars into the state — dollars that would not otherwise flow into the state. These new dollars pass from one person to another in successive rounds of spending. For example, health care employees spend part of their salaries on new cars, which adds to the income of employees of the auto dealership, enabling them to spend part of their salaries on washing machines, which enables appliance store employees to spend additional money on groceries, and so on. Economists call this the multiplier effect."

The magnitude of the multiplier effect varies from state to state, depending on how the dollars will be spent initially and on the economic structure of, and conditions in, the state, according to the report. And because of the multiplier effect, the aggregate impact of Medicaid spending on a state’s economy is much greater than the value of services purchased directly by the Medicaid program.

Ms. Stoll used an input-output model created by the Department of Commerce to capture the specific economic conditions in each state and calculate the new economic activity that will be generated by Medicaid spending in business activity (the increased output of goods and services), employment (the number of new jobs created), and employee earnings (wage and salary income associated with the new jobs created).

Among the key statistics revealed in the report:

• In fiscal year 2001, the 50 states spent a combined total of nearly $97.7 billion on Medicaid and that investment generated an almost three-fold return in state economic benefit — $279.3 billion in increased state-level output of goods and services from increased business activity.

• The 10 states with the highest rate of return for every state dollar spent on Medicaid in FY01 were:

— Mississippi ($6.34 in new state business activity per dollar of Medicaid spending)

— New Mexico ($5.76)

— Oklahoma ($5.46)

— Utah ($5.35)

— West Virginia ($5.25)

— Montana ($5.14)

— Arkansas ($5.11)

— South Carolina ($4.97)

— Alabama ($4.82)

— Kentucky ($4.71)

• In FY 2001, the average value of increased business activity generated from state Medicaid spending was nearly $6 billion per state, ranging from $33.9 billion in New York to $298 million in Wyoming. The 10 states with the largest increase in business activity attributed to state Medicaid spending were:

— New York ($31.5 billion)

— California ($31.5 billion)

— Texas ($17.8 billion)

— Pennsylvania ($14 billion)

— Ohio ($11.5 billion)

— Florida ($11.1 billion)

— Illinois ($10.2 billion)

— Michigan ($8.9 billion)

— North Carolina ($8.8 billion)

— New Jersey ($8.4 billion).

• FY 2001 Medicaid spending generated almost 3 million jobs with wages in excess of $100 billion. The jobs included Medicaid personnel, other employment in the health care sector, and jobs generated as Medicaid dollars circulated through different sectors
of the economy. The 10 states with the largest number of jobs created were:

— New York (300,352)

— California (291,439)

— Texas (187,901)

— Pennsylvania (143,110)

— Florida (132,215)

— Ohio (132,028)

— North Carolina (100,353)

— Michigan (98,754)

— Illinois (98,435)

— Tennessee (81,675).

• The average increase in employee wages attributable to state Medicaid spending was $2 billion per state. The 10 states with the largest increase in wages attributable to state Medicaid spending were:

— New York ($11.7 billion)

— California ($11.4 billion)

— Texas ($6.5 billion)

— Pennsylvania ($4.9 billion)

— Florida ($4.3 billion)

— Ohio ($4.1 billion)

— Illinois ($3.6 billion)

— Michigan ($3.3 billion)

— North Carolina ($3.2 billion)

— New Jersey ($2.9 billion).

The report suggests that as policy-makers consider their spending choices, they should be aware that increases or cuts in state Medicaid spending result in a gain or loss of federal dollars, which will have significant implications for the state’s economy.

To generate new business activity, jobs, and wages in a state economy, money must be received from outside the state, such as through visits by out-of-state tourists or the sale of manufacturing products to customers outside the state. Buying health care services through Medicaid brings new money into states in the form of federal matching dollars. Ms. Stoll suggests that Medicaid spending provides a uniquely positive, counter-cyclical stimulus to a state’s economy during a recession or downturn.

"State Medicaid spending has a greater economic impact than other state spending," she says. "Increases in state government spending on most programs do not have the same multiplier effect as Medicaid spending increases because most state government expenditures simply reallocate spending from one sector of the economy to another."

The table demonstrates an estimation of the impact of a hypothetical reduction in state Medicaid spending, by multiplying the amount of the cut by a state’s figures for lost business activity, jobs, and wages. So, for example, a cut of $250 million (5%) in Texas’ Medicaid budget would result in a loss of more than $892.5 million in state business activity, 8,843 jobs, and $322.5 million in wages paid to workers in the state. Stoll says that many states are considering state Medicaid reductions that are greater than the 5% in this example and thus could have an even greater loss.

[Contact Ms. Stoll and Mr. Pollack at (202) 628-3030. Down-load the report and information on specific state impacts from]