According to the Centers for Medicare & Medicaid Services, spending on Medicaid, the jointly funded state-federal welfare program that provides health benefits to low-income people, increased 6.7 percent in 2013 to $449.5 billion. And it will keep growing at a fast rate:

Total Medicaid spending is projected to grow 12.8 percent in 2014 due to increased enrollment of nearly 8 million beneficiaries. Primarily driving the increase in enrollment are states that chose to expand coverage to adults up to 138 percent of the federal poverty level.

As some states are expected to expand their Medicaid programs after 2014, an additional 8.5 million people are expected to enroll in the program by 2016. Medicaid spending is expected to grow by 6.7 percent in 2015, and 8.6 percent in 2016. For 2016 to 2023, Medicaid spending growth is projected to be 6.8 percent per year on average.

This comprises a massive increase in welfare dependency. I think it’s a low-ball estimate. The Office of the Inspector General of the U.S. Department of Health & Human Services has just released a Spotlight article on Medicaid, summarizing a decade of research on how states game the system to increase spending beyond that which the federal government anticipated.

The incentive lies in Medicaid’s perverse financing merry-go-round. In a rich state like California, for example, the federal government (pre-Obamacare) spent 50 cents on the dollar for adult dependents. So, if California spent 50 cents, it automatically drew 50 cents from the U.S. Treasury. And most states had a bigger multiplier. What politician can resist a deal like that?

The Spotlight describes the grossest abuses seen by the OIG:

  • Pennsylvania’s gross-receipts tax on Medicaid managed-care insurers is used to fund the state’s share of Medicaid, resulting in higher federal costs of $1 billion in 2009-2012.

  • New York’s state-operated developmental centers for people with intellectual and developmental disabilities artificially inflate operating costs to increase Medicaid reimbursement. In 2009, this increased costs $1.41 billion, of which $701 million was federal.

  • New York’s state-operated residential rehab facilities cost twice as much as comparable private facilities. This increased Medicaid costs by $592 million, of which $346 million was federal.

In 2012, the OIG published a Compendium of Unimplemented Recommendations. How’s that for a pessimistic title? It noted that:

A January 2007 proposed rule that effectively addressed our concerns was estimated to result in $120 million in savings during the first year and $3.87 billion in savings over five years; however the final rule was vacated and withdrawn.

Despite reams of OIG reports, the federal government has proved unwilling to crack down on states’ abuses. The situation will deteriorate because Obamacare’s Medicaid expansion significantly increases states’ perverse incentives to game Medicaid financing.

Obamacare expanded Medicaid eligibility to people with incomes up to 138 percent of the Federal Poverty Level (FPL). This is expected to result in a massive increase in the number of Medicaid dependents: From 73 million in 2013 to 93 million in 2024. These new dependents will be a lot more profitable to states than the current crop is.

Newly eligible Medicaid beneficiaries will be fully financed by the federal government for 2014 through 2016. Then, it slides down until the federal government funds 90 percent of their costs starting in 2020, with the states footing 10 percent. Think of the cunning with which states developed ways to abuse federal taxpayers when they could only double their money from Uncle Sam. The new normal is that they will be able to get ten times their money! Their creativity will be truly unleased, and Medicaid costs will increase beyond what is currently estimated.

NCPA Health Care Blog

John R GrahamJohn R. Graham is a Senior Fellow at the Independent Institute as well as NCPA. As an expert on individual choice and limited government control over medicine, Graham speaks frequently on health reform on radio and television, and at meetings in the United States, Canada, and Europe.