State Health Care Costs Vary Significantly

Demographics, provider fees, Medicaid, and the economy can all drive spending

State Health CareGetty Images

States spend hundreds of billions of dollars a year on various kinds of health care.

When it comes to health care spending, states face a complicated set of challenges and financial burdens,  with obligations ranging from caring for their most vulnerable populations—the poor, elderly, very young, chronically ill, or incarcerated—to providing coverage for state employees and retirees as part of compensation packages. 

All told, states spend hundreds of billions of dollars a year on various kinds of health care. But the amount each state spends doesn’t necessarily reflect either efficiency or waste. And the ability to control costs often falls outside the control of policymakers. For example, certain states must pay a larger portion of Medicaid costs (the program is jointly funded by the federal government), others pay their providers higher fees, and some residents require more care than others. Demographics—including poverty rates, the population’s age and overall health, and the number of prisoners and retirees—can affect a state’s health costs. A state’s economy also plays a major role in determining its health expenses.

The Pew Charitable Trusts and the John D. and Catherine T. MacArthur Foundation recently finished a multiyear project examining seven key areas of state health care spending—Medicaid, the Children’s Health Insurance Program (CHIP), substance use disorder treatment, mental health services, prison health care, and health insurance for both active and retired state government workers . The project shed light on how and why state health program spending has changed over time, and which policies are containing costs while maintaining or improving positive outcomes.

Researchers identified several key trends:

  • States fund and/or directly operate numerous kinds of health services—such as prison health care and treatment for mental illnesses—through a variety of agencies. While there is often an overlap in clientele, coordination and data-sharing is rare among agencies, and sometimes even prohibited by privacy laws.
  • Many states are taking actions to rein in costs within their control. These steps include, for example, having state employees and retirees assume more of the costs of their health plans, tying provider payments to high-value care instead of the number of services delivered, and shifting individuals from purely state-funded programs to federal-state programs.
  • The Affordable Care Act (ACA) and the Mental Health Parity and Addiction Equity Act (Parity Act) are affecting state spending in a wide range of programs, including Medicaid, CHIP, and treatment for mental illnesses and substance use disorders.
  • Many factors can impede program evaluation, including the dearth of comparable data across states; the lack of timely spending, utilization, and outcomes data; and the inability to track clients across agencies.

What's Next for States

State spending on health care will continue to evolve as the ACA and other federal legislation, such as the Parity Act, go into effect. Medicaid expansion could have one of the biggest influences on state health care spending, but its effect will be diminished in states opting not to expand the program. The ACA also increases the federal match for CHIP—as much as 23 percentage points as of October 2015—which will greatly reduce or even eliminate the program’s cost to all states. And both state-funded substance use disorder treatment and mental health care will be affected by the federal laws, which increase coverage for those conditions. 

The sweeping federal legislation, coupled with the continuing rise of health care spending, particularly for pharmaceuticals, will keep states at the forefront of innovation—continually examining how to provide and fund health care that improves the well-being of their residents.

Maria Schiff directs Pew’s work on state health care spending.

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