Medicaid in Transition

"Medicare is for the elderly and Medicaid is for the poor." I've heard it a million times, and probably said it myself, but of course the distinction isn't quite correct. Medicaid was from the start focused on the "deserving" poor, which at the time was low-income families with children, along with the poor who were also disabled or elderly, but it didn't cover single adults below the poverty line.

The vast majority of Medicaid's spending is not on low-income families of able-bodied adults with children, but instead on those with low incomes who are also blind, disabled, and elderly. The 2010 Actuarial Report on the Financial Outlook for Medicaid reports that in 2009, Medicaid covered 50 million people on average at any given point in time, and had outlays of $380 billion. Thus, the elderly represented about one-tenth of all Medicaid enrollees, but about one-fifth of all Medicaid expenditures. As the Medicaid actuaries report:

"Per enrollee spending for health services was $6,890 in 2009. Per capita spending for non-disabled children ($2,848) and adults ($4,123) was much lower than that for aged ($15,678) and disabled beneficiaries ($16,563) ... While blind or disabled enrollees and aged enrollees are the smallest enrollment groups in Medicaid, they are projected to account for the majority of spending. ... [F]or FY 2009, benefit spending was estimated to be $148.4 billion for blind or disabled enrollees and $74.6 billion for aged enrollees. Combined, spending on these two groups constituted 66 percent of Medicaid expenditures ... Medicaid spending on non-disabled children represented about 20 percent of total Medicaid benefit expenditures, and spending on non-disabled non-aged adults accounted for about 14 percent."

Medicaid is a huge part of the U.S. health care system. The actuaries report that in 2008, "Medicaid spending for that year represented 14.7 percent of total NHE [national health expenditures]. Private health insurance was the largest source of spending on health care in 2008, accounting for 33.5 percent of total NHE, while Medicare paid for 20.1 percent." If you're adding up at home, yes, Medicaid plus Medicare pays a higher share of the nation's health care bills than does private health insurance. At any given time, Medicaid also covers more people than Medicare: in 2009, Medicaid was covering an average of 50 million people at any given time compared to 46 million for Medicare.

However, Medicaid is about to start into two major changes that will drive up its costs. One set of changes is related to the Affordable Care Act of 2009, and the other to the aging of the U.S. population.


One of the main ways in which the Affordable Care Act plans to expand health care insurance to those who not presently have it is through an expansion of who is eligible for Medicaid. The actuaries write:  "The Affordable Care Act will have a substantial effect on Medicaid trends over the next 10 years and beyond. In terms of the magnitude of changes to the program’s projected expenditures and enrollment, it is likely that the Affordable Care Act will be the largest legislative change to Medicaid since the program’s inception." The Affordable Care Act is projected to add about 20 million enrollees to Medicaid by 2019, with roughly three-quarters of them being adults. Medicaid is now funded about two-thirds by the federal government and one-third by state governments, but for the first few years (with no promises for after that time!), the federal government  will pick up essentially 100% of the cost of these additional enrollees.



The issues of "Medicaid and the elderly"  are explored by  Mariacristina  De Nardi, Eric French, John Bailey Jones, and Angshuman Gooptu in the most recent issue of Economic Perspectives, published by the Federal Reserve Bank of Chicago. In particular, Medicaid has become a major provider of long-term care. The authors write:  "The principal public provider of long-term care is Medicaid, a means-tested program for the impoverished. Medicaid now assists 70 percent of nursing home residents and helps the elderly poor pay for other medical services as well. ... Although Medicaid is available only to “poor” households, middle-income households with high medical expenses usually qualify for assistance also. Given the ongoing growth in medical expenditures, Medicaid coverage in old age is thus becoming as much of a
program for the middle class as for the poor ..."


Here's a figure from the actuaries showing Medicaid's share of total U.S. spending in certain markets. Again, notice that Medicaid spending is a lot less about doctor visits for low-income children and a lot more about nursing home care and home health care:

As the actuaries put it: "Medicaid has a major responsibility for providing long-term care because the program covers some aged and many disabled persons, who tend to be the most frequent and most costly users of such care, and because private health insurance and Medicare often furnish only limited coverage for these benefits, particularly for nursing homes. Many people who pay for nursing home care privately become impoverished due to the expense; as a result, these people eventually become eligible for Medicaid."

At least so far, payments for long-term care are not yet a major driver of Medicaid expenses. The front edge of the baby boomer generation is just hitting its retirement years, but the really substantial demand for nursing home care kicks in more at age 85 than at age 65. The Medicaid actuaries write: "As the oldest members of the baby boom generation begin to reach age 65, both the number of aged enrollees in Medicaid and eventually the rate of long-term care spending growth are projected to increase. While the baby boom generation is not estimated to have a major effect on long-term care spending during FY 2010 through FY 2019, the increase in the number of people over age 85 in the next 10 years is expected to do so."

For a more detailed discussion of Long-Term Care Insurance in the U.S. and its interaction with Medicaid, see also my post of November 22, 2011.  For a broader discussion of Long-Term Care in International Perspective, see my post of August 9, 2011. 

It's worth remembering that unlike Medicare, Medicaid has no dedicated tax or revenue stream. Unlike private health insurance, Medicaid isn't financed by premiums. Instead, the ongoing rise in Medicaid costs will be in direct competition with other government programs funded from general tax revenues.

A Soft Drinks Tax?

The October 2011 issue of Choices, published by the Agricultural and Applied Economics Association, has a set of six short readable articles on the subject: "Should Soft Drinks Be Taxed More Heavily?"

The case for taxing soft drinks--or as some of this literature puts it, SSBs (sugar-sweetened beverages)-- is based on a hope that taxes on sugary beverages would reduce obesity and improve public health. Jason Fletcher cites some striking evidence (citations omitted here and throughout):  "[S]oft drink consumption has increased by almost 500% in the past 50 years, and recent data suggest it represents 7% of overall energy intake in adults and often larger proportions in children ... a 16% share of calories in youth ages 12-19 and 11% in children ages 2-11." Carlisle Ford Runge, Justin Johnson, and Carlisle Piehl Runge write: "U.S. sugar-sweetened sodas account for one-half of the increase in caloric consumption over the past 25 years, and are the largest source of added sugars in the average diet ..."

 Reducing calories by a small amount, if sustained continually, would bring down weight. Fletcher again: "We know that soda consumption is an important share of total consumption, and ample evidence suggests that maintained reductions in consumption of approximately 100 calories per day—less than a can of soda—could halt weight gain for 90% of the population ..."

Jason P. Block and Walter C. Willett cite a number of studies which estimate a price elasticity of demand for soda, often finding estimates in the range of .7 or .8--that is, a 10% rise in the price of the soda would lead to a decline of 7 or 8% in the quantity consumed.



The main counterargument is that when people cut back on soda or soft drinks, they don't switch to drinking water. Instead, most of them will shift to other equally caloric beverages, including cheaper brands of soft drinks, sugary fruit waters, and juices or milk. As a result, calorie intake won't drop. Fletcher one more time: "[T]here is now ample research that examines the association between the level of state soft drink taxes—or soft drink prices—and obesity rates and found no effect. ... [W]hile individuals in states with higher soda taxes have lower soda consumption, these individuals completely offset the reductions in calories from soda by consuming other high-calorie beverages, such as milk and juice. This evidence is consistent with the view that individuals demand calories each day, and if the price increases on one mechanism of attaining calories (soda) then individuals shift their consumption relatively easily to satisfy their demand."

There is also some evidence that there may be mildly positive health effects from a soda tax, but at best, the empirical evidence that an SSB tax would improve health is questionable and uncertain. Indeed, it may be that those who most need to lose some weight are also the group who would be most likely to substitute toward other caloric drinks.

Even if a sugar-sweetened beverage tax didn't reduce obesity, it might have some side benefits. For example,
Runge, Johnson, and Runge have an essay titled: "Better Milk than Cola." Their point is that drinking milk or orange juice provides some other nutrients, even if the calorie count is the same, rather than just empty sugar. There may be dental health benefits, too.

Is there a way to make sugar-sweetened beverage taxes into a more useful policy tool? There are a number of possibilities. First, an obvious possibility would be to have higher taxes on sugar-sweetened beverages, and to focus them on those beverages in particular, not on all soft drinks.  Block and Willett point out that "the inflation-adjusted price of soda has declined by as much as 48% over 20 years."


At present, lots of states apply their sales taxes to soft drinks. But usually such taxes are not specific to sugar-sweetened beverages vs. diet or low-calorie drinks. In addition, such taxes are not usually very large, and so are unlikely to have much effect on behavior. Here is Frank J. Chaloupka, Lisa M. Powell, and Jamie F. Chriqui (citations omitted): "[V]ery few governments, including seven U.S. states, levy small taxes that are unique to soft drinks and other non-alcoholic beverages, and almost none of these, including the few state taxes, apply only to sugar-sweetened beverages.  However, most governments do impose their value added or sales taxes on a variety of beverages, with about two-thirds of U.S. states levying sales taxes on carbonated soft drinks. Again, none of these differentiate sugar-sweetened from unsweetened or artificially sweetened beverages. Given the low sales tax rates in the United States, these taxes add very little to retail prices, on average accounting for less than 5% of the tax inclusive price." A true SSB tax would presumably focus on sugar-content or calorie count.

A number of the essays point out that there may be interactions with public information campaigns or advertising and a soda tax. For example, publicity about the soda tax might help to make the tax salient in the minds of the consumers, so that they react to it more strongly. Publicity about healthier alternatives might also help in making healthier substitutions. Joshua Berning points out that soft drink companies spend tens of milllions each year on television advertising for top brands, which certainly suggests that advertising can influence choices. It also suggests that a tax on sugar-sweetened beverages could be undercut or offset by changes in advertising strategy.


One concern sometimes raised about a tax on sugar-sweetened beverages is that if people switch to diet soda, that might also have some negative health effects. However, studies of health effects of drinking diet soda need to account for two-way causality: that is, it may be that drinking diet soda causes poor health, or it may be that those who are already in poor health are more likely to drink diet soda. Block and Willett write: "When all of these studies are considered together, it appears that many, if not all, of the apparent adverse effects reported for artificially sweetened beverages may be due to reverse causation—individuals may switch to artificial sweeteners because of weight gain or blood glucose abnormalities. The studies that properly account for possible reverse causation, by using longitudinal data on subjects over time and controlling for dieting behaviors and weight, find no clear association between artificially-sweetened beverage consumption and metabolic risk."

The final essay, by Robbin Johnson, offers a counterargument to the idea of a soft drink tax. He points out that there are lots of contributors to obesity: "spending too much time sitting down watching screens; a physical environment that promotes vehicle use rather than walking; competition for the dining-out dollar that leads to larger portion size; lack of access to healthy foods or individualized portions; advertising messages promoting processed, calorie-dense foods; genetic factors; hormonal or other metabolic causes; use of medicines that contribute to weight gain; emotional needs that encourage overeating; quitting smoking; sleeping too little or too much; and aging." Most advice about weight loss and good health is about taking responsibility for moving toward an overall healthy lifestyle, not about identifying certain foods as "bad foods" and taxing them.

A "bad foods" tax, after all, would probably also focus on potato chips, french fries, snacks, candies, desserts, and processed meat, along with sugar-sweetened drinks, A "bad lifestyles" tax would tax or subsidize all sorts of actions. Leave aside the practical difficulties of designing and administering a bevy of such taxes. The conceptual insight is that these taxes would affect many foods and actions that are not bad for your health if done in moderation. There is something of a mismatch between a bevy of taxes to micromanage food and lifestyle choices for the average person, and the goal of discouraging the minority who are obese from overconsuming.