Medicaid and Entitlement Reform

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Abstract

The commentary responds to a recent report from the Centers for Medicare and Medicaid Services (CMS) on future Medicaid spending growth. Medicaid spending growth will in fact be high but not probably as high as the CMS actuaries have forecast (7.9% per year). The evidence on Medicaid spending growth suggests that spending per enrollee in the Medicaid program has been held down to levels consistent with the medical care CPI and increases in GDP. The main cost driver has been enrollment growth – hard to address when the number of uninsured is rising. Further spending restraint could come from more efficient care for Medicaid's dual eligibles.

Medicaid and Entitlement Reform

On October 17, 2008, the Centers for Medicare and Medicaid Services (CMS) released a report that projected that Medicaid spending would increase by 7.9 percent per year over the next decade. Medicaid spending would grow from $339 billion in 2008 to $674 billion in 2017. Medicaid spending would increase as a share of the federal budget and grow faster than the gross domestic product. Such an increase seems unsustainable and a clear implication of the report is that Medicaid, along with Social Security and Medicare, needs to be seriously examined as part of any discussion of entitlement program reform.

My view is that the CMS actuaries estimates are in the ballpark but probably a bit too high. Many of the underlying reasons that the actuaries give for growth are at odds with recent history and this has important implications. They project that Medicaid enrollment will increase by 1.2 percent. Recent evidence suggests that enrollment growth would probably be twice that rate. On the other hand, CMS’s estimate of the increase in spending per enrollee of 6.6 percent seems too high given recent experience for both acute and long term care.

I believe that Medicaid spending will grow at a rate closer to 7 percent per year, the result of faster increases in enrollment but slower growth in spending per person than the actuaries project. Even a 7 percent per year growth rate still presents federal and state governments with a serious problem. But the policy implications are different if Medicaid spending growth is largely due to enrollment increases and underlying inflation rather than excessive increases in use of services.

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