Medicaid: Recent Spending Experience and the Administration's Proposed
Program Reform (Testimony, 03/11/97, GAO/T-HEHS-97-94).

GAO discussed recent Medicaid spending trends and their potential
implications for future outlays, focusing on: (1) key factors that
explain the Medicaid 3.3-percent growth rate in fiscal year 1996; and
(2) the administration's proposal to contain Medicaid cost growth
through decreases in disproportionate share hospital (DSH) payments and
per capita caps, and to increase state flexibility.

GAO 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) leading factors include continued reductions in DSH
payments in some states as a result of earlier federal restrictions on
the amount of such payments and the leveling off of Medicaid enrollment
in other states following planned expansions in prior years; (4) a
number of states GAO contacted attributed the lower growth rate to a
generally improved economy and state initiatives to limit expenditure
growth through programmatic changes, such as managed care programs and
long-term care alternatives; (5) while the magnitude of the effect of
these programmatic changes is less clear, there is evidence that they
helped to restrain program costs; (6) it is likely that the 3.3-percent
growth rate is not indicative of the growth rate in the years ahead; (7)
just as a number of factors converged to bring about the drop in the
1996 growth rate, so a variety of factors, such as a downturn in the
economy, could result in increased growth rates in subsequent years; (8)
the administration's proposal for Medicaid reform would further control
spending by reducing DSH expenditures and imposing a per capita cap,
while providing the states greater flexibility in program policy and
administration for their managed care and long-term care programs; (9)
these initiatives should produce cost savings; and (10) however, in
controlling program spending, attention should be given to targeting
federal funds appropriately and ensuring that added program flexibility
is accompanied by effective federal monitoring and oversight.

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

 REPORTNUM:  T-HEHS-97-94
     TITLE:  Medicaid: Recent Spending Experience and the 
             Administration's Proposed Program Reform
      DATE:  03/11/97
   SUBJECT:  Health care programs
             Health insurance cost control
             State-administered programs
             Medical economic analysis
             Hospitals
             Grants-in-aid
             Federal/state relations
             Managed health care
             Long-term care
             Payments
IDENTIFIER:  Medicaid Program
             
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Cover
================================================================ COVER


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

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

MEDICAID - RECENT SPENDING
EXPERIENCE AND THE
ADMINISTRATION'S PROPOSED PROGRAM
REFORM

Statement of William J.  Scanlon, Director
Health Financing and Systems Issues
Health, Education, and Human Services Division

GAO/T-HEHS-97-94

GAO/HEHS-97-94T


(101550)


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

  DSH - ABC
  GDP - ABC

SUMMARY
============================================================ Chapter 0

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

GAO found no single pattern across all states that accounts for the
recent dramatic decrease in the growth of Medicaid spending.  Rather,
a combination of factors--some affecting only certain states and
others common to many states--explains the low 1996 growth rate. 
Leading factors include continued reductions in DSH payments in some
states as a result of earlier federal restrictions on the amount of
such payments and the leveling off of Medicaid enrollment in other
states following planned expansions in prior years.  A number of
states GAO contacted attributed the lower growth rate to a generally
improved economy and state initiatives to limit expenditure growth
through programmatic changes, such as managed care programs and
long-term care alternatives.  While the magnitude of the effect of
these programmatic changes is less clear, there is evidence that they
helped to restrain program costs.  It is likely that the 3.3-percent
growth rate is not indicative of the growth rate in the years ahead. 
Just as a number of factors converged to bring about the drop in the
1996 growth rate, so a variety of factors--such as a downturn in the
economy--could result in increased growth rates in subsequent years. 

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


MEDICAID:  RECENT SPENDING
EXPERIENCE AND THE
ADMINISTRATION'S PROPOSED PROGRAM
REFORM
============================================================ Chapter 1

Mr.  Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss recent Medicaid spending
trends and their potential implications for future outlays.  My
comments are based on work that we have in progress at the request of
the Chairmen of the Senate and House Budget Committees.  Their
request was prompted by an interest in what contributed to the
precipitous drop in the annual growth rate of Medicaid spending from
over 20 percent in the early 1990s to 3.3 percent in fiscal year
1996.  In addition, you have asked us to comment on aspects of the
administration's fiscal year 1998 proposal for the Medicaid program. 

My remarks today focus on two broad issues:  (1) key factors that
explain the 3.3-percent growth rate in fiscal year 1996 and their
implications for future Medicaid spending and (2) the
administration's proposal to contain Medicaid cost growth through
decreases in disproportionate share hospital (DSH) payments and per
capita caps, and to increase state flexibility.  Our findings are
based on our analysis of Medicaid expenditure data published by the
Department of Health and Human Services' Health Care Financing
Administration and our review of federal outlays as reported by the
Department of the Treasury.  We also contacted Medicaid officials in
18 states that represent a cross-section of state spending patterns
over the past 2 years and that account for almost 70 percent of
Medicaid expenditures.  Our comments on the administration's proposal
are based on a review of budget documents and previous work we have
conducted. 

In brief, we found no single pattern across all states that accounts
for the recent dramatic decrease in the growth of Medicaid spending. 
Rather, a combination of factors--some affecting only certain states
and others common to many states--explains the low 1996 growth rate. 
Leading factors include continued reductions in DSH payments in some
states as a result of earlier federal restrictions on the amount of
such payments and the leveling off of Medicaid enrollment in other
states following planned expansions in prior years.  A number of
states we contacted attributed the lower growth rate to a generally
improved economy and state initiatives to limit expenditure growth
through programmatic changes, such as managed care programs and
long-term care alternatives.  While the magnitude of the effect of
these programmatic changes is less clear, there is evidence that they
helped to restrain program costs.  However, it is likely that the
3.3-percent growth rate is not indicative of the growth rate in the
years ahead.  Just as a number of factors converged to bring about
the drop in the 1996 growth rate, so a variety of factors--such as a
downturn in the economy--could result in increased growth rates in
subsequent years.  Finally, the administration's proposal for
Medicaid reform would further control spending by reducing DSH
expenditures and imposing a per capita cap, while providing the
states greater flexibility in program policy and administration for
their managed care and long-term care programs.  These initiatives
should produce cost savings.  However, in controlling program
spending, attention should be given to targeting federal funds
appropriately and ensuring that added program flexibility is
accompanied by effective federal monitoring and oversight. 


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

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 constitutes a considerable portion of both state and
federal budgets, accounting for roughly 20 percent and 6 percent of
total expenditures, respectively. 

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


   KEY FACTORS AFFECTING 1996
   SPENDING GROWTH AND THEIR
   IMPLICATION FOR THE FUTURE
---------------------------------------------------------- Chapter 1:2

In analyzing the growth rate for 1996 we found that no single
spending growth pattern was evident across the states nor did we find
a single factor that explained the decrease in growth.  Rather there
was a confluence of factors, some of which are unlikely to recur,
while others are part of a larger trend.  Future spending will
potentially be higher if the economy weakens and as the elderly
population continues to grow. 


      NO SINGLE SPENDING TREND
      ACROSS STATES
-------------------------------------------------------- Chapter 1:2.1

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 is reported.  To
determine the stability of the growth rates among states, we compared
states' growth rates in fiscal year 1995 with those in fiscal year
1996.  Our analysis showed that states could be placed in one of five
categories, as shown in table 1.  (See app.  I for specific state
growth rates.)



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

Fiscal year 1996
growth rate                          Percentage of
compared with            Number of    1996 federal
fiscal year 1995's          states         outlays  States
------------------  --------------  --------------  -------------------------------------
Decreased                       10              16  Colorado, Florida, Hawaii, Louisiana,
 substantially                                       North Carolina, Oregon, Rhode
                                                     Island, South Carolina, Tennessee,
                                                     Wyoming
Decreased                       20              48  Alabama, California, Idaho, Illinois,
 moderately                                          Iowa, Kansas, Kentucky, Maryland,
                                                     Massachusetts, Michigan, Minnesota,
                                                     Mississippi, North Dakota, Ohio,
                                                     Oklahoma, Pennsylvania, South
                                                     Dakota, Texas, Vermont, Washington
Changed minimally               16              32  Arizona, 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, New Mexico
 moderately
Increased                        2               2  Indiana, New Hampshire
 substantially
-----------------------------------------------------------------------------------------
Ten states that collectively account for 16 percent of 1996 federal
outlays experienced substantial decreases in fiscal year 1996 growth
compared with fiscal year 1995's.  However, 80 percent of 1996
federal Medicaid outlays were in states that either experienced
moderate decreases or minimal changes in their fiscal year 1996
growth.  Although five states' fiscal year 1996 growth rates
increased, those states did not have much effect on spending growth
patterns because their combined share of Medicaid outlays is only 4
percent. 


      A CONVERGENCE OF FACTORS LED
      TO THE 3.3-PERCENT GROWTH
      RATE IN 1996
-------------------------------------------------------- Chapter 1:2.2

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. 


         SEVERAL NONRECURRING
         FACTORS
------------------------------------------------------ Chapter 1:2.2.1

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

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

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

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


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

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


         STRONG ECONOMIC
         CONDITIONS
------------------------------------------------------ Chapter 1:2.2.2

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 effect on the Medicaid rates that
states set for providers.  Officials of several of the states we
spoke with reported freezing provider payment rates in recent years,
including rates for nursing facilities and hospitals.  Such a freeze
might not have been possible in periods with higher inflation because
institutional providers might challenge state payment rates in court,
arguing they had not kept pace with inflation.\4 With inflation down,
states can restrain payment rates with less concern about such
challenges. 


--------------------
\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
------------------------------------------------------ Chapter 1:2.2.3

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 effect 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 effect is difficult. 

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

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


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

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

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

\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 1:2.3

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 add to the growth
of the overall program.  While Louisiana's adjustments to its DSH
payments resulted in a substantial reduction in its 1996 spending,
other states' DSH spending began to grow moderately in 1995 as
freezes imposed on additional DSH spending no longer applied.\9
Although DSH payments are not increasing as fast as they were in the
early 1990s, these payments did grow 12.4 percent in 1995. 

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

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

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

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


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


   ADMINISTRATION'S PROPOSAL FOR
   MEDICAID CONTROLS SPENDING
   WHILE INCREASING FLEXIBILITY
---------------------------------------------------------- Chapter 1:3

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


      DSH PAYMENTS REDUCED
-------------------------------------------------------- Chapter 1:3.1

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

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


--------------------
\10 Medicaid:  States Use Illusory Approaches to Shift Program Costs
to Federal Government (GAO/HEHS-94-133, Aug.  1, 1994); Michigan
Financing Arrangements (GAO/HEHS-95-146R, May 5, 1995); and State
Medicaid Financing Practices (GAO/HEHS-96-76R, Jan.  23, 1996). 


      PER CAPITA CAPS TO LIMIT
      FEDERAL SPENDING
-------------------------------------------------------- Chapter 1:3.2

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

When the Medicaid program was established, a matching formula to
determine the share of federal funds was adopted to narrow the
differences likely to result among the Medicaid programs of wealthier
and poorer states.  Because states have discretion regarding the
extent and depth of their programs, the federal share of Medicaid
expenditures varied with states' per capita income so that
differences in poverty rates and state tax bases would not result in
excessive differences in the coverage given to poor people living in
different states.  However, per capita income has proven to be an
imprecise proxy for the incidence of poverty and state tax capacity. 
In addition, current law guarantees that no state will have to pay
more than half of the total costs of its Medicaid program, meaning
states with higher income receive a higher federal share than they
otherwise would.  This has contributed to disparities among states in
coverage of population groups and services as well as in federal
funding. 

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


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


      INCREASED STATE FLEXIBILITY
-------------------------------------------------------- Chapter 1:3.3

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

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

We have studied Medicaid managed care programs for many years and
have concluded that some federal requirements may have hampered
states' cost-containment efforts.  However, the experience of states
with Medicaid managed care programs underscores the importance of
adequate planning and appropriate quality assurance systems.\12 If
states are granted more direct control to aggressively pursue managed
care strategies, the importance of continuous oversight of managed
care systems to protect both Medicaid beneficiaries from
inappropriate denial of care and federal dollars from payment abuses
should not be overlooked. 

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

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


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


-------------------------------------------------------- Chapter 1:3.4

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


   CONTRIBUTORS
---------------------------------------------------------- Chapter 1:4

For more information on this testimony, please call Kathryn G. 
Allen, Assistant Director, on (202) 512-7059.  Other major
contributors included 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

              Percenta  Percenta
                    ge        ge             State ranking
               growth,   growth,                  based on
                fiscal    fiscal    Growth          growth
                  year      year  stabilit       stability
                  1995    1996\\   y index           index
------------  --------  --------  --------  --------------
States and       11.00    3.18\a      1.08
 District of
 Columbia
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      -0.51     -1.37      1.01              39
 Columbia
Florida          22.35     -4.28      1.28               4
Georgia           7.82      2.44      1.05              31
Hawaii           31.87     11.46      1.18               9
Idaho            12.99      5.46      1.07              24
Illinois         16.30      1.85      1.14              12
Indiana         -13.34     24.52      0.70              51
Iowa             11.46     -0.02      1.11              17
Kansas           12.67     -2.05      1.15              11
Kentucky         13.36      2.15      1.11              19
Louisiana         1.19    -15.96      1.20               8
Maine            -0.22     10.21      0.91              48
Maryland         15.56      3.36      1.12              16
Massachusett     11.22      3.50      1.07              23
 s
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             -21.73      0.95      0.78              50
 Hampshire
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            26.51      1.27      1.25               5
 Carolina
North Dakota     11.19      0.08      1.11              18
Ohio             10.94      4.43      1.06              28
Oklahoma          9.22      3.42      1.06              30
Oregon           38.37      4.26      1.33               3
Pennsylvania      7.50      1.62      1.06              29
Rhode Island     18.81    -10.97      1.33               2
South            16.72      0.71      1.16              10
 Carolina
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             -3.19     -1.77      0.99              42
 Virginia
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. ***