Medicaid: Sustainability of Low 1996 Spending Growth Is Uncertain

Published by the Government Accountability Office on 1997-06-27.

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

                  United States General Accounting Office

GAO               Report to the Chairman, Committee on
                  the Budget, U.S. Senate, and to the
                  Chairman, Committee on the Budget,
                  House of Representatives

June 1997
                  Sustainability of Low
                  1996 Spending Growth
                  Is Uncertain

      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Health, Education, and
      Human Services Division


      June 27, 1997

      The Honorable Pete V. Domenici
      Committee on the Budget
      United State Senate

      The Honorable John R. Kasich
      Committee on the Budget
      House of Representatives

      In fiscal year 1996, federal and state expenditures for Medicaid totaled
      approximately $160 billion—accounting for roughly 6 percent of total
      federal expenditures and 20 percent of total state expenditures. Medicaid’s
      annual growth rate for fiscal year 1996, however, was estimated at only
      3.3 percent or lower—a substantial drop from the more than 20-percent
      annual growth rates of the early 1990s.1 The very low 1996 spending
      growth rate raised many questions about what led to this steep drop and
      its implications for future expenditures.

      In response to your request about this low growth rate, we (1) examined
      the dominant factors affecting trends in Medicaid spending growth from
      fiscal years 1989 to 1995, (2) identified key factors that contributed to the
      low spending growth rate for fiscal year 1996 and analyzed variations in
      states’ Medicaid spending growth for the most recent 2-year period, and
      (3) assessed the implication of these factors for future Medicaid spending.

      Our findings are based on an analysis of data on state and federal Medicaid
      expenditures and on federal Medicaid outlays obtained from the Health
      Care Financing Administration (HCFA). Our trends analysis was based on
      expenditure and enrollment data for fiscal years 1988 to 1995.2 Final data
      for fiscal year 1996 were not available as of June 3, 1997. Our analysis of
      the 3.3-percent growth rate in fiscal year 1996 was based on federal
      Medicaid outlays. We also interviewed Medicaid officials from the 18

       The 3.3-percent growth rate has been widely used and represents the moneys paid to states by the
      federal government each month to fund Medicaid. Historically, federal outlays have proven to be a
      good predictor of Medicaid expenditures—representing the obligated dollar amounts for services
      provided and program administration in a given time period, whether paid or unpaid. According to
      HCFA, however, preliminary fiscal year 1996 expenditure data show only about 1.8 percent growth
      over fiscal year 1995 expenditures.
       Fiscal year 1988 was the earliest year for which spending estimates were available on one critical
      program component—the disproportionate share hospital (DSH) program. Therefore, fiscal year 1989
      was the earliest year for which a growth rate could be calculated for this program.

      Page 1                                             GAO/HEHS-97-128 Medicaid Spending Growth

                   states that accounted for almost 65 percent of federal Medicaid outlays
                   and represented the full range of growth rate trends in state spending
                   observed in the past 2 years. We conducted our review from August 1996
                   to April 1997 in accordance with generally accepted government auditing
                   standards. For more detailed information on our scope and methodology,
                   see appendix I.

                   The Medicaid spending growth rate increased dramatically in the early
Results in Brief   1990s, rising to almost 29 percent in 1992, with expenditures growing from
                   almost $60 billion in fiscal year 1989 to $157 billion in fiscal year 1995.
                   Factors that help explain this trend include (1) escalating disproportionate
                   share hospital (DSH) payments made to hospitals that cover a large
                   proportion of low-income and Medicaid beneficiaries, (2) the increasing
                   cost of providing services (the prices paid for services and the average
                   costs of services per beneficiary), and (3) the growing number of program
                   beneficiaries. Each of these factors prevailed to increase spending growth
                   at different times. For example, from fiscal years 1990 to 1992, the
                   contribution of DSH payment increases soared from 6 to 46 percent of total
                   spending growth until those payments were brought under control in 1993.
                   While DSH payment contributions erratically increased and decreased, the
                   impact of additional beneficiaries on overall expenditure growth steadily
                   increased due in part to mandated and optional eligibility expansions. By
                   fiscal year 1995, however, as Medicaid spending growth had abated
                   substantially, the contribution of these factors had decreased.

                   The dramatically low Medicaid expenditure growth rate in fiscal year 1996
                   masked wide variations in states’ Medicaid growth. One state’s Medicaid
                   expenditures decreased by 16 percent, another’s increased by 25 percent.
                   Most states, however—accounting for 80 percent of fiscal year 1996
                   federal Medicaid outlays—had moderate decreases or minimal changes
                   from their previous year’s spending growth. A combination of factors—
                   some affecting only certain states and others common to many states—
                   explains the low fiscal year 1996 growth rate. For example, some states’
                   increases in Medicaid enrollment leveled off after the prior year’s major
                   state-initiated program expansions. A number of other states we contacted
                   attributed lower growth rates to a generally improved economy and state
                   initiatives to limit expenditure growth through program changes such as
                   managed care programs and long-term care alternatives.

                   Whether the low 1996 Medicaid spending growth rate of 3.3 percent will be
                   sustained in subsequent years is uncertain. The factors that reduced

                   Page 2                                GAO/HEHS-97-128 Medicaid Spending Growth

             growth in fiscal year 1996 will continue to affect future Medicaid spending.
             The net effect of factors, such as DSH spending and the future economy,
             however, are unknown. Some of these factors may contribute to higher
             growth in the near future. For example, DSH payments have already begun
             to grow again. In addition, if the economy declines, enrollment in Medicaid
             would probably increase. The possible effects of other factors are less
             predictable. Welfare reform’s effect on expenditure growth is uncertain
             because states are just starting to implement their new programs. Also
             uncertain is the amount of money that may be saved from states
             implementing managed care alternatives.

             Medicaid, a federal grant-in-aid entitlement program administered by
Background   states, finances health care for about 37 million low-income families and
             blind, disabled, and elderly people. The federal and state governments
             share funding for Medicaid, with the federal government contributing an
             average of 57 percent of program costs in 1996.3 At the state level,
             Medicaid operates as a health insurance program covering acute care
             services for most beneficiaries, financing long-term medical care and
             social services for elderly and disabled people, and funding programs for
             people with developmental disabilities and mental illnesses.

             In 1995, almost 70 percent of total Medicaid enrollment consisted of
             children and adults, but this group accounted for less than 25 percent of
             total program expenditures. (See fig. 1.) In the same year, less than
             30 percent of the total Medicaid population consisted of blind, disabled, or
             elderly people, but this group accounted for more than 60 percent of total
             expenditures. DSH payments accounted for about 13 percent of total

              The percentage of an individual state’s Medicaid expenditures covered by the federal government can
             range from 50 to 83 percent.
              The DSH program partially offsets costs not covered by Medicaid or private insurance incurred by
             hospitals serving large numbers of Medicaid and other low-income patients, including the uninsured.

             Page 3                                             GAO/HEHS-97-128 Medicaid Spending Growth

Figure 1: Shares of Medicaid
Beneficiaries and Expenditures, by
Eligibility Category, Fiscal Year 1995

                                         Note: Excludes “other” and “unknown” eligibility categories.

                                         Source: HCFA Office of the Actuary merged enrollment (HCFA-2082) and expenditure
                                         (HCFA-64) files.

                                         For more than a decade, the national growth rate in Medicaid
                                         expenditures has been erratic. (See fig. 2.) Between fiscal years 1985 and
                                         1988, the annual growth rate remained relatively stable, ranging between
                                         roughly 8 and 10.5 percent. During the next 3 years, starting in fiscal year
                                         1989, the annual growth rate began to climb substantially, reaching almost
                                         29 percent in fiscal year 1992—an increase of more than $26 billion in
                                         expenditures for that year. Medicaid’s growth fell dramatically in fiscal
                                         year 1993 to 10.7 percent. From fiscal years 1993 through 1995, the annual

                                         Page 4                                             GAO/HEHS-97-128 Medicaid Spending Growth

                                      growth rate for the program leveled off at between 8 and 11 percent,
                                      which was similar to the growth rate between 1985 and 1988. Then, in
                                      fiscal year 1996, the growth rate fell to an estimated 3.3 percent.

Figure 2: Annual Growth Rate in
Medicaid Expenditures, Fiscal Years

                                      Sources: Fiscal years 1984-95, federal and state current expenditures (HCFA-64, line 6). Fiscal
                                      year 1996 data based on federal outlays for Medicaid. (Final expenditure data were not available
                                      for fiscal year 1996.)

                                      Page 5                                            GAO/HEHS-97-128 Medicaid Spending Growth

                    Three dominant factors affected the 1989-95 growth in Medicaid
Dominant Factors    expenditures: the DSH program, nominal spending per beneficiary (the cost
Affecting 1989-95   of services),5 and the growth in the number of program beneficiaries. To
Spending            better understand the effect of these factors on Medicaid growth rates, we
                    measured the effect of each while holding the others constant. (See fig. 3
                    and table 1.) For the first 2 years of the 7-year period, nominal spending
                    per beneficiary constituted the largest share of growth in the overall
                    program; by 1992, however, DSH payments constituted the largest share.
                    Increased beneficiary enrollment had a more constant—and increasingly
                    significant—effect on the annual growth rate. Between 1990 and 1994,
                    growth in beneficiary enrollment accounted for 30 percent or more of the
                    total growth in Medicaid spending.

                     Several different factors, including medical price inflation, reimbursement levels, and quality
                    assurance standards, affect nominal spending per beneficiary, a measure of average cost. At the
                    aggregate level, the demographic makeup of the Medicaid population also affects nominal spending
                    per beneficiary. For example, states with large elderly and disabled populations will have higher-
                    than-average costs.

                    Page 6                                             GAO/HEHS-97-128 Medicaid Spending Growth

Figure 3: Annual Increases in Medicaid
Expenditures by Growth Factor, Fiscal
Years 1989-95

                                         Sources: Medical assistance program expenditures (HCFA-64), excluding administrative costs
                                         and territories; beneficiary enrollment (HCFA-2082); and DSH estimates from the Urban Institute.

                                         Page 7                                            GAO/HEHS-97-128 Medicaid Spending Growth

Table 1: Shares of Medicaid
Expenditure Growth by Factors, Fiscal                Factors                   Percentage share of total expenditure growtha
Years 1989-95                                                              1989      1990        1991     1992         1993   1994     1995
                                        Nominal expenditures per
                                        beneficiary                           82        64         29        14         41      51         59
                                        DSH                                    3          6        21        46         –4      –1         14
                                        Beneficiary growth                    15        30         50        40         63      51         27
                                        Total expenditure growth             100       100        100      100         100     100         100
                                        Note: Does not include administrative costs or payments to U.S. territories.
                                            Percentages may not add to 100 due to rounding.
                                         DSH payments were first reported as a separate expenditure category in fiscal year 1993. The
                                        DSH shares for 1989 to 1994 used for this analysis are estimates made by the Urban Institute, in
                                        part based on HCFA-64 data. The DSH share for 1995 is based on HCFA-64 data.

Table 2: Annual Medicaid
Expenditures, Growth, and Growth                                           1989      1990        1991     1992         1993   1994     1995
Rate, Fiscal Years 1989-95              Growth rate (percent)               13.6      19.1       26.7      29.6        10.6     8.1    10.8
                                        Annual growth (dollars in
                                        billions)                           $7.0     $11.2      $18.6    $26.1     $12.1      $10.2   $14.8
                                        Total medical assistance
                                        expenditures (dollars in
                                        billions)                          $58.5     $69.6      $88.2 $114.3 $126.4 $136.6 $151.4
                                        Note: Does not include administrative costs or payments to U.S. territories.

                                        Between fiscal years 1990 and 1992, the DSH program had its most dramatic
                                        effect on Medicaid growth rates: its share of the overall Medicaid
                                        expenditure growth increased from 6 to 46 percent. A number of states
                                        increased their share of federal Medicaid dollars in fiscal years 1991 and
                                        1992 through certain creative financing mechanisms such as using
                                        provider taxes and donations to obtain federal matching funds for
                                        Medicaid.6 States used the DSH program along with these financing
                                        mechanisms to increase federal funds. As a result, DSH payments
                                        skyrocketed: In 1990, they were just above $1 billion; by 1992, they had
                                        increased to $17 billion. To limit these payments, the Congress placed
                                        restrictions on the DSH program and on the use of provider taxes and
                                        donations as revenue sources.7 DSH payments were limited to a national

                                         See Medicaid: States Use Illusory Approaches to Shift Program Costs to Federal Government
                                        (GAO/HEHS-94-133, Aug. 1, 1994); Michigan Financing Arrangements (GAO/HEHS-95-146R, May 5,
                                        1995); and State Medicaid Financing Practices (GAO/HEHS-96-76R, Jan. 23, 1996).
                                         Medicaid Voluntary Contribution and Provider-Specific Tax Amendments of 1991 (P.L. 102-234) and
                                        the Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66, section 13621).

                                        Page 8                                                GAO/HEHS-97-128 Medicaid Spending Growth

target of 12 percent of total Medicaid expenditures, excluding
administrative costs. If a state’s DSH spending exceeded this target, its DSH
payments were frozen until they equaled 12 percent or less of the state’s
medical assistance expenditures. These restrictions greatly curbed
payments, leading initially to less DSH spending and reduced Medicaid
spending growth in fiscal years 1993 and 1994. Even as states’ DSH
spending began to conform to the 12-percent target, however, aggregate
state DSH payments began to increase again as total Medicaid spending
grew. As a result, in fiscal year 1995, the DSH program share of expenditure
growth grew to 14 percent.

Nominal spending per beneficiary constituted the largest share of
Medicaid expenditure growth in fiscal years 1989, 1990, 1994, and 1995 but
accounted for only one-third or less of the growth in 2 other years. In years
in which the share of nominal spending per beneficiary was relatively
small, DSH payment growth was high. Conversely, in years in which the
share of nominal spending was high, DSH payments were low.

Beneficiary enrollment also consistently contributed to Medicaid’s growth
rate in the years that we examined. In fiscal years 1991, 1993, and 1994,
increased enrollment accounted for at least half of increased Medicaid
expenditures. After several years of static growth, the number of Medicaid
beneficiaries grew from about 22 million in fiscal year 1988 to 30 million in
fiscal year 1992; by fiscal year 1995, enrollment had grown to over
36 million. (See fig. 4.) This growth was due in part to federal mandates
that expanded eligibility to pregnant women and children and to certain
other low-income women and children who met financial but not
categorical eligibility standards. In addition, some states have used
managed care demonstration waivers to expand coverage to uninsured

 States have used the authority of demonstration waivers under section 1115 of the Social Security Act
(42 U.S.C. 1315(a)) to mandate enrollment of some or all Medicaid beneficiaries in managed care and
expand eligibility for enrollment to uninsured individuals who would not otherwise qualify for
Medicaid. See Medicaid: Spending Pressures Drive States Toward Program Reinvention
(GAO/HEHS-95-122, Apr. 4, 1995) and Medicaid: Statewide Section 1115 Demonstrations’ Impact on
Eligibility, Service Delivery, and Program Cost (GAO/T-HEHS-95-182, June 21, 1995).

Page 9                                              GAO/HEHS-97-128 Medicaid Spending Growth

Figure 4: Medicaid Enrollment by
Eligibility Category, Fiscal Years

                                     Note: Excludes “other” and “unknown” categories of eligibility.

                                     Source: Beneficiary enrollment file (HCFA-2082), fiscal years 1985-95.

                                     After relatively stable growth rates between fiscal years 1993 and 1995, the
A Combination of                     Medicaid growth rate dropped to an estimated 3.3 percent in fiscal year
Factors Affected 1996                1996. No single spending growth trend was evident in the states, and no
Spending Growth                      single factor explained the decrease in growth for 1996, according to our
                                     analysis. Rather, a combination of factors—some of which are unlikely to

                                     Page 10                                            GAO/HEHS-97-128 Medicaid Spending Growth

                           recur and others that seem part of a larger trend—have affected
                           Medicaid’s growth rate.

No Single Spending Trend   The 3.3-percent growth rate in fiscal year 1996 federal Medicaid outlays
Common to States           masked striking variation in states’ Medicaid growth. Growth rates ranged
                           from a decrease of 16 percent in one state to an increase of 25 percent in
                           another. Such differences in states’ program spending growth have been
                           fairly typical. In addition, some states often have large changes in growth
                           from one year to the next because of major program changes or
                           accounting variances that change the fiscal year in which a portion of
                           expenditures is reported. To determine the stability of states’ growth rates,
                           we compared these rates for fiscal years 1995 and 1996. We then placed
                           states in one of five growth rate categories, as shown in table 2. (See app.
                           II for states’ specific growth rates.)

                           Page 11                                GAO/HEHS-97-128 Medicaid Spending Growth

Table 3: Changes in Growth Rate of
Federal Medicaid Outlays, Fiscal Years   Fiscal year 1996                      Percentage of
1995-96                                  growth rate compared      Number of    1996 federal
                                         with fiscal year 1995’s      states         outlays     States
                                         Decreased substantially         10              16      Colorado, Florida,
                                                                                                 Hawaii, Louisiana,
                                                                                                 North Carolina,
                                                                                                 Oregon, Rhode Island,
                                                                                                 South Carolina,
                                                                                                 Tennessee, Wyoming
                                         Decreased moderately            20              48      Alabama, California,
                                                                                                 Idaho, Illinois, Iowa,
                                                                                                 Kansas, Kentucky,
                                                                                                 Michigan, Minnesota,
                                                                                                 Mississippi, North
                                                                                                 Dakota, Ohio,
                                                                                                 Pennsylvania, South
                                                                                                 Dakota, Texas,
                                                                                                 Vermont, Washington
                                         Changed minimally               16              32      Arizona, Arkansas,
                                                                                                 Connecticut, Delaware,
                                                                                                 District of Columbia,
                                                                                                 Georgia, Missouri,
                                                                                                 Montana, Nebraska,
                                                                                                 Nevada, New Jersey,
                                                                                                 New York, Utah,
                                                                                                 Virginia, West Virginia,
                                         Increased moderately             3               2      Alaska, Maine, New
                                         Increased substantially          2               2      Indiana, New

                                         Ten states that collectively accounted for 16 percent of 1996 federal
                                         Medicaid outlays had substantially decreased growth in fiscal year 1996
                                         compared with fiscal year 1995. However, 80 percent of 1996 federal
                                         Medicaid outlays took place in states whose fiscal year 1996 growth either
                                         moderately decreased or minimally changed. Although five states’ fiscal
                                         year 1996 growth rates increased, those states did not greatly affect
                                         spending growth trends because their combined share of Medicaid outlays
                                         was only 4 percent.

                                         A number of factors have led to Medicaid’s decreased spending growth
                                         rate in fiscal year 1996. Some of these—such as the prior implementation
                                         of cost controls and a leveling off in the number of program eligibles

                                         Page 12                               GAO/HEHS-97-128 Medicaid Spending Growth

                            following state-initiated expansions—continue to affect the growth rate in
                            some states. Other factors, such as improved economic conditions and
                            changing program policies—for example, increased use of alternatives to
                            institutional long-term care—also affected many states’ low growth rates.

Several Factors Affecting   The large decreases in some states’ growth rates in 1996 are largely due to
Spending Growth Will        three factors not expected to recur: substantially decreased DSH funding,
Probably Not Recur          slowdowns in state-initiated eligibility expansions, and accelerated 1995
                            payments in response to block grant proposals for Medicaid.

                            After the Congress enacted new limits in 1991 and 1993, DSH payments
                            declined nationally in 1993, stabilized in 1994, and began to grow again in
                            1995. Louisiana, however—a state that has had one of the nation’s largest
                            DSH programs, accounting for 30 percent of the state’s total Medicaid
                            expenditures in fiscal year 1995—has not followed this trend. Louisiana’s
                            1996 growth rate decreased substantially as its DSH payments continued to
                            decline. The state’s federal outlays decreased by 16 percent in 1996
                            because its DSH payments dropped dramatically.

                            Recent slowdowns in state-initiated eligibility expansions also helped to
                            substantially decrease the growth rates in selected states. In the past
                            several years, some states implemented statewide managed care
                            demonstration waiver programs to extend health care coverage to
                            uninsured people not previously eligible for Medicaid. Three states whose
                            1996 growth rates decreased substantially—Hawaii, Oregon, and
                            Tennessee—implemented most of their expansions in 1994. The increased
                            expenditures due to these expansions continued into 1995 but began to
                            level off in 1996. The number of eligible beneficiaries actually dropped in
                            these states in 1996 partly due to the states applying more stringent
                            eligibility requirements for the expansion population.

                            States accelerating 1996 payments into 1995 also helps explain the low
                            1996 growth rate.9 In 1995, the Congress—as part of a Medicaid block
                            grant proposal—was considering legislation to establish aggregate
                            spending limits that would be calculated using a base year. In response to
                            the anticipated block grant, officials from a few states told us, they
                            accelerated their Medicaid payments to increase their expenditures for
                            fiscal year 1995—the year the Congress considered using as the base. For
                            example, one state, with federal approval, made a DSH payment at the end

                             Aggregate data show that growth in federal Medicaid outlays was flat in the first 6 months of 1996 and
                            then grew 6 percent in the last 6 months.

                            Page 13                                             GAO/HEHS-97-128 Medicaid Spending Growth

                           of fiscal year 1995 rather than at the start of fiscal year 1996. Another state,
                           whose growth had moderately decreased, expedited decisions on audits of
                           hospitals and nursing homes to speed payments due these providers,
                           according to a state official.

Strong Economic            Improved economic conditions, reflected in lower unemployment rates
Conditions Have Helped     and slower increases in the cost of medical services, also have helped slow
Slow Spending Growth       the growth of Medicaid expenditures. Between 1993 and 1995, most states’
                           unemployment rates dropped—some by roughly 2 percentage points. As
                           we reported earlier, every percentage-point drop in the unemployment
                           rate is typically associated with a 6-percent drop in Medicaid spending.10
                           Low unemployment rates had reduced the number of people on welfare
                           and therefore in Medicaid, several state officials told us.

                           In addition, growth in medical service prices has been steadily declining
                           since the late 1980s. In 1990, this growth was 9.0 percent; by 1995, it was
                           halved to 4.5 percent, and in 1996 it declined further, to 3.5 percent.
                           Declines in price inflation indirectly affect the Medicaid rates that states
                           set for providers. States have frozen provider payment rates in recent
                           years, including rates for nursing facilities and hospitals, according to
                           several state officials we spoke with. Such a freeze might not have been
                           possible in periods of higher inflation because institutional providers
                           might have challenged state payment rates in court, arguing that the rates
                           have not kept pace with inflation.11 With lower inflation, states can
                           restrain payment rates with less concern about such challenges.

State Managed Care         Several states that we contacted discussed recent program changes that
Programs and Long-Term     may have affected their Medicaid expenditures. The states’
Care Policies May Have     implementation of managed care programs was most prominently
                           mentioned. The overall effect of managed care on Medicaid spending is
Affected Spending Growth   uncertain, however, because of state variations in program scope and
                           objectives. According to the Congressional Budget Office (CBO), savings
                           from enrolling beneficiaries in managed care are not likely to be large in

                             Medicaid: Restructuring Approaches Leave Many Questions (GAO/HEHS-95-103, Apr. 4, 1995).
                             The Boren Amendment, section 1902(a)(13)(A) of the Social Security Act, (42 U.S.C. 1396(a)(13)(A))
                           requires that states make payments to hospitals, nursing facilities, and intermediate care facilities for
                           the mentally retarded that are reasonable and adequate to meet the costs incurred by efficiently and
                           economically operated facilities. Providers in a number of states have used the Boren Amendment to
                           force states to increase reimbursement rates for institutional services.

                           Page 14                                              GAO/HEHS-97-128 Medicaid Spending Growth

the long run.12 States also mentioned initiatives for using alternative
service delivery methods for long-term care. These initiatives may have
helped to limit the growth in Medicaid costs; however, measuring their
effect is difficult.

Although some states have been using managed care to serve portions of
their Medicaid population for over 20 years, many of the states’ programs
have been voluntary and limited to certain geographic areas. In addition,
these programs tend to target women and children—rather than those
who may need more care and are more expensive to serve such as people
with disabilities and the elderly.13 Only a few states have mandated
enrollment statewide—fewer still have enrolled more expensive
populations—and these programs are relatively new. Arizona, which has
the most mature statewide mandatory program, has perhaps best proven
an ability to save money with managed care by devoting significant
resources to its competitive bidding process.14 Other states, however, have
emphasized objectives besides controlling total spending in moving to
managed care. In recently expanding its managed care program, Oregon
expanded eligibility and increased per capita payments to promote
improved access and quality and to look to the future for any cost savings.
Tennessee also expanded eligibility to formerly uninsured populations
with its demonstration waiver. Although initially achieving cost savings
per beneficiary by setting low capitation rates for health plans, the state
raised its rates in subsequent years.

Managed care has not significantly affected the moderate expenditure
growth decreases in Minnesota, which has high managed care market
penetration, and in California, which is in the midst of a large expansion,
according to officials in the respective states. About 40 percent of
Minnesota’s Medicaid beneficiaries—mainly women and children living in
urban areas—were enrolled in managed care plans in 1996, said an official.
Because enrollment in managed care has been mandatory for these
beneficiaries for several years, any dollar savings have been accounted for.
Significant additional savings from managed care are not expected unless
the elderly and disabled beneficiaries are mandated to enroll in managed
care plans for both Medicare and Medicaid and for long-term care

 Statement of Paul N. Van de Water, Assistant Director for Budget Analysis, CBO, on Baseline
Projections for Medicare and Medicaid before the Subcommittee on Health and Environment,
Committee on Commerce, House of Representatives, Feb. 12, 1997.
 Medicaid Managed Care: Serving the Disabled Challenges State Programs (GAO/HEHS-96-136,
July 31, 1996).
 Arizona Medicaid: Competition Among Managed Care Plans Lowers Program Costs (GAO/HEHS-96-2,
Oct. 4, 1995).

Page 15                                            GAO/HEHS-97-128 Medicaid Spending Growth

                       services. In contrast, California officials consider their program to be
                       budget neutral in the short run because they have set their capitation rate
                       at 100 percent of fee-for-service. In the long-term, however, they believe it
                       will reduce the rate of cost growth. Given the varying objectives, states’
                       experiences to date provide limited information on the ability of managed
                       care to help control state Medicaid costs and moderate spending growth
                       over time.

                       Some states we contacted are trying to control long-term care costs,
                       which, for fiscal year 1995, accounted for about 37 percent of Medicaid
                       expenditures nationwide. These states are limiting the number of nursing
                       home beds and payment rates for nursing facility services while expanding
                       home- and community-based services, which can be less expensive
                       alternatives to institutional care. For example, New York is trying to limit
                       its long-term care costs by changing its rate-setting method for nursing
                       facilities, establishing county expenditure targets to limit growth, and
                       pursuing home- and community-based service options as alternatives to
                       nursing facilities, according to a state official. Our previous work has
                       shown that such strategies can help control long-term care spending if
                       they have controls on the volume of nursing home care and home- and
                       community-based services—such as limiting the number of participating
                       beneficiaries and having waiting lists.15

                       Many of the factors resulting in the 3.3-percent growth rate in 1996—such
Implications for       as DSH payments, unemployment rates, and program policy changes—will
Future Spending        continue to affect the Medicaid growth rate in future years. Some of these
Growth                 factors, however, may contribute to higher—not lower—growth rates,
                       while the effect of others is more uncertain.16

                       Factors that may lead to increased growth in Medicaid expenditures
                       include the following:

                   •   DSHpayments: Without new limits, DSH payments will probably add to the
                       growth of the overall program. Although Louisiana’s adjustments to its DSH
                       payments substantially reduced its 1996 spending, other states’ DSH
                       spending began to grow moderately in 1995 as freezes imposed on
                       additional DSH spending no longer applied. Although DSH payments are not

                        Medicaid Long-Term Care: Successful State Efforts to Expand Home Services While Limiting Costs
                       (GAO/HEHS-94-167, Aug. 11, 1994).
                        CBO has estimated that federal Medicaid expenditures will grow by 8 percent in 1998 and by an
                       average of 7.8 percent between 1997 and 2007.

                       Page 16                                           GAO/HEHS-97-128 Medicaid Spending Growth

    growing as fast as they were in the early 1990s, these payments did begin
    to grow again in 1995 and will probably parallel the growth in the overall
•   The economy: Even though the economy has been in a prolonged
    expansion, history indicates that a robust economy will not last
    indefinitely. The unemployment rate is not expected to stay as low as it
    currently is, especially in states with rates below 4 percent. Furthermore,
    any increases in medical care price inflation will undoubtedly affect
    Medicaid reimbursement rates, especially to institutional providers.
•   Growing numbers of elderly people: While states have succeeded
    somewhat in dealing with long-term care costs, increasing numbers of
    elderly people will inevitably lead to increased program costs. The number
    of elderly over 65 years of age is estimated to grow from 31 million in 1990
    to 39 million in 2010, an increase of 26 percent. Alternative service delivery
    systems can moderate that growth but not eliminate it.

    Other factors may dampen future spending growth but by how much is
    unclear. The recently enacted welfare reform legislation makes people
    receiving cash assistance no longer automatically eligible for Medicaid.17
    As a result, the number of Medicaid enrollees—and the costs of providing
    services—may decrease because some Medicaid-eligible people may be
    discouraged from seeking eligibility and enrollment apart from the new
    welfare process. States may need to restructure their eligibility and
    enrollment systems, however, to ensure that people who are eligible for
    Medicaid continue to participate in the program. Restructuring their
    systems will undoubtedly increase states’ administrative costs. The net
    effect of these changes remains to be seen.

    The potential for cost savings through managed care is also unclear
    because experience is limited and state objectives in switching to managed
    care have not always emphasized immediate cost containment. Yet many
    hope that managed care will, over time, help constrain costs. Although
    Arizona’s Medicaid managed care program has helped limit program
    growth, cost savings have been mainly due to considerable effort to
    promote competition among health plans. Sustaining this competition in
    the future will challenge the state’s managed care program.

     Traditionally, Medicaid enrollment has been linked to the financial assistance process for Aid to
    Families With Dependent Children. Individuals enrolled in this program would automatically be
    enrolled in Medicaid as well. Under the Personal Responsibility and Working Opportunity
    Reconciliation Act of 1996 (P.L. 104-193), states may choose to separate the two processes.

    Page 17                                             GAO/HEHS-97-128 Medicaid Spending Growth

                   We provided a draft of this report to HCFA’s Administrator. HCFA officials
Agency and Other   generally agreed with the conclusions in the report concerning the factors
Comments           that affected Medicaid spending growth in the last 7 years and the
                   implications for future spending growth. They pointed out, however, that
                   while DSH payments grew significantly in fiscal year 1995, preliminary
                   expenditure data for fiscal year 1996 show that DSH payments dropped
                   about 20 percent for that year. In addition, state Medicaid estimates for
                   DSH payments through fiscal year 1998 show about a 1-percent average
                   compound annual growth from fiscal years 1993 to 1998. HCFA officials
                   believe that although DSH payments present opportunities for accelerating
                   Medicaid spending growth, it is too early to conclude that their growth is
                   likely to parallel overall program growth. They also noted that preliminary
                   fiscal year 1996 expenditure data show only a 1.8-percent growth over
                   fiscal year 1995. In addition, HCFA officials had technical comments, which
                   we have incorporated in the report as appropriate.

                   We provided relevant sections of the draft report to Medicaid officials in
                   eight states mentioned in our report to illustrate the impact of the various
                   factors on Medicaid spending growth. Officials from five states responded,
                   generally agreeing with the accuracy of the information. Officials in
                   Arizona and Tennessee commented that their managed care programs had
                   realized cost savings, contrary to CBO’s opinion that savings from enrolling
                   beneficiaries in managed care are not likely to produce savings in the long
                   run. In particular, Arizona officials cited our report on their managed care
                   program that discussed program savings. In our report, however, we noted
                   their savings were attributable to their ability to implement a strong
                   competitive bidding system among managed care plans. Continued
                   savings, we believe, are likely to depend on the state’s ability to maintain
                   competition among the plans.

                   Page 18                               GAO/HEHS-97-128 Medicaid Spending Growth

We are sending copies of this report to the Secretary of Health and Human
Services. Copies will also be made available to others on request.

Please contact me on (202) 512-7114 if you or your staff have any
questions. Other major contributors to this report are listed in appendix

William J. Scanlon
Director, Health Financing and
  Systems Issues

Page 19                               GAO/HEHS-97-128 Medicaid Spending Growth

Letter                                                                                             1

Appendix I                                                                                        22

Scope and
Appendix II                                                                                       23

Stability of Growth
Rate for Federal
Medicaid Outlays,
Fiscal Years 1995 and
Appendix III                                                                                      25

Major Contributors to
This Report
Tables                  Table 1: Shares of Medicaid Expenditure Growth by Factors,                 8
                          Fiscal Years 1989-95
                        Table 2: Annual Medicaid Expenditures, Growth, and Growth                  8
                          Rate, Fiscal Years 1989-95
                        Table 3: Changes in Growth Rate of Federal Medicaid Outlays,              12
                          Fiscal Years 1995-96
                        Table II.1: Growth Stability Index for Federal Medicaid Outlays           23
                          by State, Fiscal Years 1995 and 1996

Figures                 Figure 1: Shares of Medicaid Beneficiaries and Expenditures, by            4
                          Eligibility Category, Fiscal Year 1995
                        Figure 2: Annual Growth Rate in Medicaid Expenditures, Fiscal              5
                          Years 1985-96
                        Figure 3: Annual Increases in Medicaid Expenditures by Growth              7
                          Factor, Fiscal Years 1989-95
                        Figure 4: Medicaid Enrollment by Eligibility Category, Fiscal             10
                          Years 1985-95

                        Page 20                              GAO/HEHS-97-128 Medicaid Spending Growth


CBO        Congressional Budget Office
DSH        disproportionate share hospital
HCFA       Health Care Financing Administration

Page 21                             GAO/HEHS-97-128 Medicaid Spending Growth
Appendix I

Scope and Methodology

             To examine the trends in Medicaid spending from fiscal years 1988 to
             1995, we obtained Medicaid enrollment and expenditure data from HCFA.
             For each fiscal year, we calculated the annual growth rate, the spending
             growth in absolute dollars, and the Medicaid enrollment growth rate.
             Using these data, we calculated the share of the overall Medicaid growth
             represented by the numbers of beneficiaries, per capita nominal spending,
             and disproportionate share hospital (DSH) payments in each fiscal year.

             Because complete Medicaid expenditure data for fiscal year 1996 were
             lacking when we did our work, we obtained HCFA data on federal Medicaid
             outlays for fiscal years 1994 to 1996. For each fiscal year, we calculated
             each state’s growth rate. To analyze variations in states’ annual spending,
             we created a growth stability index by calculating the ratio of the state’s
             fiscal year 1995 growth rates to the fiscal year 1996 growth rates. We
             categorized states on the basis of their growth stability index according to
             the following five categories regarding the direction and magnitude of
             their fiscal year 1996 growth compared with their fiscal year 1995 growth:
             decreased substantially, decreased moderately, changed minimally,
             increased moderately, and increased substantially.

             Using the categories of the growth stability index, we judgmentally
             selected 18 states that represented a cross section of state spending trends
             in the past 2 years and accounted for almost 65 percent of fiscal year 1996
             federal Medicaid outlays and analyzed their enrollment, expenditure, and
             outlay data. We contacted state Medicaid officials in these states to
             identify key factors that contributed to the decrease from previous years’
             growth rates.

             To assess the implications of these and other factors for Medicaid
             expenditures in the future, we interviewed state officials in the 18 states
             on their projected growth rates for the upcoming years. We also reviewed
             the Congressional Budget Office’s baseline for Medicaid as of
             January 1997.

             We conducted our review from August 1996 to April 1997 in accordance
             with generally accepted government auditing standards.

             Page 22                               GAO/HEHS-97-128 Medicaid Spending Growth
Appendix II

Stability of Growth Rate for Federal
Medicaid Outlays, Fiscal Years 1995 and
                                         We developed a growth stability index that shows the direction and
                                         magnitude of change in the growth rates of federal Medicaid outlays
                                         between fiscal years 1995 and 1996. An index of 1.0 indicates no change in
                                         the growth rates for the 2 years. An index greater than 1.0 indicates a
                                         decrease in the growth rates. For example, Colorado’s index of 1.37
                                         indicates the largest decrease of all the states.

Table II.1: Growth Stability Index for
Federal Medicaid Outlays by State,                                                                                   State
Fiscal Years 1995 and 1996                                                                                       ranking
                                                                        Percentage Percentage                   based on
                                                                            growth,     growth,     Growth        growth
                                                                         fiscal year fiscal year   stability     stability
                                         States                               1995a        1996       index         index
                                         State averages                       11.00        3.18b       1.08
                                         Alabama                              10.63        3.71        1.07            26
                                         Alaska                                2.54       17.60        0.87            49
                                         Arizona                               2.70        4.58        0.98            43
                                         Arkansas                              8.76        7.50        1.01            38
                                         California                           13.73        2.80        1.11            21
                                         Colorado                             30.84       –4.66        1.37             1
                                         Connecticut                          10.68       11.51        0.99            40
                                         Delaware                             24.47       19.65        1.04            35
                                         District of Columbia                 –0.51       –1.37        1.01            39
                                         Florida                              22.35       –4.28        1.28             4
                                         Georgia                               7.82        2.44        1.05            31
                                         Hawaii                               31.87       11.46        1.18             9
                                         Idaho                                12.99        5.46        1.07            24
                                         Illinois                             16.30        1.85        1.14            12
                                         Indiana                            –13.34        24.52        0.70            51
                                         Iowa                                 11.46       –0.02        1.11            17
                                         Kansas                               12.67       –2.05        1.15            11
                                         Kentucky                             13.36        2.15        1.11            19
                                         Louisiana                             1.19      –15.96        1.20             8
                                         Maine                                –0.22       10.21        0.91            48
                                         Maryland                             15.56        3.36        1.12            16
                                         Massachusetts                        11.22        3.50        1.07            23
                                         Michigan                              7.86        1.46        1.06            27
                                         Minnesota                            13.48        2.52        1.11            20
                                         Mississippi                          16.54        3.34        1.13            15
                                         Missouri                              8.70        6.81        1.02            36
                                         Montana                               7.05       11.76        0.96            46

                                         Page 23                               GAO/HEHS-97-128 Medicaid Spending Growth
Appendix II
Stability of Growth Rate for Federal
Medicaid Outlays, Fiscal Years 1995 and

                                          Percentage Percentage                            based on
                                              growth,     growth,             Growth         growth
                                           fiscal year fiscal year           stability      stability
States                                          1995a        1996               index          index
Nebraska                                           6.22            9.89           0.97              45
Nevada                                            20.88          15.52            1.05              32
New Hampshire                                   –21.73             0.95           0.78              50
New Jersey                                        10.16            5.54           1.04              33
New Mexico                                        13.80          21.30            0.94              47
New York                                           8.13            6.47           1.02              37
North Carolina                                    26.51            1.27           1.25               5
North Dakota                                      11.19            0.08           1.11              18
Ohio                                              10.94            4.43           1.06              28
Oklahoma                                           9.22            3.42           1.06              30
Oregon                                            38.37            4.26           1.33               3
Pennsylvania                                       7.50            1.62           1.06              29
Rhode Island                                      18.81         –10.97            1.33               2
South Carolina                                    16.72            0.71           1.16              10
South Dakota                                      13.18          –0.03            1.13              13
Tennessee                                         21.67            0.78           1.21               7
Texas                                             11.80            4.57           1.07              25
Utah                                              10.14          11.25            0.99              41
Vermont                                           18.23            7.40           1.10              22
Virginia                                           5.24            8.41           0.97              44
Washington                                        15.39            2.02           1.13              14
West Virginia                                     –3.19          –1.77            0.99              42
Wisconsin                                          7.55            3.17           1.04              34
Wyoming                                           20.88          –1.68            1.23               6

 The fiscal year 1995 growth rate may be overstated for some states due to incomplete reporting
in fiscal year 1994.
 Aggregate growth in federal outlays for Medicaid is 3.3 percent when outlays for territories are
included in calculation.
Not applicable.

Source: Federal Medicaid outlays, HCFA.

Page 24                                             GAO/HEHS-97-128 Medicaid Spending Growth
Appendix III

Major Contributors to This Report

               Kathryn G. Allen, Acting Associate Director, (202) 512-7059
               Lourdes R. Cho, Senior Evaluator
               Richard N. Jensen, Senior Evaluator
               Deborah A. Signer, Senior Evaluator
               Karen M. Sloan, Communications Analyst

(101555)       Page 25                              GAO/HEHS-97-128 Medicaid Spending Growth
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