February 4, 2005


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New Health and Human Services Secretary Mike Leavitt has begun discussing plans for $60 billion in Medicaid cuts over the next ten years as part of the Administration’s federal budget proposal for fiscal year 2006, which will be released on Monday, February 7.   A key rationale for the effort to cut Medicaid is that the program’s costs are expected to grow faster than the general economy in the future, leading to the belief that Medicaid growth is “unsustainable.”  This brief report attempts to sort out the reasons for this rise, as well as the consequences of attempting to curtail this trend without addressing its underlying causes.[1]

In short, the rise in Medicaid costs is not due to the design of the Medicaid program.  Rather, it is due to two broader trends — increases in health care costs that are affecting the U.S. health care system as a whole, including the private sector, and the aging of the population.  Specifically:

As this discussion indicates, meaningful relief from rising Medicaid costs rests upon broader efforts to address health care cost increases throughout the U.S. health care system and to close gaps in Medicare coverage.  In the absence of such broader efforts, reductions in the federal contribution for Medicaid costs would have adverse consequences.

Such reductions would shift health care costs from the federal government to states and localities.  State and local governments would then be faced with choosing between two undesirable alternatives.  They could either try to maintain current health care coverage with fewer federal funds (which would compound problems in the rest of their budgets and likely lead to cuts in other programs such as education unless they raised taxes) or they could cut back on health care coverage for low-income families, seniors, and people with disabilities, and cause increases in the ranks of the uninsured and the underinsured.  Federal cutbacks to Medicaid also would shift costs to health care providers to the degree that providers furnish care for which they do not receive compensation, and to low-income people to the degree that they are forced to shoulder more of their medical bills out of their poverty-level incomes and to cut back on expenditures for other items such as food.

End Notes:

[1] This report has also been released, in slightly altered form, as an appendix to the report, “Cuts To Low-Income Programs May Far Exceed The Contribution Of These Programs To Deficit’s Return,” by Isaac Shapiro and Robert Greeenstein, Center on Budget and Policy Priorities, Feb. 5, 2005.  Leighton Ku and Victoria Wachino also contributed to these analyses.

[2] John Holahan (director of the Urban Institute’s Health Policy Center) and Arunabh Ghosh, “Understanding the Recent Growth in Medicaid Spending, 2000-2003,” Health Affairs, January 26, 2005; Kaiser Family Foundation, news release, “A Sharp Rise in Enrollment During the Economic Downturn Triggered Medicaid Spending to Increase by One-Third from FY 2000-03,” January 26, 2005.

[3] This study also found that people with Medicaid and people with private insurance used health services at roughly comparable levels.  Jack Hadley and John Holahan, “Is health care spending higher under Medicaid or private insurance?” Inquiry, 40:323-42, Winter 2003/2004.  Similar findings were reached by federal researchers: see Edward Miller, Jessica Banthin, and John Moeller, “Covering the Uninsured: Estimates of the Impact on Total Health Expenditures for 2002,” Agency for Healthcare Research and Quality Working Paper No. 04407, November 2004.

[4] SCHIP stands for State Children’s Health Insurance Program; for children in low-income working families, SCHIP complements the Medicaid program.

[5] Oregon Health Research and Evaluation Collaborative, “Research Brief:  Changes in Enrollment of OHP Standard Clients,” January 2004, and “Research Brief:  The Impact of Program Changes in Health Care for the Oregon Health Plan Standard Population: Early Results from a Population Cohort Study,” March 2004.