Tag Archives: Peter Orszag

Medicaid: Are Costs Up or Are We Buying More?

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.