Medicaid cost explosion

Over the past five years, Medicaid has defied all expectations and projections. It is the third largest program that the government administers, and it has grown faster than both Medicare and Social Security which have swelled along with the baby boomer generation.

Since 2019, Medicaid’s total annual cost has risen by 51 percent. Initially rising because of COVID-19, it never fell back down to levels more in line with a growing economy characterized by low unemployment. Both Medicare and Social Security have grown faster than GDP, but not nearly as much as Medicaid. All of the top three government welfare programs have grown faster than the economy for the last five years.

While Medicaid is supposed to be a jointly funded program where states chip in some share of the costs of the program, the growth over the past five years has come entirely from the federal government. Per beneficiary, federal costs have risen 21 percent since 2019, while state costs have fallen 2 percent.

This can also be seen by looking at state budgets. While states’ contributions rose in the years prior to the Affordable Care Act expansion, a smaller percentage of state budgets are going to Medicaid now than in 2019.

One of the major drivers of this trend is states’ expanding use of provider taxes to haul in federal matching money without contributing their own. According to the GAO, even by 2018, provider taxes grew substantially. In the seven years since, the problem has worsened considerably.

With provider taxes, states collect money from hospitals, nursing homes, and even insurance companies, and then return that money back to the same providers through higher Medicaid reimbursements. Because the federal government provides the state more than $1 for every dollar they run through this gimmick, the state comes out ahead.

Of course, provider taxes aren’t the only mechanism states have of increasing their federal money intake, but combined, they have raised the total cost of Medicaid massively. In 2019, the Congressional Budget Office projected that the cost to the federal government of Medicaid would be $521 billion in 2024. In reality, by 2024, that cost was $618 billion, nearly 100 billion dollars more than projected.

Using the standard accounting measure that Congress evaluates budgets on, the ten-year projected cost of Medicaid has swelled by more than $900 billion. If we apply the changes as written in the One Big Beautiful Bill legislation, Medicaid will still be larger than the 2019 CBO projection plus medical inflation and population growth.

Medicaid’s growth has surpassed projections and historical norms and is driven in large part by state government accounting devices which allow them to draw in federal money from other states without contributing themselves. Congress should work to shift Medicaid off its post-COVID explosive path before it drives the federal government to bankruptcy.