Health care isn't just a common human need, it's one of the largest items in the Texas state budget. It presents a significant continuing challenge to lawmakers, who must find ways to meet the rising costs of medical services provided to indigent and disabled Texans, state employees and retirees and those incarcerated in state prisons.
A new report by the Comptroller's office, Texas Health Care Spending Report: Fiscal 2015, quantifies these costs, analyzing spending data provided by 68 state agencies and higher education institutions for the five-year period from fiscal 2011 through 2015.
Health care spending represents nearly half of the state budget. In fiscal 2015, Texas spent $42.9 billion on health care, or 43.1 percent of all its appropriations from state, federal and other sources. About 42 percent of this spending came from state general revenue, including dedicated accounts within general revenue. Federal funds covered 43.6 percent, while the remainder came from grants, interagency contracts and other sources.
State government health care spending rose by 19.7 percent from fiscal 2011 to 2015, exceeding the growth of inflation and the Texas population during the same time period (Exhibit 1).
A variety of state agencies and institutions support or directly administer numerous health services, including Medicaid, the Children's Health Insurance Program (CHIP), mental health services, prison health care, health-related research, medical insurance for both active and retired state government employees, workers' compensation and other programs (Exhibit 2).
*"Other" includes grants from private foundations, interagency contracts, trust funds, bond proceeds, local accounts held by higher education institutions, etc.
**Expenditures are presented as "All Funds" since the method of finance detail was not available.
*** "All Funds" does not include all research expenditures. The category includes state general revenue and state grants only.
Five state agencies — the Texas Health and Human Services Commission (HHSC), Texas Department of Aging and Disability Services (DADS), Texas Department of State Health Services (DSHS), Employees Retirement System (ERS) and Teacher Retirement System (TRS) — accounted for 82.5 percent of all health care spending in fiscal 2015 (Exhibit 3).
HHSC represented about 59 percent of the state's health care spending in fiscal 2015, with $25.4 billion in total expenditures, including $10.4 billion from state funds and $14.9 billion from the federal government. From fiscal 2011 to 2015, HHSC's health care spending from all funds rose by 26 percent.
Both HHSC and DADS administer Medicaid and CHIP in Texas. Medicaid, a federal program jointly financed by the federal and state governments, supports health care for low-income children and their families as well as long-term care for aged and disabled clients. CHIP pays for health and dental care for children up to age 19 whose family incomes are higher than allowed by Medicaid but still at or below 200 percent of the federal poverty level.
Spending for Medicaid and CHIP totaled $30.3 billion in 2015, or 70 percent of all state government health care spending.
DADS administers Medicaid-funded long-term care in community and institutional settings for the elderly and disabled, including residential services for people with intellectual disabilities in 13 state-supported living centers (formerly called state schools) across the state.
In fiscal 2015, DADS spent $4.7 billion on long-term care services such as daily needs assistance, employment services, home improvements and hospice care. The state contributed almost $1.9 billion toward these services in fiscal 2015 (about 40 percent), while the federal government supplied the remaining $2.8 billion.
DSHS provides psychiatric services through the state's mental health hospitals and administers public health programs including disease prevention, community health workers and substance abuse services. DSHS spent $2.1 billion on these programs in fiscal 2015, 19 percent more than in fiscal 2011. The state's share totaled $1.4 billion, or 64.3 percent of the total.
ERS administered health insurance for 541,600 plan participants in fiscal 2015, including employees and retirees of state agencies and higher educational institutions other than the University of Texas and Texas A&M University systems (which offer a separate benefit plan) as well as some local government retirees.
TRS administers health insurance for current public school employees (the TRS-ActiveCare plan) and retirees (TRS-Care). As of Aug. 31, 2015, TRS-ActiveCare covered about 290,000 employees, while TRS-Care covered 253,000 retirees.
In fiscal 2015, TRS spent $1.3 billion, all state funds, on health care coverage for its participants. This total represents a nearly 170 percent increase from 2011, largely due to supplemental legislative appropriations made in fiscal 2013 through 2015 to maintain the financial health of TRS-Care, which has been chronically underfunded for much of its history.
As seen in Exhibit 2, a number of other state entities report health care-related expenditures. Collectively, this spending totaled $7.5 billion in 2015, or 17.5 percent of all health care spending. It included payments for workers' compensation, funding for medical research, services for the disabled, health care for adult and youth offenders, support for rural hospitals and health benefits for personnel of the Texas A&M and University of Texas systems.
Texas Health Care Spending Report: Fiscal 2015 employs a definition of "health care" largely following that used by the U.S. Department of Health and Human Services to produce official estimates of nationwide health care spending.
*Includes health care benefits for state employees and public school teachers.
**Includes costs for the state schools for the blind and deaf.
The rapid rise in Texas' health care spending is due to a number of factors.
New medical technologies: Recent decades have seen unprecedented progress in the medical sciences, including groundbreaking drugs, advanced imaging equipment, improvements in acute disease treatment, the development of non-invasive procedures and a variety of new medical devices.
While such advances have saved innumerable lives, they also drive up the cost of health care significantly. The Hastings Center, a bioethics research institute, reports that up to half of medical cost increases can be attributed to the introduction of new technologies or increased use of older ones. It may seem counterintuitive, given that technological innovation often drives down costs, but understandably both doctors and patients tend to demand the latest and greatest treatments regardless of price.
In particular, drugs represent a significant share of health care costs — about 10 percent of all U.S. health care spending in 2014, according to the National Center for Health Statistics. Total U.S. spending on prescription medicines rose by 13.1 percent in 2014 alone, to $374 billion.
Patented and costly "specialty" drugs are used by only 1 to 2 percent of the American population, but account for about 38 percent of the nation's spending on pharmaceuticals.
Patented and costly "specialty" drugs used to treat chronic diseases and conditions are providing much of the impetus behind rising drug costs. A November 2015 report by the Pew Charitable Trusts says specialty drugs are used by only 1 to 2 percent of the American population, but account for about 38 percent of the nation's spending on pharmaceuticals.
Chronic disease: Spending on specialty drugs, in turn, is driven by the prevalence of chronic diseases such as arthritis, asthma, cancer, diabetes, heart disease and stroke. Chronic disease is responsible for nearly two-thirds of all deaths in Texas each year.
Direct medical costs related to chronic diseases, including office visits, inpatient hospital stays, emergency room visits, nursing home care, prescription drugs and medical equipment, continue to rise. According to the Partnership to Fight Chronic Disease, 83 cents of every Medicaid dollar spent goes to treat these conditions.
Aging population: People generally require more medical care as they age, and are much more likely to develop one or more chronic medical conditions. Today, a huge number of baby boomers are heading, if reluctantly, into their senior years.
In Texas, the Federal Administration on Aging expects the share of the state's population 65 and older to rise to 15.6 percent by 2030, up from 9.9 percent in 2000. The number of Texans 65 and older will more than double in the same period, from 2.1 million to 5.2 million.
The aging of the Texas population will have far-reaching health care implications, including an increased need for disability services and home care.
Increased utilization: Due in part to the aging of the population, rising obesity rates and other factors leading to a greater incidence of chronic disease, Americans are seeking medical attention more frequently than in the past. According to the National Center for Health Care Statistics, between 2000 and 2010 U.S. primary care physician office visits per 100 persons rose by 11 percent; hospital outpatient visits rose by 10 percent; and emergency room visits increased by 10 percent.
Uncompensated care: Each year, Texas hospitals, community providers and physician's offices provide billions of dollars' worth of uncompensated care — services provided, generally to indigent persons, without payment. In 2014, Texas hospitals assumed costs of $5.5 billion in uncompensated care; the nationwide total was $43 billion in 2015. A 2015 study published by the National Bureau of Economic Research found that each uninsured individual in the U.S. costs hospitals about $900 per year.
Uninsured patients represent a substantial share of uncompensated care costs. The uninsured are more likely to delay medical care until they are very sick and often seek basic care in emergency rooms, where treatment is much more expensive.
Uninsured Texans are disproportionately poor. In 2015, 58 percent of uninsured Texans lived in households with annual incomes of less than $50,000, compared with 35 percent of their insured counterparts.
All levels of government help defray the costs of uncompensated care. According to the Kaiser Family Foundation, in 2013 the federal government contributed 62 percent of this funding ($32.8 billion), while state and local governments provided 37 percent ($19.8 billion). Private funding, including charity care, accounted for the remainder.
Download the full text of Texas Health Care Spending Report: Fiscal 2015.