Why Does Minnesota Spend So Much More Than the National Average on Health and Human Services?

Reports that compare and rank states provide interesting perspective and information but typically prompt far more questions than answers.  Such is the case with MCFE’s national comparison of state and local government taxation and spending, How Does Minnesota Compare (HDMC), which is based on the data releases from the Census Bureau's Survey of State and Local Government Finances. 

Our latest edition based on FY 19 information is now available, and one of the more attention-getting findings is again Minnesota’s comparative spending on what the Census calls “public welfare.”  That label is a bit unfortunate as it conjures up direct cash transfers and related assistance when in fact it is mainly health care spending and encompasses a much broader array of human service programming, targeting not just low-income individuals and households, but the disabled and the needy elderly as well.  Our HDMC findings are not a comparison of benefit levels to recipients.  Rather, it captures the overall cost of the public assistance system in each state including the administrative and operational costs of state and county systems for delivering public welfare services and any related capital spending as well as the direct payments to individuals and payments to vendors who provide these services. 

According to our latest findings, Minnesota continues to rank second in the nation on public welfare spending, now totaling $26,556 per person at or below 150% of the federal poverty level.  That’s $7,000 more than was spent in FY 2018 and 112.5% more than the national average.  In the past when we’ve been asked for additional insight on the reasons for the large difference, our best response has been because it’s simply always been in the state’s DNA to do so.  Our high public welfare spending rank and spending levels have been a fixture of our HDMC reports going back over 50 years.  Even though we have tweaked the way we compare states over the years, Minnesota has consistently ranked in the top ten nationally and spent a fair amount of the past half-century in the top five.  The state has always placed a very strong budget priority on helping and providing security for the needy and disadvantaged.

Yet it’s worth trying to get a better understanding of the differences, if for no other reason than the general fund budget pressure such a commitment creates.  Lawmakers are increasingly aware of its influence perhaps best demonstrated by the unusual feature of the 2019 budget deal requiring a blue-ribbon commission to find $100 million in savings in state health and human services spending.  State Health and Human Service (HHS) spending now comprises 29% of current general fund spending – nearly a third larger share than twenty years ago -- and is currently projected to increase to 34% of general fund spending in 3 years.  According to the most recent MMB forecast, HHS spending is expected to increase by 20.3% this biennium, or by $2.76 billion consuming 54% of all the projected increase in FY 22-23 tax revenues.    

With this in mind we attempted to dig a little deeper in the numbers behind our comparisons to see if any additional insights could be offered to specifically explain the per-person spending spike in our most recent report and more generally highlight what may be distinctive about Minnesota public welfare spending that propels us to the top of the nation.  This effort is meant only to illuminate, not critique, HHS spending differences as we are in no position to evaluate this extraordinary complex area of government.  Like the HDMC report itself, these findings probably prompt more questions than answers.

How we compare spending contributes to the size of the difference, albeit likely in a relatively minor way.

We use spending per person at or below 150% of the federal poverty level as our basis for comparison to better align government spending with its ultimate users and beneficiaries.   Eligibility for federal public assistance programs most often run from 100 - 200% of the federal poverty level.  A clearly superior measure for comparing states would be total population counts being served by public welfare spending in each state, but to our knowledge no collection of such information on a national level exists.

Although 150% of poverty is the best representative measure when comparing all states, it likely contributes to the large gap between Minnesota and the national average.  As shown in Table 1 Minnesota consistently has one of the lowest poverty ratios in the country (48^th in the nation in 2019) which spreads all public welfare spending over a proportionately smaller number of individuals falling into this lowest income group, all else being equal.  Moreover, when economic conditions improve and the numbers of persons in this economic cohort decline even further, it can lead to big dollar “shocks” in the spending measure.  Such was the case in our findings this year which reported a dramatic $7,000 spike in public welfare spending per individual.  That can be directly linked to the fact that the number of individuals at or below this poverty level in the state fell by 228,000 in FY 2019, or 25.8%.  The effect is compounded in states like Minnesota that have greater program eligibility/spending above the 150% threshold.

        Source: U.S Census Bureau

To what degree this measurement choice affects the size of the differential in spending between Minnesota and the national average is difficult to assess.  One mitigating factor is that good and bad economic conditions shared by states are likely to have similar effects around the country.  For example, in FY 2019, forty-seven states reported decreases in poverty rates with increases in per person spending.  Based on revisiting older reports using per capita and personal income measures, we feel this measurement choice could elevate Minnesota’s rank by 1-3 spots.

State Medicaid program design, accessibility, and features are the big difference-maker.

Unsurprisingly, health care is both the most utilized service and the most expensive component of state public welfare spending.  In 2019, Medicaid, which now includes MNCare under its Basic Health Plan, served 1.17 million Minnesotans, accounted for 63% of all Minnesota users of public assistance and 75% of all public welfare spending in Minnesota.  No other state public assistance program accounted for either 5% of total recipient payments or overall spending.[1] 

States have the flexibility to design their Medicaid programs to best meet the needs of their residents, as long as the program meets the minimum federal guidelines.  As a result, Medicaid program designs, income eligibilities, and service levels vary widely among the states making attempts to compare and “rank” state programs difficult at best.   Such efforts usually focus on three categories of measurement: spending, quality, and access/eligibility.  For example, a 2021 report by HealthInsider ranked Minnesota 5^th in spending, 8^th in quality, and 9^th in access.   Quality and access rankings feature greater variability due to greater subjectivity in what to measure and different weighting schemes, but cost measurement is more straightforward and objective focusing on the amount of spending on beneficiaries and Medicaid spending as a share of state budget.  Table 2 offers some additional perspective on where the sources of spending differences lie by Medicaid enrollment group.

* Excludes 16 states which have not participated in the American Care Act Medicaid expansion
   Source: Kaiser Family Foundation based on analysis of data from the Preliminary CY 2019 Transformed Medicaid
   Statistical Information System (T-MSIS).

The organization and administration of state/local public assistance spending deserves a closer look

Although Medicaid dominates the fiscal landscape of public welfare, eight other assistance programs are managed in the Department of Health and Human Services.  Combined, these programs provided assistance to approximately 1.86 million Minnesota recipients in 2019 (although it’s important to note the total number of recipients can double count people using more than one program and does not equal the number of people eligible for assistance).  All these programs have spending on administration, operations, capital expenditures and related costs. 

We subtracted Minnesota payments to recipients and providers of recipient services from total public welfare spending reported to the Census by Minnesota state and local governments to derive an approximation of this other spending.  We calculate that in 2019 Minnesota state and local governments spent $2.3 billion on administrative, operational, and all related program management spending or about 15 cents for every dollar of payments.

Interestingly, this was a $376 million increase over FY 2018 even though the total number of public assistance spending recipients declined by nearly 50,000 in FY 2019.  To some extent this should not be surprising.  The economics of public welfare programming are somewhat analogous to K-12 economics in that even though headcounts may decline -- especially in better economic times -- the administrative infrastructure demands to deliver services have a strong fixed cost dimension to them.

That said, the trends in the relationship between the number of beneficiaries served and the administrative and related spending to serve them arouse curiosity.  In 2019, state HHS programs served 78,501 more persons than it did in 2014, a 4.4% increase.  But based on our calculations from Census of Government data, Minnesota state and local governments collectively reported $854 million more on spending outside of payments to beneficiaries and providers than it did in 2014, a 59% increase.  Just looking at state employment trends over this period, DHS agency employment supported by the state General Fund grew by 682 full time equivalent (FTE) employees between Q4 2014 and Q4 2019 or an average of 136 new FTEs per year.[2]   

What we do know from our national spending comparison

As we noted, this brief look behind the numbers prompts more questions than answers.  It can’t document the specific reasons why the state spends significantly more than the national average on health and human services.  It offers no insights on if or how state Medicaid program design, delivery and administration can be improved from the standpoints of cost effectiveness and return on investment.  It sheds no light to the extent our relative public welfare spending levels might be influenced by human capital, organizational structure, administrative and program design, and coordination issues at the state and local level.  And it offers no evidence to criticize the spending levels on the human, technology, and capital infrastructure needed in this insanely complicated area to deliver efficient, effective, and accountable health and human services to Minnesotans.   

What we do know from our HDMC findings is this: Minnesota’s long-standing commitment to the quantity and quality of health and human service delivery comes with a major responsibility: a relentless and aggressive pursuit of innovation, efficiency, and reimagination in their delivery.  Otherwise, costs explode, taxes increase, and other spending no less critical to the health and welfare of citizens and the state economy will be crowded out.