Last week, I posted about Medicaid costs and raised the question: if Medicaid spending has gone up (which it has), is it because prices have gone up or because governments are simply buying more. I presented a chart, adapted from one of my working papers, which attempted to disentangle the effect. I concluded that while medical care inflation is certainly a factor in the spending increase, it cannot account for all of it. A significant factor in increased Medicaid spending is the fact that governments are buying more medical care services (by, for example, expanding the eligibility requirements to enroll more people in the program).
Astute Neighborhood Effects reader Ben, however, pointed out a flaw in my chart: If X is the product of Y and Z, and if Y and Z grow over time, then one cannot simply sum the growth rates of Y and Z and arrive at the growth rate of X. (This is the basic logic behind the product rule in calculus).
Ben was absolutely correct. And because of that, I have edited the working paper to include new charts that illustrate the same point. At the same time, I have added more detail to the discussion of the expansion in Medicaid spending.
Below is the first chart. It shows inflation-adjusted per capita spending growth in each of the major areas of state spending from 1987 through 2009. Note that even after adjusting for inflation and population growth, total per capita spending increased 64 percent over this period. Far and away, Medicaid spending growth is the main reason. When using the general price level to make the adjustment, inflation-adjusted per capita spending on Medicaid grew 240 percent from 1987 to 2009.
Many, however, have pointed out that health care prices have grown much faster than the general price level. For this reason, perhaps it is not fair to use the general price level to inflation-adjust Medicaid spending. In the chart below, I instead use medical care prices to adjust for inflation. I look at the growth in real, per capita Medicaid spending over two periods: 1987-2009 and 1987-2007. The 1987-2007 period allows us to see what was happening to Medicaid spending even before the recession.
The bottom line: even before the recession hit and even when controlling for the rapid growth in medical care inflation, state governments have markedly increased Medicaid expenditures. State per capita spending on the program grew 116 percent from 1987 to 2007. No other aspect of state spending grew anywhere near as fast.
As Holahan and Yemane have shown, enrollment growth explains most of the growth in Medicaid expenditures. While the U.S. population increases at a rate of less than 1 percent per year, they show that enrollment in Medicaid grew, on average, 4.2 percent per year. This is due, in part, to eligibility expansions.
Coughlin and Zuckerman found that since 2001, 24 states expanded eligibility. In some cases, the expansion was dramatic. For example, New York expanded its eligibility requirements so that the share of those eligible grew from 13 to 35 percent of the state’s population. Most of these expansions did not target those who are least-advantaged. According to Coughlin and Zuckerman:
[H]igher-income parents and childless adults have been the two major expansion groups.
If states hope to tackle their long-term budget problem, they will need to grapple with this fact.