State budgets in crisis: the role of health care spending

I am heartened by the release of the Report of the State Budget Crisis Task Force, which highlights the fact that state finances are a mess and likely to get worse. The report identifies six big threats:

  1. Growth of Medicaid spending
  2. Federal deficit reduction squeezing revenues
  3. Underfunded retirement commitments
  4. Narrow, eroding tax bases
  5. Local government fiscal problems
  6. State budget laws and practices

Obviously #1 (Medicaid growth) is health care related. But health care is also a major component of items #2, 3 and 5. The biggest cause of the federal deficit (other than tax policy) is growth in Medicare spending. This is largely unrelated to the Affordable Care Act. The report discusses lack of adequate funding of pension benefits, but points out that an even bigger problem is state and local retirement health care benefits, which are hardly funded at all. The combined unfunded total is close to $1 trillion at the state and local level. If the federal government increases the Medicare eligibility age then the state and local shortfall will grow even more.

The Supreme Court ruling on the Affordable Care Act that gives the states more leeway to reject the expansion of Medicaid eligibility has led to some blustery talk from certain red states who complain that they can’t afford the expansion. However, this report will provide little succor for such expansion opponents. Medicaid expansion is fully funded by the feds in the early years before dropping to about a 90 percent subsidy. This is in contrast to baseline Medicaid spending, where the state and federal shares are roughly equal. If states reject the expansion they will still have to deal with their existing Medicaid population, where costs are growing. Not only that, but the individual mandate means that more people who are currently eligible for Medicaid but not enrolled will sign up, regardless of whether a state opts ouf of the expansion or not. Those people (e.g., mothers) will come in at the existing cost share level –they won’t be as richly subsidized as newly eligible people (e.g., single men).

Finally in states that reject expansion, someone within the state will have to cover the cost of uncompensated care. That could be the state government or the privately insured. It won’t be the federal government.

July 18, 2012

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