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Economic & Fiscal Impact of Additional $100 Million In State Funding for Medicaid Programs

Prepared for Herschel Cleveland - Speaker of the House

Prepared by
Dr. Wayne Miller - Extension Economist, Cooperative Extension Service University of Arkansas and
Dr. John Pickett - Professor, College of Business University of Arkansas at Little Rock
March 24, 2003

Summary  • Economic Impact  • Fiscal Impact

Summary

$100 Million of State Funds for the Medicaid Program

Produces an additional $300 Million for the State of Arkansas from the Federal Government

This $400 Million is spent for¹

Hospitals, Doctors and other Medical Services -- $260 million (65%)
Long Term Care -- $92 million (23%)
Drugs -- $48 million (12%)

¹ These percentages were taken from the FY 2002 Medicaid Expenses as provided by the Arkansas Department of Human Services Division of Medical Services report titled "Program Overview State Fiscal Year 2002."

Economic Impact

This spending spawns $633 million in economic activity in the State and creates over 10,000 jobs for Arkansans and generates income of nearly $306 million.

For every $1 spent by State Government the total economic activity generated is $6.33.

This $633 million in economic activity generates approximately $400 million in value added (gross state product) to the state economy.

Approximately $4 is added to the Gross State Product of Arkansas’ economy for every $1 spent by State Government on the Medicaid program.

Fiscal Impact

State and Local Government Revenue generated from the additional Medicaid spending is estimated to be approximately $22 million.

• Approximately $9.7 million or 43.1% is from the sales & use tax,
• Approximately $6.9 million or 30.6% is from the personal income tax,
• Approximately $2.8 million or 12.3% is from the property tax,
• Approximately $2.9 million or 14% is from other taxes such as the corporate profits tax, motor vehicle license fees, and other direct and indirect taxes and fees.

While the Medicaid program is defensible because it provides needed medical services to people who otherwise would not have access to medical care to enable them to be productive citizens, the Medicaid program also has a significant impact on Arkansas’ economy. We have been asked to estimate the economic and fiscal impact on the Arkansas economy of providing an additional $100 million for Arkansas’ Medicaid program.

To estimate the impact on the Arkansas economy we assume that the $100 million provided by the State of Arkansas will be matched 3:1 by the Federal Government. This means that for every $1 spent by the State of Arkansas, the Federal Government will provide $3 to the State for Medicaid program expenses. Therefore, providing an additional $100 million of State funds for the Medicaid program means that an additional $400 million will be spent on the Medicaid program in Arkansas. To estimate the economic and fiscal impact on the Arkansas economy we assume that this $400 million is spent similar to the Medicaid expenditures in Fiscal Year 2002.

To identify the economic and fiscal impact we first estimate the multiplier effects of spending $400 million dollars in the Arkansas economy to identify the number of jobs created and value added to the Arkansas economy. Second, we estimate the tax revenue that would be generated from this economic activity.

Using the IMPLAN economic input-output model we estimate the additional State spending of $100 million will generate $633 million in economic activity (Table 1). This economic activity will create 10,268 jobs and provide nearly $306 million in income for Arkansas residents. This economic activity will contribute $395 million to Arkansas’ Gross State Product.

It is estimated that State and Local governments will receive $22.3 million in revenue from the economic activity resulting from the State spending an additional $100 million on the Medicaid program. Approximately $9.7 million (43.1%) of this revenue will be collected from the sales and use tax and another $6.9 million (30.6%) will be collected from the personal income tax (Table 2). Other direct and indirect taxes and fees collected are estimated to be approximately $14 million. These other sources of revenue include the corporate profits tax, motor vehicle license fees, and many other taxes and fees that generate state and local revenue.