oversight

Medicaid Formula: Fairness Could Be Improved

Published by the Government Accountability Office on 1990-12-07.

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

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                              United States General Accounting Of!flce             / 9 9 7 2 7
                              Testimony


                                                                      IllI IIII11
                                                                            142787


        For Release            k!EDICAID   FORMULA:
        on Delivery            Fairness    Could      Be Improved
        Expected    at
        9:30   a.m.   EST
        Friday
        December    7, 1990




                               Statement    of
                               Janet    L. Shikles,      Director,        Health
                                  Financing     and   Policy       Issues
                               Human Resources        Division

                               Before    the
                               Subcommittee      on Human      Resources
                                  and Intergovernmental          Relations
                               Committee     on Government       Operations
                               House of Representatives




                 Y




        GAO/T-HRD-9   l-5
                                                                                       GAO Form 160 (12187)
Mr a       Chairman and Members of the Subcommittee:
I am pleased to be here today to discuss the formula used to
share the cost of Medicaid between the federal and state
governments.
Medicaid is a jointly    funded federal-state   program providing
health care to qualified     low-income people.    Under this program,
the federal government pays about 55 percent of eligible        medical
expenses and states finance the remaining 45 percent.         The
federal share varies from 50 to 80 percent for individual         states.
In fiscal  year 1990 a total of $71 billion     was projected   to be
spent on health care services for the poor.
The current Medicaid        formula,   which was adopted     in 1965, had two
major objectives:
-- reducing differences        among states   in medical     care coverage      of
   the poor and
-- distributing  fairly       the burden of financing      program benefits
   among the states.
However, these objectives    have not been met. Nationwide, the
program covers 75 percent of those below the poverty line.     But
coverage varies from 37 percent in Idaho to 111 percent in
M ichigan.  Also, states face varying burdens in financing  the
cost of providing   for those in need. This happens, in part,
because the formula does not target most federal funds to states
with the greatest needs; that is, those with weak tax bases and
high concentrations    of poor people.
In response to your request, we have analyzed problems              with   the
Medicaid formula.i  Today, I would like to discuss:
-- How the current formula calculates          the federal     share of
   benefit costs in each state.
-- How the formula could be modified to reflect    more directly    the
   relative   taxing capacity of each state and the fraction     of
   each state's    population that is in poverty.
-- The effect of substituting a formula          that   measures fiscal
   capacity and the poor more directly.



       *


1 The work summarized here is an update of our earlier   report
Changing Medicaid Formula Can Improve Distribution   of Funds              to
States, (GAO/GGD-83-27, Mar. 9, 1983).
CURRENTFORMULAUSES PER CAPITA INCOME TO
DETERMINE FEDERAL SHARE OF MEDICAID
The legislative     history     of the Medicaid formula shows that
federal policymakers        believed that by financing     a larger share of
total program costs in states with high poverty rates and weak
tax bases states would provide comparable benefits.               The
policymakers    thought that per capita income could be used in the
formula as a good measure of differences           in the abilities   of
states to finance program benefits.           They also thought that per
capita income could be used to reflect          the greater burden of high
poverty rates under the assumption that low-income states
experienced a greater incidence of poverty.            Since per capita
income is serving two functions,         it enters the formula with its
value squared.
The use of per capita income causes the federal share for each
state to vary.     Mississippi,     with the lowest per capita income,
receives 80 cents from the federal government for each dollar           it
spends.2   Higher-income      states receive a lower federal share.
However, current    law guarantees that no state will have to pay
more than half of the total'cost         of its Medicaid program.   Under
this approach, 12 higher-income         states receive a higher federal
share than they otherwise would.3
BETTER INDICATORS OF STATE
NEED ARE NOWAVAILABLE
When income-based formulas were first     adopted in the 195Os, per
capita income was probably the best available       indicator   of both
states'   ability  to finance program benefits    and the incidence of
poverty.     However, in the intervening  years, better and more
direct   measures of states'   financing capacities    and poverty rates
have become available.
Per Capita Income Is Not a
Comprehensive Measure of All       Income
Perhaps     the most significant      weakness of per capita income as an
indicator      of a state's   ability   to finance program benefits    is
that it     does not reflect     all the income states are potentially
able to     tax.   For example, corporations      retain some of their
profits     for investment purposes.       This business income is not

2Without squaring, the federal       share for   Mississippi   would be 69
percent instead of 80 percent.
JAlaska, California,  Colorado, Connecticut, District of Columbia,
Illinois, Maryland, Massachusetts,  Nevada, New Hampshire, New
Jersey, and New York.

                                      2
reflected     in state per capita income even though states are able
to tax it through corporate          income taxes.  Similarly,   significant
portions    of business income are received by out-of-state
residents,      such as when dividends     are paid to stockholders      who
live elsewhere.         This, too, is not reflected    in state per capita
income.     Yet, states can tax this income through various state
business taxes.         This means that using per capita income
understates      the revenue-raising     capacity of states with
comparatively       high percentages of business income.
The Department of Commerce now provides estimates of total                  income
produced within each state,       in addition     to the income received
only by state residents.       With this data, the Department of the
Treasury estimates     states'  total taxable resources,         called
simply TTR. TTR is a more comprehensive measure of states'
ability    to finance program benefits       because it reflects       both
income produced within the state and income received by state
residents,     even if received from out-of-state        sources.     Because
TTR is a better measure of states'         financing    capacity   than per
capita income, the Congress approved its use as a substitute                   for
per capita income for distributing         federal   funds under the
Alcohol,    Drug Abuse and Mental Health Services block grant
program.     In fiscal  year 1990 about $1.2 billion        was distributed
under this formula.
Differences   in TTR and per capita income are substantial       in some
instances.    Figure 1 illustrates   the most extreme cases.       The
five states where per capita income understates      taxable resources
the most are Alaska, Wyoming, Louisiana,     New Mexico,    and Texas.
At the other extreme, per capita income overstates       taxable
resources the most in Maryland, Florida,     Rhode Island,
Pennsylvania,    and New Hampshire.   As a consequence, the federal
share of Medicaid is too low in states where financing        capacity
is overstated    by using per capita income.    Data comparing per
capita income and TTR for all 50 states are shown in attachment
I.
Per Capita Income Is a
Poor Measure of Poverty
Per capita income Is also a poor proxy for the incidence of
poverty because two states with the same per capita income can
have very different   poverty rates.   Because Arkansas and Utah
both have almost the same average per capita income, the formula
treats them as if they had the same poverty rate,       However,
Census data show that Arkansas‘s poverty rate is 32 percent,       and
Utah's is 20 percent,   as shown in figure 2. Similarly,     Texas and
Iowa have per capita incomes near the national     average, but
Texas's poverty rate is 25 percent,    and Iowa's is 17 percent.
Like"kise, New York's is 22 percent,   and Maryland's   is 17 percent.
Data for all 50 states are included in attachment II.

                                        3
Because per capita income does not accurately          reflect differences
for financing    capacities      and poverty rates, the burden of
financing    the needs of the poor is greater in some states than in
others.    In addition,     the guaranteed 50-percent minimum federal
share of Medicaid costs also enables states with high taxable
resources and low poverty rates to finance the needs of their
poor with comparatively        low tax burdens.
USING BETTER NEED INDICATORS WOULD
REDISTRIBUTE FUNDING AMONGSTATES
Replacing per capita income with more accurate measures of
states'  financing   capacities    and poverty rates would offset     the
fiscal  disadvantage   that low-tax-base,     high-poverty-rate   states
face under the existing      formula.   Coupled with these changes,
lowering the guaranteed 50-percent       federal share would also help
equalize the Medicaid burden facing state taxpayers.
To determine the effect of changing the formula, we conducted an
analysis  that replaces per capita income with TTR and state
poverty rates.   We also reduced the 50-percent guaranteed federal
share to 40 percent.
We did our analysis  using fiscal  year 1989 data and kept federal
spending the same as under the current formula.      This means that,
for this analysis,  funding increases for gaining states are
financed by reducing federal aid for losing states.      We made this
assumption so that we could provide a quantitative     measure of how
much fiscal  year 1989 funding would be reallocated.
Our illustration       shows that, from the standpoint          of equalizing
the tax burden on state taxpayers,           the revised formula would have
reallocated      $3.2 billion,     or 17 percent,    of all federal Medicaid
assistance     in fiscal     year 1989. Figure 3 identifies          nine states
that would have received an additional             $100 million     or more under
the revised formula:           Arkansas, California,    Florida,     Georgia,
Kentucky, Mississippi,          New York, Tennessee, and Texas.          The
figure also shows the current formula benefits               states
concentrated      in the Great Lakes and Midwest regions of the
country.      Attachments III and IV provide details            for all 50
states.
CONCLUSION
Mr. Chairman, we believe a formula that uses better indicators       of
states'  financing  capacities  and poverty rates and reduces the
minimum federal share would more equally distribute     the burden
state taxpayers face in financing    Medicaid benefits  for their
low-income residents.     If the use of such a formula continues   to
be the intent of the Congress, we believe the Congress should
consider revising   the formula along the lines I have suggested.
Doing so would enhance one of the major objectives     of the
                                        4
formula:    distributing   fairly   the burden of financing   program
benefits   among states,
However, these changes would substantially     reallocate     funding
among the states,   as I have described.   A less disruptive
approach would be to apply a revised formula only to new Medicaid
spending that exceeds the funding level existing       before
implementation   of a new formula.


Mr. Chairman this concludes my statement. I would be happy to
answer any questions you may have. Thank you.
     ~GURE I :DIFFEBENCES IN STATE
     PER CAflTA INCOME AND TOTAL
                                     40     puwadfhmrKa
     TAXABLE RESOURCES
                                     35

                                     30

                                     25

                                     20

                                     15

                                     10

                                       5




                                      -5
cn
                                     -10




                                     positive dilfer-     denok   per capita income understates total taxable nxoufces

                                     negative dfkanc65    denote per capita inoxne overstates total taxable resources
                                                   .




FIGURE 2: @MhF’ARlSON OF POVERTY
CAMA   INCOME
RATES FOR  STATES WITH EQUAL PER   35      -


                                   30




                                   20

                                   15


                                   10


                                    5


                                   250   ~,~



                                    4f 8       $


                                    sma
                                                 I

     FIGURE 3: MEMCAID   FUNLHNG REDISTRIBUTED




a3
ATTACHMENTI                                             ATTACHMENTI
                 COMPARISONOF PER CAPITA INCOME WITH TOTAL
                    TAXABLE RESOURCESPER CAPITA
                          Index No.,   U.S. = 100
                           Per         Per Capita
                          Capita        Taxable      Percent
State                     Income       Resources    Difference
 Alabama                     79            79            0.2
 Alaska                     126          171           35.9
 Arizona                     90           89           (0.4)
 Arkansas                    75           77             1.3
California                 111           110           (0.7)
Colorado                   104           104            0.3
Connecticut                137           134           (2.5)
Delaware                   103           103            0.8
Florida                      96           90           (6.5)
Georgia                      91           93            2.2
Hawaii                       99          102            2.1
Idaho                        77           77           (0.4)
Illinois                   108           107           (0.6)
Indiana                      91           91           (0.8)
 Iowa                        93           92           (1.4)
Kansas                       99           99            0.0
Kentucky                     79           82            3.2
Louisiana                    79           89          12.7
Maine                        88           87          (1.8)
Maryland                   115           106          (7.6)
Massachusetts              124           120          (2.8)
Michigan                   103           100          (2.6)
Minnesota                  102           102            0.5
Mississippi                  68           70            2.8
Missouri                     96           96          (0.3)
Montana                      83           85            3.2
Nebraska                     93           95            1.7
Nevada                       96          101            4.8
New Hampshire              111           106          (4.6)
New Jersey                 132           126          (4.6)
New Mexico                   77           84            8.7
New York                   117           119            1.1
North Carolina               85           88            3.7
North Dakota                 88           91            3.2
Ohio                         96           96          (0.3)
Oklahoma                    86            88            2.1
Oregon                       89           88          (1.0)
Pennsylvania                99            95          (4.61
Rhode Island               101            96          (5.3)
South Carolina              77            77          (1.0)
South Dakota                82            81          (1.1)
Tennessee                   83            85            2.2
                                   9
ATTACHMENTI                                                       ATTACHMENT I
                          Index    No.,   U.S.        = 100
                            Per             Per Capita
                          Capita             Taxable              Percent
State                     Income            Resources            Difference
Texas                      92                    98               7.1
Utah                       75                    79               4.9
Vermont                    90                    90               0.7
Virginia                  105               103                  (1.4)
Washington                 98                97                  (0.8)
West Virginia              75                76                   0.3
Wisconsin                  96                95                  (1.4)
Wyoming                    91               117                  28.2
Note:   Index numbers were rounded to the nearest             whole number




                                   10
ATTACHMENTII                                             ATTACHMENTII
          COMPARISON   OF PER CAPITA INCOME WITH POVERTYRATES
                              Per
                             Capita            Poverty
State                        Income              Rate
 Mississippi                $10,000             36.7%
 Utah                        11,059             20.4
West Virginia                111067             24.7
 Arkansas                    11,078             32.0
 Idaho                       11,337             23.8
New Mexico                   11,345             29.6
 South Carolina              11,347             27.1
Alabama                      11,555             29.3
Louisiana                    11,620             28.4
Kentucky                     11,620             29.2
South Dakota                 11,978             26.6
Montana                      12,124             22.6
Tennessee                    12,234             27.7
North Carolina               12,507             25.3
Oklahoma                     12,668             22.5
North Dakota                 12,873             22.8
Maine                        12,943             25.0
Oregon                       13,009             20.1
Arizona                      13,142             22.6
Vermont                      13,184             21.9
Georgia                      13,363             26.9
Indiana                      13,392             17.6
Wyoming                      13,411             14.4
Texas                        13,455             24.7
Iowa                         13,616             16.8
Nebraska                     13,676             19.1
Ohio                         14,055             17.8
Missouri                     14,074             22.1
Wisconsin                    14,079             15.8
Nevada                       14,127             16.1
Florida                      14,150             22.8
Washington                   14,416             18.0
Kansas                       14,513             18.7
Pennsylvania                 14,586             18.5
Hawaii                       14,592             17.9
Rhode Island                 14,892             18.7
Minnesota                    14,908             17.0
Michigan                     15,055             18.3
Delaware                     15,068             20.3
Colorado                     15,234             17.8
Virginia                     15,367             19,4
Illinois                     15,801             18.1
California                   16,247             20.4
New Hampshire                16,333             16.8
                                  11
ATTACHMENTII                             ATTACHNESTII
                  Per
                 Capita        Poverty
State            Income          Rate
Maryland         16,862        16.7
New York         17,214        22.1
Massachusetts    18,163        17.1
Alaska           18,499        16.7
New Jersey       19,302        16.6
Connecticut      20,157        14.5
U.S.            $14,674        21.2%




                          12
ATTACHMENTIII                                             ATTACHMENT111

           COMPARISONOF FEDERAL MEDICAID MATCHING PERCENTAGESUNDER
           THE CURRENTFORMULAAND A FORMULAUSING (1) TOTAL TAXABLE
             RESOURCES, (2) POVERTYCOUNTS, AND (3) A 40 PERCENT
                       MINIMUM FEDERAL SHARE: FY 1989
                             Federal    Share
                     Current            Alternative
State                Formula               Formula
Alabama                73%                   76%
Alaska                 50                    40
Arizona                N/A                   N/A
Arkansas               74                    79
Calit'ornia            50                    52
Colorado               50                    49
Connecticut            50                    40
Delaware                                     55
Florida                2;                    65
Georgia                63                    70
Hawaii                 54                    50
Idaho                  73                    72
Illinois               50                    48
Indiana                64                    55
Iowa                   63                    52
Kansas                                       53
Kentucky               5:
Louisiana              71                    7725
Maine                  67                    70
Maryland               50                    44
Massachusetts          SO                    40
Michigan                                     52
Minnesota              z;                    47
Mlssissippl            80                    83
Missouri               60                    62
Montana                71                    67
Nebraska               60                    56
Nevada                 50                    45
New Hampshlre          SO                    45
New Jersey             50                    40
New Mexico             72                    75
New York               50                    53
North Carolina         68                    69
North Dakota           67                    65
Ohio                   59                    53
Oklahoma               66                    65
Oregon                 62                    61
Pennsylvania           57                    55
Rhode Island           56                    55
South Carolina         73                    75
                                       13
ATTACHMENTIII                                        ATTACHMENTIII

                        Federal        Share
                Current                Alternative
State           Formula                   Formula
South Dakota      71                        73
Tennessee         70                        73
Texas             59                        65
Utah              74                        66
Vermont           64                        64
Virginia          51                        53
Washington        53                        52
West Virginia     76                        73
Wisconsin         59                        47
Wyoming           63                        40




                                  14
l




ATTACHMENTIV                                                     ATTACHMENT IV

        COMPARISONO F FEDERALMEDICAID ASSISTANCEUNDERTHE CURRENT
         FORMULAAND A FORMULAUSING (1) TOTAL TAXABLE RESOURCES,
         (2) POVERTYCOUNTS,AND (3) A 40 PERCENTMINIMUM FEDERAL
                  SHARE: FY 1989 (millions  of dollars)
                             Federal Aid
                     Current         Alternative                     Percent
State                Formula            Formula     Difference      Difference
Alabama                $408.5           $488.7      $80.2             19.6%
Alaska                   74.1             44.8      (29.3)           (39.6,
Arizona                   N/A              N/A         N/A              N/A
Arkansas                395.3            535.7      140.4             35.5
California           3,233.7          3,519.7       286.0               8.8
Colorado                268.5            234.6       (33.9)          (12.6)
Connecticut             532.8            346.1     (186.7)           (35.0)
Delaware                 63.1             69.4         6.3              9.9
Florida              1,133.4          1,711.2       577.8             51.0
Georgia                 823.4         1,118.4       295.0             35.8
Hawaii                  104.8             88.9      (15.9)           (15.2)
Idaho                   101.6             99.5        (2.1)            (2.1)
Illinois             1,132.5          1,028.l      (104.4)             (9.2)
Indiana                 772.1            531.2     (240.9)           (31.2)
Iowa                    353.1            227.0     (126.1)           (35.7)
Kansas                  222.6            205.8      (16.8)            (7.5)
Kentucky                621.8            722.8      101.0             16.2
Louisiana               840.1            918.6        78.5              9.4
Maine                   254.2            293.7        39.5            15.5
Maryland                534.1            407.3     (126.7)           (23.7)
Massachusetts        1,232.4             795.8     (436.6)           (35.4)
Michigan             1,273.4          1,090.2      (183.3)           (14.4)
Minnesota               706.6            551.1     (155.5)           (22.0)
Mississippi             415.2            535.2      120.0             28.9
Missouri                515.6            542.8        27.1              5.3
Montana                 124.5            106.7      (17.8)           (14.3)
Nebraska                177.3            149.9      (27.5)           (15.5)
Nevada                   59.9             47.5      (12.4)           (20.7)
New Hampshire           105.5             82.9      (22.6)           (21.5)
New Jersey           1,043.8             678.2     (365.6)           (35.0,
New Mexico              189.0            225.1        36.0            19.1
New York             5,635.7          6,314,s       678.8             12.1
North Carolina          837.4            903.8        66.5              7.9
North Dakota            121.8            115.9        (5.8)           (4.8)
Ohio                 1,656.g          1,274.g      (382.0)           (23.1)
Oklahoma                461.8            453.4        (8.3)           (1.8)
O regon                 308.1            305.9        (2.2)           (0.7)
Pennsylvania         1,652.6          1,503.2      (149.4)            (9.0)
Rhode Island            217.0            205.4      (11.5)            (5.3,
South Carolina          442.5            509.8        67.3            15.2
                                 15
ATTACHMENTIV                                                          ATTACHMENTIV

                                Federal Aid
                        Current         Alternative                      Percent
State                   Formula            Formula       Difference     Difference
South Dakota               106.1            115.2           9.0              8.5%
Tennessee                  824.7            959.9        135.2             16.4
Texas                   1,426.2          1,811.0         384.7             27.0
Utah                       171.7            122.6         (49.1)          (28.6)
Vermont                     92.9             90.0          (2.9)            (3.1)
Virginia                  458.5            488.7           30.2              6.6
Washington                 570.3            545.2         (25.0)            (4.4)
West Virginia              271.7            246.1         (25.6)            (9.4)
Wisconsin                 781.7            481.6        (300.1)           (38.4)
Wyoming                     37.3             14.3        (23.0)           (61.7)
Total   Redistributed                                 $3,159.5             17.0%




                                    16