Medicaid Spending Has Exploded, And It Will Keep Rising Faster Than Expected

John R. Graham Independent Institute, National Center for Policy Analysis
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According to the Centers for Medicare & Medicaid Services (CMS), spending on Medicaid, the jointly funded state-federal welfare program that provides health benefits to low-income people, increased 6.7 percent in 2013 to $449.5 billion. And it will keep growing at a fast rate.

In 2014, total Medicaid spending is projected to grow 12.8 percent because Obamacare has added about 8 million dependents. A large minority of states have chosen to increase residents’ eligibility for Medicaid by expanding coverage to adults making up to 138 percent of the federal poverty level.

Unfortunately, more states are likely to expand this welfare program. This is expected to result in a massive increase in the number of Medicaid dependents: From 73 million in 2013 to 93 million in 2024. Medicaid spending is expected to grow by 6.7 percent in 2015, and 8.6 percent in 2016. For 2016 to 2023, spending growth is projected to be 6.8 percent per year on average.

This comprises a massive increase in welfare dependency and burden on taxpayers. Further, official estimates often low-ball actual experience. This is because it is hard to grapple with how clever states are at leveraging federal dollars.

The Office of the Inspector General of the U.S. Department of Health & Human Services has just released a report that summarizes a decade of research on how states game the system to increase spending beyond that which the federal government anticipated.

The incentive lies in Medicaid’s perverse financing merry-go-round. In a rich state like California, for example, the federal government (pre-Obamacare) spent 50 cents on the dollar for adult dependents. So, if California spent 50 cents, it automatically drew 50 cents from the U.S. Treasury. And most states had a bigger multiplier. Which state politician can resist a deal like that?

Some of the grossest abuses spotlighted by the Inspector General include:

  • Pennsylvania’s gross-receipts tax on Medicaid managed-care insurers is used to fund the state’s share of Medicaid, resulting in higher federal costs of $1 billion in 2009-2012.

  • New York’s state-operated developmental centers for people with intellectual and developmental disabilities artificially inflate operating costs to increase Medicaid reimbursement. In 2009, this increased costs $1.41 billion, of which $701 million was federal.

  • New York’s state-operated residential rehab facilities cost twice as much as comparable private facilities. This increased Medicaid costs by $592 million, of which $346 million was federal.

Nor does the federal government have any success in preventing these abuses. In 2012, the Inspector General published a Compendium of Unimplemented Recommendations. How’s that for a pessimistic title? It noted that: “A January 2007 proposed rule that effectively addressed our concerns was estimated to result in $120 million in savings during the first year and $3.87 billion in savings over five years; however the final rule was vacated and withdrawn.”

Despite reams of such reports, the federal government has proved unwilling to crack down on states’ abuses. The situation will deteriorate because Obamacare’s Medicaid expansion significantly increases states’ perverse incentives to game Medicaid financing.

Obamacare’s newly eligible Medicaid dependents will bring in a lot more revenue to states than the current crop does. Newly eligible Medicaid beneficiaries will be fully financed by the federal government for 2014 through 2016. Then, it slides down until the federal government funds 90 percent of their costs starting in 2020, with the states footing 10 percent.

Recall the cunning with which states developed ways to abuse federal taxpayers when they could only double their money from Uncle Sam. The new normal is that they will be able to get nine times their money! Their creativity will be truly unleased, and Medicaid costs will increase significantly beyond what is currently estimated.

A reform in the right direction would be to get rid of the federal match in favor of a block grant, based on a simple measurement of the population in each state, and precisely define a limited federal commitment.

John R. Graham is a Senior Fellow at The Independent Institute (Independent.org) based in Oakland, California.