Prosperous Times Shouldn’t Lead To Wasteful Medicaid Spending

States Need to Reform Medicaid Now to Ensure Long-Term Security, says NCPA expert

DALLAS (October 11, 2006) - Many public health advocates are urging states to increase their spending on Medicaid, noting that average state revenue grew faster than spending on Medicaid.  The Kaiser Family Foundation adds that Medicaid spending rose at its lowest rate in a decade during fiscal year 2006.  "Not so fast," cautions a health economist with the National Center for Policy Analysis (NCPA), who counters states' priority should be Medicaid reform, not simply spending more money.

"States that waste money during good times often find themselves hurting during bad times," said NCPA Senior Fellow Devon Herrick.  "State Medicaid programs need to focus on being more responsive to patient needs and more efficient managers of our tax dollars."

Herrick notes that Medicaid, the joint federal-state health care program for the poor and near poor, is the largest single expenditure by state governments today.  At the rate the program is growing, it is on a course to consume the entire budgets of state governments in just a few decades. 

Further, because there is no limit on the number of state dollars the federal government will match, states that spend more receive more federal dollars.  This has provided states with a perverse incentive to spend money wastefully.  For example:

  • In Colorado, Michigan and many other states Medicaid has paid for services to dead beneficiaries.
  • Many states underpay physicians and overpay hospitals, encouraging more expensive hospital-based treatment.
  • Many states pay premium prices for brand-name drugs even though lower-cost generic and over-the-counter medications may be just as effective.
  • All too often Medicaid expansion encourages people to drop private health insurance and get their health care at taxpayer expense.

Herrick, who recently co-authored a comprehensive study on opportunities for state Medicaid reform in the states, suggested states should lobby Congress to distribute federal funds in block grants based on each state's poverty distribution, and allow the states full discretion over their use, provided they are spent on indigent health care. 

"States would have radically different incentives," said Herrick.  "They would realize the full benefit of every dollar saved and pay the full cost of every dollar wasted."

The NCPA Medicaid Study can be accessed online at