Who's really to blame for rise in health spending?

Medicaid, it turns out, is not the biggest driver of high costs
By Jack McCarthy
07:26 AM

The high cost of healthcare, while moderating somewhat in recent years, still puts real pressure on the budgets of state and local governments.

But Medicaid is not the chief cause, argued Austin Frakt in The New York Times article "Don't Blame Medicaid for Rise in Health Care Spending."

Frakt, a health economist with several governmental and academic affiliations, contends that health care benefits for public employees and retirees, not Medicaid, is driving a majority of the growth in state and local healthcare spending.

"Adjusted for inflation, spending for those health care benefits rose 447 percent between 1987 and 2013," Frakt wrote. "Medicaid spending rose a great deal as well, but not as much, 386 percent."

Medicaid costs will not balloon because a large proportion of Medicaid 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, Frakt wrote.

"Medicaid is by no means a perfect system for delivering health care, but it is the cheapest source of coverage," Frakt added. "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."

In contrast, as healthcare costs take up more and more of state and local budgets at the expense of education and other services, spending on healthcare for retired state employees and their beneficiaries grew 61 percent in the past six years and will continue to rise.
Estimates put state and local governments' liability for retiree health benefits is $1.1 trillion, or about one-third of total annual revenue, with 97 percent of it unfunded.

"Governments can either increase revenue or reduce benefits," Frakt wrote." 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 strategy would remove the cost of coverage away from state and local governments. However, retirees would have to pay higher premiums, and governments might have to compensate them in some form.

"Whatever states do, they won't find a lot of help by skimping on Medicaid, wrote Frakt. "It's already cheap, and it's not the biggest source of growth in health care spending."