Tag Archives: Medicaid

What’s going on with Alaska’s budget?

Alaska is facing another budget deficit this year – one of $3 billion – and many are skeptical that the process of closing this gap will be without hassle. The state faces declining oil prices and thinning reserves, forcing state legislators to rethink their previous budgeting strategies and to consider checking their spending appetites. This shouldn’t be a surprise to state legislators though – the budget process during the past two years ended in gridlock because of similar problems. And these issues have translated into credit downgrades from the three major credit agencies, each reflecting concern about the state’s trajectory if no significant improvements are made.

Despite these issues, residents have not been complaining, at least not until recently. Every fall, some earnings from Alaska’s Permanent Fund get distributed out to citizens – averaging about $1,100 per year since 1982. Last summer, Governor Walker used a partial veto to reduce the next dividend from $2,052 to $1,022. Although politically unpopular, these checks may be subject to even more cuts as a result of the current budget crisis.

The careful reader might notice that Alaska topped the list of the most fiscally healthy states in a 2016 Mercatus report that ranks the states according to their fiscal condition (using fiscal year 2014 data). For a state experiencing so much budget trouble, how could it be ranked so highly?

The short answer is that Alaska’s budget is incredibly unique.

On the one hand, the state has large amounts of cash, but on the other, it has large amounts of debt. Alaska’s cash levels are what secured its position in our ranking last year. Although holding onto cash is generally a good thing for state governments, there appears to be diminishing returns to doing so, especially if there is some structural reason that makes funds hard to access for paying off debt or for improving public services. It is yet to be seen how these factors will affect Alaska’s ranking in the next edition of our report.

Another reason why Alaska appeared to be doing well in our 2016 report is that the state’s problems – primarily spending growth and unsustainable revenue sources – are still catching up to them. Alaska has relied primarily on oil tax revenues and has funneled much of this revenue into restricted permanent trusts that cannot be accessed for general spending. When the Alaska Permanent Fund was created in the 1980s, oil prices were high and production was booming, so legislators didn’t really expect for this problem to occur. The state is now starting to experience the backlash of this lack of foresight.

The first figure below shows Alaska’s revenue and expenditure trends, drawing from the state’s Comprehensive Annual Financial Reports (CAFRs). At first look, you’ll see that revenues have generally outpaced spending, but not consistently. The state broke even in 2003 and revenues steadily outpaced expenditures until peaking at $1,266 billion in 2007. Revenues fell to an all-time low of $241 billion following the recession of 2008 and then fluctuated up and down before falling drastically again in fiscal year 2015.


The ups and downs of Alaska’s revenues reflect the extremely volatile nature of tax revenues, rents, and royalties that are generated from oil production. Rents and royalties make up 21 percent of Alaska’s total revenues and oil taxes 6 percent – these two combined actually come closer to 90 percent of the actual discretionary budget. Alaska has no personal income tax or sales tax, so there isn’t much room for other sources to make up for struggling revenues when oil prices decline.

Another major revenue source for the state are federal grants, at 32 percent of total revenues. Federal transfers are not exactly “free lunches” for state governments. Not only do they get funded by taxpayers, but they come with other costs as well. There is research that finds that as a state becomes more reliant on federal revenues, they tend to become less efficient, spending more and taxing more for the same level of services. For Alaska, this is especially concerning as it receives more federal dollars than any other state in per capita terms.

Federal transfers as an income stream have been more steady for Alaska than its oil revenues, but not necessarily more accessible. Federal funds are usually restricted for use for federal programs and therefore their use for balancing the budget is limited.

A revenue structure made up of volatile income streams and hard-to-access funds is enough by itself to make balancing the budget difficult. But Alaska’s expenditures also present cause for concern as they have been growing steadily, about 10 percent on average each year since 2002, compared with private sector growth of 6 percent.

In fiscal year 2015, education was the biggest spending category, at 28% of total expenditures. This was followed by health and human services (21%), transportation (11%), general government (10%), the Alaska Permanent Fund Dividend (9%), public protection (6%), and universities (5%). Spending for natural resources, development, and law and justice were all less than 5 percent.

The next figure illustrates the state’s biggest drivers of spending growth since 2002. Education and general government spending have grown the most significantly over the past several years. Alaska Permanent Fund spending has been the most variable, reflecting the cyclical nature of underlying oil market trends. Both transportation and health and human services have increased steadily since 2002, with the latter growing more significantly the past several years as a result of Medicaid expansion.


Alaska’s spending is significantly higher than other states relative to its resource base. Spending as a proportion of state personal income was 31 percent in fiscal year 2015, much higher than the national average of 13 percent. A high level of spending, all else equal, isn’t necessarily a bad thing if you have the revenues to support it, but as we see from this year’s budget deficit, that isn’t the case for Alaska. The state is spending beyond the capacity of residents to pay for current service levels.

What should Alaska do?

This is a complicated situation so the answer isn’t simple or easy. The Alaska government website provides a Microsoft Excel model that allows you to try and provide your own set of solutions to balance the budget. After tinkering with the state provided numbers, it becomes clear that it is impossible to balance the deficit without some combination of spending cuts and changes to revenues or the Permanent Fund dividend.

On the revenue side, Alaska could improve by diversifying their income stream and/or broadening the tax base. Primarily taxing one group – in this case the oil industry – is inequitable and economically inefficient. Broadening the base would cause taxes to fall on all citizens more evenly and be less distortive to economic growth. Doing so would also smooth revenue production, making it more predictable and reliable for legislators.

When it comes to spending, it is understandably very difficult to decide what areas of the budget to cut, but a good place to start is to at least slow its growth. The best way to do this is by changing the institutional structure surrounding the political, legislative, and budgeting processes. One example would be improving Alaska’s tax and expenditure limit (TEL), as my colleague Matthew Mitchell recommends in his recent testimony. The state could also look into item-reduction vetoes and strict balanced-budget requirements, among other institutional reforms.

Ultimately, whatever steps Alaska’s legislators take to balance the budget this year will be painful. Hopefully the solution won’t involve ignoring the role that the institutional environment has played in getting them here. A narrow tax base reliant on volatile revenue sources, restricted funds, and growing spending are all factors that have led many to think that Alaska is and always will be “different.” But what constitutes sound public financial management is the same regardless of state. Although Alaska’s situation is unique, their susceptibility to fiscal stress absent any changes is not.

An Overview of the Virginia State Budget and Economy

By Adam Millsap and Thomas Savidge

Virginia’s economy has steadily grown over time in spite of expenditures outpacing revenues each year since 2007. However, economic growth within the state is not evenly distributed geographically.

We examine Virginia’s revenue and expenditure trends, highlighting the sources of Virginia’s revenue and where it spends money. Then we discuss trends in state economic growth and compare that to recent personal income data by county.

Government Overview: Expenditures and Revenue

Figure 1 shows Virginia’s general spending and revenue trends over the past ten years. According to the Virginia Comprehensive Annual Financial Report (CAFR), after adjusting for inflation, government expenditures have outpaced revenue every single year as seen in Figure 1 below (with the exception of 2006). The red column represents yearly expenditures while the stacked column represents revenues (the lighter shade of blue at the top represents revenue from “Federal Grants and Contracts” and the bottom darker shade of blue represents “Self-Funded Revenue”).

VA expend and rev 2006-16

During the recession in 2009, expenditures climbed to $40 billion. Expenditures hovered around this amount until 2015 when they reached $41 billion. Then in 2016 expenditures dropped to just under $37 billion, a level last seen in 2006.

On the revenue side, the majority of Virginia’s government revenue is self-funded i.e. raised by the state. Self-funded revenue hovered between $24 and $29 billion over the ten year period.

However, revenue from federal contracts and grants steadily increased over time. There were two sharp increases in federal contracts and grants: 2008-2009 jumping from $8 to $10 billion and then 2009-2010 jumping from $10 to $13 billion. While there was a drop in federal contracts and grants from 2015-2016, the amount of revenue received from federal contracts and grants has not returned to its pre-2009 levels.

What is the state of Virginia spending its revenue on? According to the Virginia CAFR, state spending is separated into six major categories: General Government, Education, Transportation, Resources & Economic Development, Individual & Family Services, and Administration of Justice. The spending amounts from 2006-2016 (adjusted for inflation) are depicted in Figure 2.

VA expend by category 2006-16

As shown, the majority of spending over the ten year period was on Individual and Family Services. Prior to 2008, spending on Education closely tracked spending on Individual and Family services, but from 2008 to 2010 spending on the latter increased rapidly while spending on education declined. From 2010 through 2015 spending on Individual & Family Services was just over $15 billion per year. It dropped from 2015 to 2016, but so did spending on education, which maintained the gap between the two categories.

During the ten year period, Education spending hovered between $10 and $12 billion until it dropped to $9 billion in 2016. With the exception of Transportation (steadily climbing from 2010-2016), spending on each of the other categories remained below $5 billion per year and was fairly constant over this period.

Virginia Economic Growth & County Personal Income

After examining Virginia’s revenue and expenditures in Part 1, we now look at changes in Virginia’s economic growth and personal income at the county level. Data from the Bureau of Economic Analysis (BEA) shows that Virginia’s GDP hovered between $4 and $4.5 billion dollars (after adjusting for inflation), as shown in Figure 3 below. The blue columns depict real GDP (measured on the left vertical axis in billions of chained 2009 dollars) and the red line depicts percent changes in real GDP (measured on the right vertical axis).

VA GDP 2006-15

While Virginia’s GDP increased from 2006-2015, we’ve condensed the scale of the left vertical axis to only cover $3.9-4.35 billion dollars in order to highlight the percent changes in Virginia’s economy. The red line shows that the percent change in real GDP over this period was often quite small—between 0% and 1% in all but two years.

Virginia’s GDP rose from 2006-2007 and then immediately fell from 2007-2008 due to the financial crisis. However, the economy experienced larger growth from 2009-2010, growing from roughly $4.07-$4.17 billion, a 2.3% jump.

Virginia’s economy held steady at $4.17 billion from 2010 to 2011 and then increased each year up through 2014. Then from 2014-2015, Virginia’s economy experienced another larger spike in growth from $4.24-$4.32 billion, a 2% increase.

Virginia’s economy is diverse so it’s not surprising that the robust economic growth that occurred from 2014 to 2015 was not spread evenly across the state. While the BEA is still compiling data on county GDP, we utilized their data on personal income by county to show the intra-state differences.

Personal Income is not the equivalent of county-level GDP, the typical measure of economic output, but it can serve as a proxy for the economic conditions of a county.[1] Figure 4 below shows which counties saw the largest and smallest changes in personal income from 2014 to 2015. The red counties are the 10 counties with the smallest changes while the blue counties are the 10 counties with the largest changes.

VA county pers. inc. map

As depicted in Figure 4 above, the counties with the strongest personal income growth are concentrated in the north, the east and areas surrounding Richmond. Loudon County in the north experienced the most personal income growth at 7%. The counties surrounding Richmond experienced at least 5.5% growth. Total personal income in Albemarle County grew by 5.7% while the rest of the counties—Hanover, Charles City, Greene, Louisa, and New Kent—experienced growth between 6.2% and 6.7%.

With the exception of Northumberland, the counties in which personal income grew the least were along the western border and in the southern parts of the state. Four of these counties and an independent city were concentrated in the relatively rural Southwest corner of the state—Buchanan, Tazewell, Dickenson, Washington and the independent city of Bristol. In fact, Buchanan County’s personal income contracted by 1.14%.

Cross-county differences in personal income growth in Virginia from 2014 to 2015 are consistent with national data as shown below.

US county pers. inc. map

This map from the BEA shows personal income growth by county (darker colors mean more growth). Nationwide, personal income growth was lower on average in relatively rural counties. Residents of rural counties also have lower incomes and less educational attainment on average. This is not surprising given the strong positive relationship between human capital and economic growth.

And during the most recent economic recovery, new business growth was especially weak in counties with less than 100,000 people. In fact, from 2010 to 2014 these counties actually lost businesses on net.


Government spending on Individual and Family Services increased during the recession and has yet to return to pre-recession levels. Meanwhile, spending on education declined while spending on transportation slightly increased. This is consistent with other research that has found that state spending on health services, e.g. Medicaid, is crowding out spending in other areas.

Economic growth in Virginia was relatively strong from 2014 to 2015 but was not evenly distributed across the state. The counties with the smallest percentage changes in personal income are relatively rural while the counties with the largest gains are more urban. This is consistent with national patterns and other economic data revealing an urban-rural economic gap in and around Virginia.

[1] Personal Income is defined by the BEA as “the income received by, or on behalf of, all persons from all sources: from participation as laborers in production, from owning a home or business, from the ownership of financial assets, and from government and business in the form of transfers. It includes income from domestic sources as well as the rest of world. It does not include realized or unrealized capital gains or losses.” For more information about personal income see https://www.bea.gov/newsreleases/regional/lapi/lapi_newsrelease.htm

Local governments reluctant to issue new debt despite low interest rates

The Wall Street Journal reports that despite historically low interest rates municipal governments and voters don’t have the appetite for new debt. Municipal bond issuances have dropped to 20-year lows (1.6 percent) as governments pass on infrastructure improvements. There are a few reasons for that: weak tax revenues, fewer federal dollars, and competing budgetary pressures. As the article notes,

“Many struggling legislatures and city halls are instead focusing on underfunded employee pensions and rising Medicaid costs. Some cash-strapped areas, such as Puerto Rico and the city of Chicago, face high annual debt payments.”

The pressures governments face due to rising employee benefits is likely to continue. The low interest rate environment has already had a negative effect on public pensions. In pursuit of higher yields, investors have taken on more investment risk leaving plans open to market volatility. At the same time investments in bonds have not yielded much. WSJ reporter Timothy Martin writes that public pension returns are, “expected to drop to the lowest levels ever recorded,” with a 20-year annualized return of 7.4 percent for 2016.

The end result of this slide is to put pressure on municipal and state budgets to make up the difference, sometimes with significant tradeoffs.

The key problem for pensions is “baked into the cake,” by use of improper discounting. Linking the present value of guaranteed liabilities to the expected return on risky investments produces a distortion in how benefits are measured and funded. Public sector pensions got away with it during the market boom years. But in this market and bond environment an arcane actuarial assumption over how to select discount rates shows its centrality to the fiscal stability of governments and the pension plans they provide.

State government spending hits new heights

There is a large literature in macroeconomics that examines the extent to which federal spending “crowds out” investment in the private sector. Basic theory and common sense lead to the conclusion that government spending must replace some private sector spending. After all, dollars are scarce – if the government taxes Paul and uses his money to build a road Paul necessarily has less money to invest in his landscaping business. In theory government spending on public goods like roads could be a net gain. This would occur if the additional value produced by spending one more dollar on roads was greater than the additional value produced by investing one more dollar in Paul’s landscaping business. But even in this scenario, Paul himself may be worse off – he’s one dollar poorer and he may not use the new road – and there is still a dead-weight loss due to the tax.

In reality, the federal government does a lot more than build roads, especially productive ones. In 2014, only 1.9% of federal income tax revenue was spent on transportation. And most of the other stuff that the government does is way less productive, like shuffling money around via entitlement programs – Medicare, Medicaid, and Social Security – and investing in businesses that later go bankrupt like Solyndra. So while it is possible that a dollar spent by the government is more productive than a dollar spent by a guy like Paul, in a country with America’s spending habits it’s unlikely to be the case.

The same crowding out that occurs at the federal level can occur at the state level. In fact, in many states state spending as a percentage of gross state product (GSP) exceeds federal spending as a percentage of GDP. The graph below shows state spending as a percentage of GSP for all 50 states and Washington D.C. in 1970, 1990, and 2012 (data). The red, dashed line is federal spending as a percentage of GDP in 2012 (21.9%).

state spending gsp graph

As shown in the graph, nearly every state increased their spending relative to GSP from 1970 – 2012 (triangles are above the X’s). Only one state, South Dakota, had lower spending relative to GSP in 2012 than in 1970. In 2012, 15 of the 50 states spent more as a percentage of GSP than the federal government spent as a percentage of GDP (states where the triangle is above the red, dashed line). In 1990 only two states, Arizona and Montana, spent at that level.

It used to be the case that state and local spending was primarily focused on classic government services like roads, water/sewer systems, police officers, firemen, and K-12 education. But state spending is increasingly looking similar to federal spending. Redistributive public welfare expenditures and pension expenditures have increased substantially since 1992. As an example, the tables below provide a breakdown of some key spending areas for two states, Ohio and Pennsylvania, in 1992 and 2012 (1992 data here, 2012 data here). The dollar per capita amounts are adjusted for inflation and are in 2009 dollars.

ohio spending table

penn spending table

As the tables show, spending on public welfare, hospitals, and health increased by 120% in Ohio and 86% in Pennsylvania from 1992 to 2012. Pension expenditures increased by 83% and 125% respectively. And contrary to what many politicians and media types say, funding for higher education – the large majority of state education spending is on higher education – increased dramatically during this time period; up 250% in Ohio and 199% in Pennsylvania. Meanwhile, funding for highways – the classic public good that politicians everywhere insist wouldn’t exist without them – has increased by a much smaller amount in both states.

The state spending increases of the recent past are being driven in large part by public welfare programs that redistribute money, pensions for government employees, and higher education. While one could argue that higher education spending is a productive public investment (Milton Friedman didn’t think so and I agree) it is hard to make a case that public welfare and pension payments are good investments. This alone doesn’t mean that society shouldn’t provide those things. Other factors like equity and economic security might be more important to some people than economic productivity. But this does make it unlikely that the marginal dollar spent by a state government today is as economically productive as that dollar spent in the private sector. Like federal spending, state spending is likely crowding out productive private investment, which will ultimately lower output and economic growth in the long run.

Medicaid Expansion: State Policy Challenges

Dr. Robert Graboyes, Mercatus scholar and expert on the Affordable Care Act, recently discussed the law’s impacts on Medicaid and challenges facing states considering Medicaid expansion on Mercatus’ Inside State and Local Policy podcast. In 20 minutes, Dr. Graboyes discusses principles legislators may consider while attempting to improve opportunities for health, strengthen the healthcare system, and why the two might not be the same mission.

Birth control, keg stands, and moral hazard

A Colorado organization managed to produce ads promoting health insurance under the Affordable Care Act that are so goofy that some supporters thought they were a parody produced by over-caffeinated tea partiers. But the ads are more than just an unwitting parody. Some of them also unwittingly illustrate an economic principle that is crucial for understanding the cost of health insurance: moral hazard.

Two of the best examples are reproduced below.

lets get physical

keg stand

Source: www.doyougotinsurance.com

Contrary to what you might think after reading the ads, “moral hazard” does not mean health insurance is hazardous to your morals. (For some commentary on what these ads say about morality, look here.)

Moral hazard refers to an insured party’s incentive to take greater risk because the insurer will pay the costs if there is a loss. The two ads above pretty clearly say, “Go ahead and engage in risky behavior, because if there’s a cost, your health insurance will take care of it.”

In the health care context, moral hazard can also involve excessive use of health care services because the insurer is paying the bill. “Excessive,” in this context, means that the patient uses a service even though its cost exceeds the value to the patient.  For example, my Mercatus colleague Maurice McTigue tells me that before New Zealand reformed its health service, a lot of elderly people used to schedule monthly visits to the doctor’s office because it was free and provided a good opportunity to socialize with friends and neighbors. Visits dropped significantly after New Zealand’s health service instituted a $5 copay for doctor visits — which suggests that some of these visits were pretty unnecessary even from the patient’s perspective!

Moral hazard can have a big influence on the affordability of health insurance. Moral hazard losses in private insurance plans can equal about 10 percent of spending. Moral hazard losses in Medicare and Medicaid are much higher, equal to 28-41 percent of spending. (References for these figures are on page 8 of this paper.)

Duke University health care economist Christopher Conover and I examined the eight major regulations rushed into place in 2010 to implement the first wave of Affordable Care Act mandates. The government’s analysis accompanying these regulations failed to take moral hazard into account. In other words, federal regulators extended insurance coverage to new classes of people (such as “children” aged 21-26) and required insurance plans to offer new benefits (such as a long list of preventive services), without bothering to figure out how much of the resulting new health care expenditures would be wasted due to moral hazard.

Is it any wonder that health insurance under the Affordable Care Act has turned out to be less affordable for many people? Makes me want to do a keg stand to forget about it. After all, if I fall down and get hurt, I’m covered!

Maryland’s “severe financial management issues”

Budgetary balance continues to evade Maryland. In FY 2015 the state anticipates a deficit of $400 million. A fact that is being blaming on entitlements, mandated spending, and fiscal mismanagement in the Developmental Disabilities Administration. The agency has been cited by the HHS Inspector General as over billing the Federal government by $20.6 billion for Medicaid expenses.

For over a decade the state has struggled with structural deficits, or,  spending exceeding revenues. The state’s method of controlling spending – the Spending Affordability Commission – has overseen 30 years of spending increases, and its Debt Affordability Commission has compounded the problem by increasing the state’s debt limits in order to expand spending.

For the details, visit my blog post for the Maryland Public Policy Institute. Of related interest is the Tax Foundation’s recent ranking of government spending the states. Maryland ranks 19, and has increased spending by 30.5% since 2011  2001.

Rhode Island to unionize daycare workers

Last week, the Rhode Island legislature passed a law to permit daycare workers who receive any subsidies from the state to either form a union, or join an existing union such as the SEIU. While they would not be eligible for state pensions or health benefits, and not permitted to strike, the law allows workers to collectively bargain over subsidies, training and professional development and “other economic matters.”

Daycare workers represent a target population for unions. A new law in Minnesota permits daycare workers to unionize so home providers can advocate for higher subsidy payments from the state. In New York in 2010, Governor Paterson pushed for daycare workers to pay union dues to the teachers’ unions in his 2011 budget proposal.

With Rhode Island in the mix, 17 states now permit or strongly encourage daycare workers to unionize. In the rush to unionize private business owners, the ostensible benefits – a voice in the legislature to lobby for higher state subsidies – are touted – and the costs are ignored For example, in Massachusetts, if a private daycare owner accepts clients who pay with state daycare vouchers, the daycare provider must be represented by a union and pay dues. These dues are skimmed off of the state subsidy for low-income parents which is paid directly to the daycare provider. To avoid unionization, the provider would have to turn away low-income families who receive state subsidies for childcare.

The SEIU claims unionization will improve the quality of childcare and offers economic justice for workers. But, the most dramatic result seems to be this:  where daycare workers unionize, the SEIU immediately gains a windfall of new dues transferred from a program meant to help low-income families pay for daycare, (to the tune of $28 million in Michigan, where similar legislation was recently passed).

As James Shrek writes in National Review, one of the more remarkable things about this effort is that it represents a new strategy by unions. The target group for unionization are private individuals or business owners who are also the recipients of government benefits. For instance, at one point in Michigan, a parent receiving Medicaid to care for a disabled child could receive SEIU representation. Some parents found the only result was a reduction in their monthly Medicaid payments and no representation, effectively, “forcing disadvantaged families to pay union dues out of their government benefits.”

As Shrek notes, the Minnesota law, which authorizes AFSCME to unionize in-home daycare providers, also potentially covers short-term summer camps, and grandparents watching their grandkids, or “relative care.”

Shrek asks, does this tactic represent a sign of desperation on the part of unions who are actively seeking new members to the point of organizing, “unions of one”? With a growing number of states joining the trend, it is worth watching how these laws affect those people and families that the unions are claiming to help.





Governors’ Priorities in 2013: Medicaid Funding, Pension Reform

As the month of March draws to a close, most governors have, by this point, taken to the podiums of their respective states and outlined their priorities for the next legislative year in their State of the State addresses. Mike Maciag at Governing magazine painstakingly reviewed the transcripts of all 49 State of the State addresses delivered so far (Louisiana, for some reason, takes a leisurely approach to this tradition) and tallied the most popular initiatives in a helpful summary. While there were some small state trends in addressing hot-button social issues like climate change (7 governors), gay rights (7 governors), and marijuana decriminalization (2 states), the biggest areas of overlap from state governors concerned Medicaid spending and state pension obligations.

Medicaid Spending

Judging from their addresses, the most common concern facing governors this year is the expansion of state Medicaid financing prompted by the Supreme Court’s ruling on the Affordable Care Act last year. While the ACA originally required states to raise their eligibility standards to cover everyone below 138 percent of the federal poverty level, the Supreme Court overturned this requirement and left up to the states whether or not they wanted to participate in the expansion in exchange for federal funding or politely decline to partake.  The governors of a whopping 30 states referenced the Medicaid issue at least once during their speech. Some of the governors, like Gov. Phil Bryant of Mississippi, brought up the issue to explain why they made the decision to become one of the 14 states that decided not to participate in the expansion. Others took to defending their decision to participate in the expansion, like Gov. John Kasich of Ohio, who outlined how his state’s participation would benefit fellow Buckeyes suffering from mental illness and addiction.

Neither the considerable amount of concern nor the markedly divergent positions of the governors are especially shocking. A recent Mercatus Research paper conducted by senior fellow Charles Blahous addresses the nebulous options facing state governments in their decision on whether to participate in the expansion. This decision is not one to make lightly: in 2011, state Medicaid spending accounted for almost 24 percent of all state budget expenditures and these costs are expected to rise by upwards of 150 percent in the next decade. The answer to whether a given state should opt in or opt out of the expansion is not a straightforward one and depends on the unique financial situations of each state. Participating in the Medicaid expansion may indeed make sense for Ohioans while at the same time being a terrible deal for Mississippi. However, what is optimal for an individual state may not be good for the country as a whole. Ohio’s decision to participate in the expansion may end up hurting residents of Mississippi and other states who forgo participating in the expansion because of the unintended effects of cost shifting among the federal and state governments. It is very difficult to project exactly who will be the winners or losers in the Medicaid expansion at this point in time, but is very likely that states will fall into one of either category.


Another pressing concern for state governors is the health (or lack thereof) of their state pension systems. The governors of 20 states, including the man who brought us “Squeezy the Pension Python” himself, Illinois Gov. Pat Quinn, tackled the issue during their State of the State addresses. Among these states are a few to which Eileen has given testimony on this very issue within the past year.

In Montana, for instance, Gov. Steve Bullock promised a “detailed plan that will shore up [his state’s] retirement systems and do so without raising taxes.” While I was unable to find this plan on the governor’s website, two dueling reform proposals–one to amend the current defined benefit system, another to replace it with a defined contribution system–are currently duking it out in the Montana state legislature. While it is unclear which of the two proposals will make it onto the law books, let’s hope that the Montana Joint Select Committee on Pensions heeds Eileen’s suggestions from her testimony to them last month, and only makes changes to their pension system that are “based on an accurate accounting of the value of the benefits due to employees.”

Distinguishing between Medicaid Expenditures and Health Outcomes

As the LA Times reports, the Obama administration has vowed not to approve any cuts to Medicaid during budget negotiations:

Preserving Medicaid funding became even more crucial to the Obama administration after the Supreme Court ruled last summer that states were not required to expand their Medicaid coverage. Administration officials are working hard to convince states to expand and do not want any federal funding cuts that could discourage governors from implementing the law.

“There is a big irony,” said Ron Pollack, executive director of Washington-based Families USA, a leading Medicaid advocate. “The fact that the Supreme Court undermined the Medicaid expansion is now resulting in greater support and a deeper commitment to making sure the program is not cut back.”

Paying for Medicaid remains a major challenge for states. The program has been jointly funded by states and the federal government since it was created. And many states, including California, Illinois and New York, have had to make painful cutbacks in recent years to balance their budgets by reducing physician fees and paring benefits, such as dental care.

However, protecting Medicaid spending — without changing incentives for the healthcare industry or patients — does not necessarily mean improved health outcomes for beneficiaries. As of 2011, nearly one-third of doctors said that they would not accept new Medicaid patients because they are losing money on those who they do see, indicating not only a lower quality of care for Medicaid patients compared to those on private insurance, but reduced access to care. Under the current Medicaid structure, states are incentivized to spend more to receive larger federal matching funds grants, but at the same time federal requirements limit opportunities to improve quality of care through innovation.

The State Health Flexibility Act proposed by Representative Todd Rokita (R-IN) proposes a way to change these incentives. Under the State Health Flexibility Act, state funding for Medicaid and the Children’s Health Insurance Program would be capped at current spending levels. At the same time, states would be released from many federal Medicaid mandates and instead would have the flexibility to determine eligibility and benefits at the state level. Rokita proposed this bill last year, and parts of the bill made it into the House budget.

While this bill seems unlikely to make any progress under the current administration, it mirrors reforms proposed by at least one democratic state governor. Oregon’s Governor John Kitzhaber, a former emergency room doctor, received a Medicaid waiver in 2011 to receive a one-time $1.9 billion payment from the federal government to close the state’s Medicaid funding gap. In exchange, he promised to repay this money if the state failed to keep Medicaid costs growth at a rate two-percent below the rest of the country. Kitzhaber sought to achieve this by allowing local knowledge to guide cost savings. The Washington Post reports:

Oregon divided the state into 15 region and gave each one a set amount to care for each patient. These regions can divvy their dollars however they please, so long as patients hit certain quality metrics, like ensuring that adolescents get well-care visits and that steps are taken to control high blood pressure.

The hope is that each of the 15 regions, known as coordinated care organizations, will invest only in the most cost-effective health care. A behavioral health worker who can prevent emergency admissions becomes a lot more valuable, the thinking goes, when Medicaid funding is limited.

While the Oregon plan is not a block grant — the federal government has not capped the amount that it will provide to the state — it does share some similarities with the State Health Flexibility Act. The state and its designated regions have a strong incentive to provide their Medicaid recipients better health outcomes at lower costs because if they fail the state will have to repay $1.9 billion to the federal government. Additionally, the state and the regions have the freedom to find cost savings at the level of patients and hospitals, which isn’t possible under federal requirements.