Medicaid Teeters at the Tipping Point

The Volunteer State is not alone. Many other states soon will be forced to make similar decisions, decisions that essentially force governors into the inevitable and unenviable choice of choosing between grandparent and grandchild.

Unfortunately, Medicaid growth is being driven by two main factors, both of which are beyond the control of states. First, the consumer price index for health care has been increasing at two to three times that of the average consumer price index (CPI). In fact, over the past 13 years, this health care index has increased about 4.5 percent per year. Second, Medicaid’s caseload growth has increased 35 percent over the past four years. All major categories, including children, adults, seniors, and the blind and disabled, have shot up significantly in that same period.

While it may be difficult to develop precise projections of the future growth of Medicaid, there are ominous signs on the horizon that the growth of Medicaid expenditures will accelerate. This will severely impact state budgets and force major cuts in other state programs, particularly education.

Over the next few years, the rate of increase in the price index of health care is likely to slow only modestly from 4.5 percent to about 4 percent. At the same time, the health care industry has become increasingly more concentrated, costs for new medical technology are generally increasing, and the industry has yet to implement technology to reduce administrative costs. All these factors indicate that the price of health care likely will continue at two to three times the average CPI.

More important to prospective Medicaid growth will be future caseload expansion. The frail elderly and disabled population in long-term care, which cost Medicaid an average of $13,000 and $11,800 per year respectively in 2003, will grow dramatically over the next 20 years as the baby boomers begin to retire. Specifically, the 65-and-over crowd in the United States will grow 64 percent by 2020, and the over-85 set, which is the fastest growing population, will grow more than 3 percent annually over the next two decades. Similarly, the number of women and children who will become Medicaid-eligible is likely to accelerate because of structural changes in the economy and the decline of employer-paid health care.

Increasingly, the nation’s economy is becoming more service-oriented, and a larger percentage of output will be produced by small businesses. Historically, however, service and small businesses have not provided health care at the same percentage as the rest of the private sector. Even industrial firms, which historically have provided health care at higher rates, are likely to reduce health care benefits as they get squeezed by competition in the ever-more-global marketplace.

Between 2001 and 2003, researchers found the proportion of Americans under the age of 65 covered by employer-sponsored health care dropped from 67 to 63 percent. The drop-off did not lead to a sudden wave in the uninsured because the percentage in public programs, at the same time, increased from 9 percent to 12 percent, and most of these individuals transitioned to Medicaid or the State Children’s Health Insurance Program (SCHIP). Unfortunately, this suggests that as the cost of health care increases relative to wages, the private sector will be less willing to provide health care particularly for low-wage jobs.

How do we know this? The families that did lose coverage during that same two-year period were by and large low-income individuals with incomes less than 200 percent of poverty. Sure, some of the reduction in employer-sponsored care was a symptom of a cyclical downturn, but most was due to systematic changes to our economy.

Given that Medicaid is the only safety net available for many Americans, costs undoubtedly will soar over the next decade because of changing demographics and structural changes in the economy that will lead to a reduction in employer-paid health care. There are now 54 million individuals on Medicaid, and it costs federal and state governments about $300 billion per year. With its 28 categories of mandated eligibility and 21 optional categories, this 40-year-old state-administered health care program that was created for the nation’s neediest populations is out of sync with the rest of the health care system.

Very simply, Medicaid needs to be radically rethought and completely reformed. As it stands today, it is simply unsustainable. The program needs to redefine the federal-state role in a way that makes the state financial commitment manageable and consistent with Medicare, as well as other employer-provided care and federal subsidies, such as tax credits for trade assistance workers and health savings accounts.

Medicaid in the future cannot be the only safety net. If it is, more and more states will be forced to pull that net out from under our most vulnerable citizens. Other more cost-effective policies must be developed to assist the elderly in long-term care and low-income individuals who have lost their employer-provided health care.

Time is running out. Medicaid is at the tipping point when states such as Tennessee will be forced to make huge cuts in the Medicaid program or in other state programs, particularly education. Without comprehensive reform, governors will have to face that Sophie’s Choice-like dilemma. So, who’s it going to be, your grandmother or your grandson?

Raymond C. Scheppach, Ph.D., is the 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.