I I 

I' 1 
U.S. Advisory Commission on 

Intergovernmental Relations 

800 K Street, NW 

South Building 

Suite 450 

Washington, DC 20575 

(202) 653-5640 

FAX (202) 653-5429 
EXECUTIVE SUMMARY 

Medicaid was enacted as a joint federal-state program 

to give low-income people better access to mainstream 

medicine. Since its inception in 1965, Medicaid has grown 

into a major health care program, accounting for about 12 

percent of total U.S. health care expenditures in 1990 and 

covering more than 10 percent of the population. Medicaid spending is expected to increase sharply in the near 

future because of rising health care costs, an agingpopulation, and federally mandated changes in program conditions and requirements. The U.S. General Accounting 

Office found that new program requirements enacted 

since 1987 will be more costly for the states to implement 

than previous changes. 

There are major problems with Medicaid. Some problems have resulted from legislation that changed the 

structure, size, and scope of the program; other problems 

stem from deficiencies in the overall health care system. A 

major restructuring of health care would be required to 

address all of Medicaid’s problems adequately. 

The Commission’s recommendations for reforming 

Medicaid are intended to (1) restore balance in Medicaid 

decisionmaking between the federal government and the 

states; (2) increase program flexibility for the states; and 

(3) limit or reverse shifts in program funding within Medicaid and between Medicaid and other programs (see 

pages 3-5). The options are intended to slow the growth of 

Medicaid expenditures for the states, allow the states to 

serve the health care needs of their citizens better, and 

bring more accountability, balance, and certainty to Medicaid service delivery and financing. 

Medicaid was established as a federal-state program. The federal government makes matching grants 

to the states to pay for the medical care of certain categories of individuals. The federal government and the 

states also share in policymaking for the program. Within federal guidelines, states determine eligibility criteria, services to be covered, provider reimbursement 

rates, and local roles in financing and administration. 

Although there is a great deal of diversity among the 

states with respect to these policies, each state’s Medicaid program must be uniform statewide. 

Medicaid was intended to be the major public 

health care program for disadvantaged persons, includ- ing low-income people, the elderly, and the disabled. 

Eligibility was tied to public assistance programs, particularly Aid to Families with Dependent Children. Numerous changes in requirements and options have 

affected the scope of Medicaid. For example, in 1982, 

states were given the option of extending coverage to 

certain groups of disabled children under age 18 living at 

home who would have been eligible for Supplemental 

Security Income (SSI) if they were institutionalized. 

Other changes, both required and optional, extended 

coverage to pregnant women with young children based 

on income in relation to the poverty level, regardless of 

AFDC eligibility. Services for the mentally retarded in 

intermediate care facilities and additional services for 

children broadened the scope of Medicaid. 

In order to cope with the rising costs of expanded eligibility and services, states have been experimenting with nontraditional forms of health care. In areas where access to 

health care is difficult, states, operating under waivers from 

the Department of Health and Human Services’ Health 

Care Financing Administration (HCFA), have enrolled 

Medicaid clients in managedare programs or have required 

deductibles and copayments from certain recipients. Some 

states instituted controversial provider-assessment programs 

to help raise their share of Medicaid revenue. These programs were restricted by the Congress in 1991. 

Expenditures 

Total Medicaid expenditures grew from $1.3 billion in 

1966 to $75.2 billion in 1990. The rate of growth in total 

Medicaid spending from 1966 to 1990 was slightly lower 

than the rate of growth of Medicare expenditures, but 

significantly higher than the rate of growth of other government-financed personal health care expenditures and 

total personal health care spending. 

Medicaid spending outpaced enrollment growth 

and increases in general and medical price inflation. 

Between 1969 and 1990, Medicaid vendor payments (excluding administrative costs), per enrollee, grew by 10.7 

percent per year-from $331 to $2,818 (3.1 percent per 

year, from $918 to $1,752, in constant 1982 dollars). In 

1990, Medicaid was the fourth largest source of financingfor medical services (12.2percent), following private 

health insurance (31.8 percent), individuals’ out-of 

-pocket payments (23.3 percent), and other federal, 

state, and local programs (14.1 percent). While, on average, Medicaid represented 12.2 percent of personal 

health care spending, it accounted for 11.1 percent of 

... 

Ill 
hospital care, 9.0 percent of drugs and other medical nondurables, less than 4 percent of physician and dentist ser- vices, 31.9 percent of home health care, and 45.4 percent 

of nursing home care (the largest payer for such services). 

Total Medicaid expenditures as a percentage of state 

general expenditures rose from less than 3 percent in 1966 

to 14.8 percent in 1990, and is expected to reach 17 percent 

by 1995. However, national averages mask large variations 

in state budgets. For example, Medicaid spending as a 

proportion of total state expenditures in 1990 ranged from 

4.2 percent in Alaska to 19.1 percent in Rhode Island. 

Similarly, increases in expenditures from 1989 to 1990 

ranged from 0.6 percent in Montana to 75.7 percent in 

Michigan. In FY 1990, over half the states had to make 

supplemental Medicaid appropriations. 

Federal Medicaid spending as a percentage of federal 

general expenditures increased steadily from less than 1 

percent in 1966 to 4.0 percent in 1989, and are expected to 

reach 6.5 percent by 1996. 

There are four major causes of rising Medicaid expenditures: (1) general price inflation, (2) medical care price 

inflation, (3) enrollment growth, and (4) residual factors. 

General price inflation and medical care price inflation were the major sources of Medicaid expenditure 

growth-77.3 percent between 1979 and 1984, and approximately 60 percent between 1984 and 1989. Enrollment 

growth accounted for 0.7 percent of the growth for 

1979-1984 and 16.8 percent for 1984-1989. The residual 

factors were responsible for 21.4 percent for 1979-1984 

and 26.9 percent for 1984-1989. 

Enrollment Growth 

Although it is not possible to separate all of the 

residual factors into individual components, changes in 

the composition of the Medicaid clientele over the past 

19 years have had a significant impact on Medicaid ex- penditures. The total number of Medicaid recipients 

from 1972 to 1990 grew by 3.6 percent per year on aver- age. Disabled enrollees, including the mentally ill and 

mentally retarded, increased by 4.6 percent per year, 

and adults in AFDC families increased by 3.7 percent 

per year. The number of elderly, blind, and other Medic- aid recipients decreased. 

Despite the decline in the number of elderly Medicaid 

enrollees, their share of payments ranged between 34 and 

38 percent during 1973-1990, with a slight decline since 

1984. The disabled, who accounted for 15 percent of en- rollees in 1990, received 37 percent of payments (9.2 per- cent and 21.5 percent in 1972). Adults and children in 

AFDC families made up 68.2 percent of recipients in 1990 

but received only 37.2 percent of payments (62 percent 

and 43.4 percent in 1972). 

The elderly and disabled are the most costly Medicaid 

groups, averaging nearly $6,717 per person in 1990, or Over 

250 percent of the average for all recipients-$2,568. In 

contrast, the average payment for all other recipients ranged 

from less than $811 (32 percent of average) to just Over 

$1,429 (56 percent of average) in 1990. The most expensive 

service financed by Medicaid is for mentally retarded persons in intermediate care facilities, which cost slightly more 

than $5O,OOO per recipient in 1990. 

iv 
PREFACE 

Medicaid is aprogram that is rapidly increasing in cost 

and decreasing in effectiveness. Medicaid spending, exclusive of administrative costs, nearly tripled between 

1980 and 1990, increasing from $24.8 billion to $71.3 billion. Enacted in 1965 to provide basic medical services for 

low-income persons, Medicaid has expended funds increasingly for long-term care, mainly for the elderly and 

disabled. As a result, while costs have escalated, many 

low-income families receive little or no regular benefits 

from Medicaid. In turn, as a joint federal-state program, 

Medicaid has placed increasing fiscal burdens on the 

states and many local governments, to the point where 

some states now spend more on Medicaid than they do on 

higher education for their children’s future. 

The program does little to encourage individual responsibility for health care and its costs; it encourages 

fraud on the part of citizens and health care providers; it 

discourages many physicians from accepting Medicaid patients; it often spends more on the last three months of a 

person’s life than on the first three months of a child’s life; 

and it frequently drives low-income people to seek expensive medical treatment in hospital emergency rooms. 

Remedying the problems of Medicaid will not be easy, 

however, because it is only one component of the health 

care system and only one government health program. 

Nevertheless, the Commission felt it important to call 

attention to the problems of Medicaid, partly because of 

its dramatic impact on state budgets and partly because it 

is the single largest component of the grant-in-aid system 

today. Intergovernmental transfers for health increased 

from less than 5 percent of all federal intergovernmental 

revenues in 1961 to almost 35 percent in 1990. At the same 

time, the states’ role in Medicaid diminished as the federal 

government sought to expand the scope of the program 

and to attach conditions to Medicaid funding. 

In this brief report, the Commission has tried to identify the major trends in Medicaid in terms of the program’s 

size, structure, clientele, and services, and its ability to 

respond to emerging needs. The Commission’s recommendations, which are necessarily in the form of 

“band-aid” fixes for Medicaid’s problems, can improve the 

responsiveness of the program by enhancing state and 

local roles in policymaking and by increasing state and 

local flexibility in administering and financing Medicaid 

services. These recommendations do not lessen the need 

for a comprehensive reform of the entire health care 

system; however, they will improve the efficiency with 

which the program can achieve its original goals. 

Robert B. Hawkins, Jr. 

Chairman 

V 
vi 
ACKNOWLEDGMENTS 

This report was prepared by Elliott J. Dubin, public 

finance analyst at ACIR, with the assistance of senior 

analyst D. William Graham. ACIR is grateful to former 

senior analyst Carol E. Cohen, who was the principal 

researcher during the early stages of the project. Joan k 

Casey provided editorial assistance on the project. CheIyl A. 

Cabral and Anita J. Reynolds provided secretarial assistance. 

ACIR thanks the following individuals for their assistance in critiquing the early study outline and/or the draft 

final report: Enid Beaumont, John 0. Behrens, Jeffrey 

Buck, Richard Chambers, Andrew Clayton, David Colby, 

William G. Colman, Mary Dingrando, Robert D. Ebel, 

Martha Fabricius, Judith Feder, Melvina Ford, Jane Horvath, Anthony M. Hutchison, Judith M. Jones, Tom Joseph, Christine Klotz, Suzanne Letzsch, Katherine Levitt, 

John Luehrs, James Martin, Michele Melden, Marilyn 

Moon, Nonna Noto, Anthony Parker, James Quist, Robert W. Rafuse, Jr., Brian Roherty, Andrew Schneider, 

Bruce Spitz, Stu Stout, and Joy Wilson. 

Full responsibility for the content and accuracy of the 

report rests with the Commission and its staff. 

John Kincaid 

Executive Director 

Henry A. Coleman 

Director, Government Finance Research 

Vii 

CONTENTS 

Findings ............................................................................................ Recommendations ................................................................................... 

Short-Tkrm Recommendations ...................................................................... Recommendation ]-Increase State and Local Roles in Medicaid Policymaking ......................... Recommendation 2-Increase State and Local Program Flexibility ..................................... Long-Tkrm Recommendations ....................................................................... Recommendation 3-Adopt Interim Modifications to Medicaid and Implement Comprehensive 

Health Care Reform by 1994 ................................................... Recommendation 4-Wansfer Local Medicaid Administrative and Program Costs to the States ........... Recommendation 5-Transfer the Cost of LongTerm Care to the Federal Government under Medicare .... Recommendation 6-Improve Targeting of Federal Medicaid Funds to States with Greatest Need 

and Least Capacity to Meet Needs .............................................. 

1 . Introduction ...................................................................................... 2 . Structure of the Medicaid Program .................................................................. 

Description of Medicaid ............................................................................ 

Categorically Needy ........................................................................... 

Medicaid Services ............................................................................... Alternative Service Options .................................................................... Reimbursement of Providers ...................................................................... 

Provider Assessments .......................................................................... Impact on Federal Medicaid Costs .............................................................. Medicaid Administration ......................................................................... 

A Brief History of Medicaid ........................................................................ 

Eligibility ....................................................................................... 

Medically Needy .............................................................................. 

Medicaid Financing .............................................................................. 

Changes in Medicaid ............................................................................... Federal Program Expansions ...................................................................... Population Groups ............................................................................ Services ...................................................................................... Federal Options and Requirements ................................................................ Options ...................................................................................... 

State Program Changes .......................................................................... Summary ......................................................................................... 

3 . Trends in the Medicaid Program .................................................................... 

Trends in Medicaid Expenditures .................................................................... Growth in Expenditures ....................................................................... Medicaid as a Percentage of Federal and State Budgets .............................................. State Variations ............................................................................... 

Mandates .................................................................................... 

Medicaid in Relation to the Overall Health Care System ............................................... 

4 

4 

4 

5 

7 

9 

9 

9 

9 

9 

11 

11 

11 

14 

16 

16 

19 

19 

19 

19 

19 

20 

20 

20 

20 

21 

21 

23 

23 

25 

25 

26 

27 
Medicaid in Relation to Other Social Welfare Expenditures ............................................ Trends in Medicaid Recipients .................................................................... 31 

32 

Total Recipients ............................................................................... 32 

Type of Eligibility ............................................................................. 33 

me of Service ............................................................................... 34 

34 

By Type of Recipient .......................................................................... 34 

By Type of Service ............................................................................ 35 

36 

By Type of Recipient .......................................................................... 36 

By Type of Service ............................................................................ 36 

Source of Growth in Medicaid Expenditures .......................................................... 36 

The Outlook for Medicaid .......................................................................... 38 

Summary ......................................................................................... 39 

Appendix-Major Federal Changes in Medicaid ......................................................... 43 

Distribution of Medicaid Payments by Type of Recipient and Service ................................... 

Average Medicaid Payments by Type of Recipient and Service ........................................ 

Figures and Tables 

Figure 3-1 .-Index of Expenditures for Medicaid. Medicare. Govemment-Financed 

25 

Figure 3-2-Increases in Medicaid and General Expenditures. 1968-1990 .................................... 27 

36 

Figure 3-4-Sources of Increases in Medicaid Expenditures. 1969-1989 ..................................... 40 

Table 2-1-AFDC Need Standards and Maximum Benefit Levels for a Family of Three. by State. January 1990 . 10 

Table 2-2-Number of States Offering Optional Medicaid Services. as of October 1. 1989 ..................... 12 

Table 2-3-Approved Waiver Programs. by State. 1988 .................................................... 13 

Table 2-&Basic Reimbursement Methods for Medicaid Providers. by State ................................. 14 

Table 2-5-Federal Medicaid Assistance Matching Ratios. Selected Fiscal Years. 1966-1993 ................... 17 

Table 2-6-Local Funding Formulas for Medicaid Vendor Payments ........................................ 18 

Table 2-7-Provider Assessments. 1991 ................................................................. 18 

Table 3-]-Medicaid Expenditures Relative to Total Health Care Expenditures. 1966-1990 .................... 23 

Table 3-2-Medicaid Vendor Payments and Total Personal Health Care Expenditures. 

Current and Constant (1982) Dollars. 1969-1990 .............................................. 24 

Table 3-3-Growth of Medicaid Expenditures Relative to Growth of Government Budgets. 1966-1990 ......... 26 

Table 3-&Medicaid Expenditures as a Percentage of Governmental Budgets. 1966-1990 ..................... 28 

Table 3-5-State Medicaid Expenditures. Total. as Percentage of State General Expenditures. 

and Percentage Change. Fiscal Years 1987-1991 .............................................. 29 

31 

32 

33 

34 

35 

37 

38 

39 

Personal Health Care Expenditures. and All Personal Health Care Expenditures. 1966-1990 ....... 

Figure 3-3-Percentage Distribution of Medicaid Receipients and Payments. by Type of Eligibility. FY 1990 ..... 

Table 3-&Medicaid in Relation to Other Social Welfare Expenditures. 1969. 1979. and 1989 ................. Table 3-7-Number of Medicaid Recipients Relative to Resident and Poverty Populations. 1968-1990 ........... Table 3-8-Unduplicated Number of Recipients. by Type of Eligibility. Fiscal Years 1972-1990 ................. Table 3-9-Medicaid Recipients. by Type of Service. Fiscal Years 1972-1990 ................................. Table 3-10-Medicaid Vendor Payments. by Type of Recipient Eligibility Category. Fiscal Years 1972-1990 ...... Table 3-11-Medicaid Vendor Payments. by Type of Service. Fiscal Years 1972-1990 .......................... Table 3-12-Average Annual Payment. by Eligibility Category. Fiscal Years 1972-1990 ........................ Table 3-13-Average Payments per Recipient. by Type of Service. Fiscal Years 1972-1990 ..................... 

X 

. 
FINDINGS 

1. Without correcting the problems in the overall system 

of health care in the United States, little can be done 

through Medicaid to contain health care costs or to target 

benefits more effectively to low-income persons. Therefore, efforts to reform only Medicaid can produce only 

marginal results. However, cost pressures on the states 

could be reduced significantly by federal assumption of 

long-term health care financing and by changes in federal 

procedures in Medicaid rulemaking. Similarly, cost pressures on local governments in the 14 states that require 

local government financial participation in Medicaid 

could be reduced by state assumption of these costs. 

Reform of Medicaid alone will not alleviate many of 

the problems in the nation’s health care system because 

Medicaid accounts for only about 12 percent of all health 

care costs. A comprehensive reform of the overall health 

care system is required to correct the deficiencies of the 

Medicaid program. 

Providing long-term care for Medicaid clients in nurs- ing home facilities and in their homes accounted for 43 

percent of all Medicaid payments in 1990. Federal assumption of these costs would reduce state fiscal pressures. 

State and local government Medicaid costs are increased by unilateral federal changes in program requirements. These cost increases can be moderated by 

providing states and local governments a role in the 

rulemaking process. State program costs can also be 

moderated by granting states greater flexibility in designing programs to meet their specific needs, preferences, and capabilities. 

States with local government administration and financing of Medicaid have higher total program costs than 

states without local participation. State assumption of local administrative and program costs would reduce the 

fiscal burden on local governments and reduce overall 

program costs. 

Local governments would retain significant responsibilities for providing health care through their hospitals, 

clinics, public health programs, and school and communitybased programs. These facilities and programs would be 

affected by changes in (1) Medicaid requirements for standards and procedures, (2) health care provider reimbursement policies, (3) eligibility criteria, and (4) required and 

optional services. 

2. Medicaid policymaking has shifted disproportionately 

to the federal government, which has contributed to higher state expenditures. 

Medicaid was designed originally as a partnership between the states and the federal government. However, in 

recent years, major unilateral changes in federal Medicaid 

requirements have become more frequent. Such changes 

often are costly for the states to implement. Sometimes, 

the states must start entirely new programs, and it may be 

necessary to make several changes to a program between 

the time a new requirement is enacted and final regulations are promulgated by the Health Care Financing Administration (HCFA). New federal requirements also may 

involve costly changes in computer programs, additional 

staff training, and other inputs. 

The National Association of State Budget Officers 

(NASBO) estimates that the federal conditions and requirements enacted since 1988 will add approximately 

$17.4 billion to the states’ share of Medicaid expenditures 

from 1990 through 1995. The U.S. General Accounting 

Office (GAO) predicts the new conditions and requirements will exacerbate the states’ fiscal stress resulting 

from the current recession. In the near future, most states 

will find it extremely difficult to finance the new conditions and requirements without raising taxes, shifting 

Medicaid resources by eliminating optional services or 

closing public clinics, or reducing other state spending. 

Further, the new requirements limit state flexibility in 

providing for the health care needs of their citizens. GAO 

found that new program requirements enacted since 1987, 

extending Medicaid coverage to older children and expanded screening programs and follow-up care, will be more 

costly for the states to implement than previous changes. 

3. States have unique needs and capabilities that may be 

better served through increased program flexibility. 

1 

Present Medicaid regulations require a waiver from 

the Health Care Financing Administration for any deviation from statewide norms regarding the amount, duration, and scope of services (AD&S) provided. State 

officials are hampered in responding to variations in their 

preferences and needs and the resources available to provide various services. Greater flexibility would improve 

the states’ ability to experiment with case management or 
home and community-based care, rather than institutional 

care. Furthermore, complying with federal regulations, procedures, and standards raises state Medicaid costs but does 

not always increase the quality of health care sigmfkantly. 

4. Federal Medicaid funds can be targeted more effective. 

ly to states with greater need and lower fiscal capacity by 

changing the matching formula to replace per capita per- sonal income with alternative measures of fiscal capacity 

such as ACIR’s Representative Tax System (RTS) and 

Representative Expenditure System (RES). 

The federal Medicaid matching ratio (Fh4AP) is 

based on the ratio of state per capita personal income to 

U.S. per capita personal income. Under current law, the 

FMAP can range from 50 percent in the highest income 

states to 83 percent in the lowest income states. (The 

highest matching ratio for FY 1992 is 79.99 percent in 

Mississippi.) 

Per capita personal income is a poor measure of state 

fiscal capacity because, for many states, the ability to ex- port taxes to nonresidents is high. In addition, aggregate 

measures of income are not accurate indicators of state 

revenue-raising capacity because two states with nearly 

identical average per capita income may have different 

proportions of poverty and affluence. 

Population is a poor indicator of a state’s “need” for 

public services and of the cost of providing state services. 

Other factors, such as the age and income distribution of 

the population, the prices of service inputs, and workloads 

(e.g., population in households with incomes below the 

poverty level), are much more accurate indicators of ser- vice needs and costs. 

Changing the Medicaid allocation formula generally 

would mean a small difference in the amount of Medicaid 

funds a state would receive, but for some states the differences would be substantial. 

5. The overall cost escalation in Medicaid stems, to a 

large extent, from general price inflation and medical 

care price inflation, both of which are beyond the control of state officials. 

Medicaid expenditures, exclusive of administrative 

costs, nearly tripled between 1980 and 1990, increasing 

from $24.8 billion to $71.3 billion. Inflation in the price of 

medical care and in the general economy has been a major 

cause of these increases. For example, between 1979 and 

1984, general and medical care price inflation accounted 

for 77.3 percent of Medicaid growth. Between 1984 and 

1989, approximately 60 percent of the increased cost of 

Medicaid was due to inflation. 

Enrollment growth accounted for 0.7 percent of Medicaid growth between 1979 and 1984 and 16.8 percent 

between 1984 and 1989. Other factors, such as changes in 

the composition of medical services used, increases in the 

frequency of use of medical services, increased use of 

expensive new technology, and additional miscellaneous 

factors have accounted for between 20 percent and 25 

percent of the growth in Medicaid expenditures over the 

last decade. 

For state governments, the increased cost of Medicaid 

is reflected in their budgets. Medicaid expenditures ac- counted for 14.8 percent of state general expenditures in 

1990, the second largest category of spending. Medicaid 

expenditures now exceed state spending on higher education. Medicaid expenditures were 11.6 percent of state 

general expenditures in 1980 and 7.0 percent in 1970. 

6. The costs of providing care through Medicaid for the 

long term disabled and the elderly have grown faster than 

other Medicaid costs. 

A major policy concern is the rising proportion of 

Medicaid spending devoted to long-term care for the elderly and the disabled (including mentally ill and mentally 

retarded individuals). For example, in 1990, the elderly 

and the disabled represented 27.4 percent of all Medicaid 

enrollees but received 70.0 percent of all Medicaid funds. 

In 1972, the elderly and the disabled made up 28.7 percent 

of all Medicaid enrollees and received 52.8 percent of all 

Medicaid funds. Long-term care expenditures (intermediate care facilities, skilled nursing facilities, and home 

health care) accounted for 43.4 percent of all Medicaid 

expenditures in 1990 and 34.2 percent in 1973. 

If current demographic trends and policy provisions 

continue, Medicaid costs will increase dramatically in the 

future as the proportion of the population at age 85 and 

over increases from 1.2 percent in 1987 to 2.5 percent in 

2030. This age group uses nursing home care to a much 

greater extent than those between the ages of 65and 84. In 

addition, nursing home use will increase in the future as 

the ‘Lbaby-boom” generation retires, beginning in about 

2010, and becomes more susceptible to chronic disabilities 

and functional dependency. 

2 
RECOMMENDATIONS 

SHORT-TERM RECOMMENDATIONS 

Recommendation 7 

Increase State and local Roles 

in Medicaid Policymaking 

The Commission finds that in recent years, major 

changes in federal Medicaid conditions and requirements havebecome more frequent. State and local governments have found it difficult and costly to comply 

with these changes. 

?'he Commission therefore recommends that (1) states 

should not be required to implement any changes to Medicaid 

until final quldons h been promulgated by HCFA and (2) 

Medicaid requiremenls for a period of two years. States will 

gradual& assume some of the costs of the new requirements. After 

the f@h ye@ the state share of the cost of these conditions and 

requirements will be equal to the state matching rate determined 

by the Medicaid allodon formula. 

The Commission further recommends that a permanent intergovernmental health commission be established to 

advise the Executive Branch, the Congress, and thestateson 

(1) changes necessary to make Medicaid and other joint 

federal, state, and local health programs function more 

efficiently and effectively and (2) the fiscal impact on states 

and local governments of changes in the Medicaid program 

that are under consideration by the Congress or the Execu- tive Branch, The commission will consist of members of the 

Executive Branch, appointed by the President; members of 

Congress, appointed by the leadership of the respective 

chambers; members of the state Executive Branch, appointed by the National Governors' Association (NGA); 

state legislative members appointed by the National Conference of State Legislatures (NCSL); county representatives 

appointed by the National Association of Counties 

(NACo); and municipal representatives appointed by the 

National League of Cities (NLC) and the U. S. Conference 

of Mayors (USCM). 

The Commission further recommends that states make 

greater use of the Negotiated Rulemaking Act (RL. 

101-468) to participate in Medicaid rulemaking, and the Administrative Dispute Resolution Act (PL. 101-552) as an 

alternative to litigation. 

the federal govemment will bear 100 percent of the cost of new 

By requiring 100 percent financing of changes in federal requirements, the Congress and the Executive 

Branch will be more cognizant of the costs imposed on 

states and local governments by changes to Medicaid. 

Through the permanent health commission, states and 

local governments will gain a formal mechanism to initiate 

or evaluate Medicaid changes. 

Recommendation 2 

Increase State and Local Program Flexibility 

The Commission finds that states need greater flexibility in designing their Medicaid programs to meet their 

needs and resources. A more flexible program would enable states and local governments to control Medicaid 

costs and target assistance to their neediest citizens more 

effectively. Successful state experiments with innovative 

methods of improving access to health care and cost control could be adopted by other states. 

The Commission therefore recommends: (1) States, with 

the consent of the US. Secretary of Health and Human Services, should be allowed to experiment with case-management 

systems and with setting up their own clinics. These qenments may be statewide or limited to areas where access to 

health care through enrollee-chosen providers is not feasible. 

(2) Other states should be allowed to initiate their own programs without a waiver fiom the Health Care Financing Administraiion (HCFA), should these experiments prove 

successfil, as determined by HCFA. (3) The federal govemment should waive the requirement that state-run clinics meet 

federal requirements as long as comparable state requirements 

are met, as determined by HCFA. (4) The federal govemment 

should not preempt comparable state laws regarding procedures and regulations for health careproviders, as determined 

by HCFA. (5) Medicaid enrollees should be permitted to use 

these state-run clinics with Medicaid reimbursement even if 

the clinics do not meet federal requirements, so long as compa- rable state requirements are met, as determined by HCFA. (6) 

Health care providers should be eligible for Medicaid reimbursement if they conform to state standards, procedures, and 

regulations. Providers will not be reimbursed if federal stan- dards, procedures, and regulations clearly offer better quality 

care, as determined by HCFA. (7) States should have the 

option to require copayments and deductibles from certain 

Medicaid clients, based on income andlor asset levels, in 

circumstances where these copayments and deductibles would 

3 
improve access to health care providers for a significant number of Medicaid enrollees. 

For many Medicaid enrollees, especially those in sparsely settled rural areas and in inner cities, access to health Care 

is often difficult. This results in their using hospital emergency rooms for primary care, which is costly and inefficient. 

Medicaid enrollees who do not have a primary medical care 

provider on a consistent basis are often sicker and require 

more services than other patients when they do seek medical 

care. To some extent, the difficulty facedby Medicaid enrollees in obtaining medical care is the result of low reimbursement rates for medical care providers. 

Lo ng-Te r m Reco m mend at io n s 

Recommendation 3 

Adopt Interim Modifications to Medicaid 

and Im lement Comprehensive 

Healt R Care Reform by 1994 

The Commission finds that rising Medicaid costs are a 

factor in the deterioration of state fiscal conditions. To a 

large extent, the escalating cost of Medicaid stems from 

general price inflation and medical care price inflation, 

both of which are beyond the control of state officials. 

Increasing use of new medical technology, increasing use of 

medical services, and the aging of the population are also 

major factors contributing to the escalation of Medicaid 

costs. Without corrections of the deficiencies in the overall 

system of health care delivery, the benefits of these proposed 

recommendations to improve Medicaid will be limited. 

The Commission therefore recommends that the interim 

modifications to Medicaid set forth here be adopted by Congress and a comprehensive reform of the US. health care 

system be implemented by 1994. 

The current economic recession is causing fiscal stress 

in many states as revenue growth is slowed but expenditure needs, especially social service programs, increase. 

Medicaid expenditures account for slightly less than 15 

percent of all state general expenditures. Steps taken now 

to reduce state Medicaid program costs would help reduce 

state fiscal stress. 

Modifications to Medicaid will yield only marginal 

improvements in the health care system because Medicaid 

accounts for only 12 percent of all health care expenditures. Without effective methods of cost containment, any 

improvements in Medicaid’s efficiency and effectiveness 

resulting from these improvements may be wiped out by 

rising costs. 

Comprehensive health care reform would address all 

aspects of health care service delivery and financing, including (1) methods to control medical cost inflation; (2) 

methods to achieve universal access to health care; (3) the 

proper roles for the federal government, states, and local 

governments; and (4) the role of individuals in maintaining their health through lifestyle choices (e.g., proper diet 

and exercise, only moderate use of alcohol and tobacco, 

and reduced stress). Such reform is necessary to correct 

the problems with Medicaid and to correct problems in the 

overall health care system. 

Recommendation 4 

Transfer Local Medicaid Administrative 

and Program Costs to the States 

The Commission finds that states with local government participation in Medicaid administration and financing have higher total program costs than states without 

local participation. State assumption of local administrative and program costs would reduce the fiscal burden on 

local governments and reduce overall program costs. 

The Commission therefore recommends that states that 

require local government participation in administering or 

financing Medicaid assume all Medicaid administrative 

and program costs currently borne by their local governments. 

The federal government does not specify the extent 

of any involvement by local governments in Medicaid; 

therefore, this reform must be an initiative of the states. 

Local government revenue bases are less elastic than 

state revenue bases. It is more difficult for local governments to finance increases in Medicaid expenditures 

resulting from program expansions or deteriorating 

economic conditions. Further, Medicaid regulations require statewide uniformity in services and application of 

eligibility criteria. Satisfying this regulation would be 

more efficient under state administration. 

~~ ~ 

Recommendation 5 

Transfer the Cost of Long-Term Care 

to the Federal Government under Medicare 

The Commission finds that the cost of providing 

care through Medicaid for the long-term disabled and 

the elderly has grown faster than other Medicaid costs. 

The costs of providing such care will increase even more 

rapidly as the population ages and more people require 

nursing home services, and faster than state and local 

government ability to finance these services. New medical technology will continue to reduce mortality rates 

for all ages, raising the proportion of disabled persons in 

the population. 

The Commission therefore recommends that the cost of 

providing care for the elderly and the disabled, including the 

mentally retarded, in skilled nursing facilities (SNF), intermediate care facilities (ICF), intermediate care facilities for the 

mentally retarded (ICFJMR), and home health careprograms 

be assumed by Medicare. 

The escalating cost of providing long-term care for the 

elderly and disabled currently enrolled in Medicaid will outstrip the ability of states, and in some cases local governments, to finance these services. For example, the annual 

cost of providing Medicaid services to an ICFMR client was 

approximately $5o,OOO in 1990. The long-term costs for these 

groups should be assumed by Medicare because Medicare 

4 
has a more secure funding base than state governments and 

was established to provide for these groups. 

Medicaid will continue to finance, for those elderly 

and disabled who are eligible, routine and preventive 

medical care as well as services that Medicare does not 

cover, such as eyeglasses, hearing aids, prosthetic devices, 

and dental examinations. The cost of these services and 

items may be quite burdensome for Iow-income elderly 

and disabled persons. 

The amount of savings that would accrue to states 

by adopting this recommendation is difficult to determine. In 1990, Medicaid payments for SNF, ICF, and 

ICF/MR totaled $25.0 billion-38.6 percent of all Medicaid expenditures. However, a portion of this total was 

spent for routine medical care, for example, regular 

visits to physicians, prescription drugs, eyeglasses, and 

other sundries, some of which would still be covered by 

Medicaid under this recommendation. 

If this recommendation were adopted, the federal government would assume all costs of providing medical care for 

the elderly, disabled, and mentally retarded. This action 

would reduce the fiscal burden on states; in 1990, these 

groups received 70.0 percent of all Medicaid vendor payments. To accomplish this task, all elderly persons (65 and 

over) would become eligible for Medicare regardless of previous employment. Currently, Medicaid enrollees over 65, if 

they were eligible, received Medicare benefits because states 

were required to “buy-in” to Medicare. Under this option, 

the custodial care costs of the elderly would be assumed by 

Medicare; similarly, the disabled, including the mentally re- tarded, would become eligible for Medicare immediately 

after they are certified as disabled. 

Recommendation 6 

Improve Targeting of Federal Medicaid Funds 

to States with Greatest Need 

and least Capacity to Meet Needs 

The Commission finds that federal Medicaid funds 

could be allocated to states more effectively if state fiscal 

capacity were included directly in the matching formula. 

The major factor in allocating federal Medicaid funds to 

states is per capita personal income, which is not necessarily a good indicator of state revenue-raising ability or need. 

The Commission therefore recommends that the state 

Medicaid matching formula be changed to the ratio ofACIR’s 

measure of state revenue capacity to ACIR’s estimate of 

cost-adjusted representative state expenditures as the measure 

of fiscal capacity, The Commission further recommends that 

states that would have their federal Medicaid finds reduced 

by adoption of the new formula should be “held hann1ess”for 

a period of two years to ease the transition. 

Adoption of this Medicaid matching formula would target scarce federal funds to states with the lowest fiscal capacity more effectively than the current formula. However, 

studies indicate that for the large majority of states, the 

amount of federal Medicaid funds would be similar under 

both formulas. The political debate that would occur between the states that would stand to lose the most and those 

that would stand to gain the most from the proposed formula 

would be mitigated by the “hold-harmless” provision. 

5 
6 
1. INTRODUCTION 

This report presents ACIR’s latest research findings 

and recommendations concerning Medicaid (Title XIX of 

the Social Security Amendments of 1965), the joint feder- al-state program to improve the access of low-income 

people to mainstream medicine.’ Since its inception, 

Medicaid has grown into one of the major health care 

programs in the United States, accounting for about 12 

percent of the nation’s total health care expenditures and 

covering approximately 10 percent of the population in 

1990.2 Medicaid spending is projected to rise sharply in the 

near future because of rising health care costs, an aging 

population, and federally mandated changes in program 

conditions and requirements. The additional Medicaid 

expenditures will put increased pressure on federal and 

state budgets, and may result in tax increases or reductions 

in the growth of other program expenditure^.^ 

There are major problems with Medicaid, several of 

which have resulted from legislation that changed the 

structure, size, and scope of the program, and others that 

stem from problems in the overall health care system in 

the United States. A major restructuring of the health 

care system is required to address all of Medicaid’s problems adequately. 

The first two Commission recommendations can be 

implemented fairly quickly. The remaining four recommendations entail significant changes in Medicaid. These 

recommendations are intended to (1) restore balance in 

Medicaid policy decisionmaking between the federal government and the states and local governments, (2) increase program flexibility for state and local governments, 

and (3) limit or reverse shifts in funding within Medicaid 

and between Medicaid and other programs. 

The recommendations are intended to control the 

growth of Medicaid expenditures for the states; to allow 

the states to provide for better health care; and to bring 

more accountability, balance, and certainty to Medicaid 

service delivery and financing. 

In some cases, state costs for Medicaid may increase 

in the short run if these recommendations are adopted, or 

if the states change their provider reimbursement policies, 

or add other groups to the Medicaid clientele (e.g., persons now uninsured). In other cases, state costs may decline as the federal government assumes more of the 

burden of financing the health care needs of certain individuals. 

The report reviews the original goals of Medicaid and 

discusses the changes in the structure of the program since 

its inception. The discussion focuses on expansions in the 

services provided and population groups served by Medicaid. It also describes the program options and require- ments introduced by the federal government and, more 

generally, the recent shift in Medicaid policy decisionmaking to the federal government. 

The report also examines trends in Medicaid spending (in current and constant dollars) in relation to (1) state 

expenditures, aggregate and state by state, (2) federal 

expenditures, and (3) other social welfare expenditures. 

Also examined are trends in enrollees by eligibility catego- ry, services provided, and Medicaid expenditures per enrollee by eligibility category and by type of service. In 

addition, the report presents data on the impacts on Med- icaid spending growth of (1) general price inflation, (2) 

medical care price inflation, (3) enrollment growth, and 

(4) other factors (e.g., changing age-sex composition of the 

Medicaid clientele, increasing use of health care, and increasing use of new medical technology). 

The report includes a chronological summary of major federal changes to Medicaid. 

Notes 

The earlier report is U.S. Advisory Commission on Intergovernmental Relations, Intergovernmental Problems in Medicaid 

(Washington, DC, 1968). 

In 1990, Medicaid expenditures, including “buy-ins” to Medi- care, were $76.3 billion; total health care expenditures were 

$666.2 billion. See Katherine R. Levitt, Helen C. Lazenby, 

Cathy A. Cowan, and Suzanne W. Letsch, “National Health 

Care Expenditures, 1990,” Health Care Financing Review 13 

(Fall 1991): 30, 41, 42, and 46. 

3Harold A. Hovey, “Who Pays When State Health Care Costs 

Rise?” in State Governments: The Effects ofHealtli Cam Pmpm 

Erpansion in a Period of Fiscal Stress (Washington, DC: Advisory 

Council on Social Security, December 1991): 93. 

7 
8 
2. STRUCTURE OF THE MEDICAID PROGRAM 

The Medicaid program is financed jointly by the fed- eral government and the states. It is a means-tested pro- gram through which the federal government makes 

matching grants to the states to pay for the medical care of 

certain categories of low-income individuals. The federal 

government and the states also share in Medicaid 

policymaking. Within federal guidelines, the states deter- mine eligibility criteria, covered services, and provider 

reimbursement rates. The states administer Medicaid 

and, in some cases, require local governments to share in 

financing and/or administering the program. 

This chapter describes the basic goals and elements of 

the Medicaid program: eligibility criteria, services, provider 

reimbursement, financing, and administration. It also discusses major changes in the program, including expansions of eligibility and services and the addition of federal 

options and requirements affecting the states. The implications of the structure of Medicaid and the program 

changes for such intergovernmental issues as uniformity 

or diversity of services and state discretion are emphasized 

throughout the chapter. 

A BRIEF HISTORY OF MEDICAID 

Medicaid Qitle XIX of the Social Security Amendments 

of 1965) was enacted as a counterpart to Medicare, the 

national program to provide medical insurance for the elderly. By contrast, Medicaid was to be financed jointly with the 

states and to serve only certain groups enrolled in public 

assistance programs. Medicaid was intended to improve the 

access of these low-income people to mainstream medicine.’ 

Before Medicaid was enacted, the federal government helped finance medical assistance for the needy by 

sharing the cost of the cash assistance programs: Old Age 

Assistance (OM), Aid to Families with Dependent Children (AFDC), Aid to the Blind (AB), and Aid to the 

Partially and Totally Disabled (APTD). The federal government also participated in the Kerr-Mills program of 

Medical Assistance for the Aged (MAA), which made 

medical care available to the needy aged and the medically 

needy, by reimbursing states for 50 to 80 percent of the 

cost of setting up their programs. The higher percentages 

of federal funds went to states with lower per capita income. 

Title XIX extended Kerr-Mills principles by making 

medical vendor-payment benefits available to the recipients of all four federal-state cash assistance programs 

(OAA, AFDC, AB, and APTD), as well as to the category 

of the “medically needy.” By substituting one program of 

medical assistance (at higher matching rates for most 

states) for the separate categorical plans, Medicaid provided uniformity within states in administration, eligibility 

standards, medical services, and federal-state cost shar- ing. However, individual states still had considerable discretion to set their own standards, within the federal 

guidelines, for eligibility, services, and other aspects of the 

program. Linking Medicare and Medicaid, Title XIX provided that states could “buy in” to Medicare’s inpatient 

hospitalization costs (Part A) and physicians’ care (Part B) 

for certain Medicaid eligibles by paying the appropriate 

premiums, coinsurance, and deductibles.2 

DESCRIPTION OF MEDICAID 

Since 1965, many significant changes have been made 

to the Medicaid legi~lation.~ At the same time, many of the 

original principles still define the program-categorical 

eligibility, coverage of specified services, reimbursement 

of qualified providers, federal-state financing, and administration of approved state programs. Each of these elements is described briefly below. 

Eligibility 

Medicaid is a categorical, means-tested entitlement program. That is, specified groups of people whose income and 

resources are sufficiently low are automatically qualified 

for the program. Medicaid was not intended to provide 

universal coverage, not even for all of the poor. Medicaid 

provides (1) required coverage for the categorically needy 

and (2) optional coverage for the medically needy. 

Categorically Needy 

The categorically needy, who must be covered by state 

Medicaid programs, include, in general, those who receive or 

are eligible to receive cash assistance through Aid to Families with Dependent Children (AFDC) programs and pregnant women with incomes up to 133 percent of the poverty 

level.4 However, eligibility standards for these programs, 

particularly for AFDC, vary from state to state. A third 

federal program used to define the categorically needy is the 

9 
federal Supplemental Security Income (SSI) program. As a 

federally administered program, eligibility for SSI does not 

vary by state. However, in 12 states (so-called 209(b) states), 

an SSI recipient may or may not be eligible for Medicaid. 

For AF'DC, each state establishes, by family size, a 

need standard and a payment standard, which may be 

equal to or lower than the need standard. Both standards 

are used in determining eligibility for AFDC: in most 

states, the payment standard is the maximum AFDC 

benefit. Actual benefits are determined by subtracting 

countable income from the payment standard? The limit 

for gross income is 185 percent of the need standard. Tible 

2-1 shows the 1990 need standard and maximum AFDC 

benefit in each state for a one-parent family of three in 

relation to the federal poverty level. 

SSI has uniform eligibility requirements and payments. 

However, for Medicaid coverage, states may require SSI 

recipients to meet more restrictive eligibility standards that 

Table 2-1 

AFDC Need Standards and Maximum Benefit Levels for a Family of Three, by State, January 1990 

(dollars per month) -- Need Maximum Need Maximum 

Percent Percent Percent Percent 

of of of of 

Poverty Poverty Poverty Poverty Thresh- Thresh- Thresh- Thresh- State Amount old* Amount old* State Amount old* Amount old* 

New England 

Connecticut $649 

Maine 652 

Massachusetts 539 

New Hampshire 506 

Rhode Island 543 

Vermont 973 

Delaware 333 

District of Columbia 712 

Maryland 548 

New Jersey 424 

New York 

(Suffolk Co.) 703 

New York 

(New York City) 577 

Pennsylvania 6 14 

Illinois 777 

Indiana 324 

Michigan 

(Washtenaw Co.) 611 

Michigan 

(Wayne Co.) 575 

Ohio 739 

Wisconsin 647 

Iowa 497 

Kansas 409 

Minnesota 532 

Missouri 3 12 

Nebraska 364 

North Dakota 386 

South Dakota 377 

Mideast 

Great Lakes 

Plains 

75 % $649 

75 453 

62 539 

58 506 

63 543 

112 662 

38 333 

82 409 

63 396 

49 424 

81 703 

66 577 

71 421 

89 367 

37 288 

70 546 

66 5 16 

85 334 

75 5 17 

57 410 

47 409 

61 532 

36 289 

42 364 

44 386 

43 377 

75 % 

52 

62 

58 

63 

76 

38 

47 

46 

49 

81 

66 

48 

42 

33 

63 

59 

38 

60 

47 

47 

61 

33 

42 

44 

43 

Southeast 

Alabama 

Arkansas 

Florida 

Georgia 

Kentucky 

Louisiana 

Mississippi 

North Carolina 

South Carolina 

Tennessee 

Virginia 

West Virginia 

Southwest 

Arizona 

New Mexico 

Oklahoma 

Texas 

Rocky Mountain 

Colorado 

Idaho 

Montana 

Utah 

Wyoming 

Far West 

California 

Nevada 

Oregon 

Washington 

Alaska 

Hawaii 

$578 

705 

838 

414 

526 

658 

368 

544 

4 19 

387 

393 

497 

621 

264 

47 1 

574 

421 

554 

434 

5 16 

360 

694 

550 

432 

907 

846 

964 

67 % 

81 

97 

48 

61 

76 

42 

63 

48 

45 

45 

57 

72 

30 

54 

66 

48 

64 

50 

59 

41 

80 

63 

50 

104 

97 

111 

$118 

204 

294 

273 

228 

190 

120 

272 

206 

184 

354 

249 

293 

264 

325 

184 

356 

3 17 

359 

387 

360 

694 

330 

432 

50 1 

846 

602 

14 % 

23 

34 

31 

26 

22 

14 

31 

24 

21 

41 

29 

34 

30 

37 

21 

41 

37 

41 

4s 

41 

80 

38 

50 

58 

97 

69 

*Calculated based on poverty threshold of $10,419 annually for a three-person household. 

Sources: Need standards and maximum benefit levels-U.S. House of Representatives, Committee on Ways and Means, Background 

Material and Data on Pmgmms within the Jurisdiction of the Committee, Overview of Entitlement Programs (Washington, DC, 

l990), Table 9, pp. 553-555. 

1990 poverty threshold-U.S. Department of Commerce, Bureau of the Census, Measuring the Efiect ofBeneffs and Tm on 

Income and Poverty: 1990 (Washington, DC, 1991), p. 132. 

10 
were in effect before the implementation of SSI (the 

209(b) option) or they may extend Medicaid coverage to 

certain groups, such as those receiving certain state supplementarypayments under SSI.“ Unlike AFDC benefits, SSI 

payments are increased automatically each year. 

The Congress, particularly in recent years, has extended 

Medicaid eligibility to some categories of people who would 

not otherwise be covered, most notably pregnant women and 

children. States also may choose to extend Medicaid coverage to “optional categorically needy” groups, such as 

AFDC-related persons not actually receiving payments and 

low-income individuals who are institutionalized. 

Medically Needy 

State Medicaid coverage is optional for the other basic group of recipients, the medically needy. As of January 

1991,36 states and the District of Columbia included this 

group in their Medicaid programs. The medically needy 

are people whose income and/or resources are in excess of 

that entitling them to categorically needy coverage, but 

who meet the nonfinancial standards for categorical eligibility and whose income and resources, after deducting 

medical expenses, fall below specified standards.’ Persons 

with income above the medically needy level may reduce 

income to the requisite level through spending on medical 

care, as many do on long-term nursing home care. In fact, a 

Congressional Research Service report states, “As a practical 

matter, the medically needy program is primarily a benefit 

for institutionalized elderly and disabled persons.”8 

From this brief description, it can be seen that states, 

as well as the federal government, have considerable control over Medicaid enrollment by setting eligibility policies. These policies include setting income levels for cash 

assistance programs, to which Medicaid eligibility is generally linked, deciding whether to extend eligibility to optional categorically needy and medically needy groups, 

and determining specific eligibility criteria within broader 

federal guidelines? 

Medicaid Services 

The Medicaid legislation sets out several requirements for state benefits, including mandatory and option- al services for the categorically and medically needy, and 

general principles that must be satisfied in a state’s plan. 

Within these guidelines, states have considerable discretion to define their benefit packages. 

Mandatory services for the categorically needy are: 

Federally qualified health centers (FQHCs), 

Inpatient hospital services, 

rn Nurse practitioners, 

rn Outpatient hospital services, 

rn Physicians’ assistants, 

Rural health clinic services, 

m 

Other laboratory and X-ray services, 

Nursing facility services for those 21 or older,l0 

rn 

Physician services, 

rn 

rn Family planning services, and 

rn Nurse-midwife services. 

There also are 32 categories of optional services for 

the categorically needy, including prescription drugs, eye- glasses, services in intermediate care facilities for the 

mentally retarded (ICFsIMR), clinic services, physical 

therapy, and dental services. 

States with medically needy programs are required to 

provide the following services: (1) prenatal and delivery 

services for pregnant women; (2) ambulatory services for 

individuals under 18 and those entitled to institutional 

services; and (3) certain services provided to the categorically needy in institutions for mental diseases (IMDs) or 

intermediate care facilities for the mentally retarded (federal Medicaid funds may not be used for adults aged 21 to 

65 who reside in IMDs). 

States with medically needy programs also must make 

assistance available to individuals under age 18 and to 

pregnant women who would be eligible for categorical 

assistance except for income and resource levels. In 1993 

and 1994, these states also will make assistance available 

for Medicare cost sharing for (1) qualified Medicare enrollees, (2) qualified disabled and working individuals, and 

(3) individuals who would be qualified for Medicaid except 

that their income exceeds the state eligibility level but is 

less than 110 percent of the official federal poverty line 

(120 percent in 1995 and thereafter).l’ 

able 2-2 shows the number of states providing 31 op- tional services in 1990, and whether they are provided only to 

the categorically needy or also to the medically needy. 

In addition to the identification of covered services, 

each state’s Medicaid plan must meet the following general requirements, unless granted a waiver: 

rn Amount, Duration, and Scope (AD&S). Each covered service must be sufficient in AD&S to reasonably achieve its purpose. Nevertheless, states may 

limit the coverage of services, such as the number 

of covered hospital days or physicians’ visits.’* 

Comparability. Services available to all categorically needy beneficiaqdmedically needy groups 

must be equal. 

Statewide Coverage. The AD&S of coverage must 

be the same throughout the state. 

Freedom-of-Choice. Beneficiaries may obtain ser- vices from any participating qualified provider. 

Early and Periodic Screening, Diagnosis, and 

Beatment (EPSDT) services for children, 

Home health services for any individual entitled 

to skilled nursing facility (SNF) care, 

rn 

rn 

rn 

Alternative Service Options 

Several program options give states additional flexi- bility in designing their health care packages.13 States may 

enter into risk contracts with health maintenance organi- zations (HMOs) and other similar organizations (often 

referred to as prepaid health plans or PHPs) or they may 

seek exemptions or waivers from the Secretary of the Dell 
Service 

Table 2-2 

Number of States Offering Optional Medicaid Services, as of October 1, 1989l 

States Offerinp Service to: 

Needy and Medically Needy or Medically Needy 

Categorically Categorically Categorical I y 

Podiatrists 

Optometrists 

Chiropractors 

Other Practitioners 

Private Duty Nursing 

Clinics 

Dentists 

Physical Therapy 

Occupational Therapy 

Speech, Hearing, Language Disorders 

Prescribed Drugs 

Dentures 

Prosthetic Devices 

Eyeglasses 

Diagnostic 

Screening 

Prevention 

Rehabilitation 

Services for Age 65 or Older in Mental Institutions: 

Inpatient Hospital 

Nursing 

Intermediate Care Facility for Mentally Retarded 

Inpatient Psychiatric for under Age 21 

Christian Science Nurses 

Christian Science Sanitoria 

Skilled Nursing Facility for under Age 21 

Emergency Hospital 

Personal Care 

Transportation 

Case Management 

Hospice 

Respiratory Care 

12 

14 

8 

13 

8 

15 

12 

11 

8 

11 

16 

8 

14 

16 

5 

4 

3 

12 

14 

11 

21 

10 

1 

4 

20 

14 

9 

14 

10 

9 

3 

33 

36 

19 

32 

20 

40 

36 

31 

26 

29 

38 

31 

38 

33 

21 

19 

20 

33 

26 

22 

28 

29 

2 

11 

30 

28 

19 

37 

33 

24 

11 

~ 

45 

50 

27 

45 

28 

55 

48 

42 

34 

40 

54 

39 

52 

49 

26 

23 

23 

45 

40 

33 

49 

39 

3 

15 

50 

42 

28 

51 

43 

33 

14 

Includes American Samoa, Guam, Northern Mariana Islands, Puerto Rim, and the U.S. Virgin Islands. 

Source: Data from U.S. Department of Health and Human Services, Health Care Financing Adminstration, Medicaid Bureau, Intergovernmental Affairs Office, 1992. 

partment of Health and Human Services for other federal 

Medicaid requirements. 

Under a risk contract, the state pays an HMO or PHP 

for the enrollment of Medicaid participants. A fixed premium is paid, generally on a monthly basis, for each participant, and the plan agrees to provide all covered services. 

Use of risk contracts is entirely at the state’s discretion. 

Several types of waivers of federal Medicaid requirements are available. Section 2175 of The Omnibus Reconciliation Act of1981 (OBRA) authorizes the Secretary of 

Health and Human Services (HHS) to waive selected provisions of the Medicaid statute to allow states more flexibility in developing innovative health care delivery or 

reimbursement systems. Where Section 2175 waivers are 

used, the state must demonstrate that the program will be 

cost effective and will not impair the Medicaid enrollees’ 

access to medically necessary services of adequate quality. 

The most common use of the 2175 waiver is to establish primary-care case management. Sixteen states have 

some sort of managed-care system, and the Health Care 

Financing Administration (HCFA) estimates that they 

save $121 per year per enr011ee.’~ Under a case-management system, either Medicaid enrollees choose a “gatekeeper” or primary physician (usually a general 

practitioner, internist, or pediatrician) or the state assigns 

the physician. This physician may be an independent practitioner or part of an HMO, and is responsible for assuring 

preventive care and for referrals to specialists. Usually, 

the state reimburses the gatekeeper a nominal fee per 

patient. The preliminary evidence available indicates that 

both physicians and patients are satisfied with the 

case-management systern.l5 

The case-management system offers an alternative to 

using hospital emergency rooms for primary care, which is 

12 
costly and inefficient and often is the only care available 

for many Medicaid enrollees, especially in sparsely settled 

rural areas and inner cities. Medicaid enrollees who do not 

have a primary medical care provider on a consistent basis 

also are often sicker and require more services when they 

do seek medical care.I6 To some extent, the difficulty Medicaid enrollees face in obtaining medical care is the result 

of low reimbursement rates for providers.” 

Several waivers pertain to home and communitybased services. Section 2176 waivers of comparability and 

statewide coverage requirements allow states to provide 

comprehensive home and community-based long-term 

care, often including non-medical social services, to individuals who would otherwise be at risk of institutionalization 

or require continuing care in hospitals or nursing homes. 

Section 1915(d) waivers relax restrictions that limit 

the number of elderly participants in a Section 2176 

waiver program to the number that would actually have 

occupied a Medicaid nursing home bed. Thus, this waiver expands the number of enrollees eligible for these 

home or community-based services. 

The Medicare Catastrophic Coverage Act of 1988 establishes Section 1915(e), a new waiver for “boarder babies” 

born drug dependent or infected with the acquired immunodeficiency syndrome (AIDS). Section 1915(e) waivers allow 

states to cover these and selected other children who 

would otherwise require care in a hospital or nursing facility. 

Finally, several statutes, most importantly Section 

lllS(a) of the Social Security Act, give the Secretary of 

HHS general authority to grant waivers to the states for 

Medicaid demonstration projects. A state may be exempted from the requirements normally imposed for the 

Medicaid program or may receive matching federal funds 

for expenditures on medical services or other activities not 

ordinarily eligible. For example, Arizona’s entire Medicaid program (Arizona Health Care Cost Containment 

System) operates under such general waiver authority.’* 

nble 2-3 shows the number and type of approved waivers 

in each state in 1988. 

As in setting eligibility policy, states have considerable discretion in developing their service packages. 

There is significant variation across states in the type and 

amount of care provided due to federal matching of 

optional services, limits states can place on the coverage of 

services, and available waiver programs. 

Table 2-3 

Approved Waiver Programs, by State, 1988l 

Section 

Section 2176 1115 

waiver Proem DemonSection 

2175 

Waiver Regular Model stration 

State2 Programs Programs Waivers Waivers 

Section 

Section Section 2176 1115 

2175 Waiver Prowams DemonWaiver Regular Model stration 

State* Programs Programs Waivers Waivers 

Alabama 

Arizona 

California 

Colorado 

Connecticut 

Delaware 

Florida 

Georgia 

Hawaii 

Idaho 

Illinois 

Indiana 

Iowa 

Kansas 

Kentucky 

Louisiana 

Maine 

Maryland 

Massachusetts 

Michigan 

Minnesota 

Mississippi 

Missouri 

Montana 

Nebraska 

Nevada 

4 

1 

1 

1 

1 

1 

2 

1 

1 

1 

2 

6 

2 

2 

5 

1 

4 

1 

3 

1 

1 

2 

1 

2 

2 

2 

1 

3 

1 

2 

2 

1 

2 

1 

1 2 

1 

1 

1 

1 

2 

1 

1 

1 

1 

1 1 

1 

1 

1 2 

New Hampshire 

New Jersey 

New Mexico 

New York 

North Carolina 

North Dakota 

Ohio 

Oklahoma 

Oregon 

Pennsylvania 

Rhode Island 

South Carolina 

South Dakota 

Tennessee 

Texas 

Utah 

Vermont 

Virginia 

Washington 

West Virginia 

Wisconsin 

Number of States 

with Programs 

Number of Programs 

1 

2 

1 

1 

1 

1 

1 

1 

18 

23 

2 

3 

4 

1 

2 

2 

2 

1 

2 

2 

1 

1 

3 

1 

3 

1 

2 

2 

3 

42 

87 

1 2 

1 4 

1 

3 

1 

1 3 

1 

17 11 

20 19 

’ February 1988 for the 2175 and 2176 waivers; August 1988 for the 

*There are no waiver programs in Alaska, Hawaii, and Wyoming. 

1115 Projects. 

Source: US. House of Representatives, Committee on Energy and Commerce, Subcommittee on Health and the Environment, Medicaid Soume Book: Backpund Data and Analysis, Committee Print lOO-AA, November 1988. 

13 
Table 2-4 

Basic Reimbursement Methods for Medicaid Providers, by State 

State 

New England 

Connecticut 

Maine 

Massachusetts 

New Hampshire 

Rhcde Island 

Vermont 

Delaware 

District of Columbia 

Maryland 

New Jersey 

New York 

Pennsylvania 

Great Lakes 

Illinois 

Indiana 

Michigan 

Ohio 

Wisconsin 

IOWa 

Kansas 

Minnesota 

Missouri 

North Dakota 

South Dakota 

Alabama 

Arkansas 

Florida 

Georgia 

Kentucky 

Louisiana 

Mississippi 

Mideast 

Plains 

Southeast 

Hospital 

In atient 

6989) 

Prospective 

Prospective 

Prospective 

Prospective 

Prospective 

Prospective 

Cost 

Prospective 

Prospective 

Prospective 

Prospective 

Prospective 

Prospective 

Prospective/Cos t 

Prospective/Cost 

Prospective 

Prospective 

Prospective 

Prospective 

Prospective 

Prospective 

Prospective 

Prospective 

Prospective 

Prospective 

Prospective/Cost 

Prospective 

Prospective/Costl 

Prospect ive/Cost 

Prospective/Cost 

Nursing Homes 

Intermediate 

Skilled Nursing Care Facility 

or Intermediate for the Mentally Care Facility Retarded 

(1987) (1987) 

Prospective Prospective 

Cost2 Prospective 

Prospective Prospective 

cost2 Prospective 

Prospective Prospective 

Prospective Prospective 

Prospective3 Prospective3 

Prospective Prospective 

Prospective Prospective 

Prospective Cost 

Prospective Prospective 

Cost Cost 

Prospective Prospective 

Prospective Prospective 

Prospective Cost 

Cost cost 

Prospective Prospective 

Prospective Prospective 

Prospective Prospective 

Prospective Prospective 

Prospective Prospective 

Prospective Prospective 

Prospective Prospective 

Prospective Prospective 

Prospective Cost 

Prospective cost 

Prospective Prospective 

Prospective Prospective 

Prospective Prospective 

Prospective Prospective 

Ph sicians Hospital Outpatient 

fi989) (1987) 

Fee Schedule Prospective 

Fee Schedule Reasonable Cost 

Fee Schedule Prospective 

Reasonable Cost Reasonable Cost 

Fee Schedule Prospective 

Fee Schedule Reasonable Cost 

Fee Schedule Reasonable Cost 

Fee Schedule Prospective 

Fee Schedule Prospective 

Fee Schedule Cost/Charge Ratio 

Fee Schedule Fee Schedule 

Fee Schedule Fee Schedule 

Fee Schedule Fee Schedule 

Reasonable Cost Reasonable Cost 

Fee Schedule Prevailing Cost 

Fee Schedule Reasonable Cost 

Fee Schedule Prospective 

Fee Schedule Reasonable Cost 

Fee Schedule Fee Schedule 

Fee Schedule Prevailing Charges 

Fee Schedule Percentage of CostKharges 

Fee Schedule Reasonable Cost 

Fee Schedule Reasonable Cost 

Fee Schedule Fee Schedule 

Fee Schedule Fee Schedule 

Fee Schedule Prospective 

Fee Schedule Cost/Charge Ratio 

Reasonable Cost Percentage of Charges 

Fee Schedule Reasonable Cost 

Fee Schedule Reasonable Cost 

Reimbursement of Providers 

States use different payment approaches and stan- dards to reimburse providers for services covered by Medicaid. Federal legislation establishes specific payment 

rules for only a few types of services, although federal 

regulations establish payment ceilings or other tests of 

reasonableness of state reimbursement methods for other 

services. Providers who participate must accept Medicaid 

reimbursement as payment in full, except for any beneficiary cost sharing provided for in state plans. 

Before 1980, states were required to use the same 

reasonable cost system for Medicaid that Medicare used 

to pay for inpatient hospital and nursing home servicesproviders were reimbursed on the basis of actual costs 

incurred. (These services accounted for 68 percent of all 

Medicaid payments in 1989.) The Omnibus Reconciliation 

Acts of 1980 and 1981 removed this requirement for nursing homes and hospitals, permitting states to pay amounts 

needed to finance economical and efficient institutions 

and to maintain beneficiaries’ access to care. However, 

the aggregate annual amount spent by a state for inpatient 

hospital services may not exceed what would have been 

spent if the state used the current Medicare payment system. 

Most states have moved to prospective payment systems for reimbursing hospitals and nursing homes. The 

payment for a unit of service (e.g., a day of care or a type of 

treatment) is established in advance, or payments are baased 

on a percentage of actual costs or charges. States are re14 
Table 24 (conf.) 

Basic Reimbursement Methods for Medicaid Providers, by State 

Nursine Homes 

Intermediate 

Skilled Nursing Care Facility Hospital or Intermediate for the Mentally 

In atient Care Facility Retarded Ph sicians Hospital Outpatient 

State 8989) (1987) (1987) 8989) (1987) 

Southeast (cont.) 

North Carolina 

South Carolina 

Tennessee 

Virginia 

West Virginia 

Southwest 

Arizona 

New Mexico 

Oklahoma 

Texas 

Rocky Mountain 

Colorado 

Idaho 

Montana 

Utah 

Wyoming 

Far West 

California 

Nevada 

Oregon 

Washington 

Alaska 

Hawaii 

Prospective Prospective Prospective Fee Schedule Percentage of Cost 

Prospective Prospective prospeCtive Fee Schedule Percentage of Allowable Cost 

Prospective Cost Cost Prevailing Charges Reasonable Cost 

Prospective/Cost’ Prospective Cost Fee Schedule Reasonable Cost 

cost Prospective Prospective Fee Schedule Fee Schedule 

not applicable 

Prospective/Cost ’ Prospective Prospective Fee Schedule Reasonable Cost 

Prospective Prospective Prospective Fee Schedule Percentage of Inpatient 

Per Diem Rate 

Prospective Prospective Prospective Reasonable Cost Reasonable Cost 

prospeCtive Prospective Prospective Fee Schedule Percentage of CostlCharges 

Prospective/Cost’ Cost Cost Fee Schedule Reasonable Cost 

Prospective Prospective Cost Fee Schedule Reasonable Cost 

Prospective Prospective Cost Fee Schedule Percentage of Charges 

Cost Prospective Prospective Reasonable Cost Reasonable Cost 

Prospective/Cost’ Prospective Prospective Fee Schedule Negotiable/Fee Schedule 

Prospective Prospective Cost Fee Schedule Physician Fee Schedule 

Prospective cost Cost Fee Schedule Percentage of Allowable Cost 

Prospective Prospective Prospective Fee Schedule Prospective/Fee Schedule 

Prospective Prospective Prospective Reasonable Cost Prospective 

Prospective Prospective Prospective Reasonable Cost Negotiated 

‘Payment equals lesser of the two amounts. 

2Prospective payment method was used for intermediate care facilities. 

Sources: Hospital Inpatient Reimbursement-National Governors’ Association, Ruml Hospitals in Evolution: State Policy Issues and 

Initiatives, 1989 (Washington, DC, 1990), Table 1. 

Other Providers-US. House of Representatives, Committee on Energy and Commerce, Subcommittee on Health and the 

Environment, Medicaid Source Book: Background Data and Andysk, Committee Print lOO-AA, November 1988. 

Public nursing facilities are reimbursed using a cost method. 

quired to make additional payments to “disproportionate 

share” hospitals that serve higher than average numbers 

of Medicaid and low-income patients. 

States can develop their own payment systems for 

physicians and other individual practitioners (8 percent of 

payments in 1989), but they generally base reimbursements either on prevailing or reasonable charges or on a 

maximum amount. Prevailing charges are generally deter- mined by the method used for Medicare reimbursement, 

which reflects some percentile (usually the 75th) of the 

customary charges of all providers in an area for compara- ble services. States that set maximum amounts for reim- bursement use either (1) fee schedules that specify a flat 

maximum payment for each type of service or (2) relative 

value scales that assign each service a specific weight, 

which is then multiplied by a fixed dollar amount. 

States use reasonable cost, fee schedule, prospective 

payment, and other methods to reimburse hospital outpatient services (5 percent of total vendor payments in 1989). 

Reimbursements may not exceed the amount that would 

have been paid by Medicare, which uses a reasonable cost 

basis for these services.*9 However, in The Omnibus Budget 

Reconciliation Act of 1990, the Congress also added teeth to 

the so-called Boren Amendment, which requires that federally qualified health centers (FQHC), nursing homes, and 

community health centers be reimbursed for all reasonable 

costs of services required to attain or maintain the well-being 

of each Medicaid-eligible resident.20 This will most likely 

increase the upward pressure on Medicaid expenditures. 

able 2-4 summarizes, by state, the basic reimbursement 

methods for the four types of providers discussed above. 

15 
Medicaid regulations establish aggregate limits on 

payments for prescription drugs (7 percent of total 1989 

payments), with separate limits for multiple-source drugs 

(those for which therapeutic equivalents are available 

from at least three manufacturers) and all others. A 

state’s total spending on multiple-source drugs during a 

given period may not exceed the price limits, set by HCFA 

at 150 percent of the estimated wholesale cost of the least 

expensive therapeutic equivalent plus a reasonable dis- pensing fee. For all other drugs, aggregate statewide payments may not exceed the lesser of the state-estimated 

acquisition cost of ingredients plus a reasonable dispensing fee or the pharmacies’ usual and customary charge. In 

addition, OBR4 1990 requires that drug manufacturers 

enter into rebate agreements with HHS for prescription 

drugs reimbursed under Medicaid and denies matching 

funds to states that cover products not governed by such 

an agreement. 

Federal Medicaid law specifies payment rules for only 

a few other services, including rural health clinics, laboratories, and hospice care. Payment for these services must 

generally follow Medicare rules. 

Reimbursement is one tool available to states to con- trol Medicaid costs. Hospitals and other providers in many 

states, however, have complained that Medicaid reimbursements do not cover their costs, and the U.S. General 

Accounting Office (GAO) recently found that “the methods used by most states indicated an attempt to pay 

providers less than going market rates.”21 In addition, low 

fees have been responsible in part for low physician participation in the Medicaid program.22 In June 1990, the U.S. 

Supreme Court ruled in Wilder v. Virginia Hospital Association that hospitals, nursing homes, and other providers 

have the right to sue directly in federal court for higher 

payments. (Hospitals and nursing facilities sued and won 

in state and federal courts prior to Wilder.) Such suits 

could result in states being required to raise their reimbursement levels for certain types of providers. For example, in July 1991, a federal judge ruled that the Medicaid 

program in Washington State did not meet the “reasonable and adequate” standard and ordered increased payments for participating hospitals. 

Medicaid Financing 

Medicaid is financed jointly by the federal government and the states through federal matching grants for 

covered state expenditures. The grants are based on a 

variable matching formula, which provides a higher rate to 

states with lower per capita incomes.23 Also, the grants are 

open-ended, that is, there is no limit on the amount of 

allowable state costs that can be matched. Bylaw, the state 

matching rates can range from 50 to 83 percent. The highest rate at present is 79.99 percent; this will decrease to 

79.01 percent in FY 1993 (see Xible 2-5).24 Administrative 

costs are matched at 50 percent for all states. Selected adadministrative costs are matched at higher rates, including, for example, 75 percent for the compensation and 

training of professional medical personnel and support 

staff to administer the program, 90 percent for developing 

and 75 percent for operating automated claims processing 

systems, and 100 percent for implementing and operating 

an immigrant status verification system.” 

Medicaid is funded almost entirely out of federal and 

state general funds, unlike Medicare, which receives in- surance premiums and earmarked taxes. States may re- quire local governments to share in up to 60 percent of the 

nonfederal costs of the program, and as of 1986, 15 did 

so.% The local funding formulas, as of 1986, are shown in 

nble 2-6.27 

The original Medicaid legislation prohibited cost 

sharing (i.e., deductbles, coinsurance, enrollment fees, 

copayments, and premiums) for inpatient hospital services 

for all persons eligible for Medicaid. The law permitted 

cost sharing for other services based on the recipient’s 

income and resources, thus effectively exempting the 

categorically needy. The 1972 Social Security Amendments 

and TEFRA 1982 changed the options, and the states may 

require small amounts of cost sharing for nearly all services, 

mandated or optional, provided to the categorically and 

medically needy. As of January 1, 1991, 26 states and the 

District of Columbia had copayment programs. 

Provider Assessments 

In 1985, the states were given greater flexibility in 

raising their share of Medicaid funds. The states believe 

they should be allowed maximum flexibility in determin- ing how the state share will be raised. Several states use 

provider assessments, which may be specific taxes on 

providers of medical services or donations or voluntary 

contributions by these providers. The states view provider 

assessments as a legitimate financing technique. The Office of Management and Budget and the Department of 

Health and Human Services consider provider assessments 

to be a scheme to increase the federal share of the overall 

costs of the Medicaid program while limiting further financial commitment on the part of a state.28 As a result, HCFA 

has tried repeatedly to limit the states’ use of this financing 

technique. In each instance, the Congress intervened on 

behalf of the states and issued a moratorium precluding 

HCFAs action. In 1991, however, the Congress passed legislation that will ban voluntary contributions and severely 

restrict provider taxes and intergovernmental transfers. 

The new legislation prohibits states from obtaining federal Medicaid matching funds for money donated by hospitals or other health care providers. States will be allowed to 

levy and obtain matching payments for taxes on health care 

providers, but the taxes in most cases may not account for 

more than 25 percent of Medicaid expenditures. The 25 

percent cap will expire after three years. The legislation also 

imposes a cap of 12 percent of expenditures on the amount 

states may pay to hospitals that serve a “disproportionate 

share” of Medicaid and other low-income patients.B 

Who Pays. Provider assessments apply to or for hospitals; nursing homes; community health clinics; home health 

care operations; doctors, dentists, and pharmacists; and pre- scription drugs. Programs vary significantly from state to 

state and, in some instances, may pertain to all health care 

providers. In fml year 1991,B states had provider tax pro16 
Table 2-5 

Federal Medicaid Assistance Matching Ratios, Selected Fiscal Years, 1966-1993 

State 1966 1971 1976 1981 1986 1991 1992 1993‘ 

New England 

Connecticut 

Maine 

Massachusetts 

New Hampshire Rhode Island 

Vermont 

Delaware 

District of Columbia 

Maryland 

New Jersey New York 

Pennsylvania 

Great Lakes 

Illinois 

Indiana 

Mideast 

Michigan 

Ohio 

Wisconsin 

Plains 

Iowa 

Kansas 

Minnesota 

Missouri 

Nebraska 

North Dakota 

South Dakota 

Southeast 

Alabama 

Arkansas 

Florida 

Georgia 

Kentucky 

Louisiana 

Mississi pi 

North 8wolina 

South Carolina 

Tennessee 

Virginia 

West Virginia 

Southwest 

Arizona 

New Mexico 

Oklahoma 

Tarsls 

Rocky Mountain 

Colorado 

Idaho 

Montana 

Utah 

Wyoming 

Far West 

California 

Nevada 

%E:gton 

Alaska 

Hawaii 

50.00 

69.57 

50.00 

61.31 

56.13 

68.44 

50.00 

50.00 

50.00 

50.00 

50.00 

54.38 

50.00 

55.77 

50.31 

52.33 

57.60 

60.39 

61.45 

60.46 

53.90 

60.39 

66.67 

71.05 

79.85 

81.67 

65.21 

74.91 

76.70 

76.41 

83.00 

75.58 

81.30 

76.86 

66.96 

74.27 

63.94 

70.73 

70.32 

67.27 

53.08 

70.73 

62.86 

66.30 

55.47 

50.00 

50.00 

54.12 

50.81 

50.00 

52.97 

50.00 

68.33 

50.00 

59.18 

51.70 

64.96 

50.00 

50.00 

50.00 

50.00 

50.00 

54.60 

50.00 

5285 

50.00 

52.42 

55.21 

55.27 

57.78 

56.95 

59.29 

57.25 

70.48 

69.91 

78.54 

79.76 

64.10 

71.48 

74.30 

73.57 

83.00 

73.96 

78.68 

74.62 

65.04 

75.73 

66.42 

71.48 

68.84 

65.66 

56.24 

68.91 

64.72 

68.23 

60.38 

50.00 

50.00 

56.35 

50.00 

50.00 

50.75 

50.00 

70.60 

50.00 

60.28 

56.55 

69.82 

50.00 

50.00 

50.00 

50.00 

50.00 

55.39 

50.00 

57.47 

50.00 

53.39 

59.91 

57.13 

54.02 

56.84 

58.98 

55.59 

57.59 

67.23 

73.79 

74.60 

57.34 

66.10 

71.37 

72.41 

78.28 

68.03 

73.58 

70.43 

58.34 

71.90 

60.48 

73.29 

67.42 

63.59 

54.69 

68.18 

63.21 

70.04 

60.94 

50.00 

50.00 

59.04 

53.72 

50.00 

50.00 

50.00 

69.53 

51.75 

61.11 

57.81 

68.40 

50.00 

50.00 

50.00 

50.00 

50.00 

55.14 

50.00 

57.28 

50.00 

55.10 

57.95 

56.57 

53.52 

55.64 

60.36 

57.62 

61.44 

68.78 

71.32 

72.87 

58.94 

66.76 

68.07 

68.82 

67.64 

70.97 

69.43 

56.54 

67.35 

61.47 

69.03 

63.64 

58.35 

53.16 

65.70 

64.28 

68.07 

50.00 

50.00 

50.00 

55.66 

50.00 

50.00 

50.00 

77.55 

50.00 

68.86 

50.00 

54.42 

56.33 

67.06 

50.00 

50.00 

50.00 

50.00 

50.00 

56.72 

50.00 

6282 

56.79 

58.30 

57.54 

58.90 

50.00 

53.41 

60.62 

57.11 

55.12 

67.82 

72.30 

73.83 

56.16 

66.05 

70.23 

63.81 

78.42 

69.18 

72.70 

70.u) 

53.14 

71.53 

62.28 

68.94 

57.60 

53.56 

50.00 

69.36 

66.38 

7262 

50.00 

50.00 

50.00 

61.54 

50.06 

50.00 

51.00 

50.00 

63.49 

50.00 

50.00 

53.74 

61.97 

50.00 

50.00 

50.00 

50.00 

50.00 

56.64 

50.00 

63.24 

54.17 

59.93 

59.62 

63.41 

57.35 

53.43 

59.82 

62.71 

70.00 

71.69 

72.73 

75.12 

54.46 

61.34 

72.96 

74.48 

79.93 

66.60 

72.58 

68.57 

50.00 

77.00 

61.72 

73.38 

69.65 

63.53 

53.59 

73.65 

71.73 

74.89 

68.14 

50.00 

50.00 

63.50 

54.21 

50.00 

54.14 

50.00 

62.40 

50.00 

50.00 

53.29 

61.37 

50.12 

50.00 

50.00 

50.00 

50.00 

56.84 

50.00 

63.85 

55.41 

60.63 

60.38 

65.04 

59.23 

54.43 

60.84 

64.50 

72.75 

72.59 

72.93 

75.66 

54.69 

61.78 

72.82 

75.44 

79.99 

66.52 

72.66 

68.41 

50.00 

77.68 

62.61 

74.33 

70.74 

64.18 

54.79 

73.24 

71.70 

75.11 

69.10 

50.00 

50.00 

63.55 

54.98 

50.00 

52.57 

50.00 

61.81 

50.00 

50.00 

53.64 

59.88 

50.00 

50.00 

50.00 

50.00 

50.00 

55.48 

50.00 

63.21 

55.84 

60.25 

60.42 

62.74 

58.18 

54.93 

60.26 

61.32 

72.21 

70.27 

71.45 

74.41 

55.03 

62.08 

71.69 

73.71 

79.01 

65.92 

71.28 

67.57 

50.00 

76.29 

65.89 

73.85 

69.67 

64.44 

54.42 

71.20 

70.92 

75.29 

67.11 

50.00 

52.28 

62.39 

55.02 

50.00 

50.00 ~~ 

e-estimate 

Note: The federal Medicaid matching ratio (FMAP), vanes from a minimum of 50 percent to a maximum of 83 percent. FMAP = 100 

percent - state share. State share = [(state per capita personal income)V(U.S. per capita personal income)]’X 45 percent. 

Source: US. Department of Health and Human Services, Health Care Financing Adminstration, Medicaid Datu Book, 1988, Table 4.19; 

Medicare and Medicaid Data Book, 1990, Table 4.9; and FedemJ Funk Information for States, Issue Brief, September 12,1991, p. 7. 

17 
Table 2-6 

Local Funding Formulas for Medicaid Vendor Payments 

(March 31, 1986) 

Arizona 

Colorado 

Florida 

Iowa 

Counties pay22.5percent of thecost ofArizona 

Health Care Cost Containment System. This 

statewide Medicaid demonstration project ex- empts the state from federal restrictions on lo- cal matching. 

The 20 largest counties pay 2 percent of the 

state’s share for all new ICF nursing home ad- missions. 

Counties pay 35 percent of cost or $55 per 

month, whichever is less, for each nursing home 

resident; 35 percent of cost for inpatient hospi- tal days over 12 and less than 46. 

Counties match federal funds for ICF/MRs. 

New York Counties pay 50 percent of the nonfederal 

share, except for long-term care for which they 

pay 28 percent of nonfederal share, 20 percent 

in 1986. 

North Carolina Counties pay 15 percent of the nonfederal share 

for all services. 

North Dakota Counties pay 15 percent of the state share ex- cept for ICF/MRs, clinic services, and waivered 

community and home-based services for MR 

and A/D- related recipients. 

Counties pay 10 percent of the state’s share for 

county nursing homes plus $3 per invoice ad- ministration fee. 

Pennsylvania 

Minnesota $60 per month for each ICF/MR resident and 

Montana local school district for crippled childrens’ hosNebraska Counties pay4.67percent of total expenditures. Utah Local contribution of less than 1 percent for 

New Hampshire Local contribution of approximately 25 percent specific services (e.g., mental health). 

of nursing home costs, excluding residents in Local contribution of 10-20 percent for mental 

state institutions. health services. 

Counties pay 10 percent of the state’s share. 

Counties pay 18 percent of eligibility personnel 

costs. pital. 

South Dakota 

Wisconsin 

~~ 

Sources: U.S. Department of Health and Human Services, Health Care Financing Administration, Health CUR Financing Pmgmm Statistics:AnalysisofState Medicaid Pmgtrun Chumte*tics, 1986 (Washington, DC, August 1987); and Bruce Spitz, “The Medicaid 

Local Match: A Guide to Diffusing a Fiscal Time Bomb,” Counry Hedth Report (NACo) 2 (February 4, 1991). 

Table 2-7 

Provider Assessments, 1991 

(in millions) 

Provider Tax Amount Donation Amount 

Alabama 

Arkansas 

Florida 

Illinois 

Indiana 

Kentucky 

Massachusetts 

Maryland 

Maine 

Minnesota 

Mississippi 

Montana 

New Hampshire 

New Jersey 

Nevada 

New York 

Ohio 

South Carolina 

Tennessee 

Vermont 

Washington 

Wisconsin 

$174 

20 

174 

275 

88 

18 1 

490 

142 

85 

52 

20 

2 

35 

51 

60 

341 

400 

40 

344 

7 

35 

16 

California 

Florida 

Georgia 

Maryland 

Michigan 

Missouri 

Mississippi 

North Carolina 

Pennsylvania 

South Carolina 

Utah 

$65 

85 

88 

1 

452 

160 

39 

67 

565 

84 

5 

Source: American Public Welfare Association, Voluntary Contri- butions and Providerspeclfic Taxes Survey Results, 1991. 

grams, yielding an estimated $2.9 billion in state funds 

with a federal match of $4.4 billion. Eleven states had 

voluntary contribution programs, producing an estimated 

$1.7 billion in state funds with a federal match of $2.3 

billionM (see nble 2-7). 

How the Programs Operate. Although programs vary, 

the general pattern is for a state to impose a specific tax on a 

Medicaid provider or accept a voluntary donation from a 

hospital, nursing home, doctor, or other medical service 

provider participating in the program. The revenue from the 

tax or the donation is used to pay the state share of Medicaid, 

triaering a federal matching amount. me state share is 

between 21 percent and 50 percent of total costs, depending 

on the federal matching.) Thus, both the state outlay and the 

federal match are returned to Medicaid providers as pro- gram expenditures, with the federal outlay representing net 

additional spending. How much of a “return on investment” 

is generated by the health care provider may depend on 

whether the tax revenues or donations “contribute to a fund 

that is used directly to obtain the federal match with contri- butions proportional to Medicaid business . . .” or go to the 

state’s general fund, in which case the allocation of total 

funds (state and matching federal) to a particular provider 

may be less certain.31 

There are some interesting variations among existing 

or proposed state programs. In Florida, for example, to 

compensate for the fact that a small number of hospitals 

handles most Medicaid patients, the state imposes a tax on 

all net hospital revenues to reimburse Medicaid providers. 

Maryland raised the allowable Medicaid fees for health 

18 
care providers and then imposed a tax to recapture the fee 

increase. Pennsylvania is considering a plan to permit 

provider donations to be borrowed on behalf of its counties 

rather than requiring that they be made in cash. Massachu- setts recouped nearly $500 million for expenditures through 

its uncompensated care fund for Medicaid eligibles, some of 

which were made almost three years ago. In the District of 

Columbia, most of the revenue from a proposed provider tax 

would be used to leverage a federal Medicaid match, but part 

of the yield would be devoted to other health purposes.32 

Impact on kderal Medicaid Costs 

As noted earlier, provider assessments produced ap- proximately $6.7 billion in additional federal Medicaid 

outlays in 1991. A recent OMB-HHS report projects that 

total Medicaid spending will increase from approximately 

$72 billion to over $200 billion by 1996. OMB and HHS 

estimate that the federal share could equal $120 billion, or 

approximately 60 percent.33 

The state revenues raised by provider assessments are 

particularly needed in light of Medicaid expansions re- cently mandated by the federal government and the continu- ing health care cost inflation that characterizes the program. 

Some of the specific intergovernmental issues raised by 

provider assessments will be considered in a later section. 

Medicaid Administration 

States are responsible for developing and administering 

their Medicaid programs within federal guidelines. ’Ib re- ceive matching funds, states must have a federally approved 

plan for basic eligibility, coverage, and reimbursement. The 

plan must also detail administrative procedures, such as 

processing claims (many states contract with private ‘Tfiscal 

agents’’ to perform this function), detecting errors and fraud 

and abuse, reviewing service utilization, and maintaining a 

system to collect program information and complete reports 

required by the federal government. Most states were re- quired to have such a Medicaid Management Information 

System (MMIS) by 1985. 

As of 1986, six states delegated some program admin- istration to local agencies, but the state maintains respon- sibility for overall policy determination. According to the 

National Association of Counties, all such local agencies 

are county agencies. Local administration might include 

eligibility determination, claims processing, and contract- ing with providers. 

Federal law sets standards and certification proce- dures for institutional providers, such as hospitals and 

nursing facilities. For example, OBRA 1987 contained a 

major revision of Medicaid policy on nursing home stan- dards, survey review and certification procedures, and 

sanctions. States administer their own licensing and moni- toring programs for other kinds of providers. 

CHANGES IN MEDICAID 

Since its enactment, Medicaid has undergone fre- quent and significant changes. The major federal changes 

are summarized in the Appendix. There also have been 

numerous state changes.34 This section will focus on some 

of the issues raised by these changes for the intergovern- mental structure of Medicaid. 

Federal Program Expansions 

Enacted as a program to give recipients of cash assis- tance access to mainstream medicine, Medicaid has expanded to serve additional population groups and to cover 

a broader range of services. 

Population Groups 

AFDC and SSI recipients are still the primary groups 

served by Medicaid. However, the proportion of categorically needy Medicaid clients actually receiving cash assistance payments declined, from 75 percent in 1979 to less 

than 70 percent in 1989. 

Over time, federal provisions have expanded Medic- aid eligibility. For example: 

A 1982 provision allowing states to extend Medicaid to certain disabled children under 18 living at 

home who would be eligible for SSI if they were 

ins tit u tionalized; 

The 1984 requirement that states provide Medicaid coverage to first-time pregnant women, preg- nant women in two-parent unemployed families, 

and children in two-parent families meeting the 

income and resource criteria for AFDC, even if 

they would not otherwise be covered under a 

state’s AFDC program; 

The 1985 requirement that states extend Medicaid coverage to all pregnant women in families 

meeting AFDC income and resource standards, 

including those in two-parent families where the 

principal earner is not unemployed; and 

The 1986 requirement that states continue Medicaid coverage for certain disabled SSI recipients 

who lose their eligibility due to earnings from work. 

An even further departure from the original principle ~ 

of linking Medicaid eligibility to the categorical cash assistance programs occurred when The Omnibus Budget and 

Reconciliation Act of1986 allowed states to extend eligibility to all pregnant women, infants, and children up to age 5 

in families with incomes up to 100 percent of poverty, 

without regard to their eligibility for cash assistance. The 

legislation also made elderly and disabled individuals with 

incomes up to 100 percent of poverty eligible for Medicaid, 

as long as they met the SSI asset test. 

Other recent expansions in eligibility require states to 

cover pregnant women, infants, and children up to age 6 in 

families with incomes up to 133 percent of poverty, and 

children born after September 30, 1983, up to age 18 in 

families with incomes up to 100 percent of poverty. States 

have the option of covering pregnant women and infants 

up to 185 percent of poverty. Elderly and disabled individuals with incomes below 100 percent of poverty, who are 

qualified for Medicare, are now also covered by Medicaid 

19 
because the states are required to buy them into Medicare 

and to pay any applicable cost-sharing amounts. The incre- mental expansion of Medicaid eligibility to a broader 

range of groups has been described by some observers as 

steps in an implicit policy of using the Medicaid program to 

achieve universal health insurance for the low-income popu- lation. The eligibility expansions have created numerous 

categories of Medicaid recipients, contributing to complex 

application procedures and program administration. 

Services 

Just as the Medicaid target populations expanded, so, 

to some extent, did services. For example, nurse-midwife 

services were required to be covered in 1980. Since the 

program began, ICFIMR, hospice, and case management 

have been added to the list of optional services available 

for federal reimbursement. The program also has expanded required services for certain groups. For example, in 

1989, federal legislation required that all medically necessary services identified through EPSDT screens be provided to those children, whether or not the state covers 

such services under its Medicaid program. 

More significantly from a cost standpoint, Medicaid 

has come to be a major provider of certain services in the 

overall health care system. For example, Medicaid is the 

largest third-party payer, public or private, for nursing home 

services (including ICF/MR) and, along with Medicare, one 

of the two largest payers for home health care. Some of the 

services for which Medicaid is a major payer are also the 

ones with the most rapidly rising costs (see Chapter 3). 

These examples point up the changing emphasis of 

Medicaid from financing traditional medical services to 

financing the fast-growing, less traditional areas of health 

care. Illustrative of the shift to these types of services are 

the authorization of 2176 waivers for home and community-based long-term care in 1981 and a program for home 

and community-based care for the frail and immobile elderly 

and developmentally disabled in 1990. Medicaid is also a 

signrficant provider of specialized services to the mentally 

retarded, mentally ill, and developmentally disabled. For 

example, eligible individuals in ICF/MRs are entitled to all 

Medicaid services, mandatory and optional, within the state. 

~ ~~~ 

Federal Options and Requirements 

As Medicaid has evolved, numerous federal legislative and regulatory options and requirements have been 

added. Optional expansions allow targeted coverage to 

high priority groups and for the most needed services. 

Options 

Options allow the states to receive matching funds for 

certain aspects of their programs, such as an optional 

service or extending eligibility to an optional population, if 

they conform to federal specifications. For states that 

provided an option before it became part of the Medicaid 

program, such a change allowed them to be reimbursed 

for a portion of their costs. The changes also made it 

possible for other states to provide the option at less cost 

than without federal matching funds. 

Some Medicaid provisions that began as options be- came requirements. For example, coverage of pregnant 

women and infants up to 100 percent of poverty became an 

option in 1986 and a requirement in 1988. Likewise, a 

Medicare ‘%uy-in” for elderly and disabled individuals 

below 100 percent of poverty became optional in 1986 and 

required in 1988. This phenomenon of Medicaid options 

becoming requirements has been dubbed the “option-mandate two-step.” 

Mandates 

Because the federal government matches state Medicaid costs, most new requirements take the form of conditions a state program must meet to continue to receive 

federal funds.” New requirements have affected all areas 

of the program, including eligibility and service coverage, 

provider certification and reimbursement, and administrative requirements. 

These new requirements have implications for state 

costs, policy flexibility, and administration. The requirements often cause states to incur new costs to meet revised 

program conditions. This can be a significant burden, particularly in periods of fiscal stringency. For example, the 

National Association of State Budget Officers (NASBO) 

estimates that Medicaid expansions enacted since 1988 

will cost the states an additional $2 billion in fiscal 1991 

and $17.4 billion through 1995.36 Costly mandates also 

reduce budgetary flexibility because state revenues must 

be dedicated first to meeting the federal Medicaid requirements. Thus, in 1989,48 governors signed a resolution calling for a two-year moratorium on further 

Medicaid mandates, based on their “increasing concern 

with the impact of the last three years of Medicaid mandates on our budgets, and, consequently, on our ability to 

properly fund education and other important ~eMces.”~~ 

When additional requirements were enacted in 1989 and 

1990, the National Governors’ Association (NGA), in a 

resolution passed at its Winter 1991 meeting, called for 

the Congress to “delay the mandated implementation of 

the 1990 mandates for two years.”38 

Closely related to the issue of mandate costs is the 

argument that expanding Medicaid requirements reduces 

state discretion in service provision within and outside the 

Medicaid program. Resources, budgetary and otherwise, 

must be directed first to satisfying the federal requirements. An example of federal requirements reordering 

state priorities occurred in California, which, rather than 

enact the nursing home reforms in OBRA 87, passed a bill 

that “was believed to offer a superior option com ared to 

further program expansion under OBRA 87.”39 HCFA 

rejected California’s Medicaid plan due to its alleged failure to implement the OBRA 87 nursing home reforms. 

California amended its plan to include the OBRA provisions. In another example, GAO found that federal re- quirements to expand Medicaid eligibility and services to 

pregnant women and children had improved the access of 

these groups to the program but had also eroded Medicaid 

20 
benefits in some of the more generous states, thus leading to 

more program uniformity across the states.40 

Frequent changes to federal Medicaid requirements 

also present administrative difficulties for states. Recent 

legislation has required implementation regardless of pro- mulgation of regulations. For example, the nursing home 

reforms of OBR4 87 were to become effective October 1, 

1990, but by that date, HCFA had not published all of its 

final regulations. States, therefore, are implementing fed- eral statutes without guidance from HCFA at the risk of 

losing federal funds or having to redesign programs when 

regulations are published months or years later. 

State programs and systems have to be revised continually and workers have to be retrained and computer 

systems redesigned. In addition, future changes may supersede past legislation. For example, the 1988 Medicare 

Catastrophic Coverage Act required states to extend Medicaid eligibility to pregnant women and infants up to 75 

percent of poverty by July 1,1989, and up to 100 percent of 

poverty by July 1, 1990, but OBRA 89 required states to 

raise the eligibility levels for these groups to 133 percent of 

poverty by April 1990. 

The costs associated with these changes are often 

substantial. Thus, NGA expressed in its 1991 resolution on 

short-term medicaid policy that “states must not be expected 

to implement any Medicaid program changes until the 

Health Care Financing Administration (HCFA) has published final regulations to guide program administrati~n.”~~ 

State Program Changes 

States establish their Medicaid programs within federal guidelines. Thus, the states have a significant degree 

of control over eligibility criteria, service options, provider 

standards and reimbursement methods, and local participation. Consequently, there is considerable diversity 

among state Medicaid programs and costs. 

Many states (and local governments) have used Medicaid as a vehicle to expand medical services to needy 

populations. For example, in the 198Os, many states supported federal options to raise eligibility levels for pregnant women and children and waivers to expand home and 

community-based care, and they added those elements to 

their programs. 

States also are concerned about controlling Medicaid 

costs. Because Medicaid is an entitlement program, costs 

cannot be controlled directly. Rather, within the constraints set by the federal government, states must use the 

elements of the program (e.g., eligibility, services, pay- ment methods) as policy levers to expand or contract the 

overall costs of the program. For example, according to 

NGA, during the 1981-82 recession, states took actions to 

reduce program costs by using a “continuum of cuts,” 

which ranged in seriousness from administrative changes 

through cuts in optional services, instituting copayments, 

and reforming payment systems to cuts in eligibilit~.~~ 

Currently, many states are finding it necessary to cut ser- vices. For example, Arkansas cut back on a number of 

options, including its adult medically needy program, 

which was a major service. Missouri made cuts in podiatry 

c 

and dental services. Michigan made across-the-board re- ductions in the program and is considering deleting cer- tain optional services entirely.43 

SUMMARY 

Notes 

See, for example, Frank A. Sloan, “State Discretion in Federal 

Categorical Assistance Programs: The Case of Medicaid,” Public Finance Quarterly 12 (July 1984): 321-346; Charles J. Barrillea- and Mark E. Miller, “The Political Economy of State 

Medicaid Policy,” American Political Science Review 82 (December 1988): 1089-1107; and U.S. General Accounting Office, 

Medicaid: Interstate Variations in Benefits and Expenditures 

(Washington, DC, 1983, p. 7. 

U.S. Advisory Commission on Intergovernmental Relations, 

Intergovernmental Pmblems in Medicaid (Washington, DC, 

1968), ch. 11. 

3This section relies on US. House of Representatives, Committee on Energy and Commerce, Subcommittee on Health and 

the Environment, Medicaid Source Book: Background Data and 

Analysis, Committee Print 100-AA (Congressional Research 

Service), November 1988. 

4The Supplemental Security Income (SSI) program, enacted in 

1974, replaced the programs of Old Age Assistance, Aid to the 

Blind, and Aid to the Partially and Totally Disabled. 

’Countable income is defined as family income from all sources 

less child care allowances (up to $175 per month per child over 

age 2 and up to $200 per month per child under age 2), work 

related expenses (%90per month), and the first $30 per month of 

earnings and one-third of the remainder. Socid Security BulleMedicaid was enacted to serve certain groups of 

people enrolled in cash assistance programs. 

Medicaid coverage has been expanded to include 

groups whose eligibility is based on a percentage 

of income below or above the poverty level. Med- icaid has never provided universal coverage for 

the low-income population. 

The intent of the Medicaid program was to improve access to mainstream medical care for 

those eligible. Medicaid has become a major ve- hicle for providing some of the fast-growing, less 

traditional types of health care, such as nursing 

home services and home health care. 

Medicaid policymaking, financing, and administration are shared between the federal and state 

governments (and local governments in 14 

states). Within federal guidelines, there is considerable diversity across states in eligibility criteria, 

covered services, reimbursement methods, and 

local financing and administration. States use 

these elements of the program as levers to accomplish policy and cost objectives. Waivers provide some opportunities for state innovation. 

The Medicaid program has undergone frequent 

change, including the addition of federal options 

and requirements affecting states. Such options 

and requirements have had significant cost, flexi- bility, and administrative implications for the states. 

21 
tin: Annual Statistical Supplement, 1991 54 (December 1991) 

85-87. 

6As of October 1,1991,12 states exercised the 209(b) option; 31 

states and the District of Columbia provided automatic Medic- aid coverage to SSI recipients who mxived state supplementary 

payments only. 

‘The 1967 amendments to the Social Security Act established a 

maximum income level for federal financial participation in the 

cost of medical assistance to the medically needy of 133-l/3 per- cent of the maximum cash assistance level, after deducting 

medical expenses. 

For example, Jerry Cromwell, Sylvia Hurdle, and Gerard Wedig 

also cite rigorousness of eligibility certification as a tool forcontrolling enrollment in “Impacts of Economic and Programmatic 

Changes on Medicaid Enrollments,” 73e Ratiew of Economics 

and Statistics 68 (1986): 232240. 

‘OIncludes Skilled Nursing Facilities (SNF) and Intermediate 

Care Facilities (ICF). The Omnibus Reconciliation Act of 1987 

eliminated the programmatic distinction and payment differ- entials between SNFs and ICFs, as of October 1,1990. Prior to 

this law, SNF services were mandatory but ICF services were 

optional. 

“See United States Code, Sections 1396-1396u, Subchapter XIX, 

Chapter 7, Title 42, 1902(aXlO) pp. 1043-1044. 

l2As of December 1986, 22 states had restrictions on inpatient 

hospital length of stay; 29 limited the number of physicians’ visits. 

”This section relies on Medicaid Source Book, Chapter V. 

l4 Medicine and Health Perspectives, October 7, 1991. 

%id. 

16Emily Friedman, “Medicaid Overload Sparks a Crisis,” Hospi- tals 52 (January 10, 1987): 51. 

“States have considerable leeway in determining eligibility crite- ria for Medicaid and in setting reimbursement schedules for 

medical care providers. In some cases, states will set rigid eligi- bility criteria but offer a high number of optional services and 

set reimbursement rates at a reasonable level so that medical 

care providers will take Medicaid patients. Other states will 

have generous eligibility criteriaso that large numbers areeligible for Medicaid, but they either offer a limited number of op 

tional services or set reimbursement rates so low that many 

medical care providers will not participate. See Friedman, pp. 

51-52; and Robert Pear, “LowMedicaid Fees Seen as Depriving 

the Poor of Care,” New Yo& Times, April 2, 1991. 

laThe authority of the Secretary of Health and Human Services 

to grant such waivers comes from section lllS(a) of the Social 

Security Act. The approval of such waivers is at the discretion of 

the Secretary. 

I9The Medicare reasonable charge for a specific service to a spe- cific patient is the lowest of (a) the provider’s actual charge for 

that service; (b) the provider’s customary charge for compara- ble services; or (c) the prevailing charge in the area for comparable services. 

200BRA90requiredstates to takeintoaccount thecustsofmaintaining practicable client functioning in a nursing facility. For 

FQHC, OBRA 90 required 100 percent reasonable cost reim- bursement when the FQHC subcontracts with an HMO. 

21 U.S. General Accounting Oftice, Medicaid: Interstate Kzriations 

in Benefits and Expenditures, p. 3. 

22Numerous factors, in addition to reimbursement levels, affect 

physician participation in Medicaid. These include physician 

a Medicaid Some Book, p. 70. 

characteristics, the number and type of physicians in an area, 

population characteristics, and various other aspects-including administrative hassle-of each state’s Medicaid program. 

See Physician Payment Review Commission, Annual Report to 

Congmx: 1990 (Washington, DC, March 1990), ch. 16. 

%The formula for determining a state’s matchingrate, or Federal 

Medical Assistance Percentage (FMAP) is: 

FMAP = 100 percent - state share 

24The FMAPs are recalculated annually based on the average per 

capita income for the three most recent years of data. For exam- ple, the FMAF’s in effect for FY 1992 are based on 1987,1988, 

and 1989 data. 

2SSee Medicaid Source Book, p. 199. 

260nly New York and Arizona approach the 60 percent maxi- mum, according to Bruce Spitz, “The Medicaid Local Match: A 

Guide to Diffusing a Fiscal Time Bomb,” County Health Report 

(NACo) 2 (February 4,1991). 

27Little information is available on local government participa- tion in Medicaid. Both the National Association of Counties 

and the National Association of County Health Officials are 

undertaking surveys to gather data on the administrative and 

financial role of counties in the program. 

%3ee Ellen Perlman, “Feds Call States’ Medicaid Donations 

‘Scam,’ ” City and State, June 17, 1991. 

29 Congressional Quartedy Weekly Report, November 30, 1991, p. 

3531. 

30American Public Welfare Association, Voluntary Contribu- tions and Provider Specific Taxes Survey Results, 1991. 

31State Policy Reports 9 (June 1991, Pt. 1): 18. 

32See Lawrence J. Haas, “Creative Financing,” National Journal 

23 (July20,1991): 1806-1807, Perlman, p. 31, and State Policy Re- ports 9 (July 1991): 14. 

33S. Rich, “Task Force Says Medicaid Costs May Reach $200 Bil- lion in 1996,” Washington Post, July 11, 1991. 

34T~ good sources of information on state Medicaid program 

changes are National Governom’ Association, State Medicaid Pro- gram Information Center, A Catalogue of State Medicaid Pmgmm Changes (updated periodically); and Intergommmental 

Health Policy Project, Major Changes in State Medicaid and Indi- gent Care Progmmr (annual) and State Hdth Notes (monthly) 

35 Others impose requirements on providers, such as the 1990 leg- islation requiring that drug manufacturers enter into rebate 

agreements with HHS, or participants. 

36Statement of Raymond C. Scheppach, Executive Director, Na- tional Govemors’ Association, before the House Budget Com- mittee regarding State Fiscal Conditions, June 13, 1991. 

37NGA letter to Members of Congress, August 1, 1989. 

38National Governors’ Association, Resolution on Short-Term 

Medicaid Policy, Sect. 27.1, passed February 5, 1991. 

39NGA, Govemors’ Budget Summmy, 1991-92, p. 75. 

40 GAO briefing to ACIR representatives, December 17, 1990. 

41NGA, Resolution on Short-Term Medicaid Policy. 

42Meeting with John Luehrs, NGA, January 15,1991. 

43NGA Task Force on Health Care, Governors’ Roundtable Dis- cussion on Restructuring Medicaid, February 3,1991. (The Ar- kansas service reductions were reversed when additional 

revenues were collected through a new provider tax program.) 

22 
3. TRENDS IN THE MEDICAID PROGRAM 

This chapter addresses the growth of the Medicaid 

program by looking at trends in Medicaid expenditures 

and recipients, including payments by type of recipient 

and by type of service. Several factors have affected the 

growth of the program-including inflation, changes in 

service population, and changes in the utilization of medical services by Medicaid recipients. Each of these factors 

will be considered. 

MEDICAID IN RELATION 

TO THE OVERALL HEALTH CARE SYSTEM 

Since its inception, Medicaid has grown into one of 

the major health care programs in the United States, 

accounting for more than 10 percent of all health care 

spending since 1975 and serving about 10 percent of the 

population. Total Medicaid expenditures grew from $1.3 

billion in 1966 to $75.2 billion in 1990. Thble 3-1 shows the 

growth of Medicaid expenditures in relation to total 

health care expenditures.' 

Thble 3-2 shows the growth of total Medicaid vendor 

payments in current and constant dollars, relative to all 

personal health care expenditures. Over the life of the 

program, Medicaid vendor payments have grown by 1,681 

percent, or 14.7 percent per year on average. Much of that 

growth is attributable to general inflation and inflation in 

medical care prices, which has generally been higher. In 

constant dollars, Medicaid has grown by 311 percent (7.0 

percent per year on average), while total personal health 

care expenditures have grown by 134 percent (4.1 percent 

per year annual average growth).2 This near-constant 

growth in deflated dollars illustrates that increases in total 

Medicaid expenditures have generally outpaced even 

medical care inflation; from 1969-1990, the only annual 

decline in constant dollar expenditures occurred between 

1981 and 1982. However, Figure 3-1 shows that the rate of 

growth in total Medicaid expenditures was slightly lower 

than that for Medicare expenditures but significantly 

greater than growth in other government-financed per- sonal health care expenditures and total personal health 

care expenditures from 1966 to 1990. 

In 1990, Medicaid was the fourth largest source of 

funds for medical services. Private health insurance financed 31.8 percent of all personal health care, individuals financed 23.3 percent through out-of-pocket payments, 

Table 3-7 

Medicaid Expenditures Relative 

to Total Health Care Expenditures, 1966-1990' 

Total Total Medicaid 

Medicaid Health Care as Percent of 

(millions) (millions) Health Care 

Expenditures Expenditures Total 

1966 

1967 

1968 

1969 

1970 

197 1 

1972 

1973 

1974 

1975 

1976 

1977 

1978 

1979 

1980 

198 1 

1982 

1983 

1984 

1985 

1986 

1987 

1988 

1989 

1990 

$1,323 

3,193 

3,613 

4,267 

5,415 

6,845 

8,472 

9,599 

11,280 

13,696 

15,476 

17,756 

19,782 

22,668 

26,411 

30,679 

32,467 

35,671 

38,411 

42,204 

45,676 

51,335 

55,602 

63,464 

75,200 

$45,860 

51,655 

58,478 

65,739 

74,377 

82,331 

92,307 

102,467 

116,070 

132,944 

152,168 

172,037 

193,382 

216,604 

249,054 

288,554 

323,792 

356,114 

386,995 

420,058 

452,294 

492,498 

543,994 

604,134 

666,200 

29% 

6.2 

6.2 

6.5 

7.3 

8.3 

9.2 

9.4 

9.7 

10.3 

10.2 

10.3 

10.2 

10.5 

10.6 

10.6 

10.0 

10.0 

9.9 

10.0 

10.1 

10.4 

10.2 

10.5 

11.3 

'Total health care expenditures include amounts spent for 

research, construction, public health acti&ks, and program 

administration, as wel as direct payments for medical services 

Source: U.S. Department of Health and Human Services, 

Health Care Financing Administration, Office of Na- tional Cost Estimates. 

Medicare financed 18.6 percent, and Medicaid financed 

12.2 percent. The remainder, 14.1 percent, was financed 

through other federal, state, and local programs. While 

Medicaid represented 12.2 percent of personal health 

care spending on average, it accounted for 11.1 percent 

percent of hospital care, 9.0 percent of drugs and other 

23 
Table 3-2 

Medicaid Vendor Payments and Total Personal Health Care Expenditures, Current and Constant (1982) Dollars, 

1969-1990 

Medicaid Personal Health Care Medicaid Payments as a Percentage 

Medicaid Personal Health Care Vendor Payments Expenditures of Personal Health Care Exwnditures' 

Expenditures Vendor Payments (dollars (dollars Expenditures 

(billions) (billions) per reciDient) Der reciDient) Total ExDenditures Per Recipient 

Calendar Current Constant Current Constant Current Constant Current Constant Current Constant Current Constant 

Year Dollars Dollars Dollars Dollars Dollars Dollars Dollars Dollars Do I I a r s Dollars Dollars Dollars 

1969 

1970 

1971 

1973 

1974 

1975 

1976 

1977 

1978 

1979 

1980 

198 1 

1982 

1983 

1984 

1985 

1986 

1987 

1988 

1989 

19902 

i9n 

1969-90 

1969-90 

$4.0 

5.1 

6.4 

8.0 

9.1 

10.6 

12.9 

14.5 

16.6 

18.5 

21.2 

24.8 

28.9 

30.6 

33.6 

36.0 

39.7 

42.9 

48.2 

52.3 

59.3 

71.3 

1681.1% 

14.7% 

$11.1 

13.2 

15.8 

18.8 

20.2 

21.6 

23.8 

24.7 

26.2 

26.9 

28.4 

30.0 

31.5 

30.6 

31.5 

32.0 

33.6 

34.8 

37.4 

38.1 

39.6 

45.7 

311.4% 

7.0% 

$57.1 $155.7 $33 1 

64.9 166.9 349 

71.3 173.1 358 

79.4 184.9 455 

88.6 197.6 461 

101.6 208.3 495 

116.6 216.6 586 

1328 227.0 635 

149.2 235.9 726 

167.2 245.2 841 

188.6 254.4 985 

219.4 266.3 1,149 

253.2 276.9 1,314 

286.4 286.4 1,415 

3 12.4 292.1 1,558 

338.6 298.2 1,667 

367.2 306.8 1,818 

397.7 316.7 1,905 

434.7 327.5 2,089 

478.3 337.8 2284 

530.7 345.0 253 

585.3 364.1 2,818 

Overall Increase 

Average Annual Increase 

925.0% 133.8% 75 1.8 % 

11.7% 4.1% 10.7% 

$918 

911 

880 

1,068 

1,028 

1,008 

1,081 

1,082 

1,146 

1,227 

1,320 

1,389 

1,433 

1,415 

1,462 

1,480 

1,540 

1,547 

1,618 

1,662 

1,686 

1,752 

90.8 % 

3.1% 

$268 

302 

328 

362 

401 

456 

5 19 

586 

653 

725 

8 10 

928 

1,066 

1,184 

1,289 

1,384 

1,486 

1,594 

1,726 

1,881 

2,068 

2,255 

741.4% 

10.7% 

$732 7.0% 

777 7.8 

797 9.0 

844 10.1 

894 10.2 

935 10.5 

964 11.1 

1,002 10.9 

1,032 11.1 

1.083 11.0 

1,092 11.2 

1,126 11.4 

1,165 11.4 

1,184 10.8 

1.205 10.7 

1,219 10.6 

1242 10.8 

1,270 10.8 

1,300 11.1 

1,329 10.9 

1,345 11.2 

1,402 12.2 

91.5% 

3.1% 

7.1% 

7.9 

9.1 

10.2 

10.2 

10.4 

11.0 

10.9 

11.1 

11.0 

11.2 

11.3 

11.4 

10.8 

10.8 

10.7 

10.9 

11.0 

11.4 

11.3 

11.5 

12.6 

123.4% 

115.6 

109.1 

125.7 

115.0 

108.6 

112.8 

108.4 

111.2 

116.0 

121.6 

123.8 

123.2 

119.5 

120.9 

122.4 

119.5 

121.0 

121.4 

122.0 

125.0 

120.4 

125.4% 

117.2 

110.4 

126.5 

115.0 

107.9 

1n1 

108.0 

111.0 

113.3 

120.9 

123.3 

l23.0 

119.5 

121.3 

121.4 

124.0 

121.8 

124.4 

125.1 

125.3 

125.0 

Percentages differ for current and constant dollars because of slight differences in price deflators for Medicaid expenditures and all personal health care expenditures. 

Source: U.S. Department of Health and Human Services, Health Care Financing Administration, Office of National Cost Estimates, unpublished data; and ACIR staff estimates of 

constant dollar figures. 
Fim 3-1 

Index of Expenditures for Medicaid, Medicare, Government-Financed Personal Health Care Expenditures, 

and All Personal Health Care Expenditures, 1966-1990 

(1966 = 100) 

7000 

6500 

6000 

5500 

5000 

8 4500 

4000 

3500 

3000 

2500 

2000 

1500 

1000 

500 

c) 

w 

- - - - - Medicaid 

Medicare 

- - - - All Government Personal Health Care Expenditures 

- - All Personal Health Care Expenditures 

0 

- - All Personal Health Care Expenditures 

0 

1 

0 

0 

. 

1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 l99( 

Year 

Source: US. Department of Health and Human Services, Health Care Financing Administration. 

medical nondurables, and less than 4 percent of physicians’ and dentists’ services, but 31.9 percent of home 

health care and 45.4 percent of nursing home care, making 

it the largest payer for such service^.^ 

The relationship between Medicaid and Medicare is 

of particular interest. Both programs were enacted by the 

Social Security Amendments of 1965 and both finance 

health care for certain groups-Medicare for the elderly 

(aged 65 and over) and certain disabled individuals, and 

Medicaid for the needy, including the aged. Between 1972 

and 1984, Medicare grew significantly faster than Medicaid (total Medicaid expenditures fell from 92.3 percent of 

Medicare expenditures to 58.6 percent). Since 1984, Medicaid expenditures have risen somewhat faster than Medicare (in 1990, Medicaid expenditures were 65.5 percent of 

Medicare expenditures). 

Medicare expenditures grew faster between 1972 and 

1984 because (1) the number of Medicare beneficiaries increased faster than did Medicaid beneficiaries and (2) Medicare expenditures are weighted more heavily toward hospital 

care and physicians’ services than are Medicaid expenditures, and the costs of these services grew faster than other 

medical costs during this period.“ Conversely, between 1984 

and 1990, Medicaid expenditures grew faster than Medicare. 

The number of Medicaid beneficiaries rose 17.1 percent, 

from 21.6 million to 25.3 million, while the number of Medicare enrollees rose by 12.1 percent, from 30.5 million to 34.2 

milli~n.~ However, Medicare’s annual medical price inflation rate in the 1984-1988 period was 5.5 percent per year 

versus 5.0 percent per year for Medicaid.6 

TRENDS IN MEDICAID EXPENDITURES 

Growth in Expenditures 

The growth of Medicaid expenditures has nearly consistently outpaced that of general government expenditures. Table 3-3 and Figure 3-2 show that between 1966 

and 1972, as states joined the program, total annual Medicaid expenditure increases averaged 36.3 percent, well 

ahead of federal and state-local general expenditure 

growth. Between 1973 and 1981, annual Medicaid increases moderated somewhat (15.6 percent), following 

more closely but still higher than federal and state-local 

general expenditures (11 to 12 percent average). After 

1982, the average growth of Medicaid and general government expenditures slowed again, but became more erratic. Until 1987, Medicaid’s average annual increases of 11 

percent outpaced general expenditure growth by 2.7 to 2.9 

percentage points. Medicaid growth rates of 12.4 percent 

in 1987, 14.1 percent in 1989, and 18.5 percent in 1990 

exceeded this spread considerably. 

Medicaid has entered a new phase of very high 

growth. Total 1990 costs of $75.2 billion represent an 18.5 

percent increase over 1989. Current expenditure increases (not taking into account any future changes in the 

program) are projected to be 24.5 percent in FY 1991, 

dropping to 15.6 percent in FY 1992 and floating down to 

12.5 percent by FY 1996.7 

25 
Table 3-3 

Growth of Medicaid Expenditures Relative to Growth of Government Budgets, 1966-1990 

Total Total Federal Total State-Local Total State 

Medicaid Exne nditures General mil itures General E xDendit- General Exnenditures 

Annual Annual Annual Annual 

Amount Percentage Amount Percentage Amount Percentage Amount Percentage 

Year (millions) Increase (millions) Increase (millions) Increase (millions) Increase 

1966 

1967 

1968 

1969 

1970 

1971 

1972 

1973 

1974 

1975 

1976 

1977 

1978 

1979 

1980 

1981 

1982 

1983 

1984 

1985 

1986 

1987 

1988 

1989 

1990 

1966-72 

1973-81 

1982-90 

$1,323 

3,193 

3,613 

4,267 

5,415 

6,845 

8,472 

9,599 

11,280 

13,696 

15,476 

17,756 

19,782 

22,668 

26,411 

30,679 

32,467 

35,671 

38,411 

42,204 

45,676 

51,335 

55,602 

63,464 

75,200 

141.3% 

13.2 

18.1 

26.9 

26.4 

23.8 

13.3 

17.5 

21.4 

13.0 

14.7 

11.4 

14.6 

16.5 

16.2 

5.8 

9.9 

7.7 

9.9 

8.2 

12.4 

8.3 

14.1 

18.5 

$119,679 

138,565 

15 1,990 

158,618 

166,942 

177,922 

188,100 

208,457 

221,413 

253,492 

289,652 

315,404 

348,000 

389,986 

446,590 

516,910 

568,373 

624,170 

664,046 

747,498 

796,209 

832,200 

878,523 

910,438 

NA 

15.8% 

9.7 

4.4 

5.2 

6.6 

5.7 

10.8 

6.2 

14.5 

14.3 

8.9 

10.3 

12 1 

14.5 

15.7 

10.0 

9.8 

6.4 

12.6 

6.5 

4.5 

5.6 

3.6 

NA 

$82,843 

93,350 

102,411 

116,728 

131,332 

150,674 

168,549 

181,357 

198,959 

230,721 

256,73 1 

274,215 

296,983 

327,5 17 

369,086 

407,449 

436,896 

466,764 

505,008 

553,899 

605,623 

657,134 

704,921 

762,311 

833,003 

Average Annual Percentage Increase 

36.3% 7.8% 

15.6 12.0 

11.1 7.0 

12.7% 

9.7 

14.0 

12.5 

14.7 

11.9 

7.6 

9.7 

16.0 

11.3 

6.8 

8.3 

10.3 

12.7 

10.4 

7.2 

6.8 

8.2 

9.7 

9.3 

8.5 

7.3 

8.1 

9.3 

12.6% 

10.6 

8.4 

$46,090 

53,305 

60,395 

68,023 

77,642 

89,118 

98,810 

108,086 

119,891 

138,303 

153,690 

164,351 

179,802 

200,518 

228,223 

253,654 

269,490 

285,042 

309,684 

345,133 

376,519 

403,939 

432,178 

462,269 

507,875 

15.7% 

13.3 

12.6 

14.1 

14.8 

10.9 

9.4 

10.9 

15.4 

11.1 

6.9 

9.4 

11.5 

13.8 

11.1 

6.2 

5.8 

8.6 

11.4 

9.1 

7.3 

7.0 

7.0 

9.9 

13.6% 

11.3 

8.2 

NA-not available 

Sources: Medicaid Expenditures-Health Care Financing Administration, Office of National Cost Estimates 

General Expenditures-U.S. Department of Commerce, Bureau of the Census, Historical Statisrics on Governmental Finances 

and Employment, Census of Governments, various years, and Government Finances in (year). 

Medicaid as a Percentage 

of Federal and State Budgets 

Medicaid's higher than average rates of expenditure 

growth imply that the program has increased as a share of 

government budgets. To examine this, Thble 3-4 shows 

Medicaid expenditures relative to general government 

expenditures. 

Direct Medicaid expenditures are paid initially out of 

state budgets (and in 14 states local government budgets). 

Total Medicaid expenditures as a percentage of state general expenditures have shown near-constant growth, from 

less than 3 percent in 1966 to 14.8 percent in 1990, with a 

slight slowdown between 1984 and 1987 (see Bble 3-4). 

(Medicaid spending rose from 1.6percent to 9.0 percent as 

a percentage of state and local general government expenditures over the same period.) The percentage of each 

state's FY 1991 budget represented by state-only Medicaid expenditures is shown in Bble 3-5. 

The National Association of State Budget Officers 

(NASBO) projects that state Medicaid spending will reach 

an average of 17 percent of state budgets by 1995.8 The 

U.S. General Accounting Office (GAO) predicts that new 

conditions and requirements will exacerbate the states' 

fiscal stress resulting from the recession? GAO found that 

program requirements enacted since 1987 extending Medicaid coverage to older children and expanding screening 

programs and follow-up care will be more costly for the 

states to implement than previous changes." In the near 

future, most states will find it difficult to finance the new 

conditions and requirements without raising taxes, shifting Medicaid resources by eliminating optional services or 

closing public clinics, or reducing other state spending. 

26 
Figure 3-2 

Increases in Medicaid and General Expenditures, 

1968- 1990 

30 

20 

10 

0 

- Medicaid 

- - - - - Federal General Expenditures 

- - State-Local General Expenditures 

I 

s b 0- s 0 -. .* 8 0. *,* 9- 

1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 199( 

Year 

Source: ACIR from data supplied by U.S. Department of Health and Human Servioes, Health Care Financing Administration. 

Further, the new requirements limit state flexibility in 

providing health care for their citizens. 

When the portion of Medicaid expenditures financed 

by state and local governments is cornpared to total state 

expenditures, the pattern of increase is generally the 

same, but the magnitude is much less. As a percentage of 

state general expenditures, state and locally financed 

Medicaid expenditures grew from 1.5 percent in 1966 to 

6.4 percent in 1990.” (If Medicaid spending is compared to 

state and local government general expenditures, the proportions fall to 0.8 percent and 3.9 percent, respectively.) 

Since Medicaid began, over half of the total program 

spending (55.5 percent on average) has been financed by 

the federal government. Federal Medicaid expenditures 

as a percentage of federal general expenditures increased 

nearly steadily from less than 1 percent in 1966 to 3.4 

percent in 1981, leveled off for several years at 3.1 percent, 

and began to rise again in 1986, reaching 4.0 percent in 1989 

(see Bible 3-4). Federal Medicaid expenditures are projected 

to reach 6.5 percent of the federal budget by 1996.12 

State Variations 

National averages mask large variations in state budgets, both across states and within states between years. 

’ISlble 3-5 shows Medicaid expenditures as a percentage of 

each state’s budget in fiscal years 1987 to 1991, as well as 

the expenditure increases in those years. Medicaid spending ranged from 2.3 percent in Alaska in 1987 to 20.2 

percent in Rhode Island in 1991. Expenditures decreased 

19.5 percent in New Hampshire in FY 1988 and increased 

75.7 percent in Michigan in FY 1990. These generally high, 

but uneven, rates of growth make budgeting for Medicaid 

difficult. For example, in F’Y 1990, over half the states had to 

make supplemental Medicaid appropriation^.'^ 

Numerous studies have indicated that the major factors affecting the size of a state’s Medicaid program are 

both economic and political. Economic factors include 

conditions that affect the number of people eligible (unemployment, for example), the cost of medical care, state 

income or wealth, and taxpayer burdens. Political factors 

include the degree of state liberalism, interest group (including physician) density, size of the Medicaid bureaucracy, 

and the use of local governments to administer Medicaid.14 

Income and taxpayer burdens are of particular interest because of their importance in determining state Medicaid spending. States with higher personal incomes and 

lower taxpayer burdens are strongly associated with higher 

Medicaid spending. The Medicaid financing system attempts to change taxpayer burdens by varying state matching rates, using a formula that incorporates state personal 

income.” Under current law, the federal Medicaid matching 

ratio (FMAP) can range from 50 percent in the highest 

income states to 83 percent in the lowest income states. we 

highest ratio for FY 1992 is 79.99 percent in Mississippi.) 

Personal income does not accurately measure a 

state’s capacity to raise revenues because, for many states, 

the ability to export taxes to nonresidents is high.16 In addition, aggregate measures of income are not accurate indicators of state revenue-raising capacity because, for example, 

27 
Table 34 

Medicaid Expenditures as a Percentage of Governmental Budgets, 1966.1990 

Exhibit: 

Percentage Medicaid ExDenditures Financed bv: Total of Medicaid 

as a Percent as a Percent Expenditures Financed by: 

Federal Government State & Local Governments Medicaid Expenditures 

Total of Federal of State as a Percentage State- Medicaid Millions General Millions Own-Source of State Federal Local 

Expendi- of Expendi- of General General Govern- GovernYear tures Dollars tures Dollars Revenues’ Expenditures’ ment ments 

1966 

1967 

1968 

1969 

1970 

1971 

1972 

1973 

1974 

1975 

1976 

1977 

1978 

1979 

1980 

1981 

1982 

1983 

1984 

1985 

1986 

1987 

1988 

1989 

1990 

$1,323 

3,193 

3,613 

4,267 

5,415 

6,845 

8,472 

9,599 

11,280 

13,696 

15,476 

17,756 

19,782 

22,668 

26,411 

30,679 

32,467 

35,671 

38,411 

42,204 

45,676 

51,335 

55,602 

63,464 

75,200 

$642 

1,554 

1,877 

2,354 

2,916 

3,899 

4,642 

5,036 

6,400 

7,556 

9,295 

10,110 

11,085 

12,910 

14,660 

17,392 

17,669 

19,425 

20,667 

23,401 

25,631 

28,230 

31,405 

36,139 

42,900 

0.5% 

1.1 

1.2 

1.5 

1.7 

2.2 

2.5 

2.4 

2.9 

3.0 

3.2 

3.2 

3.2 

3.3 

3.3 

3.4 

3.1 

3.1 

3.1 

3.1 

3.2 

3.4 

3.6 

4.0 

NA 

$680 

1,638 

1,736 

1,915 

2,498 

2,946 

3,831 

4,562 

4,880 

6,139 

6,18 1 

7,647 

8,697 

9,759 

11,751 

13,287 

14,797 

16,246 

17,744 

18,803 

20,044 

23,150 

24,197 

27,325 

32,300 

2.0% 

4.3 

4.0 

3.9 

4.3 

4.8 

5.4 

5.7 

5.5 

6.3 

5.8 

6.3 

6.4 

6.5 

6.9 

7.1 

7.2 

7.5 

7.1 

6.8 

6.8 

7.3 

7.2 

7.5 

8.3 

2.9% 

6.0 

6.0 

6.3 

7.0 

7.7 

8.6 

8.9 

9.4 

9.9 

10.1 

10.8 

11.0 

11.3 

11.6 

12.1 

12.0 

12.5 

12.4 

12.2 

12.1 

12.7 

12.9 

13.5 

14.8 

48.5% 51.4% 

48.7 51.3 

52.0 48.0 

55.2 44.9 

53.9 46.1 

57.0 43.0 

54.8 45.2 

52.5 47.5 

56.7 43.3 

55.2 44.8 

60.1 39.9 

56.9 43.1 

56.0 44.0 

57.0 43.1 

55.5 44.5 

56.7 43.3 

54.4 45.6 

54.5 45.5 

53.8 46.2 

55.4 44.6 

56.1 43.9 

55.0 45.1 

56.5 43.5 

56.9 43.1 

57.0 43.0 

NA-not available 

Local governments contribute to Medicaid financing in Colorado, Florida, Iowa, Minnesota, Montana, Nebraska, New Hampshire, 

New York, North Carolina, North Dakota, Pennsylvania, South Dakota, Utah, and Wisconsin. 

Sources: See Tables 3-1 and 3-2 

two states with nearly identical average per capita income 

may have different proportions of poverty and affluence. 

Population is a poor indicator of a state’s “need” for 

public services and of the cost of providing services. Other 

factors, such as the age and income distribution of the 

population, the prices of service inputs, and workloads 

(e.g., population in households with incomes below the 

poverty line), are more accurate indicators of service 

needs and costs.17 

Research has shown that, while state Medicaid spending is responsive to the federal matching rates, the reimbursement rates in low-income states have not completely 

offset the lesser ability of these states to pay for Medicaid 

services.18 As a result, the U.S. General Accounting Office (GAO) proposed in 1983, and again in recent congressional testimony, that the Medicaid formula be revised by 

incorporating a better measure of tax capacity than personal income and adding the poverty population as a measure of need, as well as by reducing the minimum federal 

matching rate to 40 percent. ACIR’s representative tax 

system was identified in the 1983 report as providing such 

an improved measure of tax pac city.'^ 

Changing the Medicaid allocation formula would 

generally mean a small difference in the amount of Medicaid funds a state would receive, but for some states the 

differences would be substantial.*O GAO’s simulation under a federal budget-neutral constraint, using a formula 

incorporating tax capacity and adding poverty population 

as a measure of need, shows changes in federal Medicaid 

grants ranging from a decline of more than 20 percent in 

Wyoming and more than 15 percent in Wisconsin and 

Indiana to an increase of almost 19 percent in Florida.*l A 

second simulation under federal budget-neutral conditions, with a 40 percent minimum federal share rather than 

28 
Table 3-5 

State Medicaid Expenditures, Total, as Percentage of State General Expenditures, and Percentage Change, 

$ 

Fiscal Years 1987-1991 

9s Percentage of State General ExDenditureS Percentage C hange 

State 1987 1988 1989 1990 199lC 1987 1988 1989 1990 1991' 1987-88 1988-89 1989-90 1990-91 

New England 

Connecticut $600 

Maine 283 

Massachusetts 1,423 

New Hampshire 144 

Rhode Island 293 

Vermont 98 

Mideast 

Delaware 90 

District of Columbia 298 

Maryland 

New Jersey 

New York 

M Pennsylvania 

Great Lakes 

Illinois 

Indiana 

Michigan 

Ohio 

Wisconsin 

Plains 

Iowa 

Kansas 

Minnesota 

Missouri 

Nebraska 

North Dakota 

South Dakota 

Southeast 

Alabama 

Arkansas 

Florida 

Georgia 

Kentucky 

804 

1,551 

6,330 

2,125 

1,784 

933 

1,576 

2,037 

1,114 

428 

249 

1,109 

566 

195 

166 

114 

421 

358 

1,394 

911 

629 

$694 

3 14 

1,593 

183 

3 13 

110 

96 

362 

906 

1,741 

6,960 

2,252 

lB50 

1,017 

1,677 

2,250 

1,155 

478 

281 

1,194 

621 

231 

156 

123 

463 

436 

1,576 

1,087 

708 

$8 16 

392 

1,766 

140 

348 

113 

114 

354 

996 

1,913 

7,698 

2,511 

2,15 1 

1,136 

1,593 

2,269 

1,25 1 

533 

325 

722 

260 

170 

144 

1,277 

538 

507 

2,oo 1 

1,240 

815 

$964 

3% 

2,612 

215 

428 

146 

13 1 

NA 

1,152 

2,256 

8,362 

2,670 

230 

1,446 

z799 

2,800 

1,423 

624 

409 

1,421 

832 

311 

174 

160 

834 

600 

2,407 

1,497 

946 

$urn 

445 

2,581 

258 

463 

192 

156 

NA 

1,216 

2,646 

9,639 

3,910 

27540 

1,766 

2553 

3,376 

1,537 

740 

5 13 

1,606 

1,281 

320 

186 

180 

1,118 

637 

3,281 

2,001 

1,198 

8.6% 

14.6 

9.7 

12.7 

17.9 

10.4 

5.4 

9.3 

9.2 

11.7 

17.6 

11.7 

10.6 

126 

10.7 

11.5 

10.2 

6.4 

6.9 

11.1 

8.8 

9.6 

13.6 

10.8 

7.8 

10.3 

8.3 

11.5 

9.6 

8.6 % 

15.0 

10.5 

13.1 

16.3 

10.5 

5.2 

8.6 

9.7 

12.0 

17.4 

11.6 

10.7 

13.2 

10.8 

11.7 

11.7 

7.8 

7.3 

13.8 

8.9 

10.6 

11.1 

10.7 

7.2 

11.3 

8.5 

12.5 

9.7 

9.3% 

15.7 

10.6 

13.1 

16.6 

9.8 

5.6 

8.1 

9.8 

12.0 

17.7 

122 

11.9 

13.8 

10.0 

11.6 

12.2 

8.0 

7.6 

14.0 

9.9 

10.8 

11.1 

13.4 

7.7 

12.3 

9.4 

12.4 

11.3 

10.2% 

14.9 

15.2 

11.9 

19.1 

11.9 

6.0 

NA 

10.2 

13.8 

18.0 

12.2 

11.9 

16.0 

16.0 

13.3 

12.9 

8.9 

8.6 

14.2 

10.4 

11.3 

11.5 

13.8 

11.3 

13.2 

10.6 

127 

12.2 

12.1% 

15.3 

15.0 

17.7 

20.2 

14.9 

6.8 

NA 

10.4 

14.6 

19.6 

15.9 

123 

17.8 

13.9 

14.6 

13.0 

10.0 

9.9 

14.5 

15.0 

9.5 

12.4 

13.8 

13.9 

13.3 

12 1 

15.9 

12.2 

15.7% 

11.0 

11.9 

27.1 

6.8 

12.2 

6.7 

21.5 

12.7 

12.3 

10.0 

6.0 

3.7 

9.0 

6.4 

10.5 

3.7 

11.7 

12.9 

7.7 

9.7 

18.5 

-6.0 

7.9 

10.0 

21.8 

13.1 

19.3 

12.6 

17.6% 

24.8 

10.9 

-23.5 

11.2 

2.7 

18.8 

-2.2 

9.9 

9.9 

10.6 

11.5 

16.3 

11.7 

0.8 

8.3 

-5.0 

11.5 

15.7 

7.0 

16.3 

12.6 

9.0 

17.1 

16.2 

16.3 

27.0 

14.1 

15.1 

18.1% 

1.0 

47.9 

53.6 

23.0 

29.2 

14.9 

NA 

15.7 

17.9 

8.6 

6.3 

4.6 

27.3 

75.7 

23.4 

13.7 

17.1 

25.8 

11.3 

15.2 

19.6 

24 

11.1 

55.0 

18.3 

20.3 

20.7 

16.1 

21.4% 

12.4 

-1.2 

20.0 

8.2 

31.5 

19.1 

NA 

5.6 

17.3 

15.3 

46.4 

129 

22.1 

-8.8 

rn.6 

8.0 

18.6 

25.4 

13.0 

54.0 

2.9 

6.9 

12.5 

34.1 

6.2 

36.3 

33.7 

26.6 
~ ~~ 

Tobe 3-5 (cont.) 

State Medicaid Expenditures, Total, as Percentage of State General Expenditures, and Percentage Change, 

Fiscal Years 1987-1991 

State 

Amount (millions) as Percentage of State Ge neral Exwndituw Percentagc C hanee 

1987 1988 1989 1990 1991" 1987 1988 1989 1990 1991' 1987-88 1988-89 1989-90 1990-91 

Southeast (cont.) 

Louisiana 

Mississippi 

North Carolina 

South Carolina 

Tennessee 

Virginia 

West Virginia 

Southwest 

Arizona 

New Mexico 

Oklahoma 

Texas 

w 

0 Rocky Mountain 

Colorado 

Idaho 

Montana 

Utah 

Wyoming 

882 903 1,147 1,319 1,691 

384 401 464 608 707 

823 931 1,119 1,358 1,565 

421 455 612 752 1,003 

820 995 1,038 1,370 1,633 

702 734 901 1,004 1,301 

255 252 333 451 482 

NA 311 442 643 909 

192 216 255 279 341 

525 577 636 706 817 

824 2,153 2,408 3,069 4,308 

399 440 476 584 701 

84 100 112 149 200 

208 197 207 270 327 

41 43 55 62 65 

144 157 171 172 mi 

12.0 12.3 15.5 15.6 17.8 

10.5 10.3 11.3 14.9 15.0 

9.3 9.6 10.5 11.5 124 

7.8 7.7 8.8 9.8 11.9 

13.4 16.5 15.3 18.2 20.0 

7.5 7.1 7.9 8.2 9.9 

7.6 7.6 10.0 12.3 11.9 

NA 6.4 8.4 10.7 12.7 

7.1 7.1 8.4 7.3 8.9 

10.4 11.2 11.3 11.9 12.2 

4.6 11.4 13.0 13.0 16.4 

8.9 9.5 9.3 11.0 12.9 

6.3 6.9 7.2 8.2 9.8 

9.3 9.7 9.5 9.8 10.0 

7.8 6.9 7.3 8.4 9.4 

2.4 2.6 4.6 4.5 4.6 

24 

4.4 

13.1 

8.1 

21.3 

4.6 

-1.2 

NA 

125 

9.9 

161.3 

10.3 

19.0 

9.0 

-5.3 

4.9 

27.0 

15.7 

34.5 

4.3 

228 

32 1 

20.2 

42.1 

18.1 

10.2 

11.8 

8.2 

120 

8.9 

5.1 

27.9 

15.0 

31.0 

21.4 

22.9 

320 

11.4 

35.4 

45.5 

9.4 

11.0 

27.5 

227 

33.0 

0.6 

30.4 

127 

28.2 

16.3 

15.2 

33.4 

19.2 

29.6 

6.9 

41.4 

22.2 

15.7 

40.4 

20.0 

34.2 

16.9 

21.1 

4.8 

Far West 

Nevada 121 103' 114' NA NA 8.9 7.3" 7.3' NA NA -14.9 10.7 NA NA 

Oregon 286 304 330 524 700 4.8 4.9 5.0 7.5 9.3 6.3 8.6 58.8 33.6 

Washington 795 920 995 1,209 1,431 8.9 9.8 9.8 10.7 10.7 15.7 8.2 21.5 18.4 

Alaska 75 100 113 156 200 2.3 3.1 3.5 4.2 5.3 33.3 13.0 38.1 28.2 

Hawaii 176 190 210 239 254 5.8 5.8 5.8 5.5 4.9 8.0 10.5 13.8 6.3 

California 5,329 5,659 6,209 7,170 8,670 10.1 9.9 10.1 10.7 11.4 6.2 9.7 15.5 20.9 

~~~ 

NA-not available 

C-estimate 

Source: National Association of State Budget Officers, State Expenditurn Reports for 1988, 1989, 1990, and 1991. 
the current 50 percent, yielded the largest decreases in federal Medicaid funds of 36 percent to Wyomhg and 21 percent to Connecticut and New Jersey, and the largest 

increases of 21 percent to Florida and 10 percent to Rxasz2 

Local government contributions to state Medicaid 

programs are less than 10 percent of total state costs. 

Outside New York State, most local contributions are 

services rather than direct payments. States with local 

Medicaid administration spend significantly more on the 

program than the other states. Researchers have posited 

three reasons for this effect. First, adding local administration increases the complexity of the process and hence 

program costs. Second, costs may increase because of duplication, confusion, and disagreement. Third, because 

local officials do not bear the full financial burden of their 

decisions, they have incentives to administer the program 

liberally, thus increasing program spending?' In addition, 

local revenue bases are considered to be less elastic than 

state revenue bases, making it more difficult for local 

governments to finance increases in Medicaid expenditures resulting from program expansions or deteriorating 

economic conditi0ns.2~ The implication of these findings is 

that, to better achieve the objective of cost control and to 

reduce local fiscal stress, Medicaid should be administered entirely by the state government. 

Alternatively, locally administered Medicaid pro- grams may result in higher overall program spending sim- ply because needs are more apparent and better addressed 

under these decentralized systems. More research and 

analysis are needed on this issue. 

MEDICAID IN RELATION 

TO OTHER SOCIAL WELFARE EXPENDITURES 

Medicaid has grown in relation to other types of social 

welfare expenditures, as shown in Thble 3-6. For all gov- ernments combined, Medicaid has roughly doubled its 

importance relative to all other types of social services and 

income maintenance programs, rising from 12.8 percent 

of such expenditures in 1969 to over 25 percent in 1989. In 

1969, cash assistance outlays exceeded Medicaid. In 1979, 

Table 3-6 

Medicaid in Relation to Other Social Welfare Expenditures, 1969,1979, and 1989 

1969 1979 1989 

All Governments 

Total Social Services and Income Maintenance (millions)' 

Medicaid 

Cash Assistance 

Health and Hospitals 

All Other 

Federal Government 

Total Social Services and Income Maintenance (millions)' 

Medicaid 

Other Public Welfare2 

Health and Hospitals 

All Other 

Total Federal Grants (millions) 

Medicaid 

Other Payments to Individuals 

All Other Grants 

Total Social Services and Income Maintenance (millions)' 

Medicaid 

Cash Assistance 

Health and Hospitals 

All Other 

Exhibit: 

State and Local Governments 

$33,278 

12.8% 

18.8 

35.8 

325 

19,610 

12.0% 

33.8 

20.7 

33.5 

20,164 

11.3% 

24.6 

64.1 

21,297 

28.8 

40.0 

22.2 

9.0% 

$11 1,995 

20.2% 

17.0 

33.2 

29.6 

69,504 

18.6% 

42.2 

17.1 

22.2 

82,858 

15.0% 

18.3 

66.7 

71,922 

13.6% 

16.6 

39.2 

30.6 

$237,390 

26.7% 

15.3 

35.8 

22.1 

136,818 

26.4% 

37.6 

17.1 

18.9 

121,976 

28.4% 

26.8 

44.8 

168,729 

16.2% 

12.3 

40.1 

31.4 

Includes cash assistance programs, medical and other vendor payments, welfare institutions, program administration, health and hos- pitals, social insurance administration, and veterans' benefits. 

Includes intergovernmental transfers to state and local governments for cash assistance programs, Supplemental Security Income (formerly Old Age Assistance, Aid to the Blind, and Aid to the Permanently and Totally Disabled), welfare institutions, and program 

administration. 

Sources: U.S. Department of Health and Human Services, Health Care Financing Administration, Office of National Cost Estimates, 

unpublished data; U.S. Department of Commerce, Bureau of the Census, Government Finances in wear); and Office of Management and Budget, Budget of the United States Government, Fiscal Year 1992. 

31