Is Medicaid sustainable?

Feb 25 2007

As Congress prepares to debate the President's budget and looks ahead to address the growing federal deficit and the future sustainability of Medicare, Medicaid, and Social Security, a new study of future funding requirements for Medicaid by the Kaiser Family Foundation's Commission on Medicaid and the Uninsured (KCMU) projects a less dire situation than suggested by conventional wisdom.

The study, authored by Richard Kronick of the University of California, San Diego and David Rousseau of KCMU and published by the journal Health Affairs today, concludes that expected growth in government revenues is likely to be large enough to sustain Medicaid spending increases over the next 40 years, while also allowing substantial real growth in spending for other public services.

Unlike the annual examination of the long-term financial status of the Medicare program via the Medicare Trustees' report, there has been no comparable careful look at long-term Medicaid spending and the availability of government revenues to support it. This analysis fills that gap by providing a detailed forecast, based on historical trends, of projected spending over the next 40 years, 2005-2045, for Medicaid as currently structured and comparing projected Medicaid spending to projected overall health spending and federal and state revenue growth.

"Even under pessimistic assumptions, the study provides a new perspective on Medicaid's future financing," said study co-author Richard Kronick. "While a substantial component of state government spending, Medicaid is not likely to be the financial burden squeezing out other public priorities that some policymakers fear," he added.

After accounting for demographic and health coverage trends such as an aging population and declines in employer-sponsored insurance, the study finds that Medicaid's share (16.5 percent in 2005) of national health expenditures (NHE) is expected to remain at an average 16.6 percent from 2005 to 2025 and slowly rise to 19 percent by 2045. However, as overall health spending increases as a share of gross domestic product (GDP) from 2005 to 2045, there will be a commensurate increase in the share of GDP Medicaid spending represents, according to the study. The results lead the authors to conclude that "there is little that is special about Medicaid spending: It is likely to increase with health spending more generally, neither much more quickly nor much more slowly."

"As an integral part of the nation's health care system, covering 55 million people, Medicaid experiences the strains and pressures of the overall health system. This first of its kind study of Medicaid makes it clear that the growth over the next 40 years in Medicaid spending will largely be driven by the growth of health spending as a share of the economy. If there is a culprit in the room, it is not Medicaid but ever rising health costs that threaten future sustainability," said Diane Rowland, executive director of KCMU. "Efforts to reduce the growth in Medicaid without shifting costs or threatening coverage will ultimately require better controlling the rate of growth of health spending overall," she added.

How Rapidly Will Medicaid Grow?

Although long-term projections always involve uncertainty, these estimates provide a framework for assessing how future Medicaid spending might be affected by demographic and programmatic changes. The study projects that over the next 40 years, as overall health spending grows, Medicaid will also grow but stay at roughly the same share of national health spending in the coming decades due to three key factors:

• Although many adults are expected to lose employer coverage, few of them are eligible for Medicaid under current rules, and although more children are expected to enroll in Medicaid, the program's low per capita spending for children limits the impact;
• The increase in the number of Medicaid's disabled enrollees drove growth in the program's spending historically, but growth in this population has slowed in the past decade and is projected to remain slow over the next twenty five years; and
• The projections assume that nursing home and home health prices will grow roughly at the rate of growth of wages (which grow far slower than health care spending), meaning that while more elderly people will need long-term care (LTC), Medicaid LTC spending as a share of overall health spending is not likely to increase significantly.

Medicaid's Impact on State and Federal Spending

If Medicaid spending and state and federal revenue growth continue to follow long-term historical trends, then state revenues available for non- Medicaid public priorities are projected to grow at an inflation-adjusted 2.5 percent per year through 2025, roughly the projected rate of inflation- adjusted GDP growth. Even in a scenario where state revenues did not increase as a share of GDP and Medicaid spending grows more quickly, state revenues for non-Medicaid services would still rise through 2025. Spending pressures will be somewhat greater in the two decades following 2026, but under all but the most pessimistic scenarios, states can still expect substantial revenue growth for services other than Medicaid.

"While some states in some years will no doubt experience significant fiscal strain due to Medicaid spending growth-particularly during periods of recession, the long range scenario for Medicaid's impact on state revenues is not calamitous," said co-author David Rousseau.

The study shows a similar picture for federal revenues, with growth in revenues for non-Medicaid services averaging an inflation-adjusted 2.3 percent annually from 2006 to 2025, slightly lower than the inflation-adjusted 2.5 percent if Medicaid spending had remained constant as a share of GDP for the period.

The Health Affairs article, "Is Medicaid Sustainable? Spending Projections for the Program's Second Forty Years" and an interview with the authors is available here.

The Kaiser Commission on Medicaid and the Uninsured provides information and analysis on health care coverage and access for the low-income population, with a special focus on Medicaid's role and coverage of the uninsured. Begun in 1991 and based in the Kaiser Family Foundation's Washington, DC office, the Commission is the largest operating program of the Foundation. The Commission's work is conducted by Foundation staff under the guidance of a bipartisan group of national leaders and experts in health care and public policy.

The Kaiser Family Foundation is a non-profit, private operating foundation dedicated to providing information and analysis on health care issues to policymakers, the media, the health care community, and the general public. The Foundation is not associated with Kaiser Permanente or Kaiser Industries.

http://www.kff.org/medicaid/