Health Insurance Program funds and over-
Medicaid pays for covered services accord-
flowing tax coffers, states greatly expanded
ing to fixed prices that are set administrative-
optional benefits in the 1990s.6 Another
ly. Medicaid payments to providers are typi-
cally lower than those made under Medicare,
source of spending growth is the rising cost of
which also uses administrative pricing that is
medical care. Many observers argue that the
well below payments from private payers.
rising cost of private health insurance and the
Providers participate in Medicaid on a volun-
resulting growth in the number of Americans
tary basis.
without it lead to greater Medicaid enrollment
and spending. Finally, as the population ages
and longevity increases, more Americans are
Medicaid Spending
relying on Medicaid to provide nursing home
and other long-term care.
As the economy slowed in 2001, a drop in
From its inception, Medicaid has imposed a
tax revenues left states unable to meet the
rapidly growing burden on taxpayers. By its
commitments they had made. According to
fifth year of operation, actual Medicaid spend-
the National Association of State Budget
ing had reached double the official projections.
Officers: "Twenty-three states experienced
That was "primarily because analysts greatly
By its fifth year
Medicaid shortfalls in fiscal 2003 and 18
underestimated the extent to which States
of operation,
states anticipated shortfalls in fiscal 2004. The
would offer coverage of optional eligibility
shortfalls as a percentage of the total Medicaid
groups . . . and optional services. Enrollment
actual Medicaid
program in fiscal 2003 reached as high as 16.4
growth also greatly exceeded original expecta-
spending had
tions."5
percent of program costs. The combined
reached double
amount of the shortfalls in fiscal 2003 and fis-
A number of factors drive growth in
cal 2004 totaled nearly $7 billion."7
Medicaid spending. Many of those will be dis-
the official
cussed later. A large share of the growth comes
In response, all 50 states have taken steps to
projections.
from recent expansions of state Medicaid pro-
contain Medicaid spending, including restrict-
grams. Encouraged by federal State Children's
ing access to prescription drugs, freezing pay-
Figure 1
Total Medicaid Spending, Select Years, 19702004
$350
$309
$284
$300
$260
$228
$250
$207
$200
$156
$150
$100
$73
$41
$50
$26
$13
$5
$0
1970 1975
1980 1985
1990 1995 2000
2001 2002
2003 2004
Source: National Association of State Budget Officers, "2003 State Expenditure Report," October 2004, p. 47.
3