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Last week, MassInc. released a report about the state of the Commonwealth’s finances. The study’s author, Cameron Huff, raises the important point that the state budget has a “structural imbalance, with on-going spending exceeding revenues.” This is something that politicians, policy-makers and the public need to talk about; Huff’s report contributes much to the conversation. Going forward, though, we should make sure that we aren’t placing undue responsibility for increased spending on MassHealth, the state’s Medicaid program.

For his report, Huff looked at two decades of state budgets from 1987 through 2007. He finds that Medicaid “spending totaled $7.4 billion in 2006, an increase over 1987 of more than $4.5 billion, or 163 percent. This percentage growth was almost five times that of the budget as a whole. Medicaid’s share of the budget rose from 13 percent to 26 percent between 1987 and 2006. Increases in Medicaid were two-thirds of the overall growth in state spending.”

Both the Boston Herald and the Globe’s venerable business columnist Steve Bailey picked up on Huff’s conclusions. In his column March 19, Bailey cited Huff’s study and opined that “the rising cost of healthcare is devouring the budget, crowding out almost everything else.” He goes on to quote Huff’s statistic that Medicaid “accounted for almost two-thirds of all state spending growth over the last 20 years.”

In an editorial March 20, the Herald does much the same.

This over-simplification of Medicaid’s place in the state budget isn’t helpful in correctly diagnosing the problem. If we are going to assess the long-term health of the Commonwealth’s budget, we can’t take numbers out of their revenue context. It’s important, in looking at the increased share of the budgetary pie consumed by Medicaid, to do so in relation to the dramatic reduction in tax revenues that have pared the state budget.

To be fair, Huff observes that the “state has become increasingly dependent on volatile funding sources for revenue growth” such as taxes on capital gains and businesses. But he doesn’t tease out the impact of revenue decreases tied to decisions made by the public (such as approving a ballot initiative to decrease the state income tax) and state lawmakers (such as increasing the personal exemption and increasing deductions that can be taken for adoption expenses).

It’s certainly within the prerogative of the legislature to raise or lower taxes, and within the purview of the public to weigh in on the same topic either by ballot initiative or by contacting state reps and senators. But to assess Medicaid’s costs over time — and its corresponding consumption of state resources — we must compare annual state Medicaid costs with comparable changes in the state’s economy. One standard way of doing that is by measuring personal income.

A 2006 report by the Massachusetts Medicaid Policy Institute authored by Nancy Wagman and Noah Berger does just that. It shows that from fiscal years 1994 to 2005, Medicaid spending grew by 5.6 percent. During the same period, the economy, as measured by personal income, grew by 5.4 percent. Tellingly, state revenues grew by just 4.4 percent. The reason state revenues didn’t keep pace with economic growth? Tax cuts enacted by the public and the state legislature.

Between 1994 and 2005 Medicaid spending as a share of personal income increased $158 million. In the same period, state revenues as a share of personal income dropped by $2.5 billion. Since the federal government reimburses the state for approximately half of its Medicaid expenses, the increase to the state in Medicaid spending from 1994 to 2005 was just $79 million. This figure — $79 million — as Wagman and Berger point out, is “less than one-half of one percent of the Commonwealth’s budget” for 2005.

By comparing Medicaid’s annual cost as a share of the state budget without taking tax cuts into consideration, one might conclude, as Huff does, that Medicaid’s sometime reputation as a budget buster is “a label more than well deserved.” In fact, the many permanent tax cuts enacted by the public and state lawmakers account for a much more significant portion of the structural deficiency the Commonwealth is now facing.

Wagman and Berger conclude: “Although Medicaid spending as a share of the economy has remained relatively stable, state revenues as a share of the economy have dropped substantially.”

As the state continues to engage in tough debate around the costs of health care and health care reform, it is critical that the numbers we are talking about are placed in proper context. Huff acknowledges up front that the Commonwealth’s budget over the past 20 years reflects “the state’s collective values and priorities.” But failing to detail the costs of tax cuts alongside the costs of health care, human services, education reform and local aid gives an incomplete picture of what the state’s resources actually are and how they’ve been allocated.

Jarrett Barrios, President, Blue Cross Blue Shield of Massachusetts Foundation

This program aired on March 27, 2008. The audio for this program is not available.