Report on State Spending on Medicaid

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Medicaid and State Budgets: Looking at the Facts

Medicaid covered 60.5 million people in 2007,including 29.5 million children and 5.6 millionadults over age 65.

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Over the years as morestates have turned to Medicaid to cover resi-dents who lack other affordable options, and ashealth care costs have risen, Medicaid costshave grown. In addition, when the economyweakens more people become uninsured. Manywill turn to Medicaid for coverage. The value of Medicaid’s coverage role is unmistakable, butsince Medicaid is funded by states as well as thefederal government, it has a considerable impacton state budgets.Medicaid’s role in state budgets, however, ismore nuanced than the headlines frequentlysuggest. When considering Medicaid’s impacton state budgets and other state spending priori-ties, it is important to distinguish between

total

spending on Medicaid and spending with

state funds.

Often this distinction is not made.

Addi-tionally, it is important to consider the positiveimpact the federal share of Medicaid funds hason a state’s ability to finances services and to balance its budget.This brief examines the different measures of Medicaid spending and provides data on howmuch each state spends on Medicaid. Table 1(page 6) shows state and federal Medicaidspending as a share of state expenditures for allstates.

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Key Findings

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It is often reported that states spend, on average, almost 22 percent of their state budg-ets on Medicaid, but this figure can be misleading because it considers

federal

as wellas

state

funds. On average, federal funds account for 56.2 percent of all Medicaidspending. Average

state

spending on Medicaid as a share of

state general fund

budgetsis actually 16.8 percent, and, just 13.4 percent as a share of spending from

all state funds

.

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In some states with more favorable federal Medicaid matching rates, the differentmeasures can result in dramatically different stories because federal funds can accountfor as much as two-thirds to three-quarters of total Medicaid spending. For example,using the measure commonly cited, Medicaid accounts for 22.4 percent of total spend-ing in Mississippi, but when only state general funds are counted and federal funds areexcluded, Medicaid’s share of the Mississippi budget drops to just 7.8 percent.

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Rather than preventing states from spending on other priorities, federal funds cominginto a state to pay for Medicaid services actually help states finance other priorities. For example, Medicaid often pays for the medical services associated with special educa-tion services for children and covers the cost of services, such as community mentalhealth care, that states or localities would pay for in the absence of Medicaid; this helpsstretch their state and local dollars. In addition, federal dollars to states for Medicaidservices free up state dollars for other priorities that would otherwise have been spenton health care.

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Medicaid and State Budgets: Looking at the Facts

May 2008

Introduction

Medicaid is the largest single source of health care coverage in the nation. About half of its enrolleesare children, but the lion’s share of the costs are for adults with significant health and long term careneeds, namely the elderly and people with disabilities – nearly half of all nursing home care in thecountry is financed by Medicaid.

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Growth in Medicaid costs is due primarily to the generally rising cost of health care, the role Medi-caid plays in addressing the growing problem of the uninsured, and Medicaid’s largely unrecognizedresponsibility filling in the gaps in Medicare coverage. In response to growing costs, states have ad-opted a number of cost containment mechanisms and over the past few years Medicaid cost growthhas slowed.

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As the economy has weakened, however, Medicaid costs can again be expected to grow because as people lose their jobs, they lose their health insurance and many will turn to Medicaid.

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The federal and state governments fund Medicaid jointly; states finance about 40 percent of Medicaidspending, on average.

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While Medicaid constitutes a significant portion of state budgets, discussionsabout Medicaid are often confused or misleading because inappropriate measures are sometimes usedto explain Medicaid’s impact on state budgets.

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Measuring the Squeeze: Different Numbers, Different Story

Data collected by the National Association of State Budget Officers (NASBO) show how statesspend their funds and provide insight into the different ways that Medicaid affects state budgets. Thenumbers often cited show Medicaid’s share of

total

expenditures for each state – including spendingthat is financed with

federal

dollars. However, when the question is, “How does Medicaid spendingaffect states’ budgets and/or their ability to finance other state priorities, such as education?” it ismore appropriate to consider the leveland percent of

state

funds that arespent on Medicaid.Payments that a state receives from thefederal government to help financeMedicaid-covered health care do notadd to a state’s budget woes, nor dothey squeeze out state spending for education, corrections or other state priorities. Federal Medicaid fundsmust be spent on Medicaid services.Indeed, as discussed below, federalMedicaid funds help relieve statefinancing pressures by freeing up stateand local funds that would otherwise be spent on health care, allowing thosefreed-up funds to be spent on other programs and services.Figure 1 compares spending on Medicaid looking at state general fund spending, all state spending(that is, state general funds and state special funds but excluding federal funds) and spending includ-ing federal funds. (See page 5 for an explanation of these terms.) Often, the figure cited is the 21.5 percent figure, which represents total Medicaid expenditures, that is, both state

and

federal. When

Center for Children and Families

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Georgetown University Health Policy Institute

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May 2008

only state general funds are con-sidered and federal funds are ex-cluded, Medicaid’s share of spend-ing drops to 16.8 percent, still con-siderable, but much less than thecommonly cited figure. If all statespending is considered, Medicaid’sshare drops to 13.4 percent.

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Figure 2 looks at these same Medi-caid spending measures and compares them to similar spendingmeasures for education, another keystate spending priority. While it ap- pears that Medicaid spending out- paces spending on K-12 education,this is the case only when federalfunds are considered. When federal funds are excluded, K-12 education accounts for a significantlygreater share of state spending than Medicaid.

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Different States, Different Story

The figures discussed above are for the nation as a whole. The different measures will produce evenmore dramatically different results in some states, particularly those with higher-than-average federalMedicaid matching rates. For example, in Mississippi, where the federal matching rate was 76 per-cent in 2006 (Table 2, page 7),

Medicaid (federal funds, state general funds and other state funds) ac-counts for 22.4 percent of total spending, but when federal funds are excluded, Medicaid’s share of state spending drops to 7.8 percent (considering state general funds only) or 9.3 percent (consideringstate general funds and other state funds). The comparison with education spending is also starker inMississippi than in the U.S. as a whole. When federal and state funds are considered, educationspending falls short of Medicaid spending (19.9 percent compared with 22.4 percent in Mississippi), but when only state funds are con-sidered, the share of funds spent oneducation is more than double the sharespent on Medicaid (27.4 percent compared to 9.3 percent; Figure 3).Similarly, in New Mexico, Medicaidspending accounts for 21.5 percent of total spending, but only 10.9 percent of state general fund spending. When stategeneral funds and other state funds areconsidered, Medicaid accounts for only8.5 percent of state spending. The edu-cation spending comparison also chan-ges dramatically depending upon thespending sources considered (Figure

of 00

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