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The Sky is (Not) Falling

On the same day last month I received two reports about financing long-term care and Medicaid.  The first struck an often repeated theme:  the increasing burden on Medicaid is unsustainable.

The second report took the opposite position:  Growth in government revenues are projected to be large enough to sustain both Medicaid spending increases and substantial real growth in spending for other services.

“Is Medicaid Sustainable?  Spending Projections For The Program’s Second Forty Years” published in the February issue of the highly respected Health Affairs, is far from conventional wisdom.  Richard Kronick and David Rousseau, the authors, found 785 instances where “Medicaid” and “unsustainable” were used within 20 words of each other.

Medicaid has been described—incorrectly the authors believe—as the “Pac-Man” that ate state budgets, insatiable in its appetite for more money, crowding out state government’s ability to invest in other priorities such as education, transportation and corrections.

The facts paint a different picture.

Turns out discussions concerning the sustainability of Medicaid occur without the benefit of carefully constructed long-term projections of Medicaid spending.  The contrast to Medicare, another program often subject to questions regarding sustainability, is striking, state the authors:

“The annual Medicare Trustees’ report provides seventy-five-year projections of Medicare spending, and the projections are developed and refined each year through an extensive, sophisticated process engaging the efforts of a wide range of actuaries and social scientists.  There is no comparable effort within the federal government to create long- term projections of Medicaid spending or to compare projected spending with the ability of state and federal governments to support that spending.”

“Even under pessimistic assumptions, the study provides a new perspective on Medicaid’s future financing,” said study co-author Kronick. “While a substantial component of state government spending, Medicaid is not likely to be the financial burden squeezing out other public priorities that some policymakers fear,” he added.

After accounting for demographic and health coverage trends such as an aging population and declines in employer-sponsored insurance, the study finds that Medicaid’s share (16.5 percent in 2005) of national health expenditures is expected to remain at an average 16.6 percent from 2005 to 2025.

The results lead the authors to conclude that “there is little that is special about Medicaid spending: It is likely to increase with health spending more generally, neither much more quickly nor much more slowly.”

The elderly are often credited with dramatic increases in Medicaid spending.  The facts don’t bear that out.  From 1973—2003 Medicaid spending on the aged was virtually constant as a share of national health expenditures.  The report found Medicaid beneficiaries as a fraction of the U.S. population increased among children, adults and the disabled from 1975 to 2003, while remaining almost flat among the aged.  Per capita spending for the aged, as a ration to per capita national health expenditures, actually declined substantially from 2000 to 2003.

But what about the future growth of the elderly population?  This is what the authors say:

The specter of increased Medicaid long-term care (LTC) costs as the baby boomers age looms over all discussions of Medicaid’s future.  As the share of the population over age eight-five increases from 1.6 percent today to a projected 3.6 percent in 2045, LTC costs will inevitably increase.  Three factors are expected to moderate Medicaid LTC costs as a share of national health expenditures.

First, the age-specific rate of disability is expected to continue to decline, resulting in fewer LTC needs for a person of a given age in 2045 than in 2005.

Second, baby boomers have more income and assets than their parents had, and the fraction of the elderly relying on Medicaid for LTC is expected to decline.

Third, and most importantly, projected growth in the price of nursing home and home health services is much slower than the projected growth rate in national health expenditures per capita.  Health care is a technology-intensive industry, and projected growth in per capita national health expenditures is 1–2 percent per year above the rate of growth of GDP per capita. In contrast, LTC is a labor-intensive industry, and projected growth in LTC prices is approximately 1 percent per year below the rate of growth in national health expenditures per capita.  As a result, even though the number of elderly people using Medicaid LTC services is projected to increase, projected Medicaid spending on the aged is expected to increase only marginally as a share of national health expenditures.

Over the forty-year projection period, aged Medicaid enrollees as a share of the population are projected to increase by approximately 50 percent: from 1.5 percent to 2.3 percent of the population.  However, as a result of projected modest rates of growth in nursing facility per diem and home health per visit costs, Medicaid spending on the aged is projected to change very little: declining from 3.9 percent of national health expenditures in 2003 to 3.4 percent in 2006 following the implementation of Medicare Part D, declining further to 3.0 percent in 2025 before the bulge of the baby-boom generation turns eighty, and then increasing slightly to 3.6 percent in 2045 as the baby boomers’ use of LTC increases.  

Division of Aging and Adult Services
Herb Sanderson, Director
PO Box 1437 - Slot S-530
Little Rock AR 72203-1437
Telephone: (501) 682-2441
Fax: (501) 682-8155