Medicaid: Decline in Spending Growth Due to a Combination of Factors
(Testimony, 03/04/97, GAO/T-HEHS-97-91).

GAO discussed recent Medicaid spending trends and their potential
implications for future outlays, focusing on: (1) the variation in
Medicaid spending growth among the states, especially for the most
recent 2-year period, that culminated in the 3.3-percent growth rate in
fiscal year 1996; (2) key factors that contributed to the decrease from
previous years' growth rates; and (3) the implications of these and
other factors for Medicaid expenditures in the future.

GAO noted that: (1) GAO found no single pattern across all states that
accounts for the recent dramatic decrease in the growth of Medicaid
spending; (2) rather, a combination of factors, some affecting only
certain states and others common to many states, explains the low 1996
growth rate; (3) several states saw substantial drops in their 1996
growth rates associated with circumstances that are unlikely to recur to
dampen spending increases in future years; (4) moreover, the vast
majority of states experienced declines in their growth rates that were
moderate to limited; (5) the experiences of these states reflect a
number of factors at work, including a generally improved economy and
state initiatives to limit expenditure growth, such as implementing
managed care for primary and acute care services or alternative programs
for long-term care; (6) with an improved economy and declining
unemployment, the number of people eligible for Medicaid decreased; (7)
in addition, a dramatic slowdown in price increases for medical services
helped states control costs for certain services provided through
Medicaid; (8) while the magnitude of the effect of states' programmatic
changes, such as managed care programs and long-term care alternatives,
is less clear, there is evidence that they helped to restrain program
costs; (9) however, it is likely that the 3.3-percent growth rate is not
indicative of the growth rate in the years ahead; and (10) just as a
number of factors converged to bring about the drop in the 1996 growth
rate, so a variety of factors, including a downturn in the economy,
could result in increased growth rates in subsequent years.

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

 REPORTNUM:  T-HEHS-97-91
     TITLE:  Medicaid: Decline in Spending Growth Due to a Combination 
             of Factors
      DATE:  03/04/97
   SUBJECT:  State-administered programs
             Health care programs
             Health care cost control
             Medical economic analysis
             Managed health care
             Long-term care
IDENTIFIER:  Medicaid Program
             Hawaii
             Oregon
             Tennessee
             Arizona
             
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Cover
================================================================ COVER


Before the Committee on Finance, U.S.  Senate

For Release on Delivery
Expected at 10:30 a.m.,
Tuesday, March 4, 1997

MEDICAID - DECLINE IN SPENDING
GROWTH DUE TO A COMBINATION OF
FACTORS

Statement of Jonathan Ratner, Associate Director
Health Financing and Systems Issues
Health, Education, and Human Services Division

GAO/T-HEHS-97-91

GAO/HEHS-97-91T


(101547)


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

  DSH - disproportionate share hospital
  ABC - Test

MEDICAID:  DECLINE IN SPENDING
GROWTH DUE TO A COMBINATION OF
FACTORS
============================================================ Chapter 0

Mr.  Chairman and Members of the Committee: 

I am pleased to be here today to discuss recent Medicaid spending
trends and their potential implications for future outlays.  My
comments are based on work that we have in progress at the request of
the Chairmen of the Senate and House Budget Committees.  Their
request was prompted by an interest in what contributed to the
precipitous drop in the annual growth rate of Medicaid spending from
over 20 percent in the early 1990s to 3.3 percent in fiscal year
1996. 

My remarks today focus on three issues:  (1) the variation in
Medicaid spending growth among the states, especially for the most
recent 2-year period, that culminated in the 3.3-percent growth rate
in fiscal year 1996; (2) key factors that contributed to the decrease
from previous years' growth rates; and (3) the implications of these
and other factors for Medicaid expenditures in the future.  Our
findings are based on our analysis of Medicaid expenditure data
published by the Department of Health and Human Services' Health Care
Financing Administration and our review of federal outlays as
reported by the Department of the Treasury.  We also contacted
Medicaid officials in 18 states that represent a cross-section of
state spending patterns over the past 2 years and that account for
almost 70 percent of Medicaid expenditures. 

In brief, we found no single pattern across all states that accounts
for the recent dramatic decrease in the growth of Medicaid spending. 
Rather, a combination of factors--some affecting only certain states
and others common to many states--explains the low 1996 growth rate. 
For example, several states saw substantial drops in their 1996
growth rates associated with circumstances such as a sharp reduction
in very high levels of disproportionate share hospital (DSH) payments
to conform with binding restrictions on such payments or the leveling
off of their Medicaid enrollment following planned expansions in
prior years.  Such circumstances are unlikely to recur to dampen
spending increases in future years.  Moreover, the vast majority of
states experienced declines in their growth rates that were moderate
to limited.  The experiences of these states reflect a number of
factors at work, including a generally improved economy and state
initiatives to limit expenditure growth, such as implementing managed
care for primary and acute care services or alternative programs for
long-term care.  With an improved economy and declining unemployment,
the number of people eligible for Medicaid decreased.  In addition, a
dramatic slowdown in price increases for medical services helped
states control costs for certain services provided through Medicaid. 
While the magnitude of the effect of states' programmatic
changes--such as managed care programs and long-term care
alternatives--is less clear, there is evidence that they helped to
restrain program costs.  However, it is likely that the 3.3-percent
growth rate is not indicative of the growth rate in the years ahead. 
Just as a number of factors converged to bring about the drop in the
1996 growth rate, so a variety of factors--including a downturn in
the economy--could result in increased growth rates in subsequent
years. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:1

Medicaid, a federal grant-in-aid program that states administer,
finances health care for about 37 million low-income people.  With
total federal and state expenditures of approximately $160 billion in
1996, Medicaid exerts considerable fiscal pressure on both state and
federal budgets, accounting for roughly 20 percent and 6 percent of
total expenditures, respectively. 

For more than a decade, the growth rate in Medicaid expenditures
nationally has been erratic.  Between 1984 and 1987, the annual
growth rates remained relatively stable, ranging between roughly 8
and 11 percent.  Over the next 4 years, beginning in 1988, annual
growth rates increased substantially, reaching 29 percent in 1992--an
increase of over $26 billion for that year.  From this peak,
Medicaid's growth rates declined between 1993 and 1995 to
approximately mid-1980 levels.  Then, in fiscal year 1996, the growth
rate fell to 3.3 percent. 


   NO SINGLE SPENDING TREND ACROSS
   STATES
---------------------------------------------------------- Chapter 0:2

The 3.3-percent growth in 1996 federal Medicaid outlays masks
striking variation among the states.  Growth rates ranged from a
decrease of 16 percent to an increase of 25 percent.  Such
differences in program spending growth across states has been fairly
typical.  In addition, there are often some states that experience
large changes in growth from one year to the next because of major
changes in program structure or accounting variances that change the
fiscal year in which a portion of expenditures are reported.  To
determine the stability of the growth rate among states, we compared
states' growth rates in fiscal year 1995 with those in fiscal year
1996.  Our analysis revealed that states could be placed in one of
five categories, as shown in table 1.  (See app.  I for specific
state growth rates.)



                                Table 1
                
                   Changes in Growth Rate of Federal
                Medicaid Outlays, Fiscal Years 1995 and
                                  1996

Fiscal year 1996
growth rate
compared with                        Percentage of
fiscal year                           1996 federal
1995's            Number of states      outlays       States
----------------  ----------------  ----------------  ----------------
Decreased                10                16         Colorado,
 substantially                                         Florida,
                                                       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,
 minimally                                             Arkansas,
                                                       Connecticut,
                                                       Delaware,
                                                       District of
                                                       Columbia,
                                                       Georgia,
                                                       Missouri,
                                                       Montana,
                                                       Nebraska,
                                                       Nevada, New
                                                       Jersey, New
                                                       York, Utah,
                                                       Virginia, West
                                                       Virginia,
                                                       Wisconsin
Increased                3                 2          Alaska, Maine,
 moderately                                            New Mexico
Increased                2                 2          Indiana, New
 substantially                                         Hampshire
----------------------------------------------------------------------
Ten states that collectively account for 16 percent of 1996 federal
outlays experienced substantial decreases in fiscal year 1996 growth
compared with fiscal year 1995's.  However, 80 percent of 1996
federal Medicaid outlays were in states that either experienced
moderate decreases or minimal changes in their fiscal year 1996
growth.  Although five states' fiscal year 1996 growth rates
increased, those states did not have much impact on spending growth
patterns because their combined share of Medicaid outlays is only 4
percent. 


   A CONVERGENCE OF FACTORS LED TO
   THE 3.3-PERCENT GROWTH RATE IN
   1996
---------------------------------------------------------- Chapter 0:3

A number of factors have led to decreases in the growth rate in
Medicaid spending in recent years.  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
influence the growth rate in a handful of states.  Other factors,
such as improved economic conditions and changing program
policies--for example, alternatives to institutional long-term
care--also influenced many states' growth rates.  The convergence of
these factors resulted in the historically low 3.3-percent growth
rate in fiscal year 1996 Medicaid spending. 


      STATES WITH SUBSTANTIAL
      DECREASES IN GROWTH RATES
      AFFECTED BY SEVERAL
      NONRECURRING FACTORS
-------------------------------------------------------- Chapter 0:3.1

The growth rate changes in those states that experienced large
decreases in 1996 were largely attributable to three factors: 
substantial decreases in DSH funding, slowdowns in state-initiated
eligibility expansions, and accelerated 1995 payments in reaction to
block grant proposals. 

In 1991 and 1993, the Congress acted to bring under control DSH
payments, which had grown from less than $1 billion to $17 billion in
just 2 years.\1 After new limits were enacted, DSH payments
nationally declined in 1993, stabilized in 1994, and began to grow
again in 1995.  An exception to this pattern, however, Louisiana--a
state that has had one of the largest DSH programs in the
nation--still showed a substantial decrease in its 1996 growth rate
as its DSH payments declined.  The state's federal outlays decreased
by 16 percent in 1996 because of a dramatic drop in DSH payments. 

Recent slowdowns in state-initiated eligibility expansions also
helped to effect substantial decreases in the growth rates in
selected states.  Over the past several years, some states
implemented statewide managed care demonstration waiver programs to
extend health care coverage to uninsured populations not previously
eligible for Medicaid.  Three states that experienced substantial
decreases in their 1996 growth rates--Hawaii, Oregon, and
Tennessee--undertook the bulk of their expansions in 1994.  The
expenditure increases related to these expansions continued into 1995
and began to level off in 1996.  Tennessee actually experienced a
drop in the number of eligible beneficiaries in 1996, as formerly
uninsured individuals covered by the program lost their eligibility
because they did not pay the required premiums. 

States' acceleration of 1996 payments into 1995 is another
explanation sometimes given for the low 1996 growth rate.\2 In 1995,
the Congress--as part of a block grant proposal--was considering
legislation to establish aggregate Medicaid spending limits, which
would be calculated using a base year.  Officials from a few states
told us that, in response to the anticipated block grant, they
accelerated their Medicaid payments to increase their expenditures
for fiscal year 1995--the year the Congress was considering for use
as the base.  For example, one state official with federal approval
made a DSH payment at the end of fiscal year 1995 rather than at the
beginning of fiscal year 1996.  An official from another state, which
had a moderate decrease in growth, told us that the state expedited
decisions on audits of hospitals and nursing homes to speed payments
due these providers. 


--------------------
\1 DSH payments are intended to partially reimburse hospitals for the
cost of providing care not covered by public or private insurance.  A
number of states, however, began to use the program to increase their
federal Medicaid dollars in conjunction with certain creative
financing mechanisms.  To constrain these payments, DSH payments were
limited at 12 percent of the Medicaid program. 

\2 Aggregate data show that federal outlays were flat in the first 6
months of 1996 and then grew 6 percent in the last 6 months. 


      STRONG ECONOMIC CONDITIONS
      HELPED MODERATE THE GROWTH
      IN EXPENDITURES FOR MOST
      STATES
-------------------------------------------------------- Chapter 0:3.2

Improved economic conditions, reflected in lower unemployment rates
and slower increases in the cost of medical services, also have
contributed to a moderation in the growth of Medicaid expenditures. 
Between 1993 and 1995, most states experienced a drop in their
unemployment rates--
some by roughly 2 percentage points.  As we reported earlier, every
percentage-point drop in the unemployment rate is typically
associated with a 6-percent drop in Medicaid spending.\3 States told
us that low unemployment rates had lowered the number of people on
welfare and, therefore, in Medicaid. 

In addition, growth in medical service prices has steadily been
declining since the late 1980s.  In 1990, the growth in the price of
medical services was 9.0 percent; by 1995, it was cut in half to 4.5
percent.  In 1996, it declined further to 3.5 percent.  Declines in
price inflation have an indirect impact on the Medicaid rates that
states set for providers.  Officials of several of the states we
spoke with reported freezing provider payment rates in recent years,
including rates for nursing facilities and hospitals.  Such a freeze
would not have been possible in periods with higher inflation because
institutional providers can challenge state payment rates in court,
arguing they have not kept pace with inflation.\4

With inflation down, states can restrain payment rates with less
concern about such challenges. 


--------------------
\3 Medicaid:  Restructuring Approaches Leave Many Questions
(GAO/HEHS-95-103, Apr.  4, 1995). 

\4 The Boren Amendment, section 1902(a)(13)(A) of the Social Security
Act, requires that states make payments to hospitals, nursing
facilities, and intermediate care facilities for the mentally
retarded that are reasonable and adequate to meet the costs that must
be incurred by efficiently and economically operated facilities. 
Providers in a number of states have used the Boren Amendment to
compel states to increase reimbursement rates for institutional
services above the rates the states had been paying. 


      STATE MANAGED CARE PROGRAMS
      AND LONG-TERM CARE POLICIES
      MAY HELP RESTRAIN COST
      GROWTH
-------------------------------------------------------- Chapter 0:3.3

Several states that we contacted discussed recent program changes
that may have had an effect on their Medicaid expenditures.  Most
prominently mentioned was the states' implementation of Medicaid
managed care.  However, the overall impact of managed care on
Medicaid spending is uncertain because of state variations in program
scope and objectives.  States also mentioned initiatives to use
alternative service delivery methods for long-term care.  While these
initiatives may have helped to bring Medicaid costs down, measuring
their impact is difficult. 

Although some states have been using managed care to serve portions
of their Medicaid population for over 20 years, many of the states'
programs have been voluntary and limited to certain geographic areas. 
In addition, these programs tend to target women and children rather
than populations that may need more care and are more expensive to
serve--such as people with disabilities and the elderly.\5 Only a few
states have mandated enrollment statewide--fewer still have enrolled
more expensive populations--and these programs are relatively new. 
Arizona, which has the most mature statewide mandatory program, has
perhaps best proven the ability to realize cost savings in managed
care, cost savings it achieved by devoting significant resources to
its competitive bidding process.\6 However, in recently expanding its
managed care program, Oregon chose to increase per capita payments to
promote improved quality and access and to look to the future for any
cost savings.  Officials from Minnesota, which has a mature managed
care program, and California, which is in the midst of a large
expansion, told us that managed care has had no significant impact on
the moderate decreases they experienced.\7 Given the varying
objectives, the ability of managed care to help control state
Medicaid costs and moderate spending growth over time is unclear. 

Some states we contacted are trying to control long-term care costs,
which, for fiscal year 1995, accounted for about 37 percent of
Medicaid expenditures nationwide.  They are limiting the number of
nursing home beds and payment rates for nursing facility services
while expanding home and community-based services, a less-expensive
alternative to institutional care.  For example, a New York official
told us that the state is attempting to restrain its long-term care
costs by changing its rate-setting for nursing facilities,
establishing county expenditure targets to limit growth, and pursuing
home- and community-based service options as alternatives to nursing
facilities.  Our previous work showed that such strategies can work
toward controlling long-term care spending if controls on the volume
of nursing home care and home- and community-based services are in
place.\8


--------------------
\5 Medicaid Managed Care:  Serving the Disabled Challenges State
Programs (GAO/HEHS-96-136, July 31, 1996). 

\6 Arizona Medicaid:  Competition Among Managed Care Plans Lowers
Program Costs (GAO/HEHS-96-2, Oct.  4, 1995). 

\7 California considers its managed care program to be budget
neutral, having no impact on spending one way or another. 

\8 Medicaid Long-Term Care:  Successful State Efforts to Expand Home
Services While Limiting Costs (GAO/HEHS-94-167, Aug.  11, 1994). 


   POTENTIAL FOR HIGHER
   EXPENDITURE GROWTH IN FUTURE
   YEARS
---------------------------------------------------------- Chapter 0:4

Many of the factors that resulted in the 3.3-percent growth rate in
1996--
such as DSH payments, unemployment rates, and program policy
changes--will continue to influence the Medicaid growth rate in
future years.  However, there are indications that some of these
components may contribute to higher--not lower--growth rates, while
the effect of others is more uncertain. 

Without new limits, DSH payments can be expected to grow at the rate
of the overall program.  While Louisiana's adjustments to its DSH
payments resulted in a substantial reduction in its 1996 spending,
other states' DSH spending began to grow moderately in 1995 as
freezes imposed on additional DSH spending were removed.\9 Although
DSH payments are not increasing as fast as they were in the early
1990s, these payments did grow 12.4 percent in 1995. 

Even though the economy has been in a prolonged expansion, history
indicates that the current robust economy will not last indefinitely. 
The unemployment rate cannot be expected to stay as low as it
currently is, especially in states with rates below 4 percent. 
Furthermore, any increases in medical care price inflation will
undoubtedly influence Medicaid reimbursement rates, especially to
institutional providers. 

While states have experienced some success in dealing with long-term
care costs, the continued increase in the number of elderly people
will inevitably lead to an increase in program costs.  Alternative
service delivery systems can moderate that growth but not eliminate
it. 

Other factors may dampen future spending growth, but by how much is
unclear.  The recently enacted welfare reform legislation makes
people receiving cash assistance no longer automatically eligible for
Medicaid.  As a result, the number of Medicaid enrollees--and the
costs of providing services--may decrease, since some
Medicaid-eligible people may be discouraged from seeking eligibility
and enrollment apart from the new welfare process.  On the other
hand, states may need to restructure their eligibility and enrollment
systems to ensure that people who are eligible for Medicaid continue
to participate in the program.  Restructuring their systems will
undoubtedly increase states' administrative costs.  The net effect of
these changes remains to be seen. 

The potential for cost savings through managed care also remains
unclear, as experience is limited and state objectives in switching
to managed care have not always emphasized immediate
cost-containment.  Yet it is hoped that managed care will, over time,
help constrain costs.  While Arizona's Medicaid managed care program
has been effective, cost savings were due primarily to considerable
effort to promote competition among health plans.  The challenge is
whether the state can sustain this competition in the future. 


--------------------
\9 States whose DSH spending exceeded 12 percent of their total
program spending in 1993 were not allowed to increase DSH spending
until it fell below 12 percent of total current program spending. 


-------------------------------------------------------- Chapter 0:4.1

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


   CONTRIBUTORS
---------------------------------------------------------- Chapter 0:5

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


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

GAO developed a growth stability index that shows the direction and
magnitude of change in the growth rates of federal outlays between
fiscal years 1995 and 1996.  An index of 1.0 indicates no change in
the growth rates for the 2 years.  An index greater than 1.0
indicates a decrease in the 1995-96 growth rates.  For example,
Colorado's index of 1.37 ranks it as having the largest decrease. 



                               Table I.1
                
                   Growth Stability Index for Federal
                Medicaid Outlays by State, 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
                                         1995    1996   index   index
                                        ------  ------  ------  ------
States and District of Columbia          11.00  3.18\a    1.08
--------------------------------------  ------  ------  ------  ------
Alabama                                  10.63    3.71    1.07      26
Alaska                                    2.54   17.60    0.87      49
Arizona                                   2.70    4.58    0.98      43
Arkansas                                  8.76    7.50    1.01      38
California                               13.73    2.80    1.11      21
Colorado                                 30.84   -4.66    1.37       1
Connecticut                              10.68   11.51    0.99      40
Delaware                                 24.47   19.65    1.04      35
District of Columbia                     -0.51   -1.37    1.01      39
Florida                                  22.35   -4.28    1.28       4
Georgia                                   7.82    2.44    1.05      31
Hawaii                                   31.87   11.46    1.18       9
Idaho                                    12.99    5.46    1.07      24
Illinois                                 16.30    1.85    1.14      12
Indiana                                      -   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 Aggregate growth in federal outlays for Medicaid is 3.3 percent
when outlays for territories are included in calculation. 

Source:  Federal outlays for Medicaid, U.S.  Treasury. 


*** End of document. ***