United States General Accounting Office

GAO Report to the Chairman, Committee on

the Budget, U.S. Senate, and to the

Chairman, Committee on the Budget,

House of Representatives

June 1997 MEDICAID

Sustainability of Low

1996 Spending Growth

Is Uncertain

GAO/HEHS-97-128

GAO United States

General Accounting Office

Washington, D.C. 20548

Health, Education, and

Human Services Division

B-276963 

June 27, 1997

The Honorable Pete V. Domenici

Chairman

Committee on the Budget

United State Senate

The Honorable John R. Kasich

Chairman

Committee on the Budget

House of Representatives

In fiscal year 1996, federal and state expenditures for Medicaid totaled

approximately $160 billion—accounting for roughly 6 percent of total

federal expenditures and 20 percent of total state expenditures. Medicaid’s

annual growth rate for fiscal year 1996, however, was estimated at only

3.3 percent or lower—a substantial drop from the more than 20-percent

annual growth rates of the early 1990s.1

 The very low 1996 spending

growth rate raised many questions about what led to this steep drop and

its implications for future expenditures.

In response to your request about this low growth rate, we (1) examined

the dominant factors affecting trends in Medicaid spending growth from

fiscal years 1989 to 1995, (2) identified key factors that contributed to the

low spending growth rate for fiscal year 1996 and analyzed variations in

states’ Medicaid spending growth for the most recent 2-year period, and

(3) assessed the implication of these factors for future Medicaid spending.

Our findings are based on an analysis of data on state and federal Medicaid

expenditures and on federal Medicaid outlays obtained from the Health

Care Financing Administration (HCFA). Our trends analysis was based on

expenditure and enrollment data for fiscal years 1988 to 1995.2

 Final data

for fiscal year 1996 were not available as of June 3, 1997. Our analysis of

the 3.3-percent growth rate in fiscal year 1996 was based on federal

Medicaid outlays. We also interviewed Medicaid officials from the 18

1

The 3.3-percent growth rate has been widely used and represents the moneys paid to states by the

federal government each month to fund Medicaid. Historically, federal outlays have proven to be a

good predictor of Medicaid expenditures—representing the obligated dollar amounts for services

provided and program administration in a given time period, whether paid or unpaid. According to

HCFA, however, preliminary fiscal year 1996 expenditure data show only about 1.8 percent growth

over fiscal year 1995 expenditures.

2

Fiscal year 1988 was the earliest year for which spending estimates were available on one critical

program component—the disproportionate share hospital (DSH) program. Therefore, fiscal year 1989

was the earliest year for which a growth rate could be calculated for this program.

Page 1 GAO/HEHS-97-128 Medicaid Spending Growth
B-276963 

states that accounted for almost 65 percent of federal Medicaid outlays

and represented the full range of growth rate trends in state spending

observed in the past 2 years. We conducted our review from August 1996

to April 1997 in accordance with generally accepted government auditing

standards. For more detailed information on our scope and methodology,

see appendix I.

Results in Brief The Medicaid spending growth rate increased dramatically in the early

1990s, rising to almost 29 percent in 1992, with expenditures growing from

almost $60 billion in fiscal year 1989 to $157 billion in fiscal year 1995.

Factors that help explain this trend include (1) escalating disproportionate

share hospital (DSH) payments made to hospitals that cover a large

proportion of low-income and Medicaid beneficiaries, (2) the increasing

cost of providing services (the prices paid for services and the average

costs of services per beneficiary), and (3) the growing number of program

beneficiaries. Each of these factors prevailed to increase spending growth

at different times. For example, from fiscal years 1990 to 1992, the

contribution of DSH payment increases soared from 6 to 46 percent of total

spending growth until those payments were brought under control in 1993.

While DSH payment contributions erratically increased and decreased, the

impact of additional beneficiaries on overall expenditure growth steadily

increased due in part to mandated and optional eligibility expansions. By

fiscal year 1995, however, as Medicaid spending growth had abated

substantially, the contribution of these factors had decreased.

The dramatically low Medicaid expenditure growth rate in fiscal year 1996

masked wide variations in states’ Medicaid growth. One state’s Medicaid

expenditures decreased by 16 percent, another’s increased by 25 percent.

Most states, however—accounting for 80 percent of fiscal year 1996

federal Medicaid outlays—had moderate decreases or minimal changes

from their previous year’s spending growth. A combination of factors—

some affecting only certain states and others common to many states—

explains the low fiscal year 1996 growth rate. For example, some states’

increases in Medicaid enrollment leveled off after the prior year’s major

state-initiated program expansions. A number of other states we contacted

attributed lower growth rates to a generally improved economy and state

initiatives to limit expenditure growth through program changes such as

managed care programs and long-term care alternatives.

Whether the low 1996 Medicaid spending growth rate of 3.3 percent will be

sustained in subsequent years is uncertain. The factors that reduced

Page 2 GAO/HEHS-97-128 Medicaid Spending Growth
B-276963 

growth in fiscal year 1996 will continue to affect future Medicaid spending.

The net effect of factors, such as DSH spending and the future economy,

however, are unknown. Some of these factors may contribute to higher

growth in the near future. For example, DSH payments have already begun

to grow again. In addition, if the economy declines, enrollment in Medicaid

would probably increase. The possible effects of other factors are less

predictable. Welfare reform’s effect on expenditure growth is uncertain

because states are just starting to implement their new programs. Also

uncertain is the amount of money that may be saved from states

implementing managed care alternatives.

Background Medicaid, a federal grant-in-aid entitlement program administered by

states, finances health care for about 37 million low-income families and

blind, disabled, and elderly people. The federal and state governments

share funding for Medicaid, with the federal government contributing an

average of 57 percent of program costs in 1996.3

 At the state level,

Medicaid operates as a health insurance program covering acute care

services for most beneficiaries, financing long-term medical care and

social services for elderly and disabled people, and funding programs for

people with developmental disabilities and mental illnesses.

In 1995, almost 70 percent of total Medicaid enrollment consisted of

children and adults, but this group accounted for less than 25 percent of

total program expenditures. (See fig. 1.) In the same year, less than

30 percent of the total Medicaid population consisted of blind, disabled, or

elderly people, but this group accounted for more than 60 percent of total

expenditures. DSH payments accounted for about 13 percent of total

payments.4

3

The percentage of an individual state’s Medicaid expenditures covered by the federal government can

range from 50 to 83 percent.

4

The DSH program partially offsets costs not covered by Medicaid or private insurance incurred by

hospitals serving large numbers of Medicaid and other low-income patients, including the uninsured.

Page 3 GAO/HEHS-97-128 Medicaid Spending Growth
B-276963 

Figure 1: Shares of Medicaid

Beneficiaries and Expenditures, by

Eligibility Category, Fiscal Year 1995

Note: Excludes “other” and “unknown” eligibility categories.

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

(HCFA-64) files.

For more than a decade, the national growth rate in Medicaid

expenditures has been erratic. (See fig. 2.) Between fiscal years 1985 and

1988, the annual growth rate remained relatively stable, ranging between

roughly 8 and 10.5 percent. During the next 3 years, starting in fiscal year

1989, the annual growth rate began to climb substantially, reaching almost

29 percent in fiscal year 1992—an increase of more than $26 billion in

expenditures for that year. Medicaid’s growth fell dramatically in fiscal

year 1993 to 10.7 percent. From fiscal years 1993 through 1995, the annual

Page 4 GAO/HEHS-97-128 Medicaid Spending Growth
B-276963 

growth rate for the program leveled off at between 8 and 11 percent,

which was similar to the growth rate between 1985 and 1988. Then, in

fiscal year 1996, the growth rate fell to an estimated 3.3 percent.

Figure 2: Annual Growth Rate in

Medicaid Expenditures, Fiscal Years

1985-96

Sources: Fiscal years 1984-95, federal and state current expenditures (HCFA-64, line 6). Fiscal

year 1996 data based on federal outlays for Medicaid. (Final expenditure data were not available

for fiscal year 1996.)

Page 5 GAO/HEHS-97-128 Medicaid Spending Growth
B-276963 

Dominant Factors

Affecting 1989-95

Spending

Three dominant factors affected the 1989-95 growth in Medicaid

expenditures: the DSH program, nominal spending per beneficiary (the cost

of services),5

 and the growth in the number of program beneficiaries. To

better understand the effect of these factors on Medicaid growth rates, we

measured the effect of each while holding the others constant. (See fig. 3

and table 1.) For the first 2 years of the 7-year period, nominal spending

per beneficiary constituted the largest share of growth in the overall

program; by 1992, however, DSH payments constituted the largest share.

Increased beneficiary enrollment had a more constant—and increasingly

significant—effect on the annual growth rate. Between 1990 and 1994,

growth in beneficiary enrollment accounted for 30 percent or more of the

total growth in Medicaid spending.

5

Several different factors, including medical price inflation, reimbursement levels, and quality

assurance standards, affect nominal spending per beneficiary, a measure of average cost. At the

aggregate level, the demographic makeup of the Medicaid population also affects nominal spending

per beneficiary. For example, states with large elderly and disabled populations will have higherthan-average costs.

Page 6 GAO/HEHS-97-128 Medicaid Spending Growth
B-276963 

Figure 3: Annual Increases in Medicaid

Expenditures by Growth Factor, Fiscal

Years 1989-95

Sources: Medical assistance program expenditures (HCFA-64), excluding administrative costs

and territories; beneficiary enrollment (HCFA-2082); and DSH estimates from the Urban Institute.

Page 7 GAO/HEHS-97-128 Medicaid Spending Growth
B-276963 

Table 1: Shares of Medicaid

Expenditure Growth by Factors, Fiscal

Years 1989-95

Factors Percentage share of total expenditure growtha

1989 1990 1991 1992 1993 1994 1995

Nominal expenditures per

beneficiary 82 64 29 14 41 51 59

DSHb 3 6 21 46 –4 –1 14

Beneficiary growth 15 30 50 40 63 51 27

Total expenditure growth 100 100 100 100 100 100 100

Note: Does not include administrative costs or payments to U.S. territories.

aPercentages may not add to 100 due to rounding.

bDSH payments were first reported as a separate expenditure category in fiscal year 1993. The

DSH shares for 1989 to 1994 used for this analysis are estimates made by the Urban Institute, in

part based on HCFA-64 data. The DSH share for 1995 is based on HCFA-64 data.

Table 2: Annual Medicaid

Expenditures, Growth, and Growth

Rate, Fiscal Years 1989-95

1989 1990 1991 1992 1993 1994 1995

Growth rate (percent) 13.6 19.1 26.7 29.6 10.6 8.1 10.8

Annual growth (dollars in

billions) $7.0 $11.2 $18.6 $26.1 $12.1 $10.2 $14.8

Total medical assistance

expenditures (dollars in

billions) $58.5 $69.6 $88.2 $114.3 $126.4 $136.6 $151.4

Note: Does not include administrative costs or payments to U.S. territories.

Between fiscal years 1990 and 1992, the DSH program had its most dramatic

effect on Medicaid growth rates: its share of the overall Medicaid

expenditure growth increased from 6 to 46 percent. A number of states

increased their share of federal Medicaid dollars in fiscal years 1991 and

1992 through certain creative financing mechanisms such as using

provider taxes and donations to obtain federal matching funds for

Medicaid.6

 States used the DSH program along with these financing

mechanisms to increase federal funds. As a result, DSH payments

skyrocketed: In 1990, they were just above $1 billion; by 1992, they had

increased to $17 billion. To limit these payments, the Congress placed

restrictions on the DSH program and on the use of provider taxes and

donations as revenue sources.7 DSH payments were limited to a national

6

See Medicaid: States Use Illusory Approaches to Shift Program Costs to Federal Government

(GAO/HEHS-94-133, Aug. 1, 1994); Michigan Financing Arrangements (GAO/HEHS-95-146R, May 5,

1995); and State Medicaid Financing Practices (GAO/HEHS-96-76R, Jan. 23, 1996).

7

Medicaid Voluntary Contribution and Provider-Specific Tax Amendments of 1991 (P.L. 102-234) and

the Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66, section 13621).

Page 8 GAO/HEHS-97-128 Medicaid Spending Growth
B-276963 

target of 12 percent of total Medicaid expenditures, excluding

administrative costs. If a state’s DSH spending exceeded this target, its DSH

payments were frozen until they equaled 12 percent or less of the state’s

medical assistance expenditures. These restrictions greatly curbed

payments, leading initially to less DSH spending and reduced Medicaid

spending growth in fiscal years 1993 and 1994. Even as states’ DSH

spending began to conform to the 12-percent target, however, aggregate

state DSH payments began to increase again as total Medicaid spending

grew. As a result, in fiscal year 1995, the DSH program share of expenditure

growth grew to 14 percent.

Nominal spending per beneficiary constituted the largest share of

Medicaid expenditure growth in fiscal years 1989, 1990, 1994, and 1995 but

accounted for only one-third or less of the growth in 2 other years. In years

in which the share of nominal spending per beneficiary was relatively

small, DSH payment growth was high. Conversely, in years in which the

share of nominal spending was high, DSH payments were low.

Beneficiary enrollment also consistently contributed to Medicaid’s growth

rate in the years that we examined. In fiscal years 1991, 1993, and 1994,

increased enrollment accounted for at least half of increased Medicaid

expenditures. After several years of static growth, the number of Medicaid

beneficiaries grew from about 22 million in fiscal year 1988 to 30 million in

fiscal year 1992; by fiscal year 1995, enrollment had grown to over

36 million. (See fig. 4.) This growth was due in part to federal mandates

that expanded eligibility to pregnant women and children and to certain

other low-income women and children who met financial but not

categorical eligibility standards. In addition, some states have used

managed care demonstration waivers to expand coverage to uninsured

individuals.8

8

States have used the authority of demonstration waivers under section 1115 of the Social Security Act

(42 U.S.C. 1315(a)) to mandate enrollment of some or all Medicaid beneficiaries in managed care and

expand eligibility for enrollment to uninsured individuals who would not otherwise qualify for

Medicaid. See Medicaid: Spending Pressures Drive States Toward Program Reinvention

(GAO/HEHS-95-122, Apr. 4, 1995) and Medicaid: Statewide Section 1115 Demonstrations’ Impact on

Eligibility, Service Delivery, and Program Cost (GAO/T-HEHS-95-182, June 21, 1995).

Page 9 GAO/HEHS-97-128 Medicaid Spending Growth
B-276963 

Figure 4: Medicaid Enrollment by

Eligibility Category, Fiscal Years

1985-95

Note: Excludes “other” and “unknown” categories of eligibility.

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

A Combination of

Factors Affected 1996

Spending Growth

After relatively stable growth rates between fiscal years 1993 and 1995, the

Medicaid growth rate dropped to an estimated 3.3 percent in fiscal year

1996. No single spending growth trend was evident in the states, and no

single factor explained the decrease in growth for 1996, according to our

analysis. Rather, a combination of factors—some of which are unlikely to

Page 10 GAO/HEHS-97-128 Medicaid Spending Growth
B-276963 

recur and others that seem part of a larger trend—have affected

Medicaid’s growth rate.

No Single Spending Trend

Common to States

The 3.3-percent growth rate in fiscal year 1996 federal Medicaid outlays

masked striking variation in states’ Medicaid growth. Growth rates ranged

from a decrease of 16 percent in one state to an increase of 25 percent in

another. Such differences in states’ program spending growth have been

fairly typical. In addition, some states often have large changes in growth

from one year to the next because of major program changes or

accounting variances that change the fiscal year in which a portion of

expenditures is reported. To determine the stability of states’ growth rates,

we compared these rates for fiscal years 1995 and 1996. We then placed

states in one of five growth rate categories, as shown in table 2. (See app.

II for states’ specific growth rates.)

Page 11 GAO/HEHS-97-128 Medicaid Spending Growth
B-276963 

Table 3: Changes in Growth Rate of

Federal Medicaid Outlays, Fiscal Years

1995-96

Fiscal year 1996

growth rate compared

with fiscal year 1995’s

Number of

states

Percentage of

1996 federal

outlays States

Decreased substantially 10 16 Colorado, Florida,

Hawaii, Louisiana,

North Carolina,

Oregon, Rhode Island,

South Carolina,

Tennessee, Wyoming

Decreased moderately 20 48 Alabama, California,

Idaho, Illinois, Iowa,

Kansas, Kentucky,

Maryland,

Massachusetts,

Michigan, Minnesota,

Mississippi, North

Dakota, Ohio,

Oklahoma,

Pennsylvania, South

Dakota, Texas,

Vermont, Washington

Changed minimally 16 32 Arizona, Arkansas,

Connecticut, Delaware,

District of Columbia,

Georgia, Missouri,

Montana, Nebraska,

Nevada, New Jersey,

New York, Utah,

Virginia, West Virginia,

Wisconsin

Increased moderately 3 2 Alaska, Maine, New

Mexico

Increased substantially 2 2 Indiana, New

Hampshire

Ten states that collectively accounted for 16 percent of 1996 federal

Medicaid outlays had substantially decreased growth in fiscal year 1996

compared with fiscal year 1995. However, 80 percent of 1996 federal

Medicaid outlays took place in states whose fiscal year 1996 growth either

moderately decreased or minimally changed. Although five states’ fiscal

year 1996 growth rates increased, those states did not greatly affect

spending growth trends because their combined share of Medicaid outlays

was only 4 percent.

A number of factors have led to Medicaid’s decreased spending growth

rate in fiscal year 1996. Some of these—such as the prior implementation

of cost controls and a leveling off in the number of program eligibles

Page 12 GAO/HEHS-97-128 Medicaid Spending Growth
B-276963 

following state-initiated expansions—continue to affect the growth rate in

some states. Other factors, such as improved economic conditions and

changing program policies—for example, increased use of alternatives to

institutional long-term care—also affected many states’ low growth rates.

Several Factors Affecting

Spending Growth Will

Probably Not Recur

The large decreases in some states’ growth rates in 1996 are largely due to

three factors not expected to recur: substantially decreased DSH funding,

slowdowns in state-initiated eligibility expansions, and accelerated 1995

payments in response to block grant proposals for Medicaid.

After the Congress enacted new limits in 1991 and 1993, DSH payments

declined nationally in 1993, stabilized in 1994, and began to grow again in

1995. Louisiana, however—a state that has had one of the nation’s largest

DSH programs, accounting for 30 percent of the state’s total Medicaid

expenditures in fiscal year 1995—has not followed this trend. Louisiana’s

1996 growth rate decreased substantially as its DSH payments continued to

decline. The state’s federal outlays decreased by 16 percent in 1996

because its DSH payments dropped dramatically.

Recent slowdowns in state-initiated eligibility expansions also helped to

substantially decrease the growth rates in selected states. In the past

several years, some states implemented statewide managed care

demonstration waiver programs to extend health care coverage to

uninsured people not previously eligible for Medicaid. Three states whose

1996 growth rates decreased substantially—Hawaii, Oregon, and

Tennessee—implemented most of their expansions in 1994. The increased

expenditures due to these expansions continued into 1995 but began to

level off in 1996. The number of eligible beneficiaries actually dropped in

these states in 1996 partly due to the states applying more stringent

eligibility requirements for the expansion population.

States accelerating 1996 payments into 1995 also helps explain the low

1996 growth rate.9

 In 1995, the Congress—as part of a Medicaid block

grant proposal—was considering legislation to establish aggregate

spending limits that would be calculated using a base year. In response to

the anticipated block grant, officials from a few states told us, they

accelerated their Medicaid payments to increase their expenditures for

fiscal year 1995—the year the Congress considered using as the base. For

example, one state, with federal approval, made a DSH payment at the end

9

Aggregate data show that growth in federal Medicaid outlays was flat in the first 6 months of 1996 and

then grew 6 percent in the last 6 months.

Page 13 GAO/HEHS-97-128 Medicaid Spending Growth
B-276963 

of fiscal year 1995 rather than at the start of fiscal year 1996. Another state,

whose growth had moderately decreased, expedited decisions on audits of

hospitals and nursing homes to speed payments due these providers,

according to a state official.

Strong Economic

Conditions Have Helped

Slow Spending Growth

Improved economic conditions, reflected in lower unemployment rates

and slower increases in the cost of medical services, also have helped slow

the growth of Medicaid expenditures. Between 1993 and 1995, most states’

unemployment rates dropped—some by roughly 2 percentage points. As

we reported earlier, every percentage-point drop in the unemployment

rate is typically associated with a 6-percent drop in Medicaid spending.10

Low unemployment rates had reduced the number of people on welfare

and therefore in Medicaid, several state officials told us.

In addition, growth in medical service prices has been steadily declining

since the late 1980s. In 1990, this growth was 9.0 percent; by 1995, it was

halved to 4.5 percent, and in 1996 it declined further, to 3.5 percent.

Declines in price inflation indirectly affect the Medicaid rates that states

set for providers. States have frozen provider payment rates in recent

years, including rates for nursing facilities and hospitals, according to

several state officials we spoke with. Such a freeze might not have been

possible in periods of higher inflation because institutional providers

might have challenged state payment rates in court, arguing that the rates

have not kept pace with inflation.11 With lower inflation, states can

restrain payment rates with less concern about such challenges.

State Managed Care

Programs and Long-Term

Care Policies May Have

Affected Spending Growth

Several states that we contacted discussed recent program changes that

may have affected their Medicaid expenditures. The states’

implementation of managed care programs was most prominently

mentioned. The overall effect of managed care on Medicaid spending is

uncertain, however, because of state variations in program scope and

objectives. According to the Congressional Budget Office (CBO), savings

from enrolling beneficiaries in managed care are not likely to be large in

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

11The Boren Amendment, section 1902(a)(13)(A) of the Social Security Act, (42 U.S.C. 1396(a)(13)(A))

requires that states make payments to hospitals, nursing facilities, and intermediate care facilities for

the mentally retarded that are reasonable and adequate to meet the costs incurred by efficiently and

economically operated facilities. Providers in a number of states have used the Boren Amendment to

force states to increase reimbursement rates for institutional services.

Page 14 GAO/HEHS-97-128 Medicaid Spending Growth
B-276963 

the long run.12 States also mentioned initiatives for using alternative

service delivery methods for long-term care. These initiatives may have

helped to limit the growth in Medicaid costs; however, measuring their

effect is difficult.

Although some states have been using managed care to serve portions of

their Medicaid population for over 20 years, many of the states’ programs

have been voluntary and limited to certain geographic areas. In addition,

these programs tend to target women and children—rather than those

who may need more care and are more expensive to serve such as people

with disabilities and the elderly.13 Only a few states have mandated

enrollment statewide—fewer still have enrolled more expensive

populations—and these programs are relatively new. Arizona, which has

the most mature statewide mandatory program, has perhaps best proven

an ability to save money with managed care by devoting significant

resources to its competitive bidding process.14 Other states, however, have

emphasized objectives besides controlling total spending in moving to

managed care. In recently expanding its managed care program, Oregon

expanded eligibility and increased per capita payments to promote

improved access and quality and to look to the future for any cost savings.

Tennessee also expanded eligibility to formerly uninsured populations

with its demonstration waiver. Although initially achieving cost savings

per beneficiary by setting low capitation rates for health plans, the state

raised its rates in subsequent years.

Managed care has not significantly affected the moderate expenditure

growth decreases in Minnesota, which has high managed care market

penetration, and in California, which is in the midst of a large expansion,

according to officials in the respective states. About 40 percent of

Minnesota’s Medicaid beneficiaries—mainly women and children living in

urban areas—were enrolled in managed care plans in 1996, said an official.

Because enrollment in managed care has been mandatory for these

beneficiaries for several years, any dollar savings have been accounted for.

Significant additional savings from managed care are not expected unless

the elderly and disabled beneficiaries are mandated to enroll in managed

care plans for both Medicare and Medicaid and for long-term care

12Statement of Paul N. Van de Water, Assistant Director for Budget Analysis, CBO, on Baseline

Projections for Medicare and Medicaid before the Subcommittee on Health and Environment,

Committee on Commerce, House of Representatives, Feb. 12, 1997.

13Medicaid Managed Care: Serving the Disabled Challenges State Programs (GAO/HEHS-96-136,

July 31, 1996).

14Arizona Medicaid: Competition Among Managed Care Plans Lowers Program Costs (GAO/HEHS-96-2,

Oct. 4, 1995).

Page 15 GAO/HEHS-97-128 Medicaid Spending Growth
B-276963 

services. In contrast, California officials consider their program to be

budget neutral in the short run because they have set their capitation rate

at 100 percent of fee-for-service. In the long-term, however, they believe it

will reduce the rate of cost growth. Given the varying objectives, states’

experiences to date provide limited information on the ability of managed

care to help control state Medicaid costs and moderate spending growth

over time.

Some states we contacted are trying to control long-term care costs,

which, for fiscal year 1995, accounted for about 37 percent of Medicaid

expenditures nationwide. These states are limiting the number of nursing

home beds and payment rates for nursing facility services while expanding

home- and community-based services, which can be less expensive

alternatives to institutional care. For example, New York is trying to limit

its long-term care costs by changing its rate-setting method for nursing

facilities, establishing county expenditure targets to limit growth, and

pursuing home- and community-based service options as alternatives to

nursing facilities, according to a state official. Our previous work has

shown that such strategies can help control long-term care spending if

they have controls on the volume of nursing home care and home- and

community-based services—such as limiting the number of participating

beneficiaries and having waiting lists.15

Implications for

Future Spending

Growth

Many of the factors resulting in the 3.3-percent growth rate in 1996—such

as DSH payments, unemployment rates, and program policy changes—will

continue to affect the Medicaid growth rate in future years. Some of these

factors, however, may contribute to higher—not lower—growth rates,

while the effect of others is more uncertain.16

Factors that may lead to increased growth in Medicaid expenditures

include the following:

• DSH payments: Without new limits, DSH payments will probably add to the

growth of the overall program. Although Louisiana’s adjustments to its DSH

payments substantially reduced its 1996 spending, other states’ DSH

spending began to grow moderately in 1995 as freezes imposed on

additional DSH spending no longer applied. Although DSH payments are not

15Medicaid Long-Term Care: Successful State Efforts to Expand Home Services While Limiting Costs

(GAO/HEHS-94-167, Aug. 11, 1994).

16CBO has estimated that federal Medicaid expenditures will grow by 8 percent in 1998 and by an

average of 7.8 percent between 1997 and 2007.

Page 16 GAO/HEHS-97-128 Medicaid Spending Growth
B-276963 

growing as fast as they were in the early 1990s, these payments did begin

to grow again in 1995 and will probably parallel the growth in the overall

program.

• The economy: Even though the economy has been in a prolonged

expansion, history indicates that a robust economy will not last

indefinitely. The unemployment rate is not expected to stay as low as it

currently is, especially in states with rates below 4 percent. Furthermore,

any increases in medical care price inflation will undoubtedly affect

Medicaid reimbursement rates, especially to institutional providers.

• Growing numbers of elderly people: While states have succeeded

somewhat in dealing with long-term care costs, increasing numbers of

elderly people will inevitably lead to increased program costs. The number

of elderly over 65 years of age is estimated to grow from 31 million in 1990

to 39 million in 2010, an increase of 26 percent. Alternative service delivery

systems can moderate that growth but not eliminate it.

Other factors may dampen future spending growth but by how much is

unclear. The recently enacted welfare reform legislation makes people

receiving cash assistance no longer automatically eligible for Medicaid.17

As a result, the number of Medicaid enrollees—and the costs of providing

services—may decrease because some Medicaid-eligible people may be

discouraged from seeking eligibility and enrollment apart from the new

welfare process. States may need to restructure their eligibility and

enrollment systems, however, to ensure that people who are eligible for

Medicaid continue to participate in the program. Restructuring their

systems will undoubtedly increase states’ administrative costs. The net

effect of these changes remains to be seen.

The potential for cost savings through managed care is also unclear

because experience is limited and state objectives in switching to managed

care have not always emphasized immediate cost containment. Yet many

hope that managed care will, over time, help constrain costs. Although

Arizona’s Medicaid managed care program has helped limit program

growth, cost savings have been mainly due to considerable effort to

promote competition among health plans. Sustaining this competition in

the future will challenge the state’s managed care program.

17Traditionally, Medicaid enrollment has been linked to the financial assistance process for Aid to

Families With Dependent Children. Individuals enrolled in this program would automatically be

enrolled in Medicaid as well. Under the Personal Responsibility and Working Opportunity

Reconciliation Act of 1996 (P.L. 104-193), states may choose to separate the two processes.

Page 17 GAO/HEHS-97-128 Medicaid Spending Growth
B-276963 

Agency and Other

Comments

We provided a draft of this report to HCFA’s Administrator. HCFA officials

generally agreed with the conclusions in the report concerning the factors

that affected Medicaid spending growth in the last 7 years and the

implications for future spending growth. They pointed out, however, that

while DSH payments grew significantly in fiscal year 1995, preliminary

expenditure data for fiscal year 1996 show that DSH payments dropped

about 20 percent for that year. In addition, state Medicaid estimates for

DSH payments through fiscal year 1998 show about a 1-percent average

compound annual growth from fiscal years 1993 to 1998. HCFA officials

believe that although DSH payments present opportunities for accelerating

Medicaid spending growth, it is too early to conclude that their growth is

likely to parallel overall program growth. They also noted that preliminary

fiscal year 1996 expenditure data show only a 1.8-percent growth over

fiscal year 1995. In addition, HCFA officials had technical comments, which

we have incorporated in the report as appropriate.

We provided relevant sections of the draft report to Medicaid officials in

eight states mentioned in our report to illustrate the impact of the various

factors on Medicaid spending growth. Officials from five states responded,

generally agreeing with the accuracy of the information. Officials in

Arizona and Tennessee commented that their managed care programs had

realized cost savings, contrary to CBO’s opinion that savings from enrolling

beneficiaries in managed care are not likely to produce savings in the long

run. In particular, Arizona officials cited our report on their managed care

program that discussed program savings. In our report, however, we noted

their savings were attributable to their ability to implement a strong

competitive bidding system among managed care plans. Continued

savings, we believe, are likely to depend on the state’s ability to maintain

competition among the plans.

Page 18 GAO/HEHS-97-128 Medicaid Spending Growth
B-276963 

We are sending copies of this report to the Secretary of Health and Human

Services. Copies will also be made available to others on request.

Please contact me on (202) 512-7114 if you or your staff have any

questions. Other major contributors to this report are listed in appendix

III.

William J. Scanlon

Director, Health Financing and 

 Systems Issues

Page 19 GAO/HEHS-97-128 Medicaid Spending Growth
Contents

Letter 1

Appendix I 

Scope and

Methodology

22

Appendix II 

Stability of Growth

Rate for Federal

Medicaid Outlays,

Fiscal Years 1995 and

1996

23

Appendix III 

Major Contributors to

This Report

25

Tables Table 1: Shares of Medicaid Expenditure Growth by Factors,

Fiscal Years 1989-95

8

Table 2: Annual Medicaid Expenditures, Growth, and Growth

Rate, Fiscal Years 1989-95

8

Table 3: Changes in Growth Rate of Federal Medicaid Outlays,

Fiscal Years 1995-96

12

Table II.1: Growth Stability Index for Federal Medicaid Outlays

by State, Fiscal Years 1995 and 1996

23

Figures Figure 1: Shares of Medicaid Beneficiaries and Expenditures, by

Eligibility Category, Fiscal Year 1995

4

Figure 2: Annual Growth Rate in Medicaid Expenditures, Fiscal

Years 1985-96

5

Figure 3: Annual Increases in Medicaid Expenditures by Growth

Factor, Fiscal Years 1989-95

7

Figure 4: Medicaid Enrollment by Eligibility Category, Fiscal

Years 1985-95

10

Page 20 GAO/HEHS-97-128 Medicaid Spending Growth
Contents

Abbreviations

CBO Congressional Budget Office

DSH disproportionate share hospital

HCFA Health Care Financing Administration

Page 21 GAO/HEHS-97-128 Medicaid Spending Growth
Appendix I 

Scope and Methodology

To examine the trends in Medicaid spending from fiscal years 1988 to

1995, we obtained Medicaid enrollment and expenditure data from HCFA.

For each fiscal year, we calculated the annual growth rate, the spending

growth in absolute dollars, and the Medicaid enrollment growth rate.

Using these data, we calculated the share of the overall Medicaid growth

represented by the numbers of beneficiaries, per capita nominal spending,

and disproportionate share hospital (DSH) payments in each fiscal year.

Because complete Medicaid expenditure data for fiscal year 1996 were

lacking when we did our work, we obtained HCFA data on federal Medicaid

outlays for fiscal years 1994 to 1996. For each fiscal year, we calculated

each state’s growth rate. To analyze variations in states’ annual spending,

we created a growth stability index by calculating the ratio of the state’s

fiscal year 1995 growth rates to the fiscal year 1996 growth rates. We

categorized states on the basis of their growth stability index according to

the following five categories regarding the direction and magnitude of

their fiscal year 1996 growth compared with their fiscal year 1995 growth:

decreased substantially, decreased moderately, changed minimally,

increased moderately, and increased substantially.

Using the categories of the growth stability index, we judgmentally

selected 18 states that represented a cross section of state spending trends

in the past 2 years and accounted for almost 65 percent of fiscal year 1996

federal Medicaid outlays and analyzed their enrollment, expenditure, and

outlay data. We contacted state Medicaid officials in these states to

identify key factors that contributed to the decrease from previous years’

growth rates.

To assess the implications of these and other factors for Medicaid

expenditures in the future, we interviewed state officials in the 18 states

on their projected growth rates for the upcoming years. We also reviewed

the Congressional Budget Office’s baseline for Medicaid as of

January 1997.

We conducted our review from August 1996 to April 1997 in accordance

with generally accepted government auditing standards.

Page 22 GAO/HEHS-97-128 Medicaid Spending Growth
Appendix II 

Stability of Growth Rate for Federal

Medicaid Outlays, Fiscal Years 1995 and

1996

We developed a growth stability index that shows the direction and

magnitude of change in the growth rates of federal Medicaid outlays

between fiscal years 1995 and 1996. An index of 1.0 indicates no change in

the growth rates for the 2 years. An index greater than 1.0 indicates a

decrease in the growth rates. For example, Colorado’s index of 1.37

indicates the largest decrease of all the states.

Table II.1: Growth Stability Index for

Federal Medicaid Outlays by State,

Fiscal Years 1995 and 1996

States

Percentage

growth,

fiscal year

1995a

Percentage

growth,

fiscal year

1996

Growth

stability

index

State

ranking

based on

growth

stability

index

State averages 11.00 3.18b 1.08 c

Alabama 10.63 3.71 1.07 26

Alaska 2.54 17.60 0.87 49

Arizona 2.70 4.58 0.98 43

Arkansas 8.76 7.50 1.01 38

California 13.73 2.80 1.11 21

Colorado 30.84 –4.66 1.37 1

Connecticut 10.68 11.51 0.99 40

Delaware 24.47 19.65 1.04 35

District of Columbia –0.51 –1.37 1.01 39

Florida 22.35 –4.28 1.28 4

Georgia 7.82 2.44 1.05 31

Hawaii 31.87 11.46 1.18 9

Idaho 12.99 5.46 1.07 24

Illinois 16.30 1.85 1.14 12

Indiana –13.34 24.52 0.70 51

Iowa 11.46 –0.02 1.11 17

Kansas 12.67 –2.05 1.15 11

Kentucky 13.36 2.15 1.11 19

Louisiana 1.19 –15.96 1.20 8

Maine –0.22 10.21 0.91 48

Maryland 15.56 3.36 1.12 16

Massachusetts 11.22 3.50 1.07 23

Michigan 7.86 1.46 1.06 27

Minnesota 13.48 2.52 1.11 20

Mississippi 16.54 3.34 1.13 15

Missouri 8.70 6.81 1.02 36

Montana 7.05 11.76 0.96 46

(continued)

Page 23 GAO/HEHS-97-128 Medicaid Spending Growth
Appendix II 

Stability of Growth Rate for Federal

Medicaid Outlays, Fiscal Years 1995 and

1996

States

Percentage

growth,

fiscal year

1995a

Percentage

growth,

fiscal year

1996

Growth

stability

index

State

ranking

based on

growth

stability

index

Nebraska 6.22 9.89 0.97 45

Nevada 20.88 15.52 1.05 32

New Hampshire –21.73 0.95 0.78 50

New Jersey 10.16 5.54 1.04 33

New Mexico 13.80 21.30 0.94 47

New York 8.13 6.47 1.02 37

North Carolina 26.51 1.27 1.25 5

North Dakota 11.19 0.08 1.11 18

Ohio 10.94 4.43 1.06 28

Oklahoma 9.22 3.42 1.06 30

Oregon 38.37 4.26 1.33 3

Pennsylvania 7.50 1.62 1.06 29

Rhode Island 18.81 –10.97 1.33 2

South Carolina 16.72 0.71 1.16 10

South Dakota 13.18 –0.03 1.13 13

Tennessee 21.67 0.78 1.21 7

Texas 11.80 4.57 1.07 25

Utah 10.14 11.25 0.99 41

Vermont 18.23 7.40 1.10 22

Virginia 5.24 8.41 0.97 44

Washington 15.39 2.02 1.13 14

West Virginia –3.19 –1.77 0.99 42

Wisconsin 7.55 3.17 1.04 34

Wyoming 20.88 –1.68 1.23 6

aThe fiscal year 1995 growth rate may be overstated for some states due to incomplete reporting

in fiscal year 1994.

bAggregate growth in federal outlays for Medicaid is 3.3 percent when outlays for territories are

included in calculation.

cNot applicable.

Source: Federal Medicaid outlays, HCFA.

Page 24 GAO/HEHS-97-128 Medicaid Spending Growth
Appendix III 

Major Contributors to This Report

Kathryn G. Allen, Acting Associate Director, (202) 512-7059

Lourdes R. Cho, Senior Evaluator

Richard N. Jensen, Senior Evaluator

Deborah A. Signer, Senior Evaluator

Karen M. Sloan, Communications Analyst

(101555) Page 25 GAO/HEHS-97-128 Medicaid Spending Growth
Ordering Information

The first copy of each GAO report and testimony is free.

Additional copies are $2 each. Orders should be sent to the

following address, accompanied by a check or money order

made out to the Superintendent of Documents, when

necessary. VISA and MasterCard credit cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address

are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 6015

Gaithersburg, MD 20884-6015

or visit:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders may also be placed by calling (202) 512-6000 

or by using fax number (301) 258-4066, or TDD (301) 413-0006.

Each day, GAO issues a list of newly available reports and

testimony. To receive facsimile copies of the daily list or any

list from the past 30 days, please call (202) 512-6000 using a

touchtone phone. A recorded menu will provide information on

how to obtain these lists.

For information on how to access GAO reports on the INTERNET,

send an e-mail message with "info" in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov

PRINTED ON RECYCLED PAPER
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. G100