Medicaid vs. Benefits for public employees and retirees

medicaidMedicaid, contrary to popular opinion, is not the reason that healthcare spending continues to grow at the state and local level – taking up 31% of state and local government revenue in 2013, according to a Pew Charitable Trusts analysis – even as education and public safety expenditure declines. Medicaid spending is by no means niggardly, but the 386% it has risen between 1987 and 2013 still does not come close to the 447% that the spending for healthcare benefits for public employees and retirees rose in the same period – accounting for most of the growth in state and local healthcare spending.

The Brookings Institution’s Donald Boyd posits that not even Medicaid expansion under Obamacare will drive state and local healthcare spending up, what with the federal government footing up most of the bill – in fact, all of the bill through 2016 and down to 90% by 2020, leveling off at that level thenceforth. Moreover, the cost of covering an adult for a year on Medicaid is approximately $3,200 – as opposed to $5,300 a year on employer-sponsored private insurance. Additionally, Medicaid spending growth per person has been lower than Medicare’s and other sources since the mid 70’s, and grew faster that the general economy by only 0.1% between 1990 and 2012 – compared to overall health expenditure growing 1.1% faster than the economy –, according to the Congressional Budget Office.  

On the other hand, healthcare spending for retired state employees and their beneficiaries increased 61% in the last six years, and the Pew Charitable Trusts foresees that healthcare spending alone will be higher than any and all other state and local services in the next four decades. Although Medicaid covers most of the state and local healthcare costs as soon as retirees turn 65, public-sector retiree coverage still represents much of those costs. Byron Lutz and Louise Sheiner recently published a paper in the Journal of Health Economics estimating that state and local governments’ liability for retiree healthcare benefits accounts for one-third of total yearly revenue – about $1.1 trillion – of which 97 is unfunded.

The choice for governments is to increase revenue or decrease benefits. A third alternative would be for retirees who do not qualify for Medicaid yet to purchase coverage on a federally-subsidized exchange instead of getting health insurance from their former state or local government. In turn, this would shift coverage costs and future liability off state and local books. In exchange, governments could compensate retirees for paying higher premiums by padding up paychecks during their working years.

Related Read:

- Medicaid Spending: Mo’ Money, Less Problems?