The following originally appeared on The Upshot (copyright 2015, The New York Times Company).
Health care spending growth has moderated in recent years, but it’s still putting tremendous strain on state and local governments. A recent analysis by The Pew Charitable Trusts revealed that it consumed 31 percent of state and local government revenue in 2013, nearly doubling from 1987.
But Medicaid — the state-based health care program for low-income Americans — is not the chief culprit.
Health care benefits for public employees and retirees, not Medicaid, account for a majority of the growth in state and local health care spending. Adjusted for inflation, spending for those health care benefits rose 447 percent between 1987 and 2013. Medicaid spending rose a great deal as well, but not as much, 386 percent.
Analysis by Donald Boyd of The Brookings Institution suggests that Medicaid will not be the main driver of state and local health care spending growth, despite expansion of the program under the Affordable Care Act. That’s because a large proportion of Medicaid costs is paid by the federal government, including 100 percent of the costs of the Medicaid expansion through 2016, trending down to 90 percent by 2020 and holding at that level thereafter. (And, despite what you may have heard, the findings of a recent report from government actuaries do not change this story.)
Medicaid spending growth per enrollee is also much lower than that for private coverage. According to the Congressional Budget Office, per-person Medicaid spending growth has been below that of Medicare and other sources since 1975. Between 1990 and 2012, Medicaid spending outpaced the overall economy by only 0.1 of a percentage point, while overall health spending grew 1.1 percentage points faster than the economy.
Medicaid is by no means a perfect system for delivering health care, but it is the cheapest source of coverage. It costs about $3,200 per year to cover an adult on Medicaid, again with the federal government picking up most of the tab. Private insurance, delivered through an employer, costs about$5,300 annually.
Growth in health spending is crowding out state and local spending for other services. For example, in my home state of Massachusetts, between 2001 and 2014, government health spending grew 37 percent, while that for education and public safety declined 12 and 13 percent. In California, spending on health care is having the same effect.
The main source of the problem is growing spending on health care for state employees. Health care spending for retired state employees and their beneficiaries grew 61 percent in the past six years. The Pew Charitable Trusts predicts that over the next 40 years spending on health care alone will surpass that for all other state and local government services. Coverage for public-sector retirees accounts for much of state and local health care spending, even though Medicare pays most of the costs once those retirees reach 65.
In a recent paper in The Journal of Health Economics, Byron Lutz and Louise Sheiner estimated that state and local governments’ current liability for retiree health benefits is $1.1 trillion, or about one-third of total annual revenue. A vast majority — 97 percent — of the liability is unfunded, meaning it lacks dedicated trust fund dollars with which to pay benefits.
Governments can either increase revenue or reduce benefits. But the Affordable Care Act offers a potentially attractive option. Instead of receiving retiree health insurance from their former state or local government employer, retirees who are not yet eligible for Medicare could buy coverage on an exchange, which would be subsidized with federal dollars for those with incomes below a certain threshold.
This would shift the cost of coverage — and future liability for it — off the books of state and local governments. Of course, to the extent that retirees would have to pay higher premiums, the governments might have to compensate them, perhaps by increasing paychecks during their working years.
Whatever states do, they won’t find a lot of help by skimping on Medicaid. It’s already cheap, and it’s not the biggest source of growth in health care spending.