Financial Outlook for Medicaid: Spending to Continue to Outpace GDP Growth

WASHINGTON, NOVEMBER 12, 2008--For the first time ever, the Office of the Actuary for the Centers of Medicare and Medicaid Services (CMS) has produced an actuarial report on the financial outlook for Medicaid. Richard Foster, the chief actuary at CMS, and Christopher Truffer, the report's lead author, as well as CMS acting administrator Kerry Weems and John Holahan of the Urban Institute, discussed the report's findings at AEI on November 7.

One disturbing trend highlighted by the report is that Medicaid spending growth is outpacing and will continue to outpace the growth of the economy. Such excess growth has worrisome implications for both the federal budget (which currently finances 57 percent of Medicaid expenditures) and state budgets (which finance the remaining 43 percent). Medicaid has consumed an increasing portion of state budgets, supplanting spending in other areas such as education, law enforcement, and transportation. As Foster stressed, there is reason to be concerned that continued growth in federal spending on Medicaid may cause losses in state autonomy, since federal money received by states tends to come with "strings attached." This growth in spending in excess of GDP is projected to continue over the next ten years if no policies are enacted to mitigate it.

Panelists commented that there are two main drivers of the growth in Medicaid spending: the growth in the number of enrollees and the growth in spending per enrollee. Policies aimed at cost containment will differ depending on which of these is the primary cause of spending growth. Holahan suggested that although both issues will be important to address, growth in the number of enrollees will be a more significant driver of cost growth than growth in spending per enrollee in the short term because of the current economic downturn. He showed that from 2000 to 2002, a period coinciding with the most recent recession, the number of families enrolled in Medicare surged 11 percent and Medicaid spending on health services jumped 12.9 percent. But there is reason to believe that a large portion of this jump in total spending was due to a rise in prescription drug expenditures now covered under Medicare Part D. Changes in Medicare spending can have a significant effect on Medicaid spending. The Medicare Part D program may provide a silver lining for states as they figure out how to deal with the growing Medicaid burden.

--WALTON DUMAS

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