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Medicaid: Are Costs Up or Are We Buying More?

by Matt Mitchell on September 20, 2010

in Health policy, Tax and Budget

Writing in the New York Times, Peter Orszag notes that a quarter century ago, states spent 50 percent more on higher education than on Medicaid, while today states spend 50 percent more on Medicaid than they do on higher education. The former Office of Management and Budget director is absolutely right that Medicaid costs have grown far faster than every other major category in state spending. He is at least partially wrong, however, on the diagnosis. He writes:

These Medicaid cost increases have closely tracked cost increases in the rest of the health care system over the past three decades. So the problem is not Medicaid per se; the fundamental problem is rising health care costs as a whole.

The graph below, taken from my recent working paper, examines this issue:

The left column shows 2009 Medicaid spending as a percent of 1987 Medicaid spending. Over this period, spending increased 813%. There are three factors that might explain this increase:

  • The general population has increased,
  • The cost of medical care services has increased (which is what Orszag sees as the problem), and/or
  • The Medicaid program is buying more medical services.   

The chart helps disentangle these three factors. The right column is the sum of population growth and medical care inflation. Note that, together, these two factors explain little more than half of the increase in Medicaid spending.

This suggests that much more weight should be placed on the third option. In other words: Yes, medical prices have gone up and yes, the overall population has grown. But more importantly, the program is simply buying more medical services. In what ways? This paper by Holahan and Yemane offers some insight. They find that the real reason we are spending more on Medicaid is that more people are enrolled in the program.

In addition to increased federal support for the program, Orszag believes that the “fundamental response” is to “get a better handle on rising health care costs.”

The data suggest that the more appropriate response is to get a handle on enrollment growth.

My thanks to Tyler Cowen for directing me to Orszag’s piece.

  • Well, Hello.

    Considering “enrollment growth” in health care for poor people, particularly people poor in comparison to health care costs, is mainly due to an increasing number of poor people signing up for the program.

    A couple ways are obvious to address enrollment growth, (if you look away from addressing cost increasing driving membership). You could #1 raise the bar to entry somehow, which is the easiest solution. #2 something could be done about increasing inequality.

    I hope it’s not choice #1, having been in the position of dating someone unfortunate enough to live paycheck to paycheck (full time, near min wage) without savings or the ability to save. She didn’t qualify for medicaid as it was, and anyone that actually does must essentially be perpetually financially ruined.

    So, with second degree burns due to an accident, we waited 5-8 hours when we could to see weekly free clinic, when it wasn’t canceled, or when we could get there as it opened to wait in line. Pain meds wore out and we worried over infections with the regime painful daily cleaning.

    Unfortunately, I’m sure that this article points towards making sure more people end up in this situation. God forbid that the economy make its way back to where if one was willing to work hard and long, a single income could provide not only health care, but home ownership, etc. Thankfully I’m out of this position myself, but I don’t favor any dressed up dog piling on the working poor of this country — ratchet up the salaries and sense of entitlement of the most relief, then provide this intellectual cover, which amounts to complaining about how inconvenient it is that so many of the poor are running around ruining everything.

  • Ben

    How did you construct this graph? From a quick search, I found that the US population in 2009 (~305M) was roughly 1.24 times 1987 population (~245M). That’s a growth of 24%, not ~124% which is shown on your graph. Furthermore, if medical care cost growth was really 298% as your paper claims, the total height of the bar on the right should be 1.24*3.98-1 = 494%. If, instead, 2009 medical costs were 298% of 1987 costs, the total height of the bar on the right should be 1.24*2.98-1 = 370%. Either way, I don’t understand how this graph is an accurate representation of what you’re trying to show. Or am I missing something important?

    • Matt Mitchell

      Hi Ben,

      The graph is based on “percentage of” 1987 levels, not “percentage change” since 1987. Of course, you could do it your way as well. The trick is to make sure you have an apples-to-apples comparison. Either way, the conclusion is the same: medical care inflation and population growth cannot account for changes in Medicaid spending.

      • Ben

        2009 population was roughly 124 “percent of” 1987. Your paper indicates “health care prices grew 289 percent”, so 2009 health care prices were 389 percent of 1987. The correct height of the bar indicating population and health care price effects is therefore 482% [of 1987] and this is not what your graph shows.

        If you misspoke in your paper and really meant that “health care prices in 2009 were 289 percent of 1987 prices”, then the correct height of the bar indicating population and health care price effects is 370% [of 1987], again, not what your graph shows.

        If you’re just additively stacking “percentage of” values on the graph, wouldn’t your method result in a bar of total height 200% if population were 100% of 1987 levels and health care prices were 100% of 1987 levels?

        Also, both columns are mislabeled. “Growth” of 0% indicates that a value stays the same, but on your graph as you’ve explained it, this would mean that Medicaid spending went to 0% of 1987 levels. “Inflation” of 0% indicates the same thing.

        • Matt Mitchell

          You raise a good point, Ben. It probably makes more sense to use “percentage change” values. In this case, here are the relevant facts: Medicaid spending grew 713% (from $41,208 in 1987 to $335,177 in 2009); medical care prices grew 189%; and population grew 27%. In this case you can stack the rates of change of population and medical care prices to arrive a 215% sum. Do agree with this methodology?

          • Ben

            Close but not quite — if you have 27% more people and everyone spends 189% more money, you get 1.27*2.89-1 = 267% more money spent, not 189% + 27% = 216%.

            Just try the growth percentages on actual hypothetical numbers; say everyone spent $4000 per capita in 1987 and there were 200,000,000 people — that’s $800 billion. A 27% growth in people results in 254,000,000 people, and a 189% growth in costs results in $11560 per capita — that’s $2.9 trillion. $2.9 trillion is 267% more than $800 billion.

          • Matt Mitchell

            Ahh. You are quite right. It seems that I have forgotten some pretty basic calculus. Thank you for your challenge (and your persistence). Look for a new version of the working paper and for a new blog post soon.

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    SuperSonic

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