For immediate release:
Tuesday, February 23, 2007
9:00 a.m. EDT


Christopher Fleming

Fundamental Medicaid Reform, Not Spending Cuts, Vital For Program’s Continued Success, Say Analysts In Health Affairs Article

Expected Increases In Government Revenues Can Sustain
 Medicaid’s Future Spending, Authors Project In Second Article

Bethesda, MD -- As Congress debates a Bush administration proposal to cut $26 billion from Medicaid spending over the next five years, a pair of researchers today urge lawmakers instead to focus on fundamental reform of the program to eliminate interstate variations in benefits and help states cope with rising health costs. Expanding Medicaid coverage to poor adults, providing fiscal relief to states, shifting responsibility for higher-cost beneficiaries to the federal government, and eliminating the ability of states to erect questionable financial arrangements “would go a long way toward solidifying the system of financing care for low-income Americans,” say John Holahan and Alan Weil in a Health Affairs article titled “Toward Real Medicaid Reform.”

The article is one of two papers examining Medicaid’s structure and finances that were published today on the Health Affairs Web site. The papers were released at a briefing in Washington, D.C., which will be available for viewing by Monday, February 26, 2007, at 9 a.m. ET at

Holahan and Weil lay out four comprehensive options for restructuring Medicaid that would shift more of the cost and risk for cost growth onto the federal government with a net increase of $24-$30 billion a year. Their proposals would offer greater uniformity of coverage for low-income populations and provide a foundation for building on many of the expansion and tax credit proposals already put forward by states and others to reduce the number of uninsured Americans.

There have been attempts to control the rate of increase in Medicaid spending in recent years, but many of those efforts have been misguided, say Holahan, a health analyst with the Urban Institute, and Weil, executive director of the National Academy for State Health Policy. The first myth is that Medicaid enrollees use too many services. In fact, enrollees often have trouble finding a physician who will accept Medicaid, and they have utilization levels comparable to those in the private sector, the authors say. In addition, policies to reduce benefits and increase cost-sharing are often directed at low-income parents and children – most of whom are in managed care and don’t account for the largest share of Medicaid spending.

Policies to reduce Medicaid benefits and increase cost sharing persist primarily because they seem likely to save money in the short run, but the authors warn that reforms based on simply shifting costs to enrollees will have a negligible effect on controlling program expenditures. The reason is that Medicaid spending growth is due mainly to steady growth in the number of enrollees, as a result of eroding employer-sponsored coverage and increased income inequality, growth in the number of disabled enrollees, and medical care inflation.

The authors propose a range of reform options for Medicaid, all of which contain key elements. They all would expand coverage to at least 100 percent of the federal poverty level for all adults regardless of family structure or health status; offer states flexibility to adjust benefits and cost-sharing levels for higher-income enrollees; provide enhanced federal matching rates for some parts of the program to offset new state costs associated with coverage expansions; federalize some or all of the costs of care for low-income elderly (dual eligibles); and eliminate or reform the policy for providing payments to hospitals that serve a disproportionate share of low-income and uninsured patients.

Medicaid’s Sustainability

In the other Medicaid article published today by Health Affairs, a pair of health policy experts offers a more optimistic view of the future of Medicaid’s financing. Contrary to conventional wisdom, state and federal governments will both be able to fund anticipated levels of growth in Medicaid spending and still have substantial new revenue available for other state priorities.

“There is no need to rush headlong into changes in Medicaid for fear that Medicaid is unsustainable or will bankrupt state and federal taxpayers,” say University of California, San Diego, professor Richard Kronick and David Rousseau, an analyst with the Kaiser Family Foundation’s Commission on Medicaid and the Uninsured.

In a forecast commissioned by the KFF, they predict that Medicaid spending as a share of national health spending will remain unchanged at 16.6 percent from 2006 to 2025. That level is expected to increase slowly to 19 percent by 2045. “The projected stability of Medicaid as a share of health spending over the next two decades is a sharp break from our experiences over the past three decades, when Medicaid grew from 10.6 percent in 1975 to 16.5 percent of health spending in 2003,” said Rousseau. Because health spending is projected to grow more quickly than the economy, Medicaid spending is likely to account for an increasing share of the gross domestic product. However, projected levels of state and federal revenue growth are likely to be sufficient to fund both projected increases in Medicaid spending and substantial new investments in public priorities.

“We began the project assuming that the fiscal pressures created by declines in employer-sponsored insurance and the long-term care needs of the baby boomers would cause Medicaid spending as a share of total health spending to at least continue its historic rise -- if not accelerate. However, these expectations were not borne out by carefully constructed analysis of projected spending,” said Kronick. 

According to the authors, there are three key factors primarily responsible for this surprising result:

-- Although more adults are expected to lose employer coverage, few of them are eligible for Medicaid, and although more children are expected to enroll in Medicaid, they don’t cost the program much, so it limits the effect.

-- An increase in the number of disabled Medicaid enrollees had been driving up program spending historically. But that growth has been tempered in the past decade by a slowdown in the number of enrollees who also receive Supplemental Security Income. That trend is expected to continue over the next twenty-five years.

-- The projections assume that nursing home and home health prices will grow roughly at the rate of growth of wages, which grow far more slowly than health care spending. Consequently, while more elderly people will need long-term care, Medicaid LTC spending as a share of overall health spending is not likely to increase significantly.

This study indicates that although Medicaid is a special program that covers parts of the population that are ill-served by the voluntary employer-based financing system, there is little that is unique about Medicaid spending. It is likely to increase with health care spending generally, neither much more quickly nor much more slowly. Policymakers concerned about the sustainability of Medicaid should focus on controlling the overall rate of health care spending growth, not Medicaid spending growth in isolation.

You can read the article by Holahan and Weil at

You can read the article by Kronick and Rousseau at


Health Affairs, published by Project HOPE, is the leading journal of health policy. The peer-reviewed journal appears bimonthly in print with additional online-only papers published weekly as Health Affairs Web Exclusives at


©2007 Project HOPE–The People-to-People Health Foundation, Inc.