Medicaid: Decline in Spending Growth Due to a Combination of Factors

Published by the Government Accountability Office on 1997-03-04.

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

                          United States General Accounting Office

GAO                       Testimony
                          Before the Committee on Finance, U.S. Senate

For Release on Delivery
Expected at 10:30 a.m.,
Tuesday, March 4, 1997

                          Decline in Spending Growth
                          Due to a Combination of
                          Statement of Jonathan Ratner, Associate Director
                          Health Financing and Systems Issues
                          Health, Education, and Human Services Division

Medicaid: Decline in Spending Growth Due
to a Combination of Factors

              Mr. Chairman and Members of the Committee:

              I am pleased to be here today to discuss recent Medicaid spending trends
              and their potential implications for future outlays. My comments are based
              on work that we have in progress at the request of the Chairmen of the
              Senate and House Budget Committees. Their request was prompted by an
              interest in what contributed to the precipitous drop in the annual growth
              rate of Medicaid spending from over 20 percent in the early 1990s to
              3.3 percent in fiscal year 1996.

              My remarks today focus on three issues: (1) the variation in Medicaid
              spending growth among the states, especially for the most recent 2-year
              period, that culminated in the 3.3-percent growth rate in fiscal year 1996;
              (2) key factors that contributed to the decrease from previous years’
              growth rates; and (3) the implications of these and other factors for
              Medicaid expenditures in the future. Our findings are based on our
              analysis of Medicaid expenditure data published by the Department of
              Health and Human Services’ Health Care Financing Administration and
              our review of federal outlays as reported by the Department of the
              Treasury. We also contacted Medicaid officials in 18 states that represent a
              cross-section of state spending patterns over the past 2 years and that
              account for almost 70 percent of Medicaid expenditures.

              In brief, we found no single pattern across all states that accounts for the
              recent dramatic decrease in the growth of Medicaid spending. Rather, a
              combination of factors—some affecting only certain states and others
              common to many states—explains the low 1996 growth rate. For example,
              several states saw substantial drops in their 1996 growth rates associated
              with circumstances such as a sharp reduction in very high levels of
              disproportionate share hospital (DSH) payments to conform with binding
              restrictions on such payments or the leveling off of their Medicaid
              enrollment following planned expansions in prior years. Such
              circumstances are unlikely to recur to dampen spending increases in
              future years. Moreover, the vast majority of states experienced declines in
              their growth rates that were moderate to limited. The experiences of these
              states reflect a number of factors at work, including a generally improved
              economy and state initiatives to limit expenditure growth, such as
              implementing managed care for primary and acute care services or
              alternative programs for long-term care. With an improved economy and
              declining unemployment, the number of people eligible for Medicaid
              decreased. In addition, a dramatic slowdown in price increases for
              medical services helped states control costs for certain services provided

              Page 1                                                      GAO/T-HEHS-97-91
                      Medicaid: Decline in Spending Growth Due
                      to a Combination of Factors

                      through Medicaid. While the magnitude of the effect of states’
                      programmatic changes—such as managed care programs and long-term
                      care alternatives—is less clear, there is evidence that they helped to
                      restrain program costs. However, it is likely that the 3.3-percent growth
                      rate is not indicative of the growth rate in the years ahead. Just as a
                      number of factors converged to bring about the drop in the 1996 growth
                      rate, so a variety of factors—including a downturn in the economy—could
                      result in increased growth rates in subsequent years.

                      Medicaid, a federal grant-in-aid program that states administer, finances
Background            health care for about 37 million low-income people. With total federal and
                      state expenditures of approximately $160 billion in 1996, Medicaid exerts
                      considerable fiscal pressure on both state and federal budgets, accounting
                      for roughly 20 percent and 6 percent of total expenditures, respectively.

                      For more than a decade, the growth rate in Medicaid expenditures
                      nationally has been erratic. Between 1984 and 1987, the annual growth
                      rates remained relatively stable, ranging between roughly 8 and 11
                      percent. Over the next 4 years, beginning in 1988, annual growth rates
                      increased substantially, reaching 29 percent in 1992—an increase of over
                      $26 billion for that year. From this peak, Medicaid’s growth rates declined
                      between 1993 and 1995 to approximately mid-1980 levels. Then, in fiscal
                      year 1996, the growth rate fell to 3.3 percent.

                      The 3.3-percent growth in 1996 federal Medicaid outlays masks striking
No Single Spending    variation among the states. Growth rates ranged from a decrease of
Trend Across States   16 percent to an increase of 25 percent. Such differences in program
                      spending growth across states has been fairly typical. In addition, there are
                      often some states that experience large changes in growth from one year
                      to the next because of major changes in program structure or accounting
                      variances that change the fiscal year in which a portion of expenditures
                      are reported. To determine the stability of the growth rate among states,
                      we compared states’ growth rates in fiscal year 1995 with those in fiscal
                      year 1996. Our analysis revealed that states could be placed in one of five
                      categories, as shown in table 1. (See app. I for specific state growth rates.)

                      Page 2                                                       GAO/T-HEHS-97-91
                                         Medicaid: Decline in Spending Growth Due
                                         to a Combination of Factors

Table 1: Changes in Growth Rate of
Federal Medicaid Outlays, Fiscal Years                                             Percentage
1995 and 1996                            Fiscal year 1996 growth rate                  of 1996
                                         compared with fiscal year       Number of     federal
                                         1995’s                             states     outlays States
                                         Decreased substantially                    10     16 Colorado, Florida, Hawaii,
                                                                                              Louisiana, North Carolina,
                                                                                              Oregon, Rhode Island, South
                                                                                              Carolina, Tennessee,
                                         Decreased moderately                       20     48 Alabama, California, Idaho,
                                                                                              Illinois, Iowa, Kansas,
                                                                                              Kentucky, Maryland,
                                                                                              Massachusetts, Michigan,
                                                                                              Minnesota, Mississippi, North
                                                                                              Dakota, Ohio, Oklahoma,
                                                                                              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 Mexico
                                         Increased substantially                    2       2 Indiana, New Hampshire

                                         Ten states that collectively account for 16 percent of 1996 federal outlays
                                         experienced substantial decreases in fiscal year 1996 growth compared
                                         with fiscal year 1995’s. However, 80 percent of 1996 federal Medicaid
                                         outlays were in states that either experienced moderate decreases or
                                         minimal changes in their fiscal year 1996 growth. Although five states’
                                         fiscal year 1996 growth rates increased, those states did not have much
                                         impact on spending growth patterns because their combined share of
                                         Medicaid outlays is only 4 percent.

                                         A number of factors have led to decreases in the growth rate in Medicaid
A Convergence of                         spending in recent years. Some of these—such as the prior
Factors Led to the                       implementation of cost controls and a leveling off in the number of
3.3-Percent Growth                       program eligibles following state-initiated expansions—continue to
                                         influence the growth rate in a handful of states. Other factors, such as
Rate in 1996                             improved economic conditions and changing program policies—for
                                         example, alternatives to institutional long-term care—also influenced
                                         many states’ growth rates. The convergence of these factors resulted in the

                                         Page 3                                                          GAO/T-HEHS-97-91
                            Medicaid: Decline in Spending Growth Due
                            to a Combination of Factors

                            historically low 3.3-percent growth rate in fiscal year 1996 Medicaid

States With Substantial     The growth rate changes in those states that experienced large decreases
Decreases in Growth Rates   in 1996 were largely attributable to three factors: substantial decreases in
                            DSH funding, slowdowns in state-initiated eligibility expansions, and
Affected by Several
                            accelerated 1995 payments in reaction to block grant proposals.
Nonrecurring Factors
                            In 1991 and 1993, the Congress acted to bring under control DSH payments,
                            which had grown from less than $1 billion to $17 billion in just 2 years.1
                            After new limits were enacted, DSH payments nationally declined in 1993,
                            stabilized in 1994, and began to grow again in 1995. An exception to this
                            pattern, however, Louisiana—a state that has had one of the largest DSH
                            programs in the nation—still showed a substantial decrease in its 1996
                            growth rate as its DSH payments declined. The state’s federal outlays
                            decreased by 16 percent in 1996 because of a dramatic drop in DSH

                            Recent slowdowns in state-initiated eligibility expansions also helped to
                            effect substantial decreases in the growth rates in selected states. Over the
                            past several years, some states implemented statewide managed care
                            demonstration waiver programs to extend health care coverage to
                            uninsured populations not previously eligible for Medicaid. Three states
                            that experienced substantial decreases in their 1996 growth rates—Hawaii,
                            Oregon, and Tennessee—undertook the bulk of their expansions in 1994.
                            The expenditure increases related to these expansions continued into 1995
                            and began to level off in 1996. Tennessee actually experienced a drop in
                            the number of eligible beneficiaries in 1996, as formerly uninsured
                            individuals covered by the program lost their eligibility because they did
                            not pay the required premiums.

                            States’ acceleration of 1996 payments into 1995 is another explanation
                            sometimes given for the low 1996 growth rate.2 In 1995, the Congress—as
                            part of a block grant proposal—was considering legislation to establish
                            aggregate Medicaid spending limits, which would be calculated using a
                            base year. Officials from a few states told us that, in response to the

                             DSH payments are intended to partially reimburse hospitals for the cost of providing care not covered
                            by public or private insurance. A number of states, however, began to use the program to increase
                            their federal Medicaid dollars in conjunction with certain creative financing mechanisms. To constrain
                            these payments, DSH payments were limited at 12 percent of the Medicaid program.
                             Aggregate data show that federal outlays were flat in the first 6 months of 1996 and then grew
                            6 percent in the last 6 months.

                            Page 4                                                                            GAO/T-HEHS-97-91
                         Medicaid: Decline in Spending Growth Due
                         to a Combination of Factors

                         anticipated block grant, they accelerated their Medicaid payments to
                         increase their expenditures for fiscal year 1995—the year the Congress
                         was considering for use as the base. For example, one state official with
                         federal approval made a DSH payment at the end of fiscal year 1995 rather
                         than at the beginning of fiscal year 1996. An official from another state,
                         which had a moderate decrease in growth, told us that the state expedited
                         decisions on audits of hospitals and nursing homes to speed payments due
                         these providers.

Strong Economic          Improved economic conditions, reflected in lower unemployment rates
Conditions Helped        and slower increases in the cost of medical services, also have contributed
Moderate the Growth in   to a moderation in the growth of Medicaid expenditures. Between 1993
                         and 1995, most states experienced a drop in their unemployment rates—
Expenditures for Most    some by roughly 2 percentage points. As we reported earlier, every
States                   percentage-point drop in the unemployment rate is typically associated
                         with a 6-percent drop in Medicaid spending.3 States told us that low
                         unemployment rates had lowered the number of people on welfare and,
                         therefore, in Medicaid.

                         In addition, growth in medical service prices has steadily been declining
                         since the late 1980s. In 1990, the growth in the price of medical services
                         was 9.0 percent; by 1995, it was cut in half to 4.5 percent. In 1996, it
                         declined further to 3.5 percent. Declines in price inflation have an indirect
                         impact on the Medicaid rates that states set for providers. Officials of
                         several of the states we spoke with reported freezing provider payment
                         rates in recent years, including rates for nursing facilities and hospitals.
                         Such a freeze would not have been possible in periods with higher
                         inflation because institutional providers can challenge state payment rates
                         in court, arguing they have not kept pace with inflation.4 With inflation
                         down, states can restrain payment rates with less concern about such

                          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, 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 that must be incurred by efficiently and economically
                         operated facilities. Providers in a number of states have used the Boren Amendment to compel states
                         to increase reimbursement rates for institutional services above the rates the states had been paying.

                         Page 5                                                                              GAO/T-HEHS-97-91
                         Medicaid: Decline in Spending Growth Due
                         to a Combination of Factors

State Managed Care       Several states that we contacted discussed recent program changes that
Programs and Long-Term   may have had an effect on their Medicaid expenditures. Most prominently
Care Policies May Help   mentioned was the states’ implementation of Medicaid managed care.
                         However, the overall impact of managed care on Medicaid spending is
Restrain Cost Growth     uncertain because of state variations in program scope and objectives.
                         States also mentioned initiatives to use alternative service delivery
                         methods for long-term care. While these initiatives may have helped to
                         bring Medicaid costs down, measuring their impact 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 populations
                         that may need more care and are more expensive to serve—such as people
                         with disabilities and the elderly.5 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
                         the ability to realize cost savings in managed care, cost savings it achieved
                         by devoting significant resources to its competitive bidding process.6
                         However, in recently expanding its managed care program, Oregon chose
                         to increase per capita payments to promote improved quality and access
                         and to look to the future for any cost savings. Officials from Minnesota,
                         which has a mature managed care program, and California, which is in the
                         midst of a large expansion, told us that managed care has had no
                         significant impact on the moderate decreases they experienced.7 Given the
                         varying objectives, the ability of managed care to help control state
                         Medicaid costs and moderate spending growth over time is unclear.

                         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. They are limiting the number of nursing home
                         beds and payment rates for nursing facility services while expanding home
                         and community-based services, a less-expensive alternative to institutional
                         care. For example, a New York official told us that the state is attempting
                         to restrain its long-term care costs by changing its rate-setting for nursing

                           Medicaid Managed Care: Serving the Disabled Challenges State Programs (GAO/HEHS-96-136, July 31,
                         Arizona Medicaid: Competition Among Managed Care Plans Lowers Program Costs (GAO/HEHS-96-2,
                         Oct. 4, 1995).
                          California considers its managed care program to be budget neutral, having no impact on spending
                         one way or another.

                         Page 6                                                                         GAO/T-HEHS-97-91
                       Medicaid: Decline in Spending Growth Due
                       to a Combination of Factors

                       facilities, establishing county expenditure targets to limit growth, and
                       pursuing home- and community-based service options as alternatives to
                       nursing facilities. Our previous work showed that such strategies can work
                       toward controlling long-term care spending if controls on the volume of
                       nursing home care and home- and community-based services are in place.8

                       Many of the factors that resulted in the 3.3-percent growth rate in 1996—
Potential for Higher   such as DSH payments, unemployment rates, and program policy
Expenditure Growth     changes—will continue to influence the Medicaid growth rate in future
in Future Years        years. However, there are indications that some of these components may
                       contribute to higher—not lower—growth rates, while the effect of others
                       is more uncertain.

                       Without new limits, DSH payments can be expected to grow at the rate of
                       the overall program. While Louisiana’s adjustments to its DSH payments
                       resulted in a substantial reduction in its 1996 spending, other states’ DSH
                       spending began to grow moderately in 1995 as freezes imposed on
                       additional DSH spending were removed.9 Although DSH payments are not
                       increasing as fast as they were in the early 1990s, these payments did grow
                       12.4 percent in 1995.

                       Even though the economy has been in a prolonged expansion, history
                       indicates that the current robust economy will not last indefinitely. The
                       unemployment rate cannot be 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 influence Medicaid
                       reimbursement rates, especially to institutional providers.

                       While states have experienced some success in dealing with long-term
                       care costs, the continued increase in the number of elderly people will
                       inevitably lead to an increase in program costs. 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. As

                        Medicaid Long-Term Care: Successful State Efforts to Expand Home Services While Limiting Costs
                       (GAO/HEHS-94-167, Aug. 11, 1994).
                        States whose DSH spending exceeded 12 percent of their total program spending in 1993 were not
                       allowed to increase DSH spending until it fell below 12 percent of total current program spending.

                       Page 7                                                                          GAO/T-HEHS-97-91
               Medicaid: Decline in Spending Growth Due
               to a Combination of Factors

               a result, the number of Medicaid enrollees—and the costs of providing
               services—may decrease, since some Medicaid-eligible people may be
               discouraged from seeking eligibility and enrollment apart from the new
               welfare process. On the other hand, states may need to restructure their
               eligibility and enrollment systems 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 also remains unclear,
               as experience is limited and state objectives in switching to managed care
               have not always emphasized immediate cost-containment. Yet it is hoped
               that managed care will, over time, help constrain costs. While Arizona’s
               Medicaid managed care program has been effective, cost savings were due
               primarily to considerable effort to promote competition among health
               plans. The challenge is whether the state can sustain this competition in
               the future.

               Mr. Chairman, this concludes my statement. I would be happy to answer
               any questions you or members of the Committee might have at this time.
               Thank you.

               For more information on this testimony, please call Kathryn G. Allen,
Contributors   Assistant Director, on (202) 512-7059. Other major contributors included
               William J. Scanlon, Lourdes R. Cho, Richard N. Jensen, Deborah A. Signer,
               and Karen M. Sloan.

               Page 8                                                      GAO/T-HEHS-97-91
Page 9   GAO/T-HEHS-97-91
Appendix I

Stability of Growth Rate for Federal
Medicaid Outlays, Fiscal Years 1995 and
                                        GAO developed a growth stability index that shows the direction and
                                        magnitude of change in the growth rates of federal 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
                                        1995-96 growth rates. For example, Colorado’s index of 1.37 ranks it as
                                        having the largest decrease.

Table I.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
                                                                             1995        1996        index          index
                                        States and District of Columbia        11.00        3.18a         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 10                                                          GAO/T-HEHS-97-91
           Appendix I
           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
                                                         1995        1996               index            index
           States and District of Columbia                   11.00           3.18a            1.08
           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

             Aggregate growth in federal outlays for Medicaid is 3.3 percent when outlays for territories are
           included in calculation.

           Source: Federal outlays for Medicaid, U.S. Treasury.

(101547)   Page 11                                                                           GAO/T-HEHS-97-91
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