Researchers have argued that the dramatic increase in Medicaid spending during the late 1980s and early 1990s “crowded out” state spending on other activities, particularly education. Medicaid growth has, at least in part, been driven by increased federal eligibility and service mandates, federal court decisions on hospital and nursing home rates, and health care inflation; and the need to respond to these outside forces has placed increasing pressure on state finances. Other evidence, however, suggests that the adverse effect of Medicaid growth on state finances has been overstated. During the late 1980s and early 1990s, states shifted many human service programs from general fund to Medicaid financing and took advantage of Medicaid rules governing the use of provider donations and assessments, such as state matching and claiming payments to disproportionate-share hospitals to increase federal reimbursement without increasing the claims on their own revenues. But the increased burden of Medicaid growth on state finances may be more apparent than real. In this article, we test the crowding-out hypothesis using a two-stage, least-squares fixed-effects model of Medicaid’s impact on educational spending from 1980 to 1990. Our results indicate that Medicaid growth has had no significant effect on educational spending. Rather, educational spending has responded more to changes in states’ own-source revenues than to growth in Medicaid spending.

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