oversight

Medicaid: Recent Spending Experience and the Administration's Proposed Program Reform

Published by the Government Accountability Office on 1997-03-11.

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

                          United States General Accounting Office

GAO                       Testimony
                          Before the Subcommittee on Health and Environment,
                          Committee on Commerce, House of Representatives




For Release on Delivery
Expected at 1:00 p.m.
Tuesday, March 11, 1997
                          MEDICAID

                          Recent Spending
                          Experience and the
                          Administration’s Proposed
                          Program Reform
                          Statement of William J. Scanlon, Director
                          Health Financing and Systems Issues
                          Health, Education, and Human Services Division




GAO/T-HEHS-97-94
Summary


          GAO’s statement focuses on two broad issues: (1) key factors that explain
          the Medicaid 3.3-percent growth rate in fiscal year 1996 and their
          implications for future spending and (2) the administration’s proposal to
          contain Medicaid cost growth through decreases in disproportionate share
          hospital (DSH) payments and per capita caps, and to increase state
          flexibility.

          GAO  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. Leading
          factors include continued reductions in DSH payments in some states as a
          result of earlier federal restrictions on the amount of such payments and
          the leveling off of Medicaid enrollment in other states following planned
          expansions in prior years. A number of states GAO contacted attributed the
          lower growth rate to a generally improved economy and state initiatives to
          limit expenditure growth through programmatic changes, such as
          managed care programs and long-term care alternatives. While the
          magnitude of the effect of these programmatic changes is less clear, there
          is evidence that they helped to restrain program costs. 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—such as a downturn in the
          economy—could result in increased growth rates in subsequent years.

          The administration’s proposal for Medicaid reform would further control
          spending by reducing DSH expenditures and imposing a per capita cap,
          while providing the states greater flexibility in program policy and
          administration for their managed care and long-term care programs. These
          initiatives should produce cost savings. However, in controlling program
          spending, attention should be given to targeting federal funds
          appropriately and ensuring that added program flexibility is accompanied
          by effective federal monitoring and oversight.




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the Administration’s Proposed Program
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              Mr. Chairman and Members of the Subcommittee:

              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. In addition, you have asked us to comment
              on aspects of the administration’s fiscal year 1998 proposal for the
              Medicaid program.

              My remarks today focus on two broad issues: (1) key factors that explain
              the 3.3-percent growth rate in fiscal year 1996 and their implications for
              future Medicaid spending and (2) the administration’s proposal to contain
              Medicaid cost growth through decreases in disproportionate share
              hospital (DSH) payments and per capita caps, and to increase state
              flexibility. 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. Our comments on the administration’s proposal
              are based on a review of budget documents and previous work we have
              conducted.

              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. Leading
              factors include continued reductions in DSH payments in some states as a
              result of earlier federal restrictions on the amount of such payments and
              the leveling off of Medicaid enrollment in other states following planned
              expansions in prior years. A number of states we contacted attributed the
              lower growth rate to a generally improved economy and state initiatives to
              limit expenditure growth through programmatic changes, such as
              managed care programs and long-term care alternatives. While the
              magnitude of the effect of these programmatic changes 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



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                           in the 1996 growth rate, so a variety of factors—such as a downturn in the
                           economy—could result in increased growth rates in subsequent years.
                           Finally, the administration’s proposal for Medicaid reform would further
                           control spending by reducing DSH expenditures and imposing a per capita
                           cap, while providing the states greater flexibility in program policy and
                           administration for their managed care and long-term care programs. These
                           initiatives should produce cost savings. However, in controlling program
                           spending, attention should be given to targeting federal funds
                           appropriately and ensuring that added program flexibility is accompanied
                           by effective federal monitoring and oversight.


                           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
                           constitutes a considerable portion of 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 the levels of the mid-1980s. Then,
                           in fiscal year 1996, the growth rate fell to 3.3 percent.


                           In analyzing the growth rate for 1996 we found that no single spending
Key Factors Affecting      growth pattern was evident across the states nor did we find a single
1996 Spending              factor that explained the decrease in growth. Rather there was a
Growth and Their           confluence of factors, some of which are unlikely to recur, while others
                           are part of a larger trend. Future spending will potentially be higher if the
Implication for the        economy weakens and as the elderly population continues to grow.
Future
No Single Spending Trend   The 3.3-percent growth in 1996 federal Medicaid outlays masks striking
Across States              variation among the states. Growth rates ranged from a decrease of
                           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



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                                          to the next because of major changes in program structure or accounting
                                          variances that change the fiscal year in which a portion of expenditures is
                                          reported. To determine the stability of the growth rates among states, we
                                          compared states’ growth rates in fiscal year 1995 with those in fiscal year
                                          1996. Our analysis showed that states could be placed in one of five
                                          categories, as shown in table 1. (See app. I for specific state growth rates.)


Table 1: Changes in Growth Rate of Federal Medicaid Outlays, Fiscal Years 1995 and 1996
Fiscal year 1996 growth
rate compared with fiscal                           Percentage of 1996
year 1995’s                     Number of states        federal outlays        States
Decreased substantially                                                         Colorado, Florida, Hawaii, Louisiana, North
                                                                                Carolina, Oregon, Rhode Island, South Carolina,
                                              10                     16         Tennessee, Wyoming
Decreased moderately                                                            Alabama, California, Idaho, Illinois, Iowa,
                                                                                Kansas, Kentucky, Maryland, Massachusetts,
                                                                                Michigan, Minnesota, Mississippi, North Dakota,
                                                                                Ohio, Oklahoma, Pennsylvania, South Dakota,
                                              20                     48         Texas, Vermont, Washington
Changed minimally                                                               Arizona, Arkansas, Connecticut, Delaware,
                                                                                District of Columbia, Georgia, Missouri, Montana,
                                                                                Nebraska, Nevada, New Jersey, New York, Utah,
                                              16                     32         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
                                          effect on spending growth patterns because their combined share of
                                          Medicaid outlays is only 4 percent.


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




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                               many states’ growth rates. The convergence of these factors resulted in the
                               historically low 3.3-percent growth rate in fiscal year 1996 Medicaid
                               spending.

Several Nonrecurring Factors   The growth rate changes in those states that experienced large decreases
                               in 1996 were largely attributable to three factors not expected to recur:
                               substantial decreases in DSH funding, slowdowns in state-initiated
                               eligibility expansions, and accelerated 1995 payments in reaction to block
                               grant proposals for Medicaid.

                               In 1991 and 1993, the Congress acted to bring under control DSH payments
                               that 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, was Louisiana—a state that has had one of the largest
                               DSH programs in the nation. It experienced a substantial decrease in its
                               1996 growth rate as its DSH payments continued to decline. 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

                               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 to a target of 12 percent of Medicaid expenditures,
                               excluding administrative costs.
                               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.



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                              aggregate Medicaid spending limits, which would be calculated using a
                              base year. Officials from a few states told us that, in response to the
                              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, 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 Conditions    Improved economic conditions, reflected in lower unemployment rates
                              and slower increases in the cost of medical services, also have contributed
                              to a moderation in the growth of Medicaid expenditures. Between 1993
                              and 1995, most states experienced a drop in their unemployment
                              rates—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.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
                              effect 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 might not have been possible in periods with higher inflation
                              because institutional providers might challenge state payment rates in
                              court, arguing they had not kept pace with inflation.4 With inflation down,
                              states can restrain payment rates with less concern about such challenges.

State Managed Care Programs   Several states that we contacted discussed recent program changes that
and Long-Term Care Policies   may have had an effect on their Medicaid expenditures. Most prominently
                              mentioned was the states’ implementation of Medicaid managed care.
                              However, the overall effect of managed care on Medicaid spending is

                              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.



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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 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 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, other states have emphasized objectives besides cost control in
moving to managed care. 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 effect 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, which can be 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 method for nursing facilities, establishing county expenditure
targets to limit growth, and pursuing home- and community-based service

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 effect on spending one
way or another.



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                        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, such as limiting the number of participating
                        beneficiaries and having waiting lists, are in place.8


Potential for Higher    Many of the factors that resulted in the 3.3-percent growth rate in
Expenditure Growth in   1996—such as DSH payments, unemployment rates, and program policy
Future Years            changes—will continue to influence the Medicaid growth rate in future
                        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 add to the growth 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 no longer applied.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
                        a result, the number of Medicaid enrollees—and the costs of providing

                        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 medical assistance spending in 1993
                        were not allowed to increase DSH spending until it fell below 12 percent of total medical assistance
                        spending.



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                        services—may decrease, since some Medicaid-eligible people may be
                        discouraged from seeking eligibility and enrollment apart from the new
                        welfare process. However, 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.


                        To help control Medicaid spending and increase state flexibility, the
Administration’s        administration’s 1998 budget proposal includes three initiatives:
Proposal for Medicaid   (1) imposing additional controls over DSH payments, (2) implementing a
Controls Spending       per capita cap policy, and (3) eliminating waiver requirements and the
                        Boren Amendment. Through the implementation of these and other
While Increasing        initiatives, the administration’s proposal projects a net saving in federal
Flexibility             Medicaid spending of $9 billion over 5 years.

DSH Payments Reduced    As previously mentioned, in 1995 DSH payments began to grow moderately
                        as states began to reach their federal allotments. The Congressional
                        Budget Office’s Medicaid baseline estimates the federal share of DSH
                        payments over the next 5 years will increase from $10.3 billion in 1998 to
                        $13.6 billion in 2002. The administration’s proposal would cap federal
                        spending on DSH at $10 billion in 1998, $9 billion in 1999, and $8 billion in
                        2000 and thereafter. To achieve the projected savings, the administration’s
                        proposal would limit federal DSH payments for 1998 in each state to the
                        state’s 1995 level. In subsequent years, the national limit is lowered, and
                        the reduction is distributed across states by taking an equal percentage
                        reduction of all or some of each state’s 1995 DSH payments. In states where
                        DSH payments in 1995 exceeded 12 percent of total Medicaid expenditures,
                        the percentage reduction would only apply to the amounts at or under the
                        12-percent limit. This limit on reductions would affect 16 states that in
                        1995 had DSH payments in excess of 12 percent of their total Medicaid
                        expenditures.



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                           In the past we reported on states using creative mechanisms to increase
                           their federal Medicaid dollars, specifically through DSH, provider-specific
                           taxes and voluntary contributions, and intergovernmental transfers.10
                           Legislation in 1991 and 1993 went a long way toward controlling DSH
                           payments and provider taxes and voluntary contributions. In particular,
                           the 1991 legislation froze DSH payments for “high-DSH” states—those whose
                           DSH expenditures exceeded 12 percent of Medicaid expenditures—because
                           of concerns that these high levels included inappropriate efforts to
                           increase federal matching funds. The administration’s proposal would
                           provide some protection for high-DSH states at the expense of low-DSH
                           states that have kept their share of program spending on DSH below the
                           congressionally specified target level.


Per Capita Caps to Limit   The administration’s proposed per capita cap aims at more certain control
Federal Spending           over federal Medicaid spending but does not address concerns about the
                           distribution of federal funding resulting from the current matching
                           formula. The administration’s proposal defines a per capita cap policy that
                           would limit federal Medicaid spending on a per beneficiary basis. As
                           Medicaid enrollment increases in a particular state, so would the federal
                           dollars available to the state. The per capita cap would be set using 1996 as
                           the base year—including both medical and administrative expenditures.
                           The proposal would use an index based on nominal gross domestic
                           product (GDP) per capita plus an adjustment factor to account for
                           Medicaid’s high utilization and intensity of services provided. This index
                           and the number of people eligible for Medicaid in a particular year would
                           be applied to the total 1996 expenditures to determine a state’s per capita
                           limit of federal dollars. Savings expected from this proposal will depend
                           on restraining the growth in spending per beneficiary to about 5 percent a
                           year over the 5-year period.

                           When the Medicaid program was established, a matching formula to
                           determine the share of federal funds was adopted to narrow the
                           differences likely to result among the Medicaid programs of wealthier and
                           poorer states. Because states have discretion regarding the extent and
                           depth of their programs, the federal share of Medicaid expenditures varied
                           with states’ per capita income so that differences in poverty rates and state
                           tax bases would not result in excessive differences in the coverage given
                           to poor people living in different states. However, per capita income has
                           proven to be an imprecise proxy for the incidence of poverty and state tax

                           10
                            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).



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                              capacity. In addition, current law guarantees that no state will have to pay
                              more than half of the total costs of its Medicaid program, meaning states
                              with higher income receive a higher federal share than they otherwise
                              would. This has contributed to disparities among states in coverage of
                              population groups and services as well as in federal funding.

                              The administration’s proposal would not address these disparities. To the
                              extent there is congressional interest in lessening them, we have
                              previously indicated that any distribution formula should include
                              (1) better and more direct measures than per capita income for both the
                              incidence of poverty and states’ ability to finance program benefits,
                              (2) adjustors for geographic differences in the cost of health care, and
                              (3) a reduced guaranteed federal minimum match.11


Increased State Flexibility   In regard to state flexibility, the administration has proposed changes in
                              three areas: managed care programs, long-term care programs, and the
                              Boren Amendment. Currently, states must obtain waivers of certain
                              federal statutory requirements in order to implement large-scale managed
                              care programs and to provide home- and community-based services as
                              alternatives to nursing facility care. The administration has proposed
                              eliminating the need for a waiver for such programs. In addition, the Boren
                              Amendment, which places certain requirements on how states can set
                              reimbursement rates for hospitals and nursing facilities, would be
                              repealed.

                              Medicaid’s restrictions on states’ use of managed care reflect historical
                              concerns over access and quality. For example, the so-called 75/25 rule
                              that stipulates that, to serve Medicaid beneficiaries, at least 25 percent of a
                              health plan’s total enrollment must consist of private paying patients, was
                              intended as a proxy for quality because private patients presumably have a
                              choice of health plans and can vote with their feet. A second provision,
                              allowing Medicaid beneficiaries to terminate enrollment in a health plan at
                              almost any time, aims to provide them with a similar capacity to express
                              dissatisfaction over the provision of care. The administration’s proposal
                              would replace these requirements with enhanced quality monitoring
                              systems.

                              We have studied Medicaid managed care programs for many years and
                              have concluded that some federal requirements may have hampered

                              11
                                 Medicaid: Matching Formula’s Performance and Potential Modifications (GAO/T-HEHS-95-226,
                              July 27, 1995).



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states’ cost-containment efforts. However, the experience of states with
Medicaid managed care programs underscores the importance of adequate
planning and appropriate quality assurance systems.12 If states are granted
more direct control to aggressively pursue managed care strategies, the
importance of continuous oversight of managed care systems to protect
both Medicaid beneficiaries from inappropriate denial of care and federal
dollars from payment abuses should not be overlooked.

We have also reported on the successful use by states of home- and
community-based care services as an alternative to nursing facilities.
States we contacted in the course of this work have expanded the use of
such services as part of a strategy to help control rapidly increasing
Medicaid expenditures for institutional care. States have told us that when
implementing these programs, they value the control they have under a
waiver but not under the regular program over the amount of home- and
community-based services provided. They indicated this control allows
them to serve the population in need within budgetary constraints. Despite
the limitations in program size, these programs have allowed states to
serve more people with the dollars available.

Originally, the Boren Amendment was intended to provide states with
greater latitude in setting hospital and nursing facility reimbursement rates
while ensuring rates were adequate to provide needed services. Over time,
however, states believe court decisions have made the Boren Amendment
burdensome to states and affected their ability to set reimbursement rates.
The uncertainty created by the language of the Boren Amendment is
potentially preventing states from controlling rates of payment to
institutional providers in ways that compromise neither access nor quality.
While some clarification of the Boren Amendment to address state
concerns is needed, its original goals are still valid.


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




12
 Medicaid: Spending Pressures Spur States Toward Program Restructuring (GAO/T-HEHS-96-75, Jan.
18, 1996); Medicaid: Tennessee’s Program Broadens Coverage but Faces Uncertain Future
(GAO/HEHS-95-186, Sept. 1, 1995); Medicaid: State Flexibility in Implementing Managed Care
Programs Requires Appropriate Oversight (GAO/T-HEHS-95-206, July 12, 1995); Medicaid Managed
Care: More Competition and Oversight Would Improve California’s Expansion Plan (GAO/HEHS-95-87,
Apr. 28, 1995); and Medicaid: States Turn to Managed Care to Improve Access and Control Costs
(GAO/HRD-93-46, Mar. 17, 1993).



Page 12                                                                    GAO/T-HEHS-97-94
               Medicaid: Recent Spending Experience and
               the Administration’s Proposed Program
               Reform




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




               Page 13                                                   GAO/T-HEHS-97-94
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,                             Percentage     Percentage
Fiscal Years 1995 and 1996                                         growth,        growth,     Growth     State ranking based
                                                                fiscal year    fiscal year   stability    on growth 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 14                                                            GAO/T-HEHS-97-94
           Appendix I
           Stability of Growth Rate for Federal
           Medicaid Outlays, Fiscal Years 1995 and
           1996




                                      Percentage       Percentage
                                          growth,          growth,            Growth      State ranking based
                                       fiscal year      fiscal year          stability     on growth stability
                                             1995             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

           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.




(101550)   Page 15                                                                           GAO/T-HEHS-97-94
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