Options for Managing Medicaid Funding and Cost Growth
February 2012
Report 376

Medicaid is a public health insurance program for low income children and adults that is financed by the state and federal governments. As of Fiscal Year 2012, Medicaid spending consumed nearly 15 percent of total state own-source revenues (revenue generated by taxes and fees levied by Michigan). This share has grown five percentage points over the previous decade and when combined with Michigan’s decade long recession, is squeezing out appropriations for other state programs. The fundamental challenge for policymakers is that there is a structural imbalance between Medicaid’s revenue base and expenditure growth rate.

There are several factors driving Medicaid cost growth. First, Michigan’s enrollment increased nearly 60 percent between 2001 and 2010, with accelerated growth of up to 11 percent per year during the most recent national recession. Second, the type of cases and the changing case mix influence costs. The elderly and disabled Medicaid populations make up approximately one quarter of enrollees but over 60 percent of all Medicaid payments are made on their behalf. Third, the utilization rate of high cost services drives cost growth. For example, nursing facility services are consumed by less than 3 percent of Medicaid enrollees but due to the high cost of these services, make up 16 percent of total spending. In contrast, health plan services are utilized by nearly 80 percent of Medicaid clients and consume 50 percent of the budget. Fourth, states determine, with approval from the federal government, the amount they will reimburse health care providers for services rendered to Medicaid patients. As this rate grows, so do overall state costs. The final factor in Medicaid cost growth is the rate at which the federal government reimburses states for Medicaid expenditures.

Since fiscal year 2002, total own-source state spending has declined by 15.6 percent when adjusted for inflation. In contrast, Medicaid spending, which is appropriated to the Department of Community Health, has increased 29.5 percent and as a percent of the entire budget has grown from 9.9 percent to 14.8 percent over the same period. Consequently, Medicaid has been crowding out allocations to other state programs; spending for human services, K-12 school aid, and community colleges have all declined by over 20 percent when adjusted for inflation. Higher education and revenue sharing to local governments received over 45 percent fewer appropriations in FY2012 than in FY2002.

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