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YOU DECIDE: Was this a 'win-win' for government?

April 04, 2008

MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

Dr. Mike Walden
Media representatives: For a black-and-white or color copy of this photo, call 919.513.3127 or e-mail dave_caldwell@ncsu.edu.

Many people look at decisions in government as a "win-lose" tradeoff. Someone or some group wins from a government policy, while other persons or groups lose.

For example, taxes may be increased or government borrowing expanded to fund a new program. Beneficiaries of the new program win; those paying higher taxes or carrying the larger debt lose.

But sometimes a government decision comes along that appears to result in all winners - and a "win-win" outcome. Such is the case, many would conclude, with North Carolina's recent changes to funding Medicaid.

First, a little necessary background.

Medicaid is the federally instituted program begun more than 40 years ago to help households with limited income pay their medical bills. Medicaid assists almost 40 million people a year. Medicaid is termed an "entitlement" program, in that if the person qualifies for assistance - primarily on the basis of limited income - then by law they must be helped.

It should be no surprise that Medicaid has been one of the fastest-growing of government programs, with annual expenditures usually increasing by more than 10 percent. Projections show this fast growth should continue in the future.

What's this have to do with North Carolina?

First, all states must help fund Medicaid, so the growing cost of Medicaid has clearly impacted the state budget. In fact, most legislators would agree that cost containment in Medicaid would be the number one factor that could most improve the long-run health of the state's balance sheet.

But where North Carolina has been different than most states is in requiring counties to pay part of the Medicaid expenses not covered by the federal government. Typically counties would pay 15 percent of the nonfederal share of Medicaid.

Yet this created a big problem. Medicaid spending is highest in areas where there are more households with limited incomes. This makes sense because Medicaid is targeted to households with lower incomes. Therefore, counties with a higher percentage of limited-income households ended up paying a much greater share of their county budgets for Medicaid than did counties with fewer limited-income persons.

An analysis of Medicaid spending in 2002 confirmed this. North Carolina counties with the highest poverty rates paid a share of their budgets four to five times higher than counties with low poverty rates. So counties least able to afford it were being asked to provide the most help to their low-income residents.

The news is that North Carolina put an end to this situation in the 2007 legislative session.

Effective July 1, 2009, the state takes over the county share of Medicaid funding. However, to help finance this new spending, the state will also shift one-half cent of the local sales tax from the counties to the state. The total sales tax rate will remain the same, but the state now gets more of the revenues and the counties less.

If the legislation had stopped here, then it would have created some winners and some losers among counties. Counties with high Medicaid rolls and little sales tax revenue would have won, while counties with smaller Medicaid rolls and large sales tax revenue would have lost. But the legislation added two provisions that made the Medicaid/sales tax swap a win-win for all counties.

First, the legislation changed a technical aspect of how local sales tax revenues are allocated to counties that favors counties with relatively high retail sales. Second, the legislation added a "hold harmless" provision, guaranteeing that all counties would gain (by at least $500,000 annually) from the swap. In other words, if a county loses more in sales tax revenue than it gained from reduced Medicaid expenditures, then the state will make up the difference and add another $500,000 on top!

Of course, the new way of financing Medicaid in North Carolina doesn't mean all is well with the program. It's still a fast-growing program that will take increasing shares of federal and state budgets. But it will no longer be an issue for local government budgets, especially for those counties with high poverty concentrations where Medicaid could take 15 percent of local revenues. Plus, the changes were accomplished without hurting high-income counties.

You decide if this was unique!

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University's College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The Department of Communication Services provides his You Decide column every two weeks. Earlier You Decide columns are at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm

Related audio files are at http://www.ncsu.edu/waldenradio/

Posted by Dave at April 4, 2008 08:00 AM