CHA Releases White Paper Examining Medicaid’s Impact on Rising Healthcare Costs

WASHINGTON, D.C. — The Center for Healthcare Affordability (CHA), a project of the Institute for Legislative Analysis (ILA), today released a major new white paper examining how Medicaid’s growth into a nearly $1 trillion annual program is affecting healthcare costs throughout the broader market.

The report, “Medicaid at a Crossroads: Improving Program Effectiveness, Reducing Taxpayer Costs, and Limiting Broader Healthcare Cost Pressures Entering 2027,” argues that Medicaid can no longer be viewed solely as a safety-net program or federal budget line. At its current scale, even relatively modest eligibility errors, unnecessary utilization, or weak oversight can translate into billions of dollars in additional spending.

More broadly, the report examines an often-overlooked economic consequence of Medicaid: government can dramatically increase demand for healthcare without increasing the supply of doctors, nurses, hospital beds, treatment facilities, or other medical resources.

“The healthcare debate too often focuses on who pays the bill instead of why the bill is so expensive in the first place,” said Fred McGrath, Executive Director of the Center for Healthcare Affordability and author of the report. “At nearly $1 trillion a year, Medicaid is large enough that the incentives built into the program can influence utilization, provider capacity and healthcare costs across the entire system. Protecting Medicaid for those who truly need it and making healthcare more affordable are not competing goals. Done correctly, they reinforce one another.”

The white paper reviews research from leading universities and research institutions examining how heavily subsidized healthcare affects utilization. The RAND Health Insurance Experiment found healthcare spending under free care was approximately 23 percent higher than under coverage requiring 25 percent coinsurance, without measurable differences in general health outcomes for the average participant. The Oregon Health Insurance Experiment similarly found that Medicaid increased office visits, hospital admissions, prescription use and emergency-department visits, while the initial study found no statistically significant improvement in the physical-health measures examined.

CHA argues that these findings have broader implications when increased utilization occurs within a healthcare system where supply remains limited and government regulations can make it difficult for new providers and facilities to enter the market.

The report compares these dynamics with other subsidized markets. Research on housing vouchers found that increased subsidies contributed to higher rents in supply-constrained markets, while Federal Reserve Bank of New York researchers estimated that colleges captured approximately 60 cents in higher tuition for every additional dollar of subsidized federal student-loan capacity.

“Expanding the amount of money available to purchase healthcare does not automatically create another doctor, another nurse, another appointment or another hospital bed,” McGrath said. “When government subsidizes additional demand while regulation limits the ability of supply to respond, the result can be greater spending without solving the underlying affordability problem.”

The report identifies several areas for reform, including stronger eligibility verification to ensure benefits reach those who qualify; greater transparency and accountability within Medicaid managed care; closer scrutiny of provider taxes and state-directed payments; improved controls on unnecessary utilization; and supply-side reforms that reduce barriers to provider competition, facility development and professional practice.

Managed care receives particular attention because more than three-quarters of Medicaid beneficiaries are now enrolled through private managed-care arrangements. CHA recommends stronger encounter-level reporting, related-party disclosures, zero-claim monitoring and independent review so policymakers can better determine where taxpayer dollars ultimately go.

The paper also argues that Medicaid reform should be judged by more than enrollment or government spending. For families above Medicaid eligibility thresholds who face commercial premiums, deductibles and healthcare prices, the more important long-term question is whether the underlying cost of healthcare actually declines.

The full white paper, “Medicaid at a Crossroads,” is available at ReformHealthcare.org.

The Center for Healthcare Affordability, a project of the Institute for Legislative Analysis, examines government spending, treatment costs, competition, innovation and insurance markets with the goal of advancing reforms that make healthcare more affordable for patients, employers and taxpayers.

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