Research & Commentary: Medicaid Dominating State Budgets

Published January 29, 2020

A new study from the Pew Charitable Trusts has found that the states’ share of Medicaid spending has grown steadily over time and is taking up more and more of state revenue. In many states, Medicaid has become the states’ biggest expense after K-12 education.

Over the past decade, Medicaid rolls have expanded much faster than many states can handle. From 2013 to 2018, the number of Medicaid enrollees increased by nearly 28 percent, to more than 67 million. In 2017, the cost of Medicaid reached $581.9 billion. States and the federal government share costs for the safety-net program and as the federal share of costs decreases, states must take on more of the cost burden. In the states choosing to expand Medicaid, the federal share has decreased since the passage of the Affordable Care Act and now sits at 90 percent.

Medicaid costs are skyrocketing due to overregulation, rising drug and medical device costs, and increased use of long-term and behavioral health services. In Missouri, Medicaid costs have risen consistently over the past decade. These rising costs will continue to grow over time. According to a recent report from the Centers for Medicare and Medicaid Services, Medicaid expenditures are expected to rise at an average annual rate of 5.7 percent from 2017 to 2027, a rate that far exceeds annual U.S. gross domestic product growth.

According to the Pew study, the amount of state revenue spent on Medicaid has risen dramatically, driven mostly by increases in enrollment as more than twice as many people were enrolled in Medicaid in 2017 than in 2000. In 2000, states spent about 12 percent of their own revenue on Medicaid; according to the latest number from 2017 the share has increased to more than 17 percent.

Every state, except Illinois, spent a larger share of state dollars on Medicaid in 2017 than in 2000. Illinois only recorded a decline due to a delay in payments rather than a reduction in costs. The states spending the biggest share of tax revenue on Medicaid in 2017 were New York, Rhode Island, Pennsylvania, Missouri, Louisiana, and Massachusetts. The lowest were Utah, Hawaii, Nevada, and Idaho.

There are steps states can take to manage the rising costs. State policymakers can propose their own reforms through the Section 1115 and Section 1332 waiver processes. These waivers give states the ability to institute free-market reforms that would increase access to high-quality, affordable health care without breeding government dependence, raising taxes, ballooning state budgets, or adding to the $23 trillion (and counting) national debt.

The Trump administration has encouraged states to submit such waivers to reform their Medicaid and Obamacare exchange programs. Moreover, the Department of Health and Human Services (HHS) has also offered guidance to help states looking to craft these waivers.

There are two major reform paths state legislators can follow using Section 1115 waivers.

The first path would allow the state to enact reforms to contain the growing costs of their Medicaid programs while ensuring Medicaid serves those truly in need. 

Millions of Medicaid recipients can work but choose not to. More than 60 percent of Medicaid recipients are able-bodied, working-age adults, yet half of them do not work, according to a 2018 study by the White House Council of Economic Advisors. States that have enacted work requirements have enjoyed significant success in reducing their Medicaid rolls and associated costs. For example, after Maine imposed work requirements in 2014, its Medicaid rolls for able-bodied adults without dependents decreased by about 80 percent during the first year the reforms went into effect.

States can also decrease Medicaid fraud and abuse by establishing a robust eligibility verification system. After the Illinois Department of Healthcare and Family Services launched the Illinois Medicaid Redetermination Project in 2012, the Prairie State removed 400,000 ineligible recipients and saved an estimated $350 million per year.

Adding accountability to Medicaid is also crucial to containing costs and preventing abuse. State legislators can discourage patients from using costly and unnecessary health care services by imposing a modest premium and co-payment for Medicaid plans. Small cost-sharing fees on unnecessary emergency room visits incentivizes patients to visit a primary care doctor instead of visiting the emergency room for routine health needs. Primary care visits are traditionally less expensive than visiting the emergency room.

The second reform path would allow states to use the waiver process to open their health care market to new innovations. One option for states looking to expand access to primary care while cutting costs is direct primary care (DPC), which allows patients to pay a monthly membership fee and in return receive a more generous allocation of appointments than they would under most traditional health insurance plans. A comprehensive survey of DPC in the Journal of the American Board of Family Medicine found the median monthly DPC subscription is just $75 and can be as low as $26.

States can also lower costs and improve quality by allowing physicians to consult and treat patients remotely via telemedicine. As advances in information and medical technologies accelerate, doctors are increasingly connecting with patients by phone, email, and webcam, to diagnose, treat, and prescribe medications for patients. Patients in rural areas, in particular, stand to benefit because readily available physicians are often in short supply. According to a study in Health Affairs, chronically ill patients who utilize telehealth spent 7.7 to 13.4 percent ($312-$542) less per quarter than similar patients who interacted with doctors in-person.

State lawmakers should reject Medicaid expansion and choose to embrace meaningful reforms that would help increase access to high-quality, affordable health care without increasing state budgets or the national debt.

The following documents examine Medicaid reform and expansion in greater detail.

The Arizona Medicaid Expansion Experience: Beware the Peddlers of Cost-Shifting Claims
This study, written by Naomi Lopez Bauman, Angela Erickson, and Christina Sandefur examines the effects of Medicaid expansion on health care costs and whether it has cut down on the high cost-sharing borne by the insured. The study concludes expansion increased the burden on the privately insured. “The Arizona experience is a cautionary tale for lawmakers: A program should be evaluated based on outcomes, not intentions. Arizona’s expansion not only failed to deliver on its promise to alleviate supposed cost burdens on private payers, it exacerbated them.”

The Report Every State Legislator Should Read
In this article published by National Review, Chris Jacobs writes about a new report issued by the Congressional Budget Office that analyzes profit margins for hospitals over the coming decade. It concludes Medicaid expansion will not make a material difference in hospitals’ overall viability.

Evidence Is Mounting: The Affordable Care Act Has Worsened Medicaid’s Structural Problems
In this Mercatus Center paper, Brian Blase examines the effect of the Affordable Care Act on Medicaid. Blase’s findings reveal Medicaid expansion has worsened many of the structural problems in the program. “The unanticipated expense casts doubt on the value of the ACA Medicaid expansion. The enhanced federal match incentivizes states to boost ACA expansion enrollment and to categorize Medicaid enrollees as ACA expansion enrollees, and also encourages states to set high fees for ser­vices commonly used by expansion enrollees and high payment rates for insurers participating in states’ Medicaid managed care programs,” wrote Blase.

Research & Commentary: States Pursue Work Requirements for Medicaid–commentary-states-pursue-work-requirements-for-medicaid?source=policybot
Senior Policy Analyst Matthew Glans examines efforts by several states to add work requirements to their Medicaid programs. “Implementing Medicaid work requirements would be a good first step for Medicaid-expansion and non-expansion states toward helping to limit the rising costs of Medicaid,” Glans wrote.

The Oregon Experiment—Effects of Medicaid on Clinical Outcomes–effects-of-medicaid-on-clinical-outcomes?source=policybot
This article from The New England Journal of Medicine examines Medicaid outcomes in Oregon. Oregon gave researchers the opportunity to study the effects of being enrolled in Medicaid (compared to being uninsured) based on data from a randomized controlled trial, the “gold standard” of scientific research. The results showed no improvement in health for enrollees, but it did reveal better financial protections for patients and increased medical spending.

The Value of Introducing Work Requirements to Medicaid
Ben Gitis and Tara O’Neill Hayes of the American Action Forum examine the value of work requirements and argue more work requirements are needed in other safety-net programs, including in Medicaid.

Don’t Wait for Congress to Fix Health Care
Heartland Senior Policy Analyst Matthew Glans documents the failure of Medicaid to deliver quality care to the nation’s poor and disabled even as it drives health care spending to unsustainable heights. Glans argues states can follow the successful examples of Florida and Rhode Island to reform their Medicaid programs or submit even more ambitious requests for waivers to the Department of Health and Human Services, an option the Trump administration has encouraged.

Maine Food Stamp Work Requirement Cuts Non-Parent Caseload by 80 Percent
Robert Rector, Rachel Sheffield, and Kevin Dayaratna of The Heritage Foundation examine Maine’s food stamp reforms and discuss how they could act as a model for other states. “The Maine food stamp work requirement is sound public policy. Government should aid those in need, but welfare should not be a one-way handout. Able-bodied, nonelderly adults who receive cash, food, or housing assistance from the government should be required to work or prepare for work as a condition of receiving aid. Giving welfare to those who refuse to take steps to help themselves is unfair to taxpayers and fosters a harmful dependence among beneficiaries,” the authors wrote.

Welfare Reform Report Card: A State-by-State Analysis of Anti-Poverty Performance and Welfare Reform Policies
In 2015, The Heartland Institute published an updated version of its Welfare Reform Report Card. This report card compiles extensive data on five “inputs” and five “outputs” of state welfare and anti-poverty programs and assigns a final grade to each state for its welfare policies.

The Work Versus Welfare Tradeoff: 2013
The Cato Institute estimates the value of the full package of welfare benefits available to a typical recipient in each of the 50 states and the District of Columbia. The study found welfare benefits outpace the income most recipients can expect to earn from an entry-level job, and the income gap between welfare and work may actually have grown worse in recent years.


Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.

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