While total U.S. health care spending grew slowly in 2011, rising about 4 percent, the story for state and local governments was dramatically different, according to the latest data from the Centers for Medicare & Medicaid Services. Health care spending by states and localities increased 10 percent, and consumed a larger share of revenues—about 3 out of every 10 dollars—than has been the case for these expenses since at least 1987.^[1]

When combined, federal and state spending on Medicaid—the jointly financed insurance program for low-income Americans—ticked up by less than 3 percent. But states’ share of Medicaid costs climbed by more than 20 percent, and the program remains their largest health care budget item. 

As state and local governments continue to navigate through the aftermath of the Great Recession, health care spending remains a main source of fiscal pressure.

Spending Accelerates After a Brief Slowdown 

State and local health spending data from 2011 indicate that much of the slower rate of growth from 2008 to 2010 (3 percent) can be traced to a temporary surge of federal aid, not a change in longer term trends.

Under the American Recovery and Reinvestment Act (ARRA) and later legislation that extended certain ARRA provisions, the federal government contributed an extra $103 billion to Medicaid, with states receiving the bulk of that total in 2009 and 2010. So, while the recession swelled Medicaid rolls and drove increases in total program expenditures, states’ share of Medicaid spending actually declined from $146 billion in 2008 to $135 billion in 2010.^[2]

The extra federal Medicaid money stopped flowing at the end of June 2011, which was the primary reason state Medicaid expenditures rose to $165 billion in 2011—a 22 percent increase from 2010.

If unemployment remains high and the nation’s economic recovery proceeds slowly, state Medicaid enrollments and spending may be elevated for years to come, regardless of whether a state opts to raise their program’s eligibility limits under the Affordable Care Act (ACA). The ACA provides enhanced federal matching funds only for Medicaid enrollees who become newly eligible as a result of state coverage expansions in 2014.

Little Change in Long-term Outlook 

Growing health care spending poses serious fiscal challenges at all levels of government. This is especially true for states and localities that must balance their spending and revenue each year.

For state and local governments, health care spending as a share of revenue increased from 16 percent to 30 percent from 1987 to 2011 (the entire period for which data are available). After adjusting for inflation, their combined health care expenditures increased by 241 percent over that time period.^[3]

The most significant elements of this expansion were contributions to public-employee health insurance premiums and Medicaid, which experienced inflation-adjusted increases of 430 percent and 315 percent, respectively.

Pew’s analysis of projections from the Centers for Medicare & Medicaid Services shows that state and local spending is expected to rise nearly 55 percent in inflation-adjusted dollars between 2011 and 2021, driven largely by anticipated growth in Medicaid.

Looking further ahead, the Government Accountability Office (GAO) warns that health care spending is the primary driver of the long-term fiscal challenges that it expects state and local governments will face. According to the GAO’s simulation, state and local health-related expenditures will nearly double as a percentage of gross domestic product between 2012 and 2060.^[4]

A Positive Trend 

The growth in states’ total Medicaid expenses masks some good news within the numbers: spending per individual grew slower, on average, than private insurance premiums between 2000 and 2009.^[5] 

This trend suggests that much of Medicaid’s recent spending growth resulted from its larger enrollment, which increased from 32 million in 2000 to 50 million in 2010, due in part to financial hardships experienced by many Americans in the wake of the Great Recession.^[6] 

The State Health Care Spending Project is an initiative of The Pew Charitable Trusts and the John D. and Catherine T. MacArthur Foundation.