Is More Money the Answer to Budget Woes?

By Kelly McCutchen

Georgia’s economy appears to have finally turned the corner but the pressure on the budget continues. If the state fails to act quickly, Georgians may face a large tax increase in the near future.

The good news is that state revenues are expected to grow by nearly $1 billion next year. The bad news is health care and education costs will also increase and gobble up the great majority of these new revenues.

The combined costs of Medicaid and health insurance for state employees are out of control; the typical governmental answer to health care cost increases is, “Spread the pain.” Physicians, hospitals, pharmacists and pharmaceutical manufacturers all receive budget cuts. The approach could be called passing the buck, because instead of cutting costs, they’re merely shifted to someone else.

The state needs to use its purchasing power to encourage real cost savings. Insurance must revert to its proper role – protecting against unforeseen, catastrophic health care expenses. Insurance was never intended for, nor is it very efficient at, payment of routine, low-dollar expenses. That’s why you don’t file a claim on your auto insurance for an oil change.

Recent federal legislation allows businesses to put the money saved by switching to high-deductible health insurance plans into tax-free Health Savings Accounts. Unspent funds in these accounts can build up over time. Academic studies show this can reduce spending by up to 30 percent without adverse impact on health status, but it also meets the commonsense test: Just think about how people order in a restaurant when they are paying the bill versus how they order when dining on someone else’s expense account.

Gov. Sonny Perdue has announced plans to offer Health Savings Accounts as an option to more than 600,000 state employees. This is a crucial first step in fundamentally changing the incentive structure of health care in Georgia and controlling future cost increases. Changing incentives, not throwing money into the current dysfunctional system, is the long-term solution.

The biggest cost savings will come from motivating individuals with chronic diseases to enroll in disease management plans designed to provide education and medication to help them stay healthy and out of the hospital. Large companies and community-based groups throughout Georgia have proven these programs work. Similar efforts for Georgia’s Medicaid recipients and state employees should be enhanced and expanded.

Health care may be more complicated, but Georgia spends more money on education. The billion-dollar bombshell in the future is a lawsuit filed by several Georgia school systems, part of a rash of similar suits across the country calling for increased education spending. How much is enough? A study in South Carolina predicts a nearly 50 percent increase in total spending, from $3.1 billion to $6 billion. In Arkansas, a similar study predicts the need for a 34 percent increase in per-pupil spending, at a total cost of $848 million.

These may seem like idle threats with little chance of success, but consider New York City. With current per-pupil spending of about $11,800, a layperson would assume that the Big Apple is unlikely to be accused of underspending. Yet a panel of special masters appointed by a state judge recently recommended the state of New York spend $9.2 billion more on facilities and increase per-pupil expenditures by $5,118. That adds up to more than the tuition at the most elite Atlanta private schools.

In Georgia, a press release by the consortium suing the state implies that state spending would need to be increased by at least $1.4 billion to meet basic state standards.

If simply spending more money were the solution to improving our public schools, we would have figured that out long ago. Consider the facts. Georgia spends more money per pupil ($8,336) than all but 15 other states. Our average teacher salary ($45,533) is higher than all but 13 states. Over the decade from 1992-93 to 2002-03, in constant dollars, average salaries for public school teachers increased 2.6 percent nationally. Georgia’s salaries increased 18 percent, the largest increase in the nation over that period.

There may be inequities in how Georgia’s education funding is allocated or managed, but the evidence seems clear that it is not in how much total money we are spending.

Health care and education represent 75 percent of Georgia’s state budget and the majority of every local government’s budget. But the impact goes beyond taxpayers because education and quality medical care are critical to the success of every community throughout the state.

Throwing money at the problem is not the answer. We must provide incentives so that we spend health care and education dollars as carefully as we spend our own money – demanding both quality and a fair price. This will require innovative solutions, bold leadership and dramatic change, but the alternative is far more difficult.

Kelly McCutchen is executive vice president of the Georgia Public Policy Foundation, an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.

© Georgia Public Policy Foundation (January 21, 2005). Permission to reprint in whole or in part is hereby granted, provided the author and his affiliations are cited.