oversight

Medicaid Formula: Differences in Funding Ability among States Often Are Widened

Published by the Government Accountability Office on 2003-07-10.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

             United States General Accounting Office

GAO          Report to the Honorable Dianne
             Feinstein, U.S. Senate



July 2003
             MEDICAID FORMULA

             Differences in
             Funding Ability among
             States Often Are
             Widened




GAO-03-620
                                                July 2003


                                                MEDICAID FORMULA

                                                Differences in Funding Ability among
Highlights of GAO-03-620, a report to the       States Often Are Widened
Honorable Dianne Feinstein, United
States Senate




A primary goal in establishing                  The Medicaid formula narrows the average difference in states’ funding
Medicaid’s statutory formula,                   ability by 20 percent but often widens the gap between individual states and
whereby states with lower per                   the national average. Although the receipt of federal matching aid moves 30
capita incomes (PCI) receive                    states closer to the national average, making the average difference in
higher rates of federal                         funding ability smaller, it also moves 21 states farther away from the
reimbursement for program costs,
was to narrow differences among
                                                average, widening the average difference. These 21 states include 3 that are
states in their ability to fund                 among the states with the largest populations in poverty—California,
Medicaid services. States’ ability to           Florida, and New York. After federal matching aid is added, states’ funding
fund services depends on their                  ability ranges from 26 percent below the national average for two states to
financial resources in relation to              179 percent above for another. Because of the formula’s current structure,
their number of and costs to serve              in many instances, two states devoting similar proportions of their own
people in poverty. GAO and others               resources to Medicaid can spend very different amounts per person in
have testified before Congress that             poverty. For example, in fiscal year 2000, California and Wisconsin each
the current formula does not                    devoted about $8 for every $1,000 of their own state resources toward
address wide differences among                  Medicaid. However, under the current formula, Wisconsin receives a
states in their ability to fund their           relatively high federal matching rate despite its relatively high ability to fund
Medicaid programs and that the
formula’s reliance on PCI is the
                                                program services, whereas California receives a low federal matching rate
primary cause. GAO was asked to                 despite its relatively low ability to fund program services. With the addition
determine the extent to which the               of federal matching aid, Wisconsin is enabled to spend more than twice what
formula narrows these differences               California is able to spend per person in poverty ($7,532 versus $3,731).
and to identify factors that impede
further narrowing of differences.               Two factors constrain the formula from further decreasing differences in
                                                states’ funding ability. First, PCI is not a comprehensive indicator of a
To evaluate the extent to which the             state’s total available resources and is a poor measure of the size of and cost
formula narrows differences in                  to serve a state’s people in poverty. Second, the statutory provision that
states’ funding ability, GAO used an            guarantees no state will receive less than a 50 percent matching rate benefits
alternative to PCI that more                    many states that already have above-average resources to fund health care
directly measures states’ resources,
number of people in poverty, and
                                                for their populations in poverty. For example, 2 of the 11 states that benefit
cost of providing services to this              the most from the 50 percent “floor” receive matching rates that are 35 and
population. Using this measure,                 20 percentage points higher, respectively, than the rates they would receive
GAO determined the effect of the                based solely on their PCI.
current formula by comparing
states’ funding ability before and              GAO received comments on a draft of this report from two external
after receiving their federal                   reviewers who have Medicaid formula expertise. They generally agreed with
matching aid. If differences in                 the analysis and provided technical comments, which were incorporated as
funding ability were eliminated, the            appropriate.
formula would have reduced
differences by 100 percent.




www.gao.gov/cgi-bin/getrpt?GAO-03-620.

To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Kathryn G.
Allen at (202) 512-7118.
Contents


Letter                                                                                  1
              Results in Brief                                                          4
              Background                                                                5
              Medicaid Formula Narrows Differences in Some States’ Funding
                Ability and Widens Differences in Others                                6
              Use of PCI and 50 Percent Floor Inhibits Formula’s Ability to
                Further Narrow Differences in States’ Funding Ability                  14
              Comments from External Reviewers                                         20

Appendix I    Legislative History and Description of the Matching
              Formula                                                                  21
              Legislative History of the Medicaid Formula                              21
              Current Medicaid Matching Formula                                        22

Appendix II   Methodology                                                              25
              Measuring States’ Funding Ability                                        25
              Measuring State Resources                                                30
              Measuring People in Poverty and the Costs to Provide Them
                Program Services                                                       32
              Calculating States’ Ability to Fund Medicaid Services without and
                with Value of Federal Matching Aid Added                               41
              Comparing Proportion of States’ Resources Devoted to Medicaid
                with Their Total Spending per Person in Poverty                        43


Tables
              Table 1: States Benefiting from Minimum Matching Rate
                       Provisions, Fiscal Year 2002, and Their Matching Rates
                       without the Minimums                                            19
              Table 2: Medicaid Matching Rates for Fiscal Years 2002-2004              23
              Table 3: States’ Ability to Fund Program Services without and with
                       the Value of Fiscal Year 2000 Federal Matching Aid Added        28
              Table 4: Comparison of PCI with TTR, 3-Year Averages, 1996-98            30
              Table 5: Distribution of Population in Poverty, by Age Group, 5-
                       Year Averages, 1995-99                                          33
              Table 6: Weights for Age Groups to Reflect Cost Differences and
                       Medicaid Program Participation                                  35
              Table 7: Comparison of Official and Cost-Adjusted Poverty Rates,
                       5-Year Averages, 1995-99                                        37
              Table 8: Wage, Rent, and Health Care Cost Indexes, by State              40


              Page i                                          GAO-03-620 Medicaid Formula
          Table 9: States’ Funding Ability without and with the Value of
                   Fiscal Year 2000 Federal Matching Aid Added                     42
          Table 10: Proportion of State Resources Devoted to Medicaid per
                   $1,000 of TTR Compared with Total Medicaid Spending
                   per Person in Poverty, Cost Adjusted, Fiscal Year 2000          44


Figures
          Figure 1: States’ Funding Ability Compared with the National
                   Average, without and with the Value of Federal Matching
                   Aid Added                                                        8
          Figure 2: Proportion of State Resources Devoted to Medicaid,
                   Compared with Total (State plus Federal) Medicaid
                   Spending, Fiscal Year 2000                                      11
          Figure 3: Proportion of State Resources Devoted to Medicaid
                   Compared with Program Spending per Person in Poverty,
                   as a Percentage of the National Average, Selected States,
                   Fiscal Year 2000                                                13
          Figure 4: States’ per Capita TTR and PCI, 1996-98                        15
          Figure 5: Comparison of States’ PCIs with Their People in Poverty,
                   Cost Adjusted                                                   17




          Page ii                                         GAO-03-620 Medicaid Formula
Abbreviations

BEA               Bureau of Economic Analysis
BLS               Bureau of Labor Statistics
CMS               Centers for Medicare & Medicaid Services
CPS               Current Population Survey
DSH               disproportionate share hospital
EPSDT             Early and Periodic Screening, Diagnostic, and Treatment
FMAP              Federal Medical Assistance Percentage
FPL               federal poverty level
GSP               Gross State Product
HUD               Department of Housing and Urban Development
PCI               per capita income
PPS               Prospective Payment System
SIC               Standard Industrial Classification
SPI               state personal income
SSA               Social Security Administration
TTR               Total Taxable Resources



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Page iii                                                   GAO-03-620 Medicaid Formula
United States General Accounting Office
Washington, DC 20548




                                   July 10, 2003

                                   The Honorable Dianne Feinstein
                                   United States Senate

                                   Dear Senator Feinstein:

                                   Created in 1965, Medicaid is the largest federal program assisting states in
                                   financing medical and health-related services for certain categories of the
                                   country’s low-income population. In fiscal year 2000,1 Medicaid served
                                   about 43 million beneficiaries and had expenditures totaling about $196
                                   billion, $111 billion of which was financed by the federal government and
                                   the rest financed by the states.2 The federal share of total Medicaid
                                   program costs is determined using a statutory formula that calculates the
                                   portion of each state’s Medicaid expenditures that the federal government
                                   will pay, known as the Federal Medical Assistance Percentage (FMAP),
                                   referred to in this report as the federal matching rate.3 The formula
                                   calculates the federal matching rate for each state on the basis of its per
                                   capita income (PCI) in relation to national PCI. States with a low PCI
                                   receive a higher federal matching rate, and states with a high PCI receive a
                                   lower rate. The Medicaid statute also provides for a 50 percent minimum
                                   federal matching rate (“50 percent floor”) that reflects a federal
                                   commitment to fund at least half the cost of each state’s program.4

                                   One of the goals of the formula has been to narrow differences among
                                   states in their ability to fund Medicaid services, which is determined by a
                                   state’s financial resources in relation to its low-income population. By
                                   providing higher matching rates to states with low PCI, it was expected
                                   that these states would be in a better position to provide health care


                                   1
                                    Fiscal year 2000 is the latest year for which Medicaid data on spending and the number of
                                   beneficiaries served were available.
                                   2
                                    Medicaid programs operate in the 50 states, the District of Columbia, and five U.S.
                                   territories. In this report, “states” refers to the 50 states and the District of Columbia.
                                   3
                                    Three other programs—the State Children’s Health Insurance Program, Adoption
                                   Assistance, and Foster Care—also use the Medicaid matching formula to establish federal
                                   matching rates. These three programs accounted for an additional $7.49 billion in federal
                                   funding in fiscal year 2000.
                                   4
                                    42 U.S.C. § 1396d(b)(1) (2000).



                                   Page 1                                                          GAO-03-620 Medicaid Formula
services to low-income populations. (App. I contains a legislative history
of the formula.)

In 1995, we and other witnesses testified before the Senate Committee on
Finance that the current Medicaid formula did not adequately address
wide differences among states in their ability to fund program services and
that the formula’s reliance on PCI is the primary cause. Witnesses
generally testified that PCI is an unreliable indicator of states’ ability to
fund Medicaid programs.5

Because the formula has not been changed since the program’s inception
and concerns persist regarding its performance with respect to narrowing
differences in states’ ability to fund program services, you asked us to
address the following questions: (1) To what extent does the Medicaid
formula reduce differences in states’ ability to fund program services? (2)
What factors prevent the formula from further narrowing differences in
states’ funding ability?

To evaluate the extent to which the formula narrows differences in states’
ability to fund program services, we defined a state’s ability to fund its
Medicaid programs as the financial resources potentially subject to state
taxation relative to its number of low-income residents, adjusted for the
cost of providing health care to them.6 For state resources, we used Total
Taxable Resources (TTR), a measure of all income potentially subject to
taxation that is either produced within a state or received by state
residents from out-of-state sources. TTR is reported annually by the




5
 U.S. General Accounting Office, Medicaid: Matching Formula’s Performance and
Potential Modifications, GAO/T-HEHS-95-226 (Washington, D.C.: July 27, 1995); Jerry
Cromwell, testimony before the Senate Committee on Finance, Improvements in the
Federal Medicaid Matching Formula; and Robert P. Strauss, testimony before the Senate
Committee on Finance, Revising the Medicaid Reimbursement Formula in an Era of
Fiscal Austerity, 104th Congress, 1st sess., July 27, 1995.
6
 We measured states’ funding ability on the basis of potentially taxable resources and
potentially eligible participants in Medicaid so that our measure of funding ability, before
federal matching aid is taken into account, does not reflect the influence of states’
individual policy choices. The matching formula also affects states’ decisions about the
amount and type of Medicaid services they provide and therefore affects the availability of
health care to low-income individuals as well. However, we did not evaluate the formula’s
performance in terms of equalizing access to care because of the high degree of uncertainty
in predicting how individual states’ spending decisions are affected by changes in matching
rates.




Page 2                                                     GAO-03-620 Medicaid Formula
Department of the Treasury.7 To determine the number of low-income
people in each state (“people in poverty”), we obtained the Bureau of the
Census’s counts of people with incomes at or below the federal poverty
level (FPL).8 We adjusted the counts of people in poverty to reflect (1) the
higher cost of serving the elderly, who utilize health care services at higher
rates than other age groups, and (2) geographic differences in the cost of
medical personnel, facilities, and supplies used to deliver health care
services. To adjust for age differences in people in poverty, we used data
on Medicaid spending by age group from the Department of Health and
Human Services’ (HHS) Centers for Medicare & Medicaid Services (CMS).9
We used 5-year averages of people in poverty for each age group for 1995
through 1999 to increase the reliability of the state-level population counts
because they are subject to statistical error, especially in smaller states. To
measure geographic differences in the cost of medical personnel, facilities,
and supplies, we used data from the Department of Labor’s Bureau of
Labor Statistics (BLS) and from the Department of Housing and Urban
Development (HUD).

We compared states’ funding ability from their own resources with their
funding ability after their resources have been augmented to include the
value of the federal Medicaid matching aid they receive. Throughout this
report, we refer to augmenting a state’s taxable resources this way as state
funding ability with the “value” of federal matching aid included. If
differences in funding ability were completely eliminated by adding the
value of federal matching aid, the formula would have reduced differences
in states’ funding ability by 100 percent. We did our work between June
2001 and June 2003 in accordance with generally accepted government
auditing standards. (App. II provides a more detailed discussion of our
methodology.)



7
 We used 3-year averages of TTR (for 1996 through 1998) to parallel the use of 3-year
averages of PCI in the current formula (see app. I for a more detailed description of the
current formula).
8
 The federal government bases Medicaid eligibility on a variety of categorical and income-
related factors, and states may expand their programs beyond the minimum requirements.
As a result of the flexibility given states in administering their Medicaid programs, except
for children and pregnant women, there is no federal minimum income level below which
individuals must be covered under Medicaid that can be used as a basis for measuring
potentially eligible low-income individuals.
9
 We used CMS data on average per capita Medicaid spending for elderly (aged 65 and over)
and other beneficiaries to determine how much to weight the numbers of people in poverty
who are elderly to reflect the higher cost to provide them services.




Page 3                                                      GAO-03-620 Medicaid Formula
                   The current Medicaid formula narrows the average differences in states’
Results in Brief   funding ability by 20 percent, but it often widens the gap between
                   individual states and the national average. Although the formula moves 30
                   states closer to the national average funding ability after they receive their
                   federal matching aid, making the average differences in funding ability
                   smaller, it moves 21 states farther away, including 3 states that have 30
                   percent of the nation’s population in poverty—California, Florida, and
                   New York. After the value of federal matching aid is added, states’ funding
                   ability ranges from 26 percent below the national average for two states to
                   179 percent above the national average for another. Because of the
                   formula’s current structure, in many instances two states devoting roughly
                   the same proportion of their resources to Medicaid are able to spend very
                   different amounts per person in poverty. For example, in fiscal year 2000,
                   Wisconsin and California devoted the same proportion of their states’ own
                   resources to fund their Medicaid programs (about $8 per $1,000 of TTR).
                   Yet, after receiving federal matching aid, Wisconsin’s funding ability was
                   almost 50 percent above the national average and California’s was 26
                   percent below the national average. Because the current Medicaid
                   matching formula does not reflect the fact that Wisconsin has fewer
                   people in poverty and lower costs to provide health care services to its
                   population in poverty than California, Wisconsin’s federal matching aid
                   enables it to spend more than twice what California could spend per
                   person in poverty—$7,532 compared with $3,731.

                   Two factors prevent the Medicaid formula from further narrowing
                   differences in states’ funding abilities. First, the formula uses PCI to
                   calculate the federal matching rate, but it is a poor proxy measure for the
                   components of funding ability—states’ resources and the size of and costs
                   to serve their populations potentially eligible for Medicaid services.
                   Second, the 50 percent minimum federal matching rate disproportionately
                   benefits states that already have above-average resources to fund health
                   care for their populations in poverty. The 50 percent “floor” thus prevents
                   further narrowing of funding abilities by giving some states federal
                   matching rates significantly higher than they would otherwise receive
                   without the floor.

                   We received comments on a draft of this report from two external
                   reviewers with Medicaid formula expertise. They generally agreed with
                   our analysis and provided technical comments, which we incorporated as
                   appropriate.




                   Page 4                                             GAO-03-620 Medicaid Formula
             Medicaid eligibility is determined by several factors, including an
Background   individual’s or a family’s income in relation to the FPL, age, and eligibility
             for certain other federal program benefits. For example, federal law
             requires state programs to cover pregnant women and children under age
             6 if their family income is at or below 133 percent of the FPL, children
             under age 19 in families with incomes at or below the FPL, and individuals
             who receive Supplemental Security Income because they have disabling
             conditions.10 For most covered populations, state Medicaid programs are
             required to offer certain benefits, such as physician services, inpatient and
             outpatient hospital services, and nursing facility and home health services.
             State Medicaid programs must provide Early and Periodic Screening,
             Diagnostic, and Treatment (EPSDT) services for most children,11 intended
             as comprehensive, periodic evaluations of children’s health and
             developmental history, that include vision, hearing, and dental screening.

             States’ Medicaid programs can differ dramatically because states may
             expand their programs beyond the minimum requirements to cover, for
             example, individuals whose incomes exceed federally mandated eligibility
             thresholds and optional services, such as prosthetic devices and
             prescription drugs. For example, a state may extend Medicaid eligibility to
             certain population groups, such as pregnant women who have family
             incomes above 133 percent of the FPL, or make optional services such as
             prescription drugs available to its entire covered population.

             Since the Medicaid program began, total program costs have been
             apportioned between states and the federal government using a formula
             that provides more generous federal matching aid to states with lower
             PCI.12 The use of PCI in federal grant formulas dates to 1946, when it was


             10
               In the majority of states, individuals who receive SSI are automatically eligible for
             Medicaid. Eleven states have more restrictive Medicaid eligibility standards through
             section 1902(f) of the Social Security Act. These 11 states are often referred to as “209(b)
             states” because the origin of this authority was section 209(b) of the Social Security
             Amendments of 1972. Pub. L. No. 92-603, 86 Stat. 1329, 1381 (codified as amended at 42
             U.S.C. § 1396a(f) (2000)).
             11
               EPSDT services are optional for the medically needy population, a category of individuals
             who generally have too much income to qualify for Medicaid but have “spent down” their
             income by incurring medical care expenses. See 42 U.S.C. § 1396(a)(10)(C) (2000).
             12
              Matching rates are calculated using the following formula:
                                                                   2
                                                   State PCI 
             Federal Matching Rate = 1.00 − 0.45            
                                                   U.S. PCI 




             Page 5                                                        GAO-03-620 Medicaid Formula
                          chosen as a proxy for a state’s ability to fund public services. Consistent
                          with the purpose described in the formula’s legislative history, PCI is used
                          as a proxy for both state resources and the low-income population. As a
                          state’s PCI increases, relative to the national average, the formula provides
                          for a decreasing federal matching rate, meaning the federal government
                          shares a smaller portion of a state’s costs. By statute, the federal matching
                          rate may range from 50 percent to 83 percent.13 The formula’s multiplier,
                          currently 0.45, represents the state’s share of its total Medicaid costs for a
                          state with PCI equal to the national average, and the federal government
                          thus pays a 55 percent share of total costs.


                          The Medicaid formula reduces by 20 percent the differences among states
Medicaid Formula          in their ability to fund program services, compared with the national
Narrows Differences       average funding ability. While the formula narrows differences for 30
                          states, making the average difference in funding ability smaller, it moves
in Some States’           21 states farther away from the national average, making the average
Funding Ability and       difference wider. These 21 states include 3 that are among those with the
                          largest populations in poverty—California, Florida, and New York.
Widens Differences in     Because of the formula’s current structure, in many instances, two states
Others                    devoting the same proportion of their own resources toward funding
                          Medicaid services are unable, after receiving federal matching aid, to
                          spend the same amounts per person in poverty, adjusted for cost
                          differences related to age and geographic location.


Formula Reduces Overall   Because state resources, numbers of people in poverty, and the cost of
Differences in States’    serving this population vary widely across the states, there also are wide
Funding Ability by 20     differences in states’ ability to fund health care services. Considering these
                          indicators of state funding ability, Alaska has the highest funding ability—
Percent                   exceeding the national average by 119 percent—and Mississippi has the
                          lowest funding ability—46 percent below the national average, as
                          measured using states’ TTR and the number of people in poverty, adjusting
                          the poverty count for age and geographic cost differences (see fig. 1).
                          Nationwide, the average difference between a state’s funding ability and




                          13
                           In fiscal year 2003, Mississippi had the highest federal matching rate of any state—76.6
                          percent.




                          Page 6                                                      GAO-03-620 Medicaid Formula
that of the average state is 22.7 percent.14 Nineteen states have funding
ability 25 percent or more above the national average, and 10 states have
funding ability 25 percent or more below the national average.

After the value of federal matching aid is added to states’ own resources,
the average difference in states’ funding ability drops from 22.7 percent to
18.1 percent. This represents a 20 percent reduction of aggregate
differences in states’ funding ability.15 After the receipt of federal matching
aid, differences in states’ funding abilities ranged from 26 percent below
the national average for California and New York to 179 percent above for
Alaska.




14
  The average difference in states’ funding ability is calculated by comparing each state’s
funding ability with the average funding ability of all states and calculating the average
difference (both positive and negative), weighting each state by its number of people in
poverty.
15
  In an absolute sense, the federal matching rate enhances the funding ability of all states.
By comparing each state’s funding ability with the average funding ability for all states, our
measure of funding ability is a relative, rather than an absolute, measure of differences in
funding ability. As a consequence, while states with low funding ability receiving a
relatively low federal match are helped in an absolute sense, in a relative sense they move
farther below a new, higher national average funding ability, resulting in relatively larger
differences in states’ funding ability.




Page 7                                                       GAO-03-620 Medicaid Formula
Figure 1: States’ Funding Ability Compared with the National Average, without and with the Value of Federal Matching Aid
Added




                                         Page 8                                                GAO-03-620 Medicaid Formula
                              Note: GAO analysis of data from HHS, HUD, and the Departments of Commerce, Labor, and the
                              Treasury.



Funding Ability of 21         The aggregate 20 percent reduction of differences in states’ funding ability
States Moves Farther from     under the formula masks the effect of the formula on individual states. For
Average State’s Funding       example, as shown in figure 1, consistent with the formula’s goals, the one-
                              quarter of states with the lowest funding ability before the match move
Ability after Federal Match   closer to the average state’s funding ability after the value of the federal
Is Added                      match is added.16 In total, 30 states move closer to the national average
                              after adding the federal match. However, as the right panel of figure 1
                              shows, adding the value of federal matching aid often has inconsistent
                              effects. For example, including the value of federal matching aid moves
                              Alaska’s and Utah’s funding ability farther above, rather than closer to, the
                              national average funding ability. This happens because PCI does not
                              adequately reflect that these two states have fewer people in poverty than
                              the national average. In addition, Utah has lower-than-average costs to
                              provide health care services. The current formula actually moves 21 states
                              farther above or below the average:

                          •   Four of the 21 states—California, Florida, Hawaii, and New York—have
                              below-average funding ability before federal matching aid is added and
                              move farther below the average after federal matching aid is added. These
                              4 states have approximately 31 percent of the nation’s people in poverty.
                              For example, California’s funding ability drops from 15 percent below the
                              average to 26 percent below the average and New York’s funding ability
                              drops from 12 percent below the average to 26 percent below the average.
                              These two states thus rank last in terms of state funding ability after the
                              value of federal matching aid is added.
                          •   Thirteen states that have above-average funding ability before adding the
                              value of federal matching aid move farther above the average after it is
                              added.17 For example, Utah’s funding ability is 73 percent above the
                              national average before the federal match is added but increases to 155
                              percent above the national average after the match.
                          •   Of the 4 remaining states, 3—Idaho, Maine, and North Dakota—have
                              below-average funding ability before the match is added and above-


                              16
                               In decreasing order of funding ability before adding the value of the federal match, these
                              states are Tennessee, Kentucky, Oklahoma, Montana, Arizona, South Carolina, Louisiana,
                              District of Columbia, Alabama, Arkansas, West Virginia, New Mexico, and Mississippi.
                              17
                                The states, listed from highest to lowest funding ability, are Alaska, Utah, Wisconsin,
                              Indiana, Wyoming, Iowa, Kansas, Missouri, Nebraska, Vermont, Ohio, Oregon, and South
                              Dakota.




                              Page 9                                                       GAO-03-620 Medicaid Formula
                           average funding ability after the match is added. For the fourth state—
                           Rhode Island—the reverse is true: Rhode Island has above-average
                           funding ability before the match and below-average funding ability after
                           the match is added.


Many States Devoting the   States commit widely varying proportions of their own financial resources
Same Proportion of Their   to fund Medicaid benefits. For example, in fiscal year 2000, New York
Own Resources to           devoted $18.16 per $1,000 of its TTR toward its Medicaid program,18
                           roughly 5 times the proportion of resources that Utah devoted ($3.74 per
Medicaid Cannot Spend      $1,000) (see left panel of fig. 2). States’ Medicaid cost-adjusted spending
Comparable Amounts per     per person in poverty varies as well. For example, Alaska’s combined
Person                     federal and state spending was over $10,000 per person in poverty, while
                           Nevada’s spending was approximately $2,500 per person in poverty (see
                           right panel of fig. 2).




                           18
                            The TTR amount used in these calculations is a 3-year average, 1996-98.




                           Page 10                                                   GAO-03-620 Medicaid Formula
Figure 2: Proportion of State Resources Devoted to Medicaid, Compared with Total (State plus Federal) Medicaid Spending,
Fiscal Year 2000




                                        Page 11                                               GAO-03-620 Medicaid Formula
Note: GAO analysis of data from HHS, HUD, and the Departments of Commerce, Labor, and the
Treasury.
a
 Medicaid spending per person is total spending (state and federal) per person in poverty after
adjusting for cost differences related to age and geographic location.


Because the federal matching formula does not fully eliminate differences
in states’ funding ability, states devoting similar proportions of their own
resources to Medicaid cannot spend the same amounts per person in
poverty, cost adjusted, with federal matching aid factored in. In addition,
because the formula further increases the already high funding ability of
some states and decreases the low funding ability of others, these
spending differences can be quite large. For example, in fiscal year 2000,
both California and Wisconsin devoted roughly the same proportion of
their own resources to fund program benefits—about $8 per $1,000 of
taxable resources—which was close to the national average ($8.37)
proportion of resources states devoted to Medicaid that year. However,
the current formula moved California’s below-average funding ability
farther below the national average and increased Wisconsin’s above-
average funding ability farther above. This occurred because Wisconsin
receives a high federal match despite its relatively high funding ability,
whereas California receives a low federal match despite its relatively low
funding ability. Once federal matching aid was factored in, with their
nearly identical funding effort, Wisconsin is enabled to spend more than
twice what California could spend per person in poverty—$7,532
compared with $3,731. Similarly, Florida and Iowa each devoted $6.48 per
$1,000 in state resources toward their Medicaid programs. After adding the
federal match, Iowa could spend $6,729 per person in poverty, cost
adjusted, while Florida could spend just $3,160 per person. (See fig. 3.)




Page 12                                                            GAO-03-620 Medicaid Formula
Figure 3: Proportion of State Resources Devoted to Medicaid Compared with
Program Spending per Person in Poverty, as a Percentage of the National Average,
Selected States, Fiscal Year 2000




Notes: Spending per person in poverty includes cost adjustments for differences in age and
geographic location. GAO analysis of data from HHS, HUD, and the Departments of Commerce,
Labor, and the Treasury.




Page 13                                                       GAO-03-620 Medicaid Formula
                              Two factors prevent the Medicaid formula from further reducing
Use of PCI and 50             differences in states’ funding ability. First, PCI—the single measure used
Percent Floor Inhibits        to establish federal matching rates—is not a comprehensive measure of
                              state resources and is a poor proxy for the size of and cost to serve a
Formula’s Ability to          state’s population in poverty. Second, special statutory provisions,
Further Narrow                including the minimum 50 percent federal matching rate, give several
                              states with already high funding ability a higher federal matching rate than
Differences in States’        they would receive without these provisions.
Funding Ability

PCI Is Not a                  PCI is an inadequate measure of states’ funding ability because it is an
Comprehensive Measure         incomplete measure of states’ resources, it is a poor proxy for the size of a
of States’ Resources and Is   state’s population in poverty, and it does not take into account differences
                              in the cost of providing health care services to people in poverty. As an
a Poor Proxy for the Size     indicator of state resources, PCI measures income received by state
of and Cost to Provide        residents, such as wages, rents, and interest income, but it does not
Services to Their People in   include other sources of income potentially subject to state taxation, such
Poverty                       as corporate income produced within the state but not received by state
                              residents. For example, PCI especially understates the taxable resources
                              in energy-exporting states, such as Alaska and Wyoming, and in states that
                              house numerous corporate headquarters, such as Delaware.

                              By comparison, because TTR comprises the income included in PCI as
                              well as income from other sources, such as corporate income and capital
                              gains, states’ TTR exceeds PCI by about 32 percent nationwide.19 As shown
                              in figure 4, which compares states’ TTR with PCI, states whose resources
                              are particularly poorly represented by PCI include the District of
                              Columbia, Delaware, Alaska, and Wyoming.




                              19
                               For a discussion of TTR, see Department of the Treasury, Office of Economic Policy,
                              Treasury Methodology for Estimating Total Taxable Resources, TTR (Washington, D.C.:
                              Oct. 1, 1998; revised November 2002). http://www.treas.gov/offices/economic-
                              policy/resources/index.html?IMAGE.X=28\&IMAGE.Y=9 (See “Summary of Current
                              Methodology for Estimating TTR”) (downloaded June 4, 2003).




                              Page 14                                                 GAO-03-620 Medicaid Formula
Figure 4: States’ per Capita TTR and PCI, 1996-98
District of Columbia
Connecticut
New Jersey
Massachusetts
New York
Maryland
Illinois
Nevada
Colorado
Delaware
New Hampshire
Minnesota
Alaska
Washington
Virginia
California
Rhode Island
Hawaii
Pennsylvania
Florida
Michigan
Ohio
Wisconsin
Nebraska
Oregon
Georgia
Kansas
Missouri
Texas
North Carolina
Indiana
Iowa
Wyoming
Vermont
Tennessee
Arizona
South Dakota
Maine
North Dakota
South Carolina
Louisiana
Kentucky
Alabama
Oklahoma
Utah
Idaho
Arkansas
New Mexico
Montana
West Virginia
Mississippi
                        0                10,000      20,000   30,000     40,000     50,000    60,000
                        Dollars


                                   TTR
                                   PCI

Sources: Departments of Commerce and the Treasury.

Notes: TTR comprises the income included in PCI as well as income from other sources, such as
corporate income and capital gains. GAO analysis of data from the Departments of Commerce and
the Treasury.




Page 15                                                                GAO-03-620 Medicaid Formula
Using PCI to measure the size of a state’s low-income population assumes
that the lower a state’s PCI, the greater its population in poverty. However,
two states with similar PCIs may differ widely in their percentages of
people in poverty. In addition, PCI is not a good proxy for the differences
in the cost of providing health care services that are related to the ages of
the population served and the geographic area in which services are
provided. Persons who are elderly typically use health care services at
higher rates than adults and children and therefore cost more to serve.
Two states with low PCIs may have very different proportions of elderly
persons potentially eligible for Medicaid. In addition, costs to provide
health care services vary widely depending on geographic location
because wages and other costs of office space vary regionally. For
example, the District of Columbia and Connecticut have similar PCIs, but
the share of the District’s population in poverty is more than twice
Connecticut’s. Health care costs also are 10 percent higher in the District
than in Connecticut. (Fig. 5 compares state rankings by PCI and by people
in poverty, adjusted for cost differences related to age and geographic
location.)




Page 16                                           GAO-03-620 Medicaid Formula
Figure 5: Comparison of States’ PCIs with Their People in Poverty, Cost Adjusted




                                         Note: GAO analysis of data from HHS, HUD, and the Departments of Commerce, Labor, and the
                                         Treasury.




                                         Page 17                                                      GAO-03-620 Medicaid Formula
                         a
                          People in poverty refers to people with incomes at or below the FPL, adjusted for cost differences
                         related to age and geographic location.



Minimum Federal Match    Because of the 50 percent floor, 11 states received higher federal matching
Generally Helps States   rates in fiscal year 2002 than they would have if their rates had been based
That Already Have High   only on their PCI. Two others—Alaska and the District of Columbia—
                         received special federal matching rates set in statutes that gave them
Funding Ability          higher matching rates than they would have received solely on the basis of
                         PCI.20 (See table 1.)




                         20
                          Alaska’s current higher matching rate was authorized by the Medicare, Medicaid, and
                         SCHIP Benefits Improvement and Protection Act of 2000 to address inadequacies in the
                         national calculation and establish more equitable matching rates for the state. Pub. L. No.
                         106-554, App. F, § 706, 114 Stat. 2763, 2763A-577. The District of Columbia’s higher
                         matching rate was authorized by the Balanced Budget Act of 1997 at the time
                         comprehensive policy changes realigning the financial relationship between the District
                         and federal government also were enacted. Pub. L. No. 105-33, § 4725 and tit. XI, 111 Stat.
                         251, 518 and 712.




                         Page 18                                                            GAO-03-620 Medicaid Formula
Table 1: States Benefiting from Minimum Matching Rate Provisions, Fiscal Year
2002, and Their Matching Rates without the Minimums

                                                    Numbers in percent
                          Funding ability
                          without federal                              Federal
                             match (as a           Minimum        matching rate
                           percentage of             federal           without          Percentage
                                national           matching           minimum                  point
 State                          average)                rate             match           difference
 Alaska                              219               57.38              53.01                -4.37
 New Hampshire                       179               50.00              47.36                -2.64
 Connecticut                         176               50.00              14.99               -35.01
 Colorado                            165               50.00              46.22                -3.78
 Delaware                            162               50.00              48.13                -1.87
 New Jersey                          160               50.00              29.60               -20.40
 Maryland                            143               50.00              42.32                -7.68
 Minnesota                           143               50.00              48.03                -1.97
 Illinois                            131               50.00              46.09                -3.91
 Massachusetts                       131               50.00              32.27               -17.73
 Nevada                              126               50.00              46.62                -3.38
 New York                             88               50.00              37.14               -12.86
 District of Columbia                 71               70.00              12.99               -57.01

Source: HHS.

Notes: States are listed in decreasing order of funding ability. GAO analysis of data from HHS.


Eleven of these 13 states (all except the District of Columbia and New
York) had above-average funding ability in fiscal year 2002. Their receipt
of a higher federal matching rate than they would have received without
statutory minimums increases the overall differences in funding ability
among the states. Connecticut and New Jersey benefit the most from the
statutory minimums, receiving—as a result of the 50 percent floor—
matching rates that are 35 and 20 percentage points higher, respectively,
than the rates they would have received based solely on their PCI.
Receiving a higher matching rate than what the formula provides on the
basis of PCI enables these states to spend more on program benefits per
person in poverty than states with less funding ability that devote a higher
percentage of their resources to funding program benefits.

The statutory minimums benefit the District of Columbia and New York by
providing them a higher matching rate than they would otherwise have.
Because these two states have below-average funding ability, the minimum
matching provisions have the effect of moving them closer to the funding
ability of the average state and thus help to reduce overall differences in



Page 19                                                           GAO-03-620 Medicaid Formula
                     funding ability among the states. For example, New York’s funding ability
                     without the value of federal matching aid added is 12 percent below the
                     average funding ability; with the value of federal matching aid added, its
                     funding ability is farther from the average funding ability—26 percent
                     below the average. Without the floor, New York’s matching rate would be
                     37 percent, rather than 50 percent. Therefore, the 50 percent minimum
                     brings New York’s funding ability closer to the average funding ability than
                     it would be with the matching rate it would receive without the minimum.


                     We received comments on our draft report from two external reviewers
Comments from        who have Medicaid formula expertise. The reviewers generally agreed
External Reviewers   with our analysis and provided technical comments, which we
                     incorporated as appropriate.


                     As agreed with your office, unless you publicly announce its contents
                     earlier, we plan no further distribution of this report until 30 days after its
                     issue date. At that time, we will send copies of this report to appropriate
                     congressional committees and will make copies available to others on
                     request. In addition, the report will be available at no charge on the GAO
                     Web site at http://www.gao.gov.

                     If you or your staff have any questions about this report, please call me at
                     (202) 512-7118 or Jerry Fastrup at (202) 512-7211. Major contributors to
                     this report include Richard Horte, Robert Dinkelmeyer, Michael Williams,
                     Elizabeth T. Morrison, and Michael Rose.

                     Sincerely yours,




                     Kathryn G. Allen
                     Director, Health Care—Medicaid
                      and Private Health Insurance Issues




                     Page 20                                             GAO-03-620 Medicaid Formula
                         Appendix I: Legislative History and
Appendix I: Legislative History and
                         Description of the Matching Formula



Description of the Matching Formula

                         This appendix summarizes the legislative history that led to the use of per
                         capita income (PCI) in the Medicaid matching formula and describes how
                         matching rates are calculated.


                         The current formula is an outgrowth of variable rate matching formulas
Legislative History of   first discussed by Congress in the late 1940s. Senate reports accompanying
the Medicaid Formula     the Social Security Act Amendments of 1946 first articulated, in the case of
                         public assistance, the rationale for a variable rate matching formula based
                         on state PCI:

                         Federal grants-in-aid for public assistance are intended to help in aiding the aged and blind
                         persons and dependent children in all parts of the country and to some extent to equalize
                         the financial burden throughout the Nation. . . . The present 50 percent basis of Federal
                         participation does not recognize differences in the ability of States to finance public
                         assistance, nor does it recognize the greater incidence of poverty in States with low
                         economic resources. To assist their needy people, the low income States must make
                         greater tax effort than States with larger resources where relatively fewer persons are in
                               1
                         need.

                         The Social Security Amendments of 1958 established a PCI-based variable
                         rate matching formula, with certain maximums, for public assistance and
                         reimbursement of medical providers. Under this formula, federal matching
                         rates ranged from a minimum of 50 percent for high-income states to a
                         maximum of 65 percent for low-income states.2 The Social Security
                         Amendments of 1960 increased the maximum matching rate from 65
                         percent to 80 percent.3




                         1
                          S. Rep. No. 79-1862, at 15 (1946), reprinted in 1946 U.S.C.C.A.N. 1510, 1525. In conference,
                         a variable rate was adopted, but not one based on state PCI. S. Conf. Rep. No. 79-2724, at 8
                         (1946), reprinted in 1946 U.S.C.A.N.N. 1552, 1555.
                         2
                          Pub. L. No. 85-840, § 505, 72 Stat. 1013, 1050. Before this, payments to medical providers
                         were reimbursed up to a certain maximum dollar amount at a uniform rate of 50 percent
                         for all states. S. Rep. No. 85-2388, at 39 (1958), reprinted in 1958 U.S.C.C.A.N. 4212, 4259.
                         3
                         Pub. L. No. 86-778, sec. 601(f), § 6(c), 74 Stat. 924, 991.




                         Page 21                                                       GAO-03-620 Medicaid Formula
                   Appendix I: Legislative History and
                   Description of the Matching Formula




                   When Medicaid was created in 1965, it (1) was structured as an open-
Current Medicaid   ended entitlement for eligible low-income individuals without limits on the
Matching Formula   maximum dollar amount subject to reimbursement, as in predecessor
                   programs;4 (2) increased the federal government’s total nationwide share
                   financed from 50 to 55 percent; and (3) raised the maximum federal
                   matching rate from 80 to 83 percent.5 The statutory matching formula,
                   known as the Federal Medical Assistance Percentage (FMAP), used for
                   calculating matching rates is

                                                           2
                                        State PCI 
                   FMAP = 1.00 − 0.45            
                                        U.S. PCI   

                   The current matching formula is calibrated with a 0.45 “multiplier.” The
                   value of the multiplier determines the percentage of a state’s Medicaid
                   spending for which the state is responsible. For example, using the 0.45
                   multiplier, a state with a PCI equal to the U.S. average would receive a
                   federal matching rate of 55 percent (1 - 0.45 = 0.55). A smaller multiplier
                   of 0.40 would raise the federal matching rate for all states and would raise
                   the matching rate for a state with the national average PCI from 55 percent
                   to 60 percent, whereas a higher multiplier of 50 percent would reduce the
                   federal matching rate for a state with average PCI from 55 percent to 50
                   percent.

                   Relative PCI is intended to represent states’ funding ability, which is a
                   combination of states’ resources and states’ people in poverty.6 Consistent
                   with this intent, squaring PCI has the effect of making PCI appear in the
                   formula twice, thus reflecting both state resources and people in poverty.
                   Squaring PCI magnifies the difference between the state’s and the national
                   average PCI. For example, if a state’s PCI is 90 percent of the national
                   average, the squared value of its relative PCI would be 81 percent (0.9 x 0.9
                   = 0.81), resulting in a federal matching rate of 64 percent (that is, 1.00 -
                   0.45 x 0.81 = 0.64), rather than the 60 percent rate the state would receive
                   if relative income was not squared (that is, 1.00 - 0.45 x 0.9 = 0.60). If PCI


                   4
                    Social Security Amendments of 1965, Pub. L. No. 89-97, sec. 121, § 1905(b), 79 Stat. 286,
                   344.
                   5
                   See U.S. General Accounting Office, Changing Medicaid Formula Can Improve
                   Distribution of Funds to States, GAO/GGD-83-27 (Washington, D.C.: Mar. 9, 1983) for a
                   more complete description of the legislative history of the Medicaid formula.
                   6
                   A state’s relative PCI is its PCI when expressed as a percentage of the U.S. average PCI.




                   Page 22                                                      GAO-03-620 Medicaid Formula
Appendix I: Legislative History and
Description of the Matching Formula




were a good proxy for people in poverty, squaring would be appropriate
since squaring would reflect the effect on states’ funding ability of both
resources and people in poverty. However, to the extent that PCI does not
accurately reflect state resources and people in poverty, squaring
magnifies this inaccuracy.

The Department of Health and Human Services (HHS) is responsible for
calculating matching rates under the formula. HHS is required to calculate
matching rates 1 year before the fiscal year in which they are effective,
using a 3-year average of the most recently available PCI data reported by
the Department of Commerce. Thus, fiscal year 2003 matching rates were
calculated at the beginning of fiscal year 2002 using a 3-year average of
PCI for 1998 through 2000. Publicly announcing matching rates a year in
advance of their use allows states time to make program changes in
response to changes in the rate at which the federal government will
reimburse eligible program costs. However, the combination of a 1-year
lag between the computation of state matching rates and their
implementation, coupled with the fact that a 3-year average of PCI is used,
also means that the distribution of states’ matching rates reflects
economic conditions that existed several years earlier. Federal matching
rates for fiscal years 2002 through 2004 are shown in table 2.

Table 2: Medicaid Matching Rates for Fiscal Years 2002-2004

                                              Fiscal year
State                                 2002              2003               2004
Alabama                               70.45             70.60              70.75
Alaska                                57.38             58.27              58.39
Arizona                               64.98             67.25              67.26
Arkansas                              72.64             74.28              74.67
California                            51.40             50.00              50.00
Colorado                              50.00             50.00              50.00
Connecticut                           50.00             50.00              50.00
Delaware                              50.00             50.00              50.00
District of Columbia                  70.00             70.00              70.00
Florida                               56.43             58.83              58.93
Georgia                               59.00             59.60              59.58
Hawaii                                56.34             58.77              58.90
Idaho                                 71.02             70.96              70.46
Illinois                              50.00             50.00              50.00
Indiana                               62.04             61.97              62.32
Iowa                                  62.86             63.50              63.93
Kansas                                60.20             60.15              60.82
Kentucky                              69.94             69.89              70.09



Page 23                                              GAO-03-620 Medicaid Formula
Appendix I: Legislative History and
Description of the Matching Formula




                                              Fiscal year
 State                                2002              2003               2004
 Louisiana                            70.30             71.28              71.63
 Maine                                66.58             66.22              66.01
 Maryland                             50.00             50.00              50.00
 Massachusetts                        50.00             50.00              50.00
 Michigan                             56.36             55.42              55.89
 Minnesota                            50.00             50.00              50.00
 Mississippi                          76.09             76.62              77.08
 Missouri                             61.06             61.23              61.47
 Montana                              72.83             72.96              72.85
 Nebraska                             59.55             59.52              59.89
 Nevada                               50.00             52.39              54.93
 New Hampshire                        50.00             50.00              50.00
 New Jersey                           50.00             50.00              50.00
 New Mexico                           73.04             74.56              74.85
 New York                             50.00             50.00              50.00
 North Carolina                       61.46             62.56              62.85
 North Dakota                         69.87             68.36              68.31
 Ohio                                 58.78             58.83              59.23
 Oklahoma                             70.43             70.56              70.24
 Oregon                               59.20             60.16              60.81
 Pennsylvania                         54.65             54.69              54.76
 Rhode Island                         52.45             55.40              56.03
 South Carolina                       69.34             69.81              69.86
 South Dakota                         65.93             65.29              65.67
 Tennessee                            63.64             64.59              64.40
 Texas                                60.17             59.99              60.22
 Utah                                 70.00             71.24              71.72
 Vermont                              63.06             62.41              61.34
 Virginia                             51.45             50.53              50.00
 Washington                           50.37             50.00              50.00
 West Virginia                        75.27             75.04              75.19
 Wisconsin                            58.57             58.43              58.41
 Wyoming                              61.97             61.32              59.77

Source: HHS.

Note: GAO compiled data from HHS.




Page 24                                              GAO-03-620 Medicaid Formula
                             Appendix II: Methodology
Appendix II: Methodology


                             This appendix describes our methodology for measuring the extent to
                             which the current Medicaid matching formula reduces differences in
                             states’ funding abilities and the data, and their sources, we used to
                             measure the elements of states’ funding ability. While we considered
                             alternative indicators of state resources, people in poverty, and the cost of
                             health care, and we chose those indicators we believed were most
                             appropriate, we did not perform an exhaustive comparative analysis of
                             other potential indicators, nor did we attempt to develop new indicators.



Measuring States’
Funding Ability

Funding Ability from State   We defined a state’s ability to fund Medicaid services as the economic
Resources                    resources a state is potentially able to tax to fund its Medicaid program
                             relative to the number of persons with incomes below the federal poverty
                             level (FPL), adjusted for the cost of providing health care to them.
                             Specifically, we took into account differences in the utilization of health
                             care services by children, adults, and the elderly, and we developed an
                             index for the differences in the cost of health care personnel and the cost
                             of medical facilities and supplies used to provide the services.

                             We calculated state funding ability according to the following formula:


                                  State Funding 
                                                               Ystate     
                                  Ability From         =                  
                                                             P ∗c           
                                  Own Resources             state state   
                                                 state

                             where

                             Y = State resources potentially subject to state taxation

                             P = People with incomes below the FPL, adjusted for differences in
                             service utilization by children, adults, and the elderly

                             c = Index of the cost of factors in the provision of health care services
                             (e.g., health care personnel, medical facilities, and supplies).




                             Page 25                                             GAO-03-620 Medicaid Formula
                             Appendix II: Methodology




                             We explain later in this appendix how we adjusted the counts of people in
                             poverty for differences in service utilization and in the cost of personnel,
                             facilities, and supplies.


State Funding Ability with   Federal matching aid, in effect, adds to a state’s ability to fund program
the Value of Federal         costs from its own resources. For example, when federal matching aid
Matching Aid Added           pays for half the cost of a state’s program, it effectively doubles that state’s
                             ability to fund program services. The higher the federal matching rate, the
                             more federal matching aid contributes to a state’s ability to fund Medicaid
                             services. In general, a state’s funding ability after the value of its federal
                             matching aid is added can be determined using the following formula:


                                  Medicaid Funding Ability                     1               Ystate         
                                                                   =                                     
                                   with Federal Matching Aid   state     1 − FMAPstate      state ∗ c state
                                                                                                  P                 

                             where

                             FMAP = State’s federal matching rate

                             Y = State resources potentially subject to state taxation

                             P = People with incomes below the FPL, adjusted for differences in
                             service utilization by children, adults, and the elderly

                             c = Index of the cost of factors in the provision of health care services
                             (e.g., health care personnel, medical facilities, and supplies).

                             The first term after the equals sign represents the multiple by which a
                             state’s matching rate increases the state’s funding ability. For example, if a
                             state receives a federal match of 75 percent, its funding ability is increased
                             by a factor of 4 [(1/(1 - 0.75) = 4].


Calculating the Reduction    To measure the effect of the current formula in reducing differences in
of Differences in States’    states’ funding ability, we compared differences between each state’s
Funding Ability              funding ability before and after the value of federal matching aid is added
                             and calculated the percentage reduction in these differences. In
                             performing these calculations, we measured each state’s funding ability
                             relative to the average funding ability of all states. The resulting indexes of
                             states’ funding abilities provide a means of comparing relative differences



                             Page 26                                                           GAO-03-620 Medicaid Formula
Appendix II: Methodology




in states’ ability to fund their Medicaid programs. We used the weighted
absolute mean deviation as a quantitative measure of differences in states’
funding ability. This statistic is a measure of average differences in states’
funding ability. It is calculated by taking the absolute value of each state’s
index of relative funding ability and computing the arithmetic average of
these differences, using the following formula:


                                51

                                ∑w ⋅ X
                                s =1
                                       s          s   − X AVG
    Mean Absolute Deviation =              51

                                       ∑w  s =1
                                                      s




where

Xs = A state’s funding ability index

XAVG = Weighted average of all states’ funding ability indexes

ws = A state’s weighting factor (people in poverty).

In calculating the mean absolute deviation, we took into account
differences in the potential size of state programs by using the number of
people living in poverty in each state.

We chose the mean absolute deviation rather than the more commonly
used weighted standard deviation because the latter, by squaring
differences between each state’s funding ability and the national average
funding ability, gives much greater weight to states at the extreme ends of
the distribution of states’ funding abilities, resulting in a measure that is
more sensitive to extreme values and thus less likely to reflect the norm.

We calculated the mean absolute deviation in states’ funding ability both
without and with the value of federal matching aid added. Calculating the
percentage change in the two mean absolute deviations measures the
extent to which the current formula reduces differences in states’ funding
ability. For example, if the current formula completely eliminated
differences in states’ funding ability, total funding ability of all states
would equal the average of all states, and the mean absolute deviation
would be zero, representing a 100 percent reduction in differences in
states’ funding ability (the maximum possible). Alternatively, if the
formula had no effect in reducing differences in states’ funding ability, the


Page 27                                                         GAO-03-620 Medicaid Formula
Appendix II: Methodology




mean absolute deviation in states’ funding ability with the value of federal
matching aid taken into account would be the same as the mean absolute
deviation in states’ funding ability from their own resources. In this case,
there would be no change in the mean absolute deviation, meaning that
the matching formula had no effect in reducing relative differences in
states’ funding ability.

Table 3 shows each state’s index of Medicaid funding ability without and
with the value of its federal matching aid.

Table 3: States’ Ability to Fund Program Services without and with the Value of
Fiscal Year 2000 Federal Matching Aid Added

                                          State Medicaid funding ability
                                         (percentage of national average)
                                                     (1)                       (2)
                                         Without federal      With FY 2000 federal
                                                        a
State                                      matching aid               matching aid
Alabama                                              65                         89
Alaska                                              219                       279
Arizona                                              73                         98
Arkansas                                             61                         94
California                                           85                         74
Colorado                                            165                       138
Connecticut                                         176                       147
Delaware                                            162                       136
District of Columbia                                 71                       102
Florida                                              81                         78
Georgia                                              96                       101
Hawaii                                               98                         84
Idaho                                                94                       131
Illinois                                            131                       110
Indiana                                             148                       162
Iowa                                                147                       166
Kansas                                              126                       132
Kentucky                                             79                       112
Louisiana                                            72                       101
Maine                                                95                       117
Maryland                                            143                       120
Massachusetts                                       131                       110
Michigan                                            111                       103
Minnesota                                           143                       123
Mississippi                                          54                         97
Missouri                                            123                       130
Montana                                              73                       119




Page 28                                               GAO-03-620 Medicaid Formula
Appendix II: Methodology




                                                              State Medicaid funding ability
                                                             (percentage of national average)
                                                                         (1)                       (2)
                                                             Without federal      With FY 2000 federal
                                                                            a
    State                                                      matching aid               matching aid
    Nebraska                                                            122                       131
    Nevada                                                              126                       106
    New Hampshire                                                       179                       150
    New Jersey                                                          160                       134
    New Mexico                                                           55                         88
    New York                                                             88                         74
    North Carolina                                                       94                       105
    North Dakota                                                         92                       132
    Ohio                                                                111                       112
    Oklahoma                                                             76                       112
    Oregon                                                              111                       117
    Pennsylvania                                                        108                         98
    Rhode Island                                                        101                         92
    South Carolina                                                       73                       102
    South Dakota                                                        105                       152
    Tennessee                                                            80                         91
    Texas                                                                86                         93
    Utah                                                                173                       255
    Vermont                                                             121                       134
    Virginia                                                            125                       108
    Washington                                                          141                       123
    West Virginia                                                        56                         92
    Wisconsin                                                           150                       153
    Wyoming                                                             147                       174

Sources: HHS and the Departments of Commerce, Labor, and the Treasury.

Note: GAO calculations are based on data from HHS and the Departments of Commerce, Labor, and
the Treasury.
a
 Funding ability without federal matching aid was calculated using an average of state taxable
resources for 1996 through 1998.


The mean absolute deviation of states’ funding ability before taking into
account the value of federal matching aid (column 1 of table 3) yielded an
average difference in states’ relative funding ability of 22.7 percent. The
mean absolute deviation in states’ funding ability after taking into account
the value of federal matching aid (column 2 of table 3) yielded an average
difference of 18.1 percent. This difference represents a 20 percent overall
reduction in differences in states’ funding ability as a result of adding
federal matching aid.




Page 29                                                                   GAO-03-620 Medicaid Formula
                  Appendix II: Methodology




                  As the indicator of state resources in the formula, PCI includes income
Measuring State   received by state residents (“personal income”), such as wages, rents, and
Resources         interest income, but excludes other important taxable income. For
                  example, PCI excludes corporate income not received as income by state
                  residents, such as undistributed corporate profits and dividends received
                  by people who reside out-of-state. An ideal resources measure would
                  count all income that states are able to tax. Even certain types of income
                  that states exempt from taxation or tax at preferential rates should be
                  counted as potentially taxable income because these enhance taxpayers’
                  ability to pay all taxes levied in the state.

                  We used Total Taxable Resources (TTR), as reported by the Department of
                  the Treasury, to measure state resources because it comprises the income
                  included in PCI as well as income from other sources, such as corporate
                  income and capital gains, and thus it is a more comprehensive indicator of
                  income than PCI alone.1 TTR includes personal income received by state
                  residents as well as income produced within a state but received by
                  individuals who reside out-of-state (which is considered a portion of the
                  Gross State Product (GSP)). As indicated in table 4, nationwide, the TTR
                  measure of income is 32 percent larger than PCI.

                  Table 4: Comparison of PCI with TTR, 3-Year Averages, 1996-98

                      State                          PCI         TTR per capita     Percentage difference
                      Alabama                    $21,194               $26,884                         27
                      Alaska                      27,001                42,755                         58
                      Arizona                     22,842                29,947                         31
                      Arkansas                    20,310                26,324                         30
                      California                  26,867                35,057                         30
                      Colorado                    28,014                36,340                         30
                      Connecticut                 35,507                48,047                         35
                      Delaware                    27,872                47,020                         69
                      District of Columbia        36,067                51,503                         43
                      Florida                     25,756                32,267                         25
                      Georgia                     24,756                33,364                         35
                      Hawaii                      26,209                35,220                         34
                      Idaho                       21,035                27,399                         30




                  1
                   Another possible measure of a state’s resources is the Representative Tax System
                  developed by the Advisory Commission on Intergovernmental Relations. We did not use
                  this measure in our analysis because data on this measure are not available on an annual
                  basis.




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Appendix II: Methodology




 State                                         PCI   TTR per capita    Percentage difference
 Illinois                                   28,442          37,421                        32
 Indiana                                    23,902          31,493                        32
 Iowa                                       23,785          32,282                        36
 Kansas                                     24,388          32,456                        33
 Kentucky                                   21,241          28,774                        35
 Louisiana                                  21,272          31,520                        48
 Maine                                      22,376          28,205                        26
 Maryland                                   29,305          38,019                        30
 Massachusetts                              31,448          41,141                        31
 Michigan                                   25,608          31,558                        23
 Minnesota                                  27,773          35,996                        30
 Mississippi                                18,981          24,480                        29
 Missouri                                   24,251          32,314                        33
 Montana                                    20,291          25,436                        25
 Nebraska                                   24,832          33,481                        35
 Nevada                                     28,383          38,887                        37
 New Hampshire                              27,776          39,760                        43
 New Jersey                                 32,492          44,438                        37
 New Mexico                                 20,296          29,533                        46
 New York                                   30,661          41,470                        35
 North Carolina                             24,194          32,076                        33
 North Dakota                               21,577          29,298                        36
 Ohio                                       24,897          32,450                        30
 Oklahoma                                   21,152          26,412                        25
 Oregon                                     24,817          34,477                        39
 Pennsylvania                               26,096          33,239                        27
 Rhode Island                               26,589          35,002                        32
 South Carolina                             21,444          27,809                        30
 South Dakota                               22,603          31,700                        40
 Tennessee                                  23,450          30,323                        29
 Texas                                      24,201          32,931                        36
 Utah                                       21,135          29,010                        37
 Vermont                                    23,487          30,344                        29
 Virginia                                   26,869          36,788                        37
 Washington                                 26,912          35,271                        31
 West Virginia                              19,400          25,379                        31
 Wisconsin                                  24,863          32,456                        31
 Wyoming                                    23,615          41,920                        78
 United States                             $25,949         $34,299                        32

Source: Departments of Commerce and the Treasury.

Notes: Data reflect 3-year averages of TTR and PCI. GAO analysis of data from the Departments of
Commerce and the Treasury.




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                          Appendix II: Methodology




                          While TTR is a more comprehensive measure of state resources than PCI,
                          recent definitional changes to GSP and state personal income (SPI) data
                          made by the Bureau of Economic Analysis (BEA) may have implications
                          for the methodology used by the Department of the Treasury to calculate
                          TTR. For example, BEA has changed its treatment of the value of services
                          provided by government-owned fixed assets that are now included in GSP
                          and benefit payments of government employee pension plans, which are
                          now excluded from SPI. Since the Treasury initially developed the TTR
                          methodology, it has not reported why definitional changes made by BEA
                          should or should not be reflected in TTR. In the case of the changes to
                          government pension plans, the Treasury has reported it is currently
                          studying whether they necessitate any modifications to the TTR
                          methodology.


                          To measure people in poverty, we adjusted the Bureau of the Census’s
Measuring People in       estimates of people in households with incomes at or below the FPL for
Poverty and the Costs     (1) differences in the cost of providing health care services to children,
                          adults, and the elderly (to account for the higher health care costs for the
to Provide Them           elderly) and (2) geographic differences in the cost of providing health care
Program Services          services (such as wages and salaries of health care professionals and the
                          rental cost of medical facilities).2


Measuring the Number of   We obtained estimated counts of people living in poverty from the Bureau
People in Poverty         of the Census’s Current Population Survey (CPS). Because the CPS sample
                          sizes for individual states are especially small when disaggregated by age
                          cohorts, they are subject to greater statistical error than a sample
                          representing all age groups. To improve the accuracy of these estimates,
                          we averaged poverty counts over the 5-year period 1995 through 1999. We
                          used the FPL as a basis for making cross-state comparisons of the number
                          of people in poverty. (See table 5.)




                          2
                           We have excluded disproportionate share hospital (DSH) payments from this analysis.
                          These hospitals receive additional Medicaid reimbursement because they serve a
                          disproportionate number of Medicaid and other low-income patients. We have excluded
                          these payments from our analysis because the federal government uses a different
                          distribution formula from the regular Medicaid program.




                          Page 32                                                  GAO-03-620 Medicaid Formula
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Table 5: Distribution of Population in Poverty, by Age Group, 5-Year Averages,
1995-99

                                                        Percentage who are
                              Official
                              poverty
                                                    a                b              c
State                           count      Children            Adults        Elderly
Alabama                       684,401             44               44             11
Alaska                         52,434             47               50              3
Arizona                       773,651             49               44               7
Arkansas                      418,593             43               44             14
California                  5,213,675             48               46              6
Colorado                      356,379             42               52               6
Connecticut                   307,435             46               44             10
Delaware                       73,643             47               43             11
District of Columbia          111,071             43               46             12
Florida                     2,040,854             41               47             12
Georgia                     1,024,452             47               44              9
Hawaii                        138,433             42               49              9
Idaho                         166,135             49               44              7
Illinois                    1,335,576             49               42               9
Indiana                       485,926             39               50             10
Iowa                          273,851             44               47              9
Kansas                        275,646             45               44             12
Kentucky                      568,739             41               48             10
Louisiana                     811,417             47               44             10
Maine                         132,323             39               47             14
Maryland                      437,917             42               44             14
Massachusetts                 653,754             43               46             11
Michigan                    1,064,367             47               43             10
Minnesota                     437,201             46               43             11
Mississippi                   518,149             45               44             11
Missouri                      554,936             42               46             11
Montana                       143,838             46               47              7
Nebraska                      176,270             42               44             13
Nevada                        181,524             46               45               9
New Hampshire                  91,519             42               45             12
New Jersey                    680,727             39               47             13
New Mexico                    411,507             51               42               8
New York                    2,945,784             45               45             10
North Carolina                931,440             42               46             12
North Dakota                   81,831             44               44             12
Ohio                        1,308,010             46               45              9
Oklahoma                      486,474             42               47             11
Oregon                        410,697             45               49              7




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                              Appendix II: Methodology




                                                                                                     Percentage who are
                                                                    Official
                                                                    poverty
                                                                                                 a                b              c
                                  State                               count          Children               Adults        Elderly
                                  Pennsylvania                    1,322,801                 42                  47             12
                                  Rhode Island                      107,019                 40                  43             17
                                  South Carolina                    539,744                 46                  42             12
                                  South Dakota                       86,713                 45                  42             13
                                  Tennessee                         784,910                 43                  47             10
                                  Texas                           3,149,475                 48                  44               9
                                  Utah                              163,467                 51                  44              5
                                  Vermont                            61,026                 42                  49              9
                                  Virginia                          686,279                 39                  48             13
                                  Washington                        584,612                 43                  50               7
                                  West Virginia                     299,257                 36                  50             14
                                  Wisconsin                         448,444                 46                  45             10
                                  Wyoming                            57,957                 45                  45              9
                                  United States                  35,052,282                 45                  45             10

                              Source: Department of Commerce.

                              Note: Percentages may not add to 100 across age groups because of rounding.
                              a
                                  Population under age 21 with income at or below the FPL.
                              b
                                  Population aged 21 to 64 with income at or below the FPL.
                              c
                                  Population aged 65 and over with income at or below the FPL.




Adjusting Poverty Counts      Official poverty counts are not a good proxy for the low-income
for Differences in Costs to   population because they do not take into account the higher cost of
Serve Children, Adults, and   serving elderly individuals. For example, elderly individuals represented
                              27 percent of Medicaid beneficiaries in fiscal year 2000, the latest year for
the Elderly                   which data are available. However, because they are more intensive users
                              of the health care system and utilize more expensive long-term care
                              services, elderly persons accounted for 66 percent of all Medicaid
                              spending that year.

                              To account for differences in costs to serve each group, we weighted the
                              numbers of children, adults, and the elderly. We calculated Medicaid
                              spending per beneficiary for each age group nationwide, then compared
                              spending per beneficiary for each age group with average spending per
                              beneficiary for all age groups. We used a 5-year average of Medicaid
                              spending per beneficiary derived from data reported by the Centers for
                              Medicare & Medicaid Services (CMS) for fiscal years 1995 through 1999.
                              The results suggest that, nationwide, elderly beneficiaries utilize health



                              Page 34                                                                 GAO-03-620 Medicaid Formula
Appendix II: Methodology




care services at about two-and-one-half times the rate of the average
Medicaid beneficiary, and children utilize services at less than half the rate
of the average beneficiary. (See the cost weight index column in table 6.)

Table 6: Weights for Age Groups to Reflect Cost Differences and Medicaid Program
Participation

                                        Average
                                         annual                                  Average      Adjusted
                                    spending per        Cost weight         participation         cost
                                                                    a                     b           c
    Age group                         beneficiary           (index)          rate (index)      weight
    Elderly (aged 65 or
    older)                                  $9,005                  2.5                1.4          3.5
    Adults (aged 21-64)                     $4,729                  1.3                0.7          1.0
    Children (under age 21)                 $1,483                  0.4                1.2          0.5
    All groups                              $3,532                  1.0                1.0          1.0

Sources: Department of Commerce and HHS.

Note: GAO analysis of data from the Department of Commerce for 1995 through 1999 and data from
HHS for 1994 through 1998.
a
 Index is spending per recipient for each age group divided by average spending per recipient for all
age groups.
b
 Index is the percentage of people in each age group receiving Medicaid benefits, expressed as a
ratio to the average of all groups.
c
    Calculated by multiplying the cost weight index by the participation rate index.


To adjust for differences in program participation across age groups, we
compared the number of Medicaid beneficiaries by age group with the
number of people in poverty. We compared these counts with the national
average participation rates for all Medicaid beneficiaries. We calculated
the adjusted cost weight by multiplying the cost weight index by the
average participation rate index. We calculated a weighted count of people
in poverty for each state by applying the adjusted cost weights in the last
column of table 6 to poverty counts by age group, according to the
following formula:


                             Number in 
       Weighted                                 Number in                 Number in 
                           Poverty                                                      
       Poverty  = 3.5      Over       + 1.0     Poverty        + 0.5      Poverty Under 
       Count                                    Aged 21 to 64             Age 21        
                           Age 65                                                       
                                       

In table 7, the columns representing official poverty rates report the
percentage of people in poverty based on the official government poverty


Page 35                                                                   GAO-03-620 Medicaid Formula
Appendix II: Methodology




statistics reported by the Bureau of the Census. The age-weighted columns
are the percentages of people in poverty after weighting children, adults,
and the elderly. Comparing the percentages in the official poverty rate
columns with the percentages after age-weighting illustrates the effect of
differences in utilization rates by age cohort. For example, Florida’s
official poverty rate is revised upward from 14.0 percent to 15.3 percent
when weighted for age differences. Similarly, the District of Columbia’s
poverty rate increases from about 21.1 percent to about 22.7 percent after
weighting.3




3
 The age and health care use cost-adjusted poverty rates in table 7 will be discussed in the
next section, in which we describe the cost adjustments made for differences in medical
care costs.




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                                        Appendix II: Methodology




Table 7: Comparison of Official and Cost-Adjusted Poverty Rates, 5-Year Averages, 1995-99

                                                                                             Age and health care use
                             Official poverty rate            Age-weighted poverty rate     cost-adjusted poverty rate
                                              Percentage                     Percentage                     Percentage
                            Percentage of          of U.S.    Percentage in      of U.S.     Percentage         of U.S.
State                    people in poverty poverty rate            poverty poverty rate       in poverty   poverty rate
Alabama                                15.9           122              16.9          128            16.0            121
Alaska                                  8.2            63               6.9           52             7.2             54
Arizona                               16.5            126              15.2          115            15.7            119
Arkansas                              16.3            125              18.3          138            16.4            124
California                             15.9           122              14.2          108            15.7            118
Colorado                                9.0            69               8.4           63             8.5             64
Connecticut                             9.3            71               9.4           71            10.4             78
Delaware                                9.9            75              10.2           77            11.1             84
District of Columbia                  21.1            162              22.7          172            27.7            209
Florida                               14.0            108              15.3          116            15.6            118
Georgia                               13.6            104              13.6          103            13.4            102
Hawaii                                 11.6            89              11.9           90            13.7            104
Idaho                                  13.6           104              12.6           95            11.3             85
Illinois                              11.1             85              11.0           83            11.0             83
Indiana                                 8.4            64               8.9           68             8.3             63
Iowa                                    9.6            74               9.7           73             8.5             64
Kansas                                 10.7            82              11.4           86            10.1             76
Kentucky                              14.7            112              15.4          117            14.2            107
Louisiana                              19.0           145              19.2          145            17.1            130
Maine                                  10.7            82              12.5           94            11.6             87
Maryland                                8.6            66               9.9           75            10.3             78
Massachusetts                         10.7             82              11.3           86            12.1             92
Michigan                               10.8            83              10.9           83            10.9             82
Minnesota                               9.2            71               9.8           74             9.7             73
Mississippi                           18.9            145              19.6          149            17.5            132
Missouri                              10.4             80              11.2           85            10.3             78
Montana                               16.0            123              15.0          114            13.1             99
Nebraska                               10.6            81              11.8           90            10.4             79
Nevada                                 10.5            80              10.4           79            11.9             90
New Hampshire                           7.7            59               8.5           64             8.5             64
New Jersey                              8.5            65               9.6           73            10.8             82
New Mexico                            22.6            173              21.2          161            19.8            150
New York                              16.1            123              16.5          125            17.9            136
North Carolina                        12.8             98              13.9          105            13.6            103
North Dakota                          13.0             99              14.1          106            12.4             94
Ohio                                   11.6            89              11.7           88            11.2             85
Oklahoma                              14.8            114              15.7          119            13.5            102
Oregon                                12.5             95              11.8           89            11.9             90
Pennsylvania                           11.1            85              12.0           91            11.9             90



                                        Page 37                                             GAO-03-620 Medicaid Formula
                                                            Appendix II: Methodology




                                                                                                                          Age and health care use
                                          Official poverty rate                             Age-weighted poverty rate    cost-adjusted poverty rate
                                                           Percentage                                      Percentage                    Percentage
                                         Percentage of          of U.S.                     Percentage in      of U.S.    Percentage         of U.S.
 State                                people in poverty poverty rate                             poverty poverty rate      in poverty   poverty rate
 Rhode Island                                      11.2             86                               13.6          103           13.6            103
 South Carolina                                    14.3            109                               15.1          114           14.9            113
 South Dakota                                      12.3             94                               13.5          102           12.0             90
 Tennessee                                         14.2            109                               14.5          110           14.2            107
 Texas                                             16.1            124                               15.8          119           14.8            112
 Utah                                                7.9            61                                7.0           53            6.5             49
 Vermont                                           10.3             79                               10.6           80            9.6             73
 Virginia                                           10.4            79                               11.8           89           11.6             88
 Washington                                         10.4            79                               10.0           75            9.7             73
 West Virginia                                     17.0            131                               20.1          152           18.0            136
 Wisconsin                                           8.6            66                                8.7           66            8.3             62
 Wyoming                                            12.0            92                               12.1           91           10.8             82
 United States                                      13.1           100                               13.2          100           13.2            100

Sources: HHS, and the Departments of Commerce, Housing and Urban Development (HUD), and Labor.

                                                            Note: GAO analysis of data from HHS, HUD, and the Departments of Commerce and Labor.




Adjusting Poverty Counts                                    The cost of providing health care services is affected by three factors: (1)
for Differences in the Cost                                 the cost of the personnel who provide the services (wages, for example),
of Providing Health Care                                    (2) the rental cost of facilities in which the services are provided, and (3)
                                                            the cost of medical equipment and supplies.
Services
                                                            We used the average wage per worker in the health industry (Standard
                                                            Industrial Classification (SIC) code 8000), produced by the Bureau of
                                                            Labor Statistics (BLS), to measure the cost of personnel for 1996 through
                                                            1998. The BLS cost data cover personnel in a wide variety of settings,
                                                            including offices, clinics, hospitals, and medical and dental laboratories, as
                                                            well as health care providers who work for home health agencies.

                                                            To measure the cost of facilities through which services are delivered, we
                                                            used apartment rents as reported by the Department of Housing and
                                                            Urban Development (HUD) because data on commercial office space
                                                            rental rates in the health sector of the economy were not available.
                                                            Apartment rental rates were an appropriate alternative because the same
                                                            factors that affect the cost of office space (for example, population density
                                                            and income) affect housing rental rates, and apartment rental rates are
                                                            likely to more closely mimic office space costs than would owner-
                                                            occupied housing units. In addition, data are available for apartment



                                                            Page 38                                                      GAO-03-620 Medicaid Formula
Appendix II: Methodology




rentals by the size of the unit, which allowed us to take size differences
into account.

Data on the geographic differences in the cost of medical equipment and
supplies were not readily available. Because medical equipment and
supplies generally are purchased in national markets, we assumed that the
costs of these items do not vary across states.

We calculated an index of health industry wage rates and apartment rents
(our proxy for the rental cost of medical facilities). For medical supplies,
we used a cost index of 1.0 for all states to reflect the assumption that
these costs do not vary across states. We then combined the three factors
into an overall index of the cost of health care services by state, weighting
each factor on the basis of its respective proportion of the total cost of
health care services. Personnel costs represent the greatest share of health
care costs, as much as 75 percent of total costs, according to one study.4
We constructed our cost index conservatively by reducing the personnel
cost weight to 60 percent. We applied a cost weight of 30 percent for
medical equipment and supplies and other miscellaneous costs that are
assumed to be the same across states. The remaining 10 percent is the cost
weight for rent. Using these cost weights is likely to understate cross-state
cost differences.

Nineteen states had health care costs estimated to be at least 10 percent
above or below the national average. The states with costs 10 percent or
more above the national average were California, Connecticut, the District
of Columbia, Hawaii, Nevada, and New Jersey. States with lower costs
tended to be southern or midwestern states. (See table 8.)




4
Gregory Pope, Adjusting the Alcohol, Drug Abuse, and Mental Health Services Block
Grant for Allocations for Poverty Population and Cost of Service (Needham, Mass.: Health
Economics Research, Inc., Mar. 30, 1990).




Page 39                                                  GAO-03-620 Medicaid Formula
Appendix II: Methodology




Table 8: Wage, Rent, and Health Care Cost Indexes, by State

                                        Percentage of national average
                                    Wage index
                              (3-year averages,     Rent index Health care cost
State                                  1996-98)       (FY 2000)           index
Alabama                                      96              70              95
Alaska                                      104             124             105
Arizona                                     106              98             103
Arkansas                                     88              67              89
California                                  112             127             110
Colorado                                    101             107             101
Connecticut                                 113             125             110
Delaware                                    114             104             109
District of Columbia                        131             133             122
Florida                                     103             100             102
Georgia                                     100              91              99
Hawaii                                      119             139             115
Idaho                                        87              75              90
Illinois                                    100             104             100
Indiana                                      92              82              93
Iowa                                         83              74              87
Kansas                                       85              77              89
Kentucky                                     92              69              92
Louisiana                                    87              72              89
Maine                                        90              88              93
Maryland                                    105             113             104
Massachusetts                               106             131             107
Michigan                                    101              93             100
Minnesota                                    99              93              99
Mississippi                                  87              66              89
Missouri                                     91              74              92
Montana                                      82              77              87
Nebraska                                     84              77              88
Nevada                                      122             110             114
New Hampshire                                99             112             100
New Jersey                                  114             134             112
New Mexico                                   92              81              93
New York                                    109             132             109
North Carolina                               99              84              98
North Dakota                                 85              71              88
Ohio                                         96              85              96
Oklahoma                                     83              69              86
Oregon                                      101              99             101
Pennsylvania                                 99              94              99




Page 40                                              GAO-03-620 Medicaid Formula
                      Appendix II: Methodology




                                                                             Percentage of national average
                                                                         Wage index
                                                                   (3-year averages,     Rent index Health care cost
                          State                                             1996-98)       (FY 2000)           index
                          Rhode Island                                            99             108             100
                          South Carolina                                         101              79              99
                          South Dakota                                            85              77              89
                          Tennessee                                              100              76              98
                          Texas                                                   92              90              94
                          Utah                                                    90              95              93
                          Vermont                                                 85              97              91
                          Virginia                                                98              98              99
                          Washington                                              94             106              97
                          West Virginia                                           88              66              90
                          Wisconsin                                               95              85              95
                          Wyoming                                                 87              76              90
                          United States                                          100             100             100

                      Sources: HHS, HUD, and the Department of Labor.

                      Notes: States in bold have health care costs estimated to be 10 percent or more above or below the
                      national average. GAO analysis of data from HHS, HUD, and the Department of Labor.




                      We compared states’ ability to fund Medicaid services without and with
Calculating States’   the value of federal matching aid added. Column 1 of table 9 shows states’
Ability to Fund       funding ability: states’ TTR per person in poverty adjusted for differences
                      in the cost of providing them health care services. Column 2 shows states’
Medicaid Services     effective fiscal year 2000 federal matching rates used in the analysis5 and
without and with      column 3 shows the resulting “multipliers” (i.e., 1/(1 - FMAP)) that reflect
                      the effect of federal matching on states’ funding ability. Funding ability
Value of Federal      with federal aid is shown in column 4.
Matching Aid Added




                      5
                       To calculate effective matching rates we divided each state’s federal matching aid by its
                      total Medicaid spending, net of DSH and certain other costs.




                      Page 41                                                            GAO-03-620 Medicaid Formula
                                         Appendix II: Methodology




Table 9: States’ Funding Ability without and with the Value of Fiscal Year 2000 Federal Matching Aid Added

                                                 (1)
                              Funding ability from                                                                         (4)
                                   state resources                      (2)                             Funding ability with
                             (dollars per person in      Effective FY 2000                     (3)     federal matching aid
 State                                    poverty)a     FMAP (percentage)          FMAP multiplier           (col. 1 x col. 3)
 Alabama                                   $169,683                  69.64                   3.29                   $558,840
 Alaska                                     570,409                  67.26                   3.05                  1,742,447
 Arizona                                    189,505                  69.19                   3.25                    615,081
 Arkansas                                   158,718                  73.11                   3.72                    590,165
 California                                 222,437                  52.06                   2.09                    463,963
 Colorado                                   429,969                  50.08                   2.00                    861,380
 Connecticut                                459,835                  50.02                   2.00                    920,046
 Delaware                                   422,823                  50.20                   2.01                    848,991
 District of Columbia                       184,951                  70.93                   3.44                    636,309
 Florida                                    211,705                  56.60                   2.30                    487,803
 Georgia                                    251,548                  60.01                   2.50                    628,961
 Hawaii                                     256,566                  51.03                   2.04                    523,891
 Idaho                                      244,092                  70.29                   3.37                    821,587
 Illinois                                   341,369                  50.15                   2.01                    684,770
 Indiana                                    386,661                  61.84                   2.62                  1,013,136
 Iowa                                       382,676                  63.14                   2.71                  1,038,320
 Kansas                                     328,243                  60.09                   2.51                    822,538
 Kentucky                                   205,683                  70.62                   3.40                    700,085
 Louisiana                                  187,290                  70.37                   3.38                    632,139
 Maine                                      246,614                  66.31                   2.97                    732,052
 Maryland                                   374,141                  50.18                   2.01                    750,931
 Massachusetts                              342,550                  50.13                   2.01                    686,922
 Michigan                                   289,686                  55.17                   2.23                    646,136
 Minnesota                                  372,580                  51.69                   2.07                    771,185
 Mississippi                                140,227                  76.89                   4.33                    606,653
 Missouri                                   320,009                  60.58                   2.54                    811,740
 Montana                                    190,431                  74.49                   3.92                    746,413
 Nebraska                                   319,214                  61.00                   2.56                    818,427
 Nevada                                     327,582                  50.45                   2.02                    661,158
 New Hampshire                              467,893                  50.08                   2.00                    937,274
 New Jersey                                 417,976                  50.07                   2.00                    837,128
 New Mexico                                 142,227                  74.19                   3.87                    551,081
 New York                                   229,337                  50.11                   2.00                    459,721
 North Carolina                             244,355                  62.61                   2.67                    653,542
 North Dakota                               238,866                  70.97                   3.45                    822,897
 Ohio                                       289,509                  58.72                   2.42                    701,375
 Oklahoma                                   198,643                  71.63                   3.53                    700,263
 Oregon                                     288,765                  60.42                   2.53                    729,556
 Pennsylvania                               281,796                  53.84                   2.17                    610,540




                                         Page 42                                               GAO-03-620 Medicaid Formula
                                                         Appendix II: Methodology




                                                                 (1)
                                              Funding ability from                                                                                      (4)
                                                   state resources                         (2)                                       Funding ability with
                                             (dollars per person in         Effective FY 2000                           (3)         federal matching aid
 State                                                    poverty)a        FMAP (percentage)                FMAP multiplier               (col. 1 x col. 3)
 Rhode Island                                               264,602                     53.77                         2.16                        572,326
 South Carolina                                             189,300                     70.18                         3.35                        634,851
 South Dakota                                               274,528                     71.07                         3.46                        948,856
 Tennessee                                                  209,859                     63.19                         2.72                        570,142
 Texas                                                      224,158                     61.54                         2.60                        582,883
 Utah                                                       452,178                     71.65                         3.53                      1,595,085
 Vermont                                                    315,610                     62.39                         2.66                        839,259
 Virginia                                                   325,551                     51.90                         2.08                        676,811
 Washington                                                 367,374                     52.08                         2.09                        766,584
 West Virginia                                              145,611                     74.80                         3.97                        577,734
 Wisconsin                                                  392,390                     58.88                         2.43                        954,178
 Wyoming                                                    383,724                     64.63                         2.83                      1,084,827
 United States                                             $260,851                     56.83                         2.32                       $624,935

Sources: HHS and the Department of the Treasury.

                                                         Notes: Calculations were done with unrounded numbers, not the rounded numbers shown in the
                                                         table. GAO analysis of data from HHS and the Department of the Treasury.
                                                         a
                                                          Funding ability without federal matching aid was calculated using an average of TTR for 1996
                                                         through 1998.




                                                         The data used to show the relationship between a state’s effort to fund
Comparing                                                Medicaid benefits from its own financial resources and its total Medicaid
Proportion of States’                                    spending per person in poverty, shown in figure 2, are displayed in table
                                                         10.
Resources Devoted to
Medicaid with Their
Total Spending per
Person in Poverty




                                                         Page 43                                                          GAO-03-620 Medicaid Formula
Appendix II: Methodology




Table 10: Proportion of State Resources Devoted to Medicaid per $1,000 of TTR
Compared with Total Medicaid Spending per Person in Poverty, Cost Adjusted,
Fiscal Year 2000

                            State financial resources       Total Medicaid spending
State                               per $1,000 of TTR          per person in poverty
Alabama                                         $6.08                         $3,397
Alaska                                            5.84                        10,178
Arizona                                           4.64                         2,851
Arkansas                                          6.35                         3,747
California                                        8.04                         3,731
Colorado                                          6.26                         5,391
Connecticut                                       8.99                         8,274
Delaware                                          7.35                         6,242
District of Columbia                              8.51                         5,417
Florida                                           6.48                         3,160
Georgia                                           6.15                         3,869
Hawaii                                            7.51                         3,935
Idaho                                             5.07                         4,166
Illinois                                          7.79                         5,332
Indiana                                           6.07                         6,153
Iowa                                              6.48                         6,729
Kansas                                            6.23                         5,127
Kentucky                                          7.40                         5,179
Louisiana                                         5.59                         3,533
Maine                                           10.93                          7,999
Maryland                                          7.38                         5,544
Massachusetts                                   11.43                          7,849
Michigan                                          9.12                         5,895
Minnesota                                         9.20                         7,094
Mississippi                                       6.19                         3,757
Missouri                                          7.82                         6,345
Montana                                           5.13                         3,826
Nebraska                                          7.26                         5,941
Nevada                                            3.83                         2,533
New Hampshire                                     7.32                         6,864
New Jersey                                        7.00                         5,857
New Mexico                                        6.12                         3,370
New York                                        18.16                          8,347
North Carolina                                    7.77                         5,075
North Dakota                                      6.64                         5,467
Ohio                                              7.77                         5,449
Oklahoma                                          5.12                         3,586
Oregon                                            7.26                         5,299
Pennsylvania                                    11.29                          6,891




Page 44                                                  GAO-03-620 Medicaid Formula
           Appendix II: Methodology




                                                     State financial resources                  Total Medicaid spending
            State                                            per $1,000 of TTR                     per person in poverty
            Rhode Island                                                 14.27                                     8,170
            South Carolina                                                 6.40                                    4,061
            South Dakota                                                   4.92                                    4,671
            Tennessee                                                    11.04                                     6,296
            Texas                                                          5.58                                    3,252
            Utah                                                           3.74                                    5,964
            Vermont                                                      10.32                                     8,661
            Virginia                                                       5.10                                    3,455
            Washington                                                     8.71                                    6,679
            West Virginia                                                  7.22                                    4,170
            Wisconsin                                                      7.89                                    7,532
            Wyoming                                                        3.85                                    4,171
            United States                                                $8.37                                    $5,056

           Sources: HHS and the Departments of Commerce, Housing and Urban Development, and the Treasury.

           Note: GAO analysis of data from HHS and the Departments of Commerce, Housing and Urban
           Development, and the Treasury.




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           Page 45                                                                        GAO-03-620 Medicaid Formula
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