Cost of Medicaid in the United States on the Rise… Again

Traditionally, programs such as Medicaid account for large portions of the states' budgets. Medicaid spending accounted for 22% of all state budgets in 2007, and spending is expected to increase more than 5% this year. States could weather this kind of growth in the past few years through a mixture of funds and loans from private and government institutions. However, with credit markets freezing, it is becoming increasingly difficult for states to fund Medicaid. Furthermore, higher Medicaid spending rates than normal will likely be reported as enrollment increases during the economic recession into next year.

There are two ways Medicaid can be affected by a recession. The first is through increased enrollment leading to high costs. With the national unemployment rate at 6.1% and rising, many will see their incomes fall below the threshold that makes them eligible to enroll in Medicaid. Paradoxically, declining state revenues will force contraction as fewer resources are available to counter an expanding Medicare program. Historically, states lean toward cutting benefits and eligibility of Medicaid programs during hard economic times. However, the Medicaid program is expanding faster than states can cut the program. The only solution is federal fiscal relief to prevent extraordinary Medicaid cuts during economic downturns. From 2005 to 2008, the federal government contributed around $150 billion per fiscal year in Medicaid grants to states. This year, we anticipate federal spending to increase by 3.1%. Global Insight expects federal grants to increase by another 6.4% in 2009 and 5.1% in 2010 as budgets deficits are estimated for next year.

Despite growing federal grants to state governments, rising unemployment and enrollment will outpace budgets. In a study conducted by the Urban Institute, an increase in the unemployment rate to 6.5% would increase the overall number of beneficiaries by 3.3 million, or 7.2%. This will cost states on average an additional $2.3 billion to fund Medicaid. Inevitably, budget cuts will have to be made. As a result, areas such as nursing homes—where 40% of funding comes from Medicaid—will see their real revenue growth decelerate after a period of robust growth. In 2007, real revenue for nursing homes grew by 4.5%. We expect it will decelerate to 3.1% in 2008 and 2.2% in 2009 before picking up some steam again in 2010.

Unfortunately, state governments cannot just borrow their way out of the situation as they did in the past. A substantial number of loans will be unobtainable until credit markets thaw. Therefore, state officials are already proposing significant cutbacks. Medicaid and State Children's Health Insurance Plans (SCHIP) are proposed in 13 states; K-12 education is targeted in 9 states; higher education reductions are up for debate in 12 states; and 7 states have considered increasing taxes—or have already done so. This fall-out of the financial crisis will continue to add pressure to an already imbalanced system of Medicaid cost and funding. Until the financial industry is nursed backed to health, we will continue to see more states calling for emergency loans in the upcoming fiscal year.