Medicaid: Sustainability of Low 1996 Spending Growth Is Uncertain (Letter
Report, 06/27/97, GAO/HEHS-97-128).

Pursuant to a congressional request, GAO reviewed Medicaid's spending
growth rate, focusing on: (1) the dominant factors affecting trends in
Medicaid spending growth from fiscal years 1989 to 1995; (2) key factors
that contributed to the low spending growth rate for fiscal year (FY)
1996 and variations in states' Medicaid spending growth for the most
recent 2-year period; and (3) the implication of these factors for
future Medicaid spending.

GAO noted that: (1) the Medicaid spending growth rate increased
dramatically in the early 1990s, rising to almost 29 percent in 1992,
with expenditures growing from almost $60 billion in FY 1989 to $157
billion in FY 1995; (2) factors that help explain this trend include:
(a) escalating disproportionate share hospital (DSH) payments made to
hospitals that cover a large proportion of low-income and Medicaid
beneficiaries; (b) the increasing cost of providing services (the prices
paid for services and the average costs of services per beneficiary);
and (c) the growing number of program beneficiaries; (3) each of these
factors prevailed to increase spending growth at different times; (4)
for example, from fiscal years 1990 to 1992, the contribution of DSH
payment increases soared from 6 to 46 percent of total spending growth
until those payments were brought under control in 1993; (5) while DSH
payment contributions erratically increased and decreased, the impact of
additional beneficiaries on overall expenditure growth steadily
increased due in part to mandated and optional eligibility expansions;
(6) by FY 1995, however, as Medicaid spending growth had abated
substantially, the contribution of these factors had decreased; (7) the
dramatically low Medicaid expenditure growth rate in FY 1996 masked wide
variations in states' Medicaid growth; (8) one state's Medicaid
expenditures decreased by 16 percent, another's increased by 25 percent;
(9) most states, however, accounting for 80 percent of FY 1996 federal
Medicaid outlays, had moderate decreases or minimal changes from their
previous year's spending growth; (10) a combination of factors, some
affecting only certain states and others common to many states, explains
the low FY 1996 growth rate; (11) a number of other states GAO contacted
attributed lower growth rates to a generally improved economy and state
initiatives to limit expenditure growth through program changes such as
managed care programs and long-term care alternatives; (12) the low 1996
Medicaid spending growth rate of 3.3 percent appears to be an anomaly
not likely to persist in subsequent years; (13) the factors that reduced
growth in FY 1996 will continue to affect future Medicaid spending; (14)
the net effect of factors, such as DSH spending and the future economy,
however, are unknown; (15) some of these factors may contribute to
higher growth in the near future; (16) in addition, if the economy decl*

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-97-128
     TITLE:  Medicaid: Sustainability of Low 1996 Spending Growth Is 
             Uncertain
      DATE:  06/27/97
   SUBJECT:  Health care cost control
             Health care programs
             Budget outlays
             Managed health care
             State-administered programs
             Long-term care
             Payments
             Hospital care services
             Future budget projections
IDENTIFIER:  Medicaid Disproportionate Share Hospital Program
             Medicaid Managed Care Program
             Medicaid Program
             
**************************************************************************
* This file contains an ASCII representation of the text of a GAO        *
* report.  Delineations within the text indicating chapter titles,       *
* headings, and bullets are preserved.  Major divisions and subdivisions *
* of the text, such as Chapters, Sections, and Appendixes, are           *
* identified by double and single lines.  The numbers on the right end   *
* of these lines indicate the position of each of the subsections in the *
* document outline.  These numbers do NOT correspond with the page       *
* numbers of the printed product.                                        *
*                                                                        *
* No attempt has been made to display graphic images, although figure    *
* captions are reproduced. Tables are included, but may not resemble     *
* those in the printed version.                                          *
*                                                                        *
* A printed copy of this report may be obtained from the GAO Document    *
* Distribution Facility by calling (202) 512-6000, by faxing your        *
* request to (301) 258-4066, or by writing to P.O. Box 6015,             *
* Gaithersburg, MD 20884-6015. We are unable to accept electronic orders *
* for printed documents at this time.                                    *
**************************************************************************


Cover
================================================================ COVER


Report to the Chairman, Committee on the Budget, U.S.  Senate, and to
the Chairman, Committee on the Budget, House of Representatives

June 1997

MEDICAID - SUSTAINABILITY OF LOW
1996 SPENDING GROWTH IS UNCERTAIN

GAO/HEHS-97-128

Medicaid Spending Growth

(101555)


Abbreviations
=============================================================== ABBREV

  CBO - Congressional Budget Office
  DSH - disproportionate share hospital
  HCFA - Health Care Financing Administration

Letter
=============================================================== LETTER


B-276963

June 27, 1997

The Honorable Pete V.  Domenici
Chairman
Committee on the Budget
United State Senate

The Honorable John R.  Kasich
Chairman
Committee on the Budget
House of Representatives

In fiscal year 1996, federal and state expenditures for Medicaid
totaled approximately $160 billion--accounting for roughly 6 percent
of total federal expenditures and 20 percent of total state
expenditures.  Medicaid's annual growth rate for fiscal year 1996,
however, was estimated at only 3.3 percent or lower--a substantial
drop from the more than 20-percent annual growth rates of the early
1990s.\1 The very low 1996 spending growth rate raised many questions
about what led to this steep drop and its implications for future
expenditures. 

In response to your request about this low growth rate, we (1)
examined the dominant factors affecting trends in Medicaid spending
growth from fiscal years 1989 to 1995, (2) identified key factors
that contributed to the low spending growth rate for fiscal year 1996
and analyzed variations in states' Medicaid spending growth for the
most recent 2-year period, and (3) assessed the implication of these
factors for future Medicaid spending. 

Our findings are based on an analysis of data on state and federal
Medicaid expenditures and on federal Medicaid outlays obtained from
the Health Care Financing Administration (HCFA).  Our trends analysis
was based on expenditure and enrollment data for fiscal years 1988 to
1995.\2 Final data for fiscal year 1996 were not available as of June
3, 1997.  Our analysis of the 3.3-percent growth rate in fiscal year
1996 was based on federal Medicaid outlays.  We also interviewed
Medicaid officials from the 18 states that accounted for almost 65
percent of federal Medicaid outlays and represented the full range of
growth rate trends in state spending observed in the past 2 years. 
We conducted our review from August 1996 to April 1997 in accordance
with generally accepted government auditing standards.  For more
detailed information on our scope and methodology, see appendix I. 


--------------------
\1 The 3.3-percent growth rate has been widely used and represents
the moneys paid to states by the federal government each month to
fund Medicaid.  Historically, federal outlays have proven to be a
good predictor of Medicaid expenditures--representing the obligated
dollar amounts for services provided and program administration in a
given time period, whether paid or unpaid.  According to HCFA,
however, preliminary fiscal year 1996 expenditure data show only
about 1.8 percent growth over fiscal year 1995 expenditures. 

\2 Fiscal year 1988 was the earliest year for which spending
estimates were available on one critical program component--the
disproportionate share hospital (DSH) program.  Therefore, fiscal
year 1989 was the earliest year for which a growth rate could be
calculated for this program. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

The Medicaid spending growth rate increased dramatically in the early
1990s, rising to almost 29 percent in 1992, with expenditures growing
from almost $60 billion in fiscal year 1989 to $157 billion in fiscal
year 1995.  Factors that help explain this trend include (1)
escalating disproportionate share hospital (DSH) payments made to
hospitals that cover a large proportion of low-income and Medicaid
beneficiaries, (2) the increasing cost of providing services (the
prices paid for services and the average costs of services per
beneficiary), and (3) the growing number of program beneficiaries. 
Each of these factors prevailed to increase spending growth at
different times.  For example, from fiscal years 1990 to 1992, the
contribution of DSH payment increases soared from 6 to 46 percent of
total spending growth until those payments were brought under control
in 1993.  While DSH payment contributions erratically increased and
decreased, the impact of additional beneficiaries on overall
expenditure growth steadily increased due in part to mandated and
optional eligibility expansions.  By fiscal year 1995, however, as
Medicaid spending growth had abated substantially, the contribution
of these factors had decreased. 

The dramatically low Medicaid expenditure growth rate in fiscal year
1996 masked wide variations in states' Medicaid growth.  One state's
Medicaid expenditures decreased by 16 percent, another's increased by
25 percent.  Most states, however--accounting for 80 percent of
fiscal year 1996 federal Medicaid outlays--had moderate decreases or
minimal changes from their previous year's spending growth.  A
combination of factors--
some affecting only certain states and others common to many states--
explains the low fiscal year 1996 growth rate.  For example, some
states' increases in Medicaid enrollment leveled off after the prior
year's major state-initiated program expansions.  A number of other
states we contacted attributed lower growth rates to a generally
improved economy and state initiatives to limit expenditure growth
through program changes such as managed care programs and long-term
care alternatives. 

Whether the low 1996 Medicaid spending growth rate of 3.3 percent
will be sustained in subsequent years is uncertain.  The factors that
reduced growth in fiscal year 1996 will continue to affect future
Medicaid spending.  The net effect of factors, such as DSH spending
and the future economy, however, are unknown.  Some of these factors
may contribute to higher growth in the near future.  For example, DSH
payments have already begun to grow again.  In addition, if the
economy declines, enrollment in Medicaid would probably increase. 
The possible effects of other factors are less predictable.  Welfare
reform's effect on expenditure growth is uncertain because states are
just starting to implement their new programs.  Also uncertain is the
amount of money that may be saved from states implementing managed
care alternatives. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Medicaid, a federal grant-in-aid entitlement program administered by
states, finances health care for about 37 million low-income families
and blind, disabled, and elderly people.  The federal and state
governments share funding for Medicaid, with the federal government
contributing an average of 57 percent of program costs in 1996.\3 At
the state level, Medicaid operates as a health insurance program
covering acute care services for most beneficiaries, financing
long-term medical care and social services for elderly and disabled
people, and funding programs for people with developmental
disabilities and mental illnesses. 

In 1995, almost 70 percent of total Medicaid enrollment consisted of
children and adults, but this group accounted for less than 25
percent of total program expenditures.  (See fig.  1.) In the same
year, less than 30 percent of the total Medicaid population consisted
of blind, disabled, or elderly people, but this group accounted for
more than 60 percent of total expenditures.  DSH payments accounted
for about 13 percent of total payments.\4

   Figure 1:  Shares of Medicaid
   Beneficiaries and Expenditures,
   by Eligibility Category, Fiscal
   Year 1995

   (See figure in printed
   edition.)

Note:  Excludes "other" and "unknown" eligibility categories. 

Source:  HCFA Office of the Actuary merged enrollment (HCFA-2082) and
expenditure (HCFA-64) files. 

For more than a decade, the national growth rate in Medicaid
expenditures has been erratic.  (See fig.  2.) Between fiscal years
1985 and 1988, the annual growth rate remained relatively stable,
ranging between roughly 8 and 10.5 percent.  During the next 3 years,
starting in fiscal year 1989, the annual growth rate began to climb
substantially, reaching almost 29 percent in fiscal year 1992--an
increase of more than $26 billion in expenditures for that year. 
Medicaid's growth fell dramatically in fiscal year 1993 to 10.7
percent.  From fiscal years 1993 through 1995, the annual growth rate
for the program leveled off at between 8 and 11 percent, which was
similar to the growth rate between 1985 and 1988.  Then, in fiscal
year 1996, the growth rate fell to an estimated 3.3 percent. 

   Figure 2:  Annual Growth Rate
   in Medicaid Expenditures,
   Fiscal Years 1985-96

   (See figure in printed
   edition.)

Sources:  Fiscal years 1984-95, federal and state current
expenditures (HCFA-64, line 6).  Fiscal year 1996 data based on
federal outlays for Medicaid.  (Final expenditure data were not
available for fiscal year 1996.)


--------------------
\3 The percentage of an individual state's Medicaid expenditures
covered by the federal government can range from 50 to 83 percent. 

\4 The DSH program partially offsets costs not covered by Medicaid or
private insurance incurred by hospitals serving large numbers of
Medicaid and other low-income patients, including the uninsured. 


   DOMINANT FACTORS AFFECTING
   1989-95 SPENDING
------------------------------------------------------------ Letter :3

Three dominant factors affected the 1989-95 growth in Medicaid
expenditures:  the DSH program, nominal spending per beneficiary (the
cost of services),\5 and the growth in the number of program
beneficiaries.  To better understand the effect of these factors on
Medicaid growth rates, we measured the effect of each while holding
the others constant.  (See fig.  3 and table 1.) For the first 2
years of the 7-year period, nominal spending per beneficiary
constituted the largest share of growth in the overall program; by
1992, however, DSH payments constituted the largest share.  Increased
beneficiary enrollment had a more constant--and increasingly
significant--effect on the annual growth rate.  Between 1990 and
1994, growth in beneficiary enrollment accounted for 30 percent or
more of the total growth in Medicaid spending. 

   Figure 3:  Annual Increases in
   Medicaid Expenditures by Growth
   Factor, Fiscal Years 1989-95

   (See figure in printed
   edition.)

Sources:  Medical assistance program expenditures (HCFA-64),
excluding administrative costs and territories; beneficiary
enrollment (HCFA-2082); and DSH estimates from the Urban Institute. 



                          Table 1
          
          Shares of Medicaid Expenditure Growth by
               Factors, Fiscal Years 1989-95


                  1989  1990  1991  1992  1993  1994  1995
----------------  ----  ----  ----  ----  ----  ----  ----
Nominal             82    64    29    14    41    51    59
 expenditures
 per beneficiary
DSH\b                3     6    21    46    -4    -1    14
Beneficiary         15    30    50    40    63    51    27
 growth
Total              100   100   100   100   100   100   100
 expenditure
 growth
----------------------------------------------------------
Note:  Does not include administrative costs or payments to U.S. 
territories. 

\a Percentages may not add to 100 due to rounding. 

\b DSH payments were first reported as a separate expenditure
category in fiscal year 1993.  The DSH shares for 1989 to 1994 used
for this analysis are estimates made by the Urban Institute, in part
based on HCFA-64 data.  The DSH share for 1995 is based on HCFA-64
data. 



                          Table 2
          
           Annual Medicaid Expenditures, Growth,
           and Growth Rate, Fiscal Years 1989-95

                  1989  1990  1991  1992  1993  1994  1995
----------------  ----  ----  ----  ----  ----  ----  ----
Growth rate       13.6  19.1  26.7  29.6  10.6   8.1  10.8
 (percent)
Annual growth     $7.0  $11.  $18.  $26.  $12.  $10.  $14.
 (dollars in               2     6     1     1     2     8
 billions)
Total medical     $58.  $69.  $88.  $114  $126  $136  $151
 assistance          5     6     2    .3    .4    .6    .4
 expenditures
 (dollars in
 billions)
----------------------------------------------------------
Note:  Does not include administrative costs or payments to U.S. 
territories. 

Between fiscal years 1990 and 1992, the DSH program had its most
dramatic effect on Medicaid growth rates:  its share of the overall
Medicaid expenditure growth increased from 6 to 46 percent.  A number
of states increased their share of federal Medicaid dollars in fiscal
years 1991 and 1992 through certain creative financing mechanisms
such as using provider taxes and donations to obtain federal matching
funds for Medicaid.\6 States used the DSH program along with these
financing mechanisms to increase federal funds.  As a result, DSH
payments skyrocketed:  In 1990, they were just above $1 billion; by
1992, they had increased to $17 billion.  To limit these payments,
the Congress placed restrictions on the DSH program and on the use of
provider taxes and donations as revenue sources.\7 DSH payments were
limited to a national target of 12 percent of total Medicaid
expenditures, excluding administrative costs.  If a state's DSH
spending exceeded this target, its DSH payments were frozen until
they equaled 12 percent or less of the state's medical assistance
expenditures.  These restrictions greatly curbed payments, leading
initially to less DSH spending and reduced Medicaid spending growth
in fiscal years 1993 and 1994.  Even as states' DSH spending began to
conform to the 12-percent target, however, aggregate state DSH
payments began to increase again as total Medicaid spending grew.  As
a result, in fiscal year 1995, the DSH program share of expenditure
growth grew to 14 percent. 

Nominal spending per beneficiary constituted the largest share of
Medicaid expenditure growth in fiscal years 1989, 1990, 1994, and
1995 but accounted for only one-third or less of the growth in 2
other years.  In years in which the share of nominal spending per
beneficiary was relatively small, DSH payment growth was high. 
Conversely, in years in which the share of nominal spending was high,
DSH payments were low. 

Beneficiary enrollment also consistently contributed to Medicaid's
growth rate in the years that we examined.  In fiscal years 1991,
1993, and 1994, increased enrollment accounted for at least half of
increased Medicaid expenditures.  After several years of static
growth, the number of Medicaid beneficiaries grew from about 22
million in fiscal year 1988 to 30 million in fiscal year 1992; by
fiscal year 1995, enrollment had grown to over 36 million.  (See fig. 
4.) This growth was due in part to federal mandates that expanded
eligibility to pregnant women and children and to certain other
low-income women and children who met financial but not categorical
eligibility standards.  In addition, some states have used managed
care demonstration waivers to expand coverage to uninsured
individuals.\8

   Figure 4:  Medicaid Enrollment
   by Eligibility Category, Fiscal
   Years 1985-95

   (See figure in printed
   edition.)

Note:  Excludes "other" and "unknown" categories of eligibility. 

Source:  Beneficiary enrollment file (HCFA-2082), fiscal years
1985-95. 


--------------------
\5 Several different factors, including medical price inflation,
reimbursement levels, and quality assurance standards, affect nominal
spending per beneficiary, a measure of average cost.  At the
aggregate level, the demographic makeup of the Medicaid population
also affects nominal spending per beneficiary.  For example, states
with large elderly and disabled populations will have higher-
than-average costs. 

\6 See 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). 

\7 Medicaid Voluntary Contribution and Provider-Specific Tax
Amendments of 1991 (P.L.  102-234) and the Omnibus Budget
Reconciliation Act of 1993 (P.L.  103-66, section 13621). 

\8 States have used the authority of demonstration waivers under
section 1115 of the Social Security Act (42 U.S.C.  1315(a)) to
mandate enrollment of some or all Medicaid beneficiaries in managed
care and expand eligibility for enrollment to uninsured individuals
who would not otherwise qualify for Medicaid.  See Medicaid: 
Spending Pressures Drive States Toward Program Reinvention
(GAO/HEHS-95-122, Apr.  4, 1995) and Medicaid:  Statewide Section
1115 Demonstrations' Impact on Eligibility, Service Delivery, and
Program Cost (GAO/T-HEHS-95-182, June 21, 1995). 


   A COMBINATION OF FACTORS
   AFFECTED 1996 SPENDING GROWTH
------------------------------------------------------------ Letter :4

After relatively stable growth rates between fiscal years 1993 and
1995, the Medicaid growth rate dropped to an estimated 3.3 percent in
fiscal year 1996.  No single spending growth trend was evident in the
states, and no single factor explained the decrease in growth for
1996, according to our analysis.  Rather, a combination of
factors--some of which are unlikely to recur and others that seem
part of a larger trend--have affected Medicaid's growth rate. 


      NO SINGLE SPENDING TREND
      COMMON TO STATES
---------------------------------------------------------- Letter :4.1

The 3.3-percent growth rate in fiscal year 1996 federal Medicaid
outlays masked striking variation in states' Medicaid growth.  Growth
rates ranged from a decrease of 16 percent in one state to an
increase of 25 percent in another.  Such differences in states'
program spending growth have been fairly typical.  In addition, some
states often have large changes in growth from one year to the next
because of major program changes or accounting variances that change
the fiscal year in which a portion of expenditures is reported.  To
determine the stability of states' growth rates, we compared these
rates for fiscal years 1995 and 1996.  We then placed states in one
of five growth rate categories, as shown in table 2.  (See app.  II
for states' specific growth rates.)



                          Table 3
          
             Changes in Growth Rate of Federal
           Medicaid Outlays, Fiscal Years 1995-96

Fiscal year
1996 growth                 Percentage
rate compared                  of 1996
with fiscal      Number of     federal
year 1995's         states     outlays  States
--------------  ----------  ----------  ------------------
Decreased               10          16  Colorado, Florida,
 substantially                           Hawaii,
                                         Louisiana, North
                                         Carolina, Oregon,
                                         Rhode Island,
                                         South Carolina,
                                         Tennessee,
                                         Wyoming
Decreased               20          48  Alabama,
 moderately                              California,
                                         Idaho, Illinois,
                                         Iowa, Kansas,
                                         Kentucky,
                                         Maryland,
                                         Massachusetts,
                                         Michigan,
                                         Minnesota,
                                         Mississippi,
                                         North Dakota,
                                         Ohio, Oklahoma,
                                         Pennsylvania,
                                         South Dakota,
                                         Texas, Vermont,
                                         Washington
Changed                 16          32  Arizona, Arkansas,
 minimally                               Connecticut,
                                         Delaware,
                                         District of
                                         Columbia,
                                         Georgia,
                                         Missouri,
                                         Montana,
                                         Nebraska, Nevada,
                                         New Jersey, New
                                         York, Utah,
                                         Virginia, West
                                         Virginia,
                                         Wisconsin
Increased                3           2  Alaska, Maine, New
 moderately                              Mexico
Increased                2           2  Indiana, New
 substantially                           Hampshire
----------------------------------------------------------
Ten states that collectively accounted for 16 percent of 1996 federal
Medicaid outlays had substantially decreased growth in fiscal year
1996 compared with fiscal year 1995.  However, 80 percent of 1996
federal Medicaid outlays took place in states whose fiscal year 1996
growth either moderately decreased or minimally changed.  Although
five states' fiscal year 1996 growth rates increased, those states
did not greatly affect spending growth trends because their combined
share of Medicaid outlays was only 4 percent. 

A number of factors have led to Medicaid's decreased spending growth
rate in fiscal year 1996.  Some of these--such as the prior
implementation of cost controls and a leveling off in the number of
program eligibles following state-initiated expansions--continue to
affect the growth rate in some states.  Other factors, such as
improved economic conditions and changing program policies--for
example, increased use of alternatives to institutional long-term
care--also affected many states' low growth rates. 


      SEVERAL FACTORS AFFECTING
      SPENDING GROWTH WILL
      PROBABLY NOT RECUR
---------------------------------------------------------- Letter :4.2

The large decreases in some states' growth rates in 1996 are largely
due to three factors not expected to recur:  substantially decreased
DSH funding, slowdowns in state-initiated eligibility expansions, and
accelerated 1995 payments in response to block grant proposals for
Medicaid. 

After the Congress enacted new limits in 1991 and 1993, DSH payments
declined nationally in 1993, stabilized in 1994, and began to grow
again in 1995.  Louisiana, however--a state that has had one of the
nation's largest DSH programs, accounting for 30 percent of the
state's total Medicaid expenditures in fiscal year 1995--has not
followed this trend.  Louisiana's 1996 growth rate decreased
substantially as its DSH payments continued to decline.  The state's
federal outlays decreased by 16 percent in 1996 because its DSH
payments dropped dramatically. 

Recent slowdowns in state-initiated eligibility expansions also
helped to substantially decrease the growth rates in selected states. 
In the past several years, some states implemented statewide managed
care demonstration waiver programs to extend health care coverage to
uninsured people not previously eligible for Medicaid.  Three states
whose 1996 growth rates decreased substantially--Hawaii, Oregon, and
Tennessee--implemented most of their expansions in 1994.  The
increased expenditures due to these expansions continued into 1995
but began to level off in 1996.  The number of eligible beneficiaries
actually dropped in these states in 1996 partly due to the states
applying more stringent eligibility requirements for the expansion
population. 

States accelerating 1996 payments into 1995 also helps explain the
low 1996 growth rate.\9 In 1995, the Congress--as part of a Medicaid
block grant proposal--was considering legislation to establish
aggregate spending limits that would be calculated using a base year. 
In response to the anticipated block grant, officials from a few
states told us, they accelerated their Medicaid payments to increase
their expenditures for fiscal year 1995--the year the Congress
considered using 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 start of fiscal year 1996.  Another state, whose growth
had moderately decreased, expedited decisions on audits of hospitals
and nursing homes to speed payments due these providers, according to
a state official. 


--------------------
\9 Aggregate data show that growth in federal Medicaid outlays was
flat in the first 6 months of 1996 and then grew 6 percent in the
last 6 months. 


      STRONG ECONOMIC CONDITIONS
      HAVE HELPED SLOW SPENDING
      GROWTH
---------------------------------------------------------- Letter :4.3

Improved economic conditions, reflected in lower unemployment rates
and slower increases in the cost of medical services, also have
helped slow the growth of Medicaid expenditures.  Between 1993 and
1995, most states' unemployment rates dropped--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.\10 Low unemployment rates had
reduced the number of people on welfare and therefore in Medicaid,
several state officials told us. 

In addition, growth in medical service prices has been steadily
declining since the late 1980s.  In 1990, this growth was 9.0
percent; by 1995, it was halved to 4.5 percent, and in 1996 it
declined further, to 3.5 percent.  Declines in price inflation
indirectly affect the Medicaid rates that states set for providers. 
States have frozen provider payment rates in recent years, including
rates for nursing facilities and hospitals, according to several
state officials we spoke with.  Such a freeze might not have been
possible in periods of higher inflation because institutional
providers might have challenged state payment rates in court, arguing
that the rates have not kept pace with inflation.\11 With lower
inflation, states can restrain payment rates with less concern about
such challenges. 


--------------------
\10 Medicaid:  Restructuring Approaches Leave Many Questions
(GAO/HEHS-95-103, Apr.  4, 1995). 

\11 The Boren Amendment, section 1902(a)(13)(A) of the Social
Security Act, (42 U.S.C.  1396(a)(13)(A)) 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 incurred by efficiently and economically operated
facilities.  Providers in a number of states have used the Boren
Amendment to force states to increase reimbursement rates for
institutional services. 


      STATE MANAGED CARE PROGRAMS
      AND LONG-TERM CARE POLICIES
      MAY HAVE AFFECTED SPENDING
      GROWTH
---------------------------------------------------------- Letter :4.4

Several states that we contacted discussed recent program changes
that may have affected their Medicaid expenditures.  The states'
implementation of managed care programs was most prominently
mentioned.  The overall effect of managed care on Medicaid spending
is uncertain, however, because of state variations in program scope
and objectives.  According to the Congressional Budget Office (CBO),
savings from enrolling beneficiaries in managed care are not likely
to be large in the long run.\12 States also mentioned initiatives for
using alternative service delivery methods for long-term care.  These
initiatives may have helped to limit the growth in Medicaid costs;
however, 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 those who may need more care and are more expensive to serve
such as people with disabilities and the elderly.\13 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 an ability to save money with managed care by
devoting significant resources to its competitive bidding process.\14
Other states, however, have emphasized objectives besides controlling
total spending in moving to managed care.  In recently expanding its
managed care program, Oregon expanded eligibility and increased per
capita payments to promote improved access and quality and to look to
the future for any cost savings.  Tennessee also expanded eligibility
to formerly uninsured populations with its demonstration waiver. 
Although initially achieving cost savings per beneficiary by setting
low capitation rates for health plans, the state raised its rates in
subsequent years. 

Managed care has not significantly affected the moderate expenditure
growth decreases in Minnesota, which has high managed care market
penetration, and in California, which is in the midst of a large
expansion, according to officials in the respective states.  About 40
percent of Minnesota's Medicaid beneficiaries--mainly women and
children living in urban areas--were enrolled in managed care plans
in 1996, said an official.  Because enrollment in managed care has
been mandatory for these beneficiaries for several years, any dollar
savings have been accounted for.  Significant additional savings from
managed care are not expected unless the elderly and disabled
beneficiaries are mandated to enroll in managed care plans for both
Medicare and Medicaid and for long-term care services.  In contrast,
California officials consider their program to be budget neutral in
the short run because they have set their capitation rate at 100
percent of fee-for-service.  In the long-term, however, they believe
it will reduce the rate of cost growth.  Given the varying
objectives, states' experiences to date provide limited information
on the ability of managed care to help control state Medicaid costs
and moderate spending growth over time. 

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.  These states 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 less expensive alternatives to institutional care.  For
example, New York is trying to limit 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 options as alternatives to nursing
facilities, according to a state official.  Our previous work has
shown that such strategies can help control long-term care spending
if they have 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.\15


--------------------
\12 Statement of Paul N.  Van de Water, Assistant Director for Budget
Analysis, CBO, on Baseline Projections for Medicare and Medicaid
before the Subcommittee on Health and Environment, Committee on
Commerce, House of Representatives, Feb.  12, 1997. 

\13 Medicaid Managed Care:  Serving the Disabled Challenges State
Programs (GAO/HEHS-96-136, July 31, 1996). 

\14 Arizona Medicaid:  Competition Among Managed Care Plans Lowers
Program Costs (GAO/HEHS-96-2, Oct.  4, 1995). 

\15 Medicaid Long-Term Care:  Successful State Efforts to Expand Home
Services While Limiting Costs (GAO/HEHS-94-167, Aug.  11, 1994). 


   IMPLICATIONS FOR FUTURE
   SPENDING GROWTH
------------------------------------------------------------ Letter :5

Many of the factors resulting in the 3.3-percent growth rate in
1996--such as DSH payments, unemployment rates, and program policy
changes--will continue to affect the Medicaid growth rate in future
years.  Some of these factors, however, may contribute to higher--not
lower--growth rates, while the effect of others is more uncertain.\16

Factors that may lead to increased growth in Medicaid expenditures
include the following: 

  DSH payments:  Without new limits, DSH payments will probably add
     to the growth of the overall program.  Although Louisiana's
     adjustments to its DSH payments substantially reduced its 1996
     spending, other states' DSH spending began to grow moderately in
     1995 as freezes imposed on additional DSH spending no longer
     applied.  Although DSH payments are not growing as fast as they
     were in the early 1990s, these payments did begin to grow again
     in 1995 and will probably parallel the growth in the overall
     program. 

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

  Growing numbers of elderly people:  While states have succeeded
     somewhat in dealing with long-term care costs, increasing
     numbers of elderly people will inevitably lead to increased
     program costs.  The number of elderly over 65 years of age is
     estimated to grow from 31 million in 1990 to 39 million in 2010,
     an increase of 26 percent.  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.\17 As a result, the number of Medicaid enrollees--and the
costs of providing services--may decrease because some
Medicaid-eligible people may be discouraged from seeking eligibility
and enrollment apart from the new welfare process.  States may need
to restructure their eligibility and enrollment systems, however, 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 is also unclear
because experience is limited and state objectives in switching to
managed care have not always emphasized immediate cost containment. 
Yet many hope that managed care will, over time, help constrain
costs.  Although Arizona's Medicaid managed care program has helped
limit program growth, cost savings have been mainly due to
considerable effort to promote competition among health plans. 
Sustaining this competition in the future will challenge the state's
managed care program. 


--------------------
\16 CBO has estimated that federal Medicaid expenditures will grow by
8 percent in 1998 and by an average of 7.8 percent between 1997 and
2007. 

\17 Traditionally, Medicaid enrollment has been linked to the
financial assistance process for Aid to Families With Dependent
Children.  Individuals enrolled in this program would automatically
be enrolled in Medicaid as well.  Under the Personal Responsibility
and Working Opportunity Reconciliation Act of 1996 (P.L.  104-193),
states may choose to separate the two processes. 


   AGENCY AND OTHER COMMENTS
------------------------------------------------------------ Letter :6

We provided a draft of this report to HCFA's Administrator.  HCFA
officials generally agreed with the conclusions in the report
concerning the factors that affected Medicaid spending growth in the
last 7 years and the implications for future spending growth.  They
pointed out, however, that while DSH payments grew significantly in
fiscal year 1995, preliminary expenditure data for fiscal year 1996
show that DSH payments dropped about 20 percent for that year.  In
addition, state Medicaid estimates for DSH payments through fiscal
year 1998 show about a 1-percent average compound annual growth from
fiscal years 1993 to 1998.  HCFA officials believe that although DSH
payments present opportunities for accelerating Medicaid spending
growth, it is too early to conclude that their growth is likely to
parallel overall program growth.  They also noted that preliminary
fiscal year 1996 expenditure data show only a 1.8-percent growth over
fiscal year 1995.  In addition, HCFA officials had technical
comments, which we have incorporated in the report as appropriate. 

We provided relevant sections of the draft report to Medicaid
officials in eight states mentioned in our report to illustrate the
impact of the various factors on Medicaid spending growth.  Officials
from five states responded, generally agreeing with the accuracy of
the information.  Officials in Arizona and Tennessee commented that
their managed care programs had realized cost savings, contrary to
CBO's opinion that savings from enrolling beneficiaries in managed
care are not likely to produce savings in the long run.  In
particular, Arizona officials cited our report on their managed care
program that discussed program savings.  In our report, however, we
noted their savings were attributable to their ability to implement a
strong competitive bidding system among managed care plans. 
Continued savings, we believe, are likely to depend on the state's
ability to maintain competition among the plans. 


---------------------------------------------------------- Letter :6.1

We are sending copies of this report to the Secretary of Health and
Human Services.  Copies will also be made available to others on
request. 

Please contact me on (202) 512-7114 if you or your staff have any
questions.  Other major contributors to this report are listed in
appendix III. 

William J.  Scanlon
Director, Health Financing and
 Systems Issues


SCOPE AND METHODOLOGY
=========================================================== Appendix I

To examine the trends in Medicaid spending from fiscal years 1988 to
1995, we obtained Medicaid enrollment and expenditure data from HCFA. 
For each fiscal year, we calculated the annual growth rate, the
spending growth in absolute dollars, and the Medicaid enrollment
growth rate.  Using these data, we calculated the share of the
overall Medicaid growth represented by the numbers of beneficiaries,
per capita nominal spending, and disproportionate share hospital
(DSH) payments in each fiscal year. 

Because complete Medicaid expenditure data for fiscal year 1996 were
lacking when we did our work, we obtained HCFA data on federal
Medicaid outlays for fiscal years 1994 to 1996.  For each fiscal
year, we calculated each state's growth rate.  To analyze variations
in states' annual spending, we created a growth stability index by
calculating the ratio of the state's fiscal year 1995 growth rates to
the fiscal year 1996 growth rates.  We categorized states on the
basis of their growth stability index according to the following five
categories regarding the direction and magnitude of their fiscal year
1996 growth compared with their fiscal year 1995 growth:  decreased
substantially, decreased moderately, changed minimally, increased
moderately, and increased substantially. 

Using the categories of the growth stability index, we judgmentally
selected 18 states that represented a cross section of state spending
trends in the past 2 years and accounted for almost 65 percent of
fiscal year 1996 federal Medicaid outlays and analyzed their
enrollment, expenditure, and outlay data.  We contacted state
Medicaid officials in these states to identify key factors that
contributed to the decrease from previous years' growth rates. 

To assess the implications of these and other factors for Medicaid
expenditures in the future, we interviewed state officials in the 18
states on their projected growth rates for the upcoming years.  We
also reviewed the Congressional Budget Office's baseline for Medicaid
as of January 1997. 

We conducted our review from August 1996 to April 1997 in accordance
with generally accepted government auditing standards. 


STABILITY OF GROWTH RATE FOR
FEDERAL MEDICAID OUTLAYS, FISCAL
YEARS 1995 AND 1996
========================================================== Appendix II

We developed a growth stability index that shows the direction and
magnitude of change in the growth rates of federal Medicaid 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 growth rates.  For example,
Colorado's index of 1.37 indicates the largest decrease of all the
states. 



                               Table II.1
                
                   Growth Stability Index for Federal
                Medicaid Outlays by State, Fiscal Years
                             1995 and 1996

                                                                 State
                                                                rankin
                                        Percen  Percen               g
                                          tage    tage           based
                                        growth  growth              on
                                             ,       ,  Growth  growth
                                        fiscal  fiscal  stabil  stabil
                                          year    year     ity     ity
States                                  1995\a    1996   index   index
--------------------------------------  ------  ------  ------  ------
State averages                           11.00  3.18\b    1.08      \c
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                                      -   24.52    0.70      51
                                         13.34
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       -    1.20       8
                                                 15.96
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
Nebraska                                  6.22    9.89    0.97      45
Nevada                                   20.88   15.52    1.05      32
New Hampshire                                -    0.95    0.78      50
                                         21.73
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       -    1.33       2
                                                 10.97
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 The fiscal year 1995 growth rate may be overstated for some states
due to incomplete reporting in fiscal year 1994. 

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

\c Not applicable. 

Source:  Federal Medicaid outlays, HCFA. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

Kathryn G.  Allen, Acting Associate Director, (202) 512-7059
Lourdes R.  Cho, Senior Evaluator
Richard N.  Jensen, Senior Evaluator
Deborah A.  Signer, Senior Evaluator
Karen M.  Sloan, Communications Analyst


*** End of document. ***