Medicaid Spending Growth is Unrelated to Recession

Although the White House’s marketing focused on keeping teachers employed, last Monday’s bailout of public employee unions included a huge chunk of change for Medicaid, the joint federal-state program for low-income Americans. This follows the so-called “stimulus” bill, signed in February 2009, which increased federal funding to each state’s Medicaid program by 5.5 to 11.5 percent until the end of this year. Because Medicaid is a welfare program, some economists might not think this spending is wrong: In recession, welfare programs increase spending, and they cut back when prosperity returns. At university, they told me that such programs are “automatic stabilizers.”

But Medicaid is not an “automatic stabilizer.” In fact, it’s been growing through thick and thin, in good times and bad, at a faster rate than Medicare, the program for the elderly that started the same year.

Figure 1 shows the relative growth of the two programs from 1967 through 2008. While Medicare’s share of national health spending doubled between 1967 and 2008, much of this was a recent “growth spurt” concurrent with the Medicare Prescription Drug Benefit, which launched in 2006. Medicaid’s share increased three times over the same period.  Whereas Medicaid was only two thirds the size of Medicare in 1967, it had grown to three quarters the size of Medicare by 2008. (SCHIP, the State Children’s Health Insurance Program, which began in 1997, is included in the Medicaid figures because it is a similar state-federal welfare program). For this disproportionate growth to be reasonable, the number of poor people in the U.S. would have had to grow faster than the number of seniors, which defies reality.

So out of control is Medicaid that its growth has not only dramatically outpaced both Medicare and private health spending but still appears to be ramping up. In 2008, Medicaid, SCHIP, and expansion programs cost $1,162 for every American resident. (Not every Medicaid beneficiary, for which the number is obviously much greater, but for every American!) While this looks tame compared to $4,039 for private health spending, the gap has closed dramatically since 1967, when Medicaid spending was only $15 for every American and private health spending $160. In order to strip out the effect of inflation, as well as demonstrate the program’s disproportionate growth relative to other health spending since 1967, Figure 2 shows real (i.e. inflation adjusted) spending on Medicaid (including SCHIP and expansion), Medicare, and private health care, per capita, indexed to 1967, using the Gross Domestic Product (GDP) Deflator.

While the average American spent almost five times as many (inflation-adjusted) dollars on private health care in 2008 as in 1967, he contributed almost 15 times as much towards Medicaid as he did before. The amount spend on Medicare went up by a little more than 12 times. 

Figure 3 compares the annual rate of growth of real (inflation-adjusted) GDP with Medicaid’s share of national health expenditures. Even when GDP growth was strong, for example between 1994 and 2000, Medicaid just kept growing.

Many people want to believe that Medicaid spending is satisfying people’s needs in recessionary times. But a better explanation for Medicaid’s breathtaking growth is unrestrained government, not human need. (For the complete analysis, see here.)

Print