After three years of the worst fiscal situation in the last 60 years, states are now witnessing relatively robust revenue growth. While the Midwest is still lagging, the Rockefeller Institute of Government recently reported that state revenues were up 8.4 percent for the first three months of calendar year 2004. There are clearly differences of opinion regarding the sustainability of the current recovery, but there is cautious optimism that it will continue through 2005.
Regardless of the length and bullishness of the economic recovery, states will continue to confront very difficult long-run budget choices. Over 50 percent of a state's budget goes to education and Medicaid. Medicaid is a mandatory federal entitlement whose growth rate is driven by rapidly changing demographics and rising costs, while education is primarily discretionary. Medicaid's growth is biasing state budget decisions and is winning the contest for state dollars. This will limit the ability of states to adequately fund education over the next decade.
Medicaid, the federal-state health care program for low-income individuals, now represents 21 percent of the average state budget, provides health care for 50 million Americans, and costs $300 billion 42 percent paid by states and 58 percent by the federal government. It provides health care for one out of every five children and pays almost 50 percent of nursing home care.
Given that a significant portion of this program is mandatory, i.e., it entitles certain populations to receive specific benefits, an individual state has limited ability to control costs. State spending for Medicaid has increased 8.4 percent per year over the last ten years, but has accelerated to 11.3 percent over the last three years. This is in spite of the fact that virtually every state cut reimbursement rates as well as optional populations and benefits and restricted drug purchases through the use of formularies. Both the Centers for Medicare and Medicaid Services and the Congressional Budget Office project Medicaid to grow 9-10 percent per year over the next decade.
Elementary and secondary education represents 21.6 percent of state budgets and higher education represents another 11.2 percent. Unlike Medicaid, however, all education spending is discretionary. State spending on education has increased 6.6 percent per year over the last ten years. However, over the last three years when Medicaid growth exploded, secondary education growth rate fell to 2.7 percent and higher education fell to 1.5 percent.
Unfortunately, the next decade looks like a continuation of recent growth rates of 8-10 percent for Medicaid and 2-4 percent for education. The existence of a federal entitlement health care program that states administer and partially fund, but have limited ability to control costs, creates a serious bias in state budget priorities. These are not the growth rates preferred by most governors or their citizens. Most would prefer more equal growth rates for both, or even moderately higher growth rates for education as opposed to Medicaid.
Now that the United States is operating in a true global marketplace, it is critical that the United States develop a highly educated and skilled labor force. Furthermore, it must be a creative labor force whose education will stimulate continuous innovations that can be converted into products sold in the global marketplace and utilized to continue high rates of productivity change. This is not the time to reduce our commitment to education.
This means that Medicaid reform and national health care reform must become a national priority. Part of Medicaid reform must have the federal government assume the cost of low-income individuals over 65 who are currently both Medicare and Medicaid eligible. This is a population that is growing rapidly, is very costly, and from a program standpoint should be part of Medicare not Medicaid. In addition to this realignment of Medicaid and Medicare, it is critical that we also develop a cost-effective, high-quality health care system for the 21st century. The failure to do this will limit our ability to maintain our education commitment, which will in turn make it very difficult to maintain our position in the new global marketplace.
Raymond C. Scheppach, Ph.D, is executive director of the National Governors Association. The views expressed here are those of the author and do not necessarily represent those of the National Governors Association.