Gov. Corbett’s proposal to cut Penn State’s funding by more than 50 percent clearly shocked Graham Spanier, the university’s president. “Not in our wildest imagination could we have anticipated a proposal like this,” Spanier said. As a Penn State graduate and a policy analyst who works on state budget issues, I believe I can explain why the governor looked to higher education for cuts.
Pennsylvania’s budgetary problems result from a spending problem, not a taxing problem. Over the last two decades, the state’s per-person spending has increased 66 percent, adjusted for inflation. Average state government spending per person in Pennsylvania is now nearly $5,000 a year.
Over the same time period, Pennsylvania’s annual state spending has averaged a 6 percent increase, more than a quarter higher than the growth in the total income of state residents. This means the state government now consumes a much greater share of family income than it did a generation ago.
Nearly 60 percent of the increase in Pennsylvania’s spending is from Medicaid growth. In 2009, annual Medicaid expenditures were more than $1,500 per Pennsylvanian, an inflation-adjusted 317<TH>percent increase from 20 years earlier. Medicaid is so large that it represents almost a third of Pennsylvania’s state government spending, double the percentage of two decades ago.
Medicaid pays for health-care services for about one in six Pennsylvanians. It’s also a program in crisis: Low payment rates cause many providers to refuse to treat Medicaid enrollees, and the program is plagued by an unacceptably low quality of care for many beneficiaries. Plus, generous eligibility and numerous loopholes in Medicaid’s payment of long-term-care services discourage proper financial planning.
Despite these problems, Medicaid growth (and corresponding taxpayer burden) has soared. The reason: The federal government provides an open-ended reimbursement of state Medicaid spending. This structure causes states to spend carelessly and create larger programs than if their own taxpayers had to pay the entire cost.
Pennsylvania’s reimbursement rate, which is based on state per capita income, is about 55 percent. This means an extra $1 million of state Medicaid spending costs federal taxpayers $550,000 and state taxpayers only $450,000. When Pennsylvania policymakers can pass 55 percent of the cost of the program’s spending to federal taxpayers, they are going to overspend on Medicaid. It is difficult to imagine the level of wasteful spending on a national scale, since all states have exactly the same incentive.
When states experience budgetary trouble, Medicaid is one of the last areas where cuts are made. This is because to cut $1 of state-only Medicaid spending, Pennsylvania has to cut about $2.25 from its total Medicaid program, as the federal contribution (about $1.25 in this example) would be lost.
Worse, each time state budget situations deteriorated in the last decade, states received a bump in their Medicaid match rate. This enabled states to avoid dealing with the pain of irresponsible program growth and encouraged states to look to Washington to bail them out if their programs grew too expensive.
So Medicaid in Pennsylvania has grown at a clip seven times greater than the growth in primary and secondary education over the last two decades. And inflation-adjusted state spending on higher education has actually declined over the last two decades.
The most recent federal bailout, which was massive, ends in three months. This loss of federal funds, which has plugged state budgetary holes, is finally making states confront out-of-control spending.
Corbett’s budget cuts overall state spending by only about 4 percent, but it does not cut Medicaid overall because doing so would result in the loss of federal matching funds. Moreover, there is a requirement in the new health-care law that prohibits states from tightening Medicaid eligibility.
The current state budgetary crisis underscores the need for fundamental Medicaid financing reform that puts the program on a fixed budget. If states receive a capped federal Medicaid allotment, they would not be able to leverage additional money by growing Medicaid. This would impose discipline on state programs and make future crises less likely.
Schools and state-supported universities should direct their ire at Medicaid. There is only so much money to spend, and federal policy encourages states to spend as much as possible on Medicaid.
State education spending doesn’t get reimbursed by the federal government. Neither should Medicaid.
Brian Blase is a 2003 graduate of Pennsylvania State University and a policy analyst at the Heritage Foundation (www.heritage.org).