Report Health Care

Confronting the Tradeoffs in Medicaid Cost Containment

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February 20, 2004

Medicaid is a joint federal-state program intended to help people with limited income obtain medical and related health care services. In New York State, Medicaid is quite successful in achieving this goal. More than 3.4 million New Yorkers benefit directly by receiving a comprehensive range of Medicaid-financed services. In addition, Medicaid payments to hospitals and clinics help enable those institutions to provide care to New Yorkers who do not qualify for Medicaid, but who lack health insurance.

While its benefits are clear and widely supported, Medicaid’s costs are far more controversial. In New York, total spending for Medicaid of $36 billion in fiscal year 2003 represented nearly 40 percent of total State expenditures. The portion of the Medicaid program paid for with State-raised revenues (as distinct from federal aid and local government contributions) totaled $12.6 billion or more than one-quarter of all State spending financed with State revenues.

Medicaid consumes so large a share of State expenditures because it has been growing at an extraordinary pace. In the last 15 years, Medicaid spending grew at an annual rate of more than 9 percent, compared to total State spending growth of 3.1 percent. If the State’s share of Medicaid funding had grown at the same rate as its total budget, then the State would have had $7.3 billion available in fiscal year 2003 for other purposes such as public school aid and higher education or for tax cuts (rather than recent tax increases).

It is possible to reverse the trend in Medicaid spending and lower Medicaid expenditures by about $4.6 billion annually, without reducing the program’s effectiveness in helping low-income New Yorkers obtain needed care. These significant savings are feasible because New York now spends in ways that are far less efficient than practices followed in other states.