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Where is Medicaid Spending Headed? – Report

Where is Medicaid Spending Headed?

Prepared for: The Kaiser Commission on the Future of Medicaid

Prepared by: John Holahan and David Liska, The Urban Institute

December 1996

In 1995, the United States witnessed a major debate over the future course of the Medicaid program. At the heart of this debate were the individual entitlement to benefits, the desire to limit federal spending, and the degree of control and flexibility given to states over their separate programs. The Congress proposed that the Medicaid program be repealed and replaced with a block grant to states; states would be given fixed allocations of federal dollars as well as broad flexibility on how these funds would be spent on health care for low-income individuals. The Clinton Administration, in contrast, would have kept the Medicaid entitlement but would have placed a cap on spending per enrollee-again with considerable increases in state flexibility.

Much of the impetus behind the calls for major program restructuring came from the rapid growth in Medicaid expenditures that occurred between 1988 and 1992. Medicaid spending was argued to be “out of control” and a major financial burden to states. The program was also viewed as “out of control” from the perspective of the federal government, as well as a major contributor to the federal deficit. In April 1996, the Congressional Budget Office (CBO) forecast that Medicaid spending would grow by about 10 percent per year through the year 2002, faster than the projected increases in inflation and in the US. population.

In this paper we first discuss reasons for the rapid growth in Medicaid spending between 1988 and 1992. We then show that Medicaid spending has, in fact, slowed considerably since 1992 and argue that this slowdown is likely to continue. After growing by an average annual rate of 22.4 percent between 1988 and 1992, Medicaid expenditures increased by an average of 9.5 percent each year between 1992 and 1995. Furthermore, although the data are preliminary, 1995-1996 spending growth for Medicaid appears to be about 3.2 percent.

This dramatic reduction in the rate of spending growth is attributable to a number of factors. First, the rapid growth that marked the 1988-1992 period has been curtailed by federal legislation limiting use of provider taxes and donations and placing a ceiling on disproportionate share hospital (DSH) payments. Second, general and medical price inflation are substantially lower today than in the earlier period. Third, the factors propelling rapid enrollment growth have diminished considerably-much of the increase in enrollment was a response to federal and state expansions in eligibility for low-income pregnant women and children, the recession, and court decisions and regulatory changes involving coverage for individuals with disabilities. Finally, Medicaid spending has slowed because of state cost containment efforts, including increased enrollment of Medicaid beneficiaries in capitated managed care arrangements.

The Medicaid Growth Explosion from 1988 to 1992

Between 1988 and 1992, Medicaid expenditures grew on average by 22.4 percent per year, increasing from $53.5 billion in 1988 to $119.9 billion in 1992. As shown in Table 1, expenditures on the elderly and disabled grew each year by an average of 14.7 percent and 17.0 percent, respectively. Spending on adults and children grew from $13.1 billion to $30.9 billion, an average annual increase of 23.9 percent. While spending on adults and children grew more rapidly in percentage terms than did spending on the elderly and blind and disabled, the impact on total spending was mitigated by lower per capita costs for adults and children .

Table 2 shows that Medicaid enrollment increased from 22.0 million to 29.8 million Americans from 1988 to 1992. Increases in the enrollment of the elderly were relatively slow, increasing from 3.1 to 3.5 million, or 3.2 percent per year. There was, however, substantial growth in coverage of the disabled, with enrollment increasing from 3.4 to 4.5 million, or by 6.7 percent per year. The high annual cost of covering the disabled means that this expansion has been extremely important to the cost of the program. The number of adults and children increased from 15.4 to 21.8 million, an average annual increase of 9.0 percent.

There are a large number of reasons for the growth in Medicaid expenditures during this period. Although precise contributions are difficult to quantify, the following factors seem to be particularly significant: DSH payments, enrollment, and costs per enrollee. An earlier analysis conducted for the Kaiser Commission on the Future of Medicaid found that all of these factors were important contributors to spending growth in this period.1

First, an important contributor to the large increase in Medicaid spending during this period was the aggressive use of provider taxes and donations and Disproportionate Share Hospital (DSH) payments.2 These arrangements brought federal dollars to states, with the funds largely distributed to hospitals providing disproportionate amounts of care to low-income individuals. The typical practice was for states to require provider contributions or impose taxes on providers-Medicaid programs would then increase payments to the same providers through DSH payments. These DSH payments would return much, if not all, of the hospital's donation or tax payment; the state could then claim federal matching funds for the DSH payment to the hospital. In many cases, these funds were used to assist hospitals in supporting indigent care for low-income individuals. In others, federal funds substituted for expenditures states would have otherwise made, and leaving total health expenditures for health care relatively the same. However these funds were used, it had a major impact on Medicaid expenditure growth during this period. DSH payments accounted for about $400 million in 1988 and grew to more than $17 billion by 1992.

The second major factor related to increases in enrollment. A series of legislative mandates extended Medicaid coverage to pregnant women and children and to the elderly and disabled. In the late 1980's, Medicaid ended the exclusive link between participation in the Aid to Families with Dependent Children (AFDC) program and access to Medicaid coverage. By 1990, federal law required coverage of all pregnant women, infants, and children under age six with incomes below 133 percent of the federal poverty line regardless of AFDC recipiency. States were given the option to extend coverage to pregnant women and infants up to 185 percent of the poverty line with federal matching payments and 33 states have done so. States are now required to cover children ages 6 through 12 up to the federal poverty line. Poor children ages 13 to 18 are scheduled to be phased in by the year 2002. Between 1988 and 1992, 4.5 million pregnant women and children were covered through these mandates.3These new eligible groups composed about 50 percent of the total increase in enrollment, though they accounted for a substantially lower share of total spending growth.4

Congress also extended Medicaid eligibility to elderly and disabled Medicare beneficiaries. The Medicare Catastrophic Coverage Act of 1988 and the Omnibus Budget Reconciliation Act of 1990 required Medicaid programs to cover Medicare costs for low-income persons not eligible for cash assistance-Qualified Medicare Beneficiaries (QMBs). States are required to cover Medicare premiums and cost sharing for all Medicare eligible persons with incomes below the federal poverty line. By 1995, this was extended to premium assistance for Medicare eligibles with incomes between 100 percent and 120 percent of poverty. Because of data limitations, it is difficult to know how many enrollees have been covered by these provisions; one estimate is that there are 1.3 million low-income elderly and disabled in 1995 who received premium assistance through the QMB legislation and would not have otherwise qualified for Medicaid.5

Medicaid also expanded during these years because of the recession and in concert with other related programs. For example, between 1988 and 1991, AFDC enrollment increased by 15.6 percent and food stamp enrollment by about 20 percent. States also took a number of steps to simplify the eligibility and enrollment processes during this period.

Supplemental Security Income (SSI) program enrollment also grew because of court decisions, principally the Zebley court decision which increased coverage for disabled children. More important, at the same time, a regulatory broadening of the list of qualifying medical conditions affecting disabled children, as mandated by Congress, also expanded SSI enrollment and Medicaid eligibility. During these years, many states and localities intensified efforts to enroll individuals who would have otherwise been covered by state or local general assistance programs in SSI to obtain the federal cash contributions as well as Medicaid coverage. Another cause of Medicaid enrollment growth during this period was SSI coverage of many individuals with acquired immunodeficiency syndrome (AIDS), substance abuse problems, and other social and medical problems.

Third, increased in health care prices are an important contributor to Medicaid expenditure growth and yet are largely outside the control of the program. Medical price inflation accounted for about one third of Medicaid spending growth between 1988 and 1992.6 While states did not strictly have to increase provider payment rates with inflation, it has proven difficult over the long term to allow these rates to continue to diverge widely from private and Medicare rates without eroding provider participation in Medicaid. Furthermore, the Boren Amendment requires states to pay the cost of efficiently and economically operated facilities such as hospitals and nursing homes; the costs of such facilities have clearly increased with inflation as a direct result of wage costs, among other factors.

Another factor contributing to Medicaid expenditure increases during this period was growth in utilization, in part due to changes in the average health status of enrollees. Average Medicaid utilization rates increased because of changes in the population gaining coverage. For example, expansions to cover pregnant women would automatically bring in a group that will incur health care expenditures higher than an average adult. Increased coverage of AIDS patients and substance abusers also adds high-cost groups. The 1989 amendments to the Early and Periodic Screening Diagnosis and Treatment (EPSDT) program for children, which required additional screening services-plus Medicaid coverage of all needed services irrespective of their coverage under a particular state benefit package-also increased costs.

Medicaid's financial role in nursing home care also expanded during this time. While the number of nursing home beneficiaries grew only modestly, the role of Medicaid financing increased because of newly enacted protections against spousal impoverishment that reduced the cost for nursing home residents whose spouses continued to live in the community. Medicaid expenditures during this period also grew in many states because of greater availability of Medicaid-financed long term care in the community and at home and reportedly because of more widespread divestiture of assets to become eligible for nursing home benefits.

Finally, states became increasingly aggressive during this period in shifting services to Medicaid that had previously been financed by other state and federal programs.7 This practice, known as “Medicaid maximization,” results in the shift of services that have formerly been paid for by state only dollars on to Medicaid where they receive federal matching payments. These services include state-funded institutional services for the developmentally disabled and mentally ill, and home and community-based services for the disabled funded under Title XX.

The Slowdown in Medicaid Expenditure Growth, 1992 to 1995

Following four years of rapid expansion, Medicaid program growth slowed precipitously after 1992. After four years with an average annual growth rate of 22.4 percent, Medicaid spending grew on average by 9.5 percent per year between 1992 and 1995 (Table 1). Spending increased from $119.9 billion in 1992 to $157.3 in 1995. Annual increases in spending continued to be higher for families (12.1 percent) than for the disabled (11.3 percent) and for the elderly (7.9 percent). Preliminary data suggest that Medicaid expenditures grew by about 3.2 percent in 1996. The low 1996 growth probably, at least partially, reflects an acceleration of state spending in 1995 because of proposed legislation to restructure Medicaid that would have used 1995 data as the basis for distribution of block grants. Looking across 1994 and 1996, however, the average annual spending growth is about 6 percent per year.

Disproportionate Share Hospital Payments (DSH)

There are several reasons for the decline in Medicaid spending growth. An important reason the growth in Medicaid expenditures have declined is because of 1991 and 1993 legislation affecting the use of disproportionate share payments.8 As shown in Table 1, disproportionate share payments increase by only 2 percent per year between 1992 and 1995, after several years of explosive growth. In 1991, legislation banned the use of provider donations and severely restricted the kinds of provider taxes that states could employ. In effect, states could no longer make a guarantee that a hospital could be “made whole” for a donation or tax payment through reciprocal DSH payments. The 1991 legislation also capped DSH payments to 12 percent of program expenditures. Any state whose DSH payments exceeded 12 percent would be frozen at 1993 levels until DSH payments were at 12 percent of Medicaid expenditures. The states whose DSH payments were below 12 percent were allowed to grow at the same rate as program spending. Because program spending has slowed, the allowed rate of growth in DSH payments has also slowed. The 1993 legislation restricted the level of DSH payments to hospitals. States could no longer pay a hospital more than that facility was losing through low Medicaid reimbursement rates or through the provision of uncompensated care. This severely restricted states' ability to pay large amounts of money to specific hospitals and has reduced Medicaid expenditures in some of these states.

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Where is Medicaid Spending Headed?:
Press Release Fact Sheet Report Part One Part Two Tables and References

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