According to the N.C. General Assembly’s Fiscal Research Division, about 14 percent of the projected $791.3 million budget deficit for FY 2000-01 can be attributed to higher-than-expected growth in the state’s Medicaid program.1 The cost spike is sharp. Payments for services have risen by nearly 17 percent in the past year, and the cost per recipient grew by about 12 percent.2

No one should be surprised at this trend. Indeed, except for a brief period in the late-1990s, Medicaid has grown at a mind-boggling rate in recent years. From 1986 to 1997, expenditures for North Carolina’s program grew at an average annual rate of 18 percent. But Medicaid spending grew only 2 percent in 1998 and 5 percent in 1999.3

This atypically low growth in 1998-99 appeared to lull many lawmakers and the Hunt administration into a false sense of security, leading to withdrawals from Medicaid trust funds to balance previous state budgets. At the same time, lawmakers expanded the program’s obligations by changing reimbursements for adult-care homes and emergency rooms, doubling the length of time former TANF recipients could stay in the program, and aggressively recruiting new enrollees among children in conjunction with the roll-out of North Carolina’s S-CHIP program, called Health Choice.

Our Medicaid program is hardly alone in its resurgent inflation. As of Feb. 28, 23 states are reporting Medicaid overruns for the 2001 fiscal year.4 But North Carolina’s problem is worse than that in most states. Indeed, in the most recent year for which comprehensive data are available, our Medicaid program was the most expensive, in dollars per person served, in the South (see graph on the next page). Given these facts and a projection by the U.S. Health Care Financing Administration of 8 percent annual growth in national Medicaid expenditures through the year 20105North Carolina leaders can expect rapid Medicaid growth to force tax increases or cuts in other services in the future (in addition to its role in the current deficit problem) unless policymakers make fundamental changes in the program.

The Easley administration and legislators must take both a short-run and long-run approach to Medicaid reform. To help close the budget deficit, the state should adjust reimbursement rates and partially eliminate optional services not mandated by the federal government. These options will produce tens of millions of dollars in immediate budget savings. The state should also look to Mecklenburg County for ideas. Since 1996, Mecklenburg has experimented with private contracts to deliver health insurance to low-income recipients. Over three years of full implementation, annual growth in Medicaid expenditures for these patients averaged 5.3 percent while statewide costs increased at a 6.5 percent annual rate.6

In the long run, Medicaid recipients must face greater incentives to consume health care wisely and become self-sufficient. Reformers should 1) reshape the benefits package to more closely resemble plans available in the private market; 2) offer high-deductible, low-cost options that allow poor recipients to save unused dollars; 3) tighten eligibility standards for the elderly and disabled to focus on the truly needy; and 4) encourage families to plan for their future long-term care needs by setting shorter time periods for eligibility and expanding state tax relief for private long-term care insurance and medical savings. If these reforms were to succeed only at reducing North Carolina’s Medicaid expenditures to the regional average, that would still represent more than $251 million a year in state budget savings.

John Hood, President 


  1. David Crotts, “Updated Budget Outlook for 2000-01 Fiscal Year,” Legislative Services Office, N.C. General Assembly, Feb. 8, 2001.
  2. Kerra Bolton Fisher, “Health programs hanging in limbo,” Asheville Citizen Times, March 5, 2001.
  3. “A History of Medicaid Expenditures,” Table 8, Division of Medical Assistance, N.C. Dept. of Health and Human Services, updated Feb. 21, 2000.
  4. “State Legislatures React to Changing Economy,” News Release, National Conference of State Legislatures, Feb. 28, 2001.
  5. “A Profile of Medicaid: Chartbook 2000,” Health Care Financing Administration, Washington, D.C., Sept. 2000, p. 35.
  6. Ashley M. Gibson, “CHS Mulls Medicaid HMO options,” The Business Journal (Charlotte), January 5, 2001.