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
MEDICAID
Decline in Spending Growth
Due to a Combination of
Factors
Statement of Jonathan Ratner, Associate Director
Health Financing and Systems Issues
Health, Education, and Human Services Division
GAO/T-HEHS-97-91
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,
Wyoming
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,
Wisconsin
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
spending.
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
payments.
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
1
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.
2
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
challenges.
3
Medicaid: Restructuring Approaches Leave Many Questions (GAO/HEHS-95-103, Apr. 4, 1995).
4
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
5
Medicaid Managed Care: Serving the Disabled Challenges State Programs (GAO/HEHS-96-136, July 31,
1996).
6
Arizona Medicaid: Competition Among Managed Care Plans Lowers Program Costs (GAO/HEHS-96-2,
Oct. 4, 1995).
7
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
8
Medicaid Long-Term Care: Successful State Efforts to Expand Home Services While Limiting Costs
(GAO/HEHS-94-167, Aug. 11, 1994).
9
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
1996
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
(continued)
Page 10 GAO/T-HEHS-97-91
Appendix I
Stability of Growth Rate for Federal
Medicaid Outlays, Fiscal Years 1995 and
1996
State
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
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
a
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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Address Correction Requested
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)