United States General Accounting Office

GAO Testimony

Before the Committee on Finance, U.S. Senate

For Release on Delivery

Expected at 10:30 a.m.,

Tuesday, March 4, 1997

MEDICAID

Decline in Spending Growth

Due to a Combination of

Factors

Statement of Jonathan Ratner, Associate Director

Health Financing and Systems Issues

Health, Education, and Human Services Division

GAO/T-HEHS-97-91

Medicaid: Decline in Spending Growth Due

to a Combination of Factors

Mr. Chairman and Members of the Committee:

I am pleased to be here today to discuss recent Medicaid spending trends

and their potential implications for future outlays. My comments are based

on work that we have in progress at the request of the Chairmen of the

Senate and House Budget Committees. Their request was prompted by an

interest in what contributed to the precipitous drop in the annual growth

rate of Medicaid spending from over 20 percent in the early 1990s to

3.3 percent in fiscal year 1996.

My remarks today focus on three issues: (1) the variation in Medicaid

spending growth among the states, especially for the most recent 2-year

period, that culminated in the 3.3-percent growth rate in fiscal year 1996;

(2) key factors that contributed to the decrease from previous years’

growth rates; and (3) the implications of these and other factors for

Medicaid expenditures in the future. Our findings are based on our

analysis of Medicaid expenditure data published by the Department of

Health and Human Services’ Health Care Financing Administration and

our review of federal outlays as reported by the Department of the

Treasury. We also contacted Medicaid officials in 18 states that represent a

cross-section of state spending patterns over the past 2 years and that

account for almost 70 percent of Medicaid expenditures.

In brief, we found no single pattern across all states that accounts for the

recent dramatic decrease in the growth of Medicaid spending. Rather, a

combination of factors—some affecting only certain states and others

common to many states—explains the low 1996 growth rate. For example,

several states saw substantial drops in their 1996 growth rates associated

with circumstances such as a sharp reduction in very high levels of

disproportionate share hospital (DSH) payments to conform with binding

restrictions on such payments or the leveling off of their Medicaid

enrollment following planned expansions in prior years. Such

circumstances are unlikely to recur to dampen spending increases in

future years. Moreover, the vast majority of states experienced declines in

their growth rates that were moderate to limited. The experiences of these

states reflect a number of factors at work, including a generally improved

economy and state initiatives to limit expenditure growth, such as

implementing managed care for primary and acute care services or

alternative programs for long-term care. With an improved economy and

declining unemployment, the number of people eligible for Medicaid

decreased. In addition, a dramatic slowdown in price increases for

medical services helped states control costs for certain services provided

Page 1 GAO/T-HEHS-97-91
Medicaid: Decline in Spending Growth Due

to a Combination of Factors

through Medicaid. While the magnitude of the effect of states’

programmatic changes—such as managed care programs and long-term

care alternatives—is less clear, there is evidence that they helped to

restrain program costs. However, it is likely that the 3.3-percent growth

rate is not indicative of the growth rate in the years ahead. Just as a

number of factors converged to bring about the drop in the 1996 growth

rate, so a variety of factors—including a downturn in the economy—could

result in increased growth rates in subsequent years.

Background Medicaid, a federal grant-in-aid program that states administer, finances

health care for about 37 million low-income people. With total federal and

state expenditures of approximately $160 billion in 1996, Medicaid exerts

considerable fiscal pressure on both state and federal budgets, accounting

for roughly 20 percent and 6 percent of total expenditures, respectively.

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

nationally has been erratic. Between 1984 and 1987, the annual growth

rates remained relatively stable, ranging between roughly 8 and 11

percent. Over the next 4 years, beginning in 1988, annual growth rates

increased substantially, reaching 29 percent in 1992—an increase of over

$26 billion for that year. From this peak, Medicaid’s growth rates declined

between 1993 and 1995 to approximately mid-1980 levels. Then, in fiscal

year 1996, the growth rate fell to 3.3 percent.

No Single Spending

Trend Across States

The 3.3-percent growth in 1996 federal Medicaid outlays masks striking

variation among the states. Growth rates ranged from a decrease of

16 percent to an increase of 25 percent. Such differences in program

spending growth across states has been fairly typical. In addition, there are

often some states that experience large changes in growth from one year

to the next because of major changes in program structure or accounting

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

are reported. To determine the stability of the growth rate among states,

we compared states’ growth rates in fiscal year 1995 with those in fiscal

year 1996. Our analysis revealed that states could be placed in one of five

categories, as shown in table 1. (See app. I for specific state growth rates.)

Page 2 GAO/T-HEHS-97-91
Medicaid: Decline in Spending Growth Due

to a Combination of Factors

Table 1: Changes in Growth Rate of

Federal Medicaid Outlays, Fiscal Years

1995 and 1996 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 account for 16 percent of 1996 federal outlays

experienced substantial decreases in fiscal year 1996 growth compared

with fiscal year 1995’s. However, 80 percent of 1996 federal Medicaid

outlays were in states that either experienced moderate decreases or

minimal changes in their fiscal year 1996 growth. Although five states’

fiscal year 1996 growth rates increased, those states did not have much

impact on spending growth patterns because their combined share of

Medicaid outlays is only 4 percent.

A Convergence of

Factors Led to the

3.3-Percent Growth

Rate in 1996

A number of factors have led to decreases in the growth rate in Medicaid

spending in recent years. Some of these—such as the prior

implementation of cost controls and a leveling off in the number of

program eligibles following state-initiated expansions—continue to

influence the growth rate in a handful of states. Other factors, such as

improved economic conditions and changing program policies—for

example, alternatives to institutional long-term care—also influenced

many states’ growth rates. The convergence of these factors resulted in the

Page 3 GAO/T-HEHS-97-91
Medicaid: Decline in Spending Growth Due

to a Combination of Factors

historically low 3.3-percent growth rate in fiscal year 1996 Medicaid

spending.

States With Substantial

Decreases in Growth Rates

Affected by Several

Nonrecurring Factors

The growth rate changes in those states that experienced large decreases

in 1996 were largely attributable to three factors: substantial decreases in

DSH funding, slowdowns in state-initiated eligibility expansions, and

accelerated 1995 payments in reaction to block grant proposals.

In 1991 and 1993, the Congress acted to bring under control DSH payments,

which had grown from less than $1 billion to $17 billion in just 2 years.1

After new limits were enacted, DSH payments nationally declined in 1993,

stabilized in 1994, and began to grow again in 1995. An exception to this

pattern, however, Louisiana—a state that has had one of the largest DSH

programs in the nation—still showed a substantial decrease in its 1996

growth rate as its DSH payments declined. The state’s federal outlays

decreased by 16 percent in 1996 because of a dramatic drop in DSH

payments.

Recent slowdowns in state-initiated eligibility expansions also helped to

effect substantial decreases in the growth rates in selected states. Over the

past several years, some states implemented statewide managed care

demonstration waiver programs to extend health care coverage to

uninsured populations not previously eligible for Medicaid. Three states

that experienced substantial decreases in their 1996 growth rates—Hawaii,

Oregon, and Tennessee—undertook the bulk of their expansions in 1994.

The expenditure increases related to these expansions continued into 1995

and began to level off in 1996. Tennessee actually experienced a drop in

the number of eligible beneficiaries in 1996, as formerly uninsured

individuals covered by the program lost their eligibility because they did

not pay the required premiums.

States’ acceleration of 1996 payments into 1995 is another explanation

sometimes given for the low 1996 growth rate.2

 In 1995, the Congress—as

part of a block grant proposal—was considering legislation to establish

aggregate Medicaid spending limits, which would be calculated using a

base year. Officials from a few states told us that, in response to the

1

DSH payments are intended to partially reimburse hospitals for the cost of providing care not covered

by public or private insurance. A number of states, however, began to use the program to increase

their federal Medicaid dollars in conjunction with certain creative financing mechanisms. To constrain

these payments, DSH payments were limited at 12 percent of the Medicaid program.

2

Aggregate data show that federal outlays were flat in the first 6 months of 1996 and then grew

6 percent in the last 6 months.

Page 4 GAO/T-HEHS-97-91
Medicaid: Decline in Spending Growth Due

to a Combination of Factors

anticipated block grant, they accelerated their Medicaid payments to

increase their expenditures for fiscal year 1995—the year the Congress

was considering for use as the base. For example, one state official with

federal approval made a DSH payment at the end of fiscal year 1995 rather

than at the beginning of fiscal year 1996. An official from another state,

which had a moderate decrease in growth, told us that the state expedited

decisions on audits of hospitals and nursing homes to speed payments due

these providers.

Strong Economic

Conditions Helped

Moderate the Growth in

Expenditures for Most

States

Improved economic conditions, reflected in lower unemployment rates

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

to a moderation in the growth of Medicaid expenditures. Between 1993

and 1995, most states experienced a drop in their unemployment rates—

some by roughly 2 percentage points. As we reported earlier, every

percentage-point drop in the unemployment rate is typically associated

with a 6-percent drop in Medicaid spending.3

 States told us that low

unemployment rates had lowered the number of people on welfare and,

therefore, in Medicaid.

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

since the late 1980s. In 1990, the growth in the price of medical services

was 9.0 percent; by 1995, it was cut in half to 4.5 percent. In 1996, it

declined further to 3.5 percent. Declines in price inflation have an indirect

impact on the Medicaid rates that states set for providers. Officials of

several of the states we spoke with reported freezing provider payment

rates in recent years, including rates for nursing facilities and hospitals.

Such a freeze would not have been possible in periods with higher

inflation because institutional providers can challenge state payment rates

in court, arguing they have not kept pace with inflation.4

 With inflation

down, states can restrain payment rates with less concern about such

challenges.

3

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

4

The Boren Amendment, section 1902(a)(13)(A) of the Social Security Act, requires that states make

payments to hospitals, nursing facilities, and intermediate care facilities for the mentally retarded that

are reasonable and adequate to meet the costs that must be incurred by efficiently and economically

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

to increase reimbursement rates for institutional services above the rates the states had been paying.

Page 5 GAO/T-HEHS-97-91
Medicaid: Decline in Spending Growth Due

to a Combination of Factors

State Managed Care

Programs and Long-Term

Care Policies May Help

Restrain Cost Growth

Several states that we contacted discussed recent program changes that

may have had an effect on their Medicaid expenditures. Most prominently

mentioned was the states’ implementation of Medicaid managed care.

However, the overall impact of managed care on Medicaid spending is

uncertain because of state variations in program scope and objectives.

States also mentioned initiatives to use alternative service delivery

methods for long-term care. While these initiatives may have helped to

bring Medicaid costs down, measuring their impact is difficult.

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

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

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

these programs tend to target women and children rather than populations

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

with disabilities and the elderly.5

 Only a few states have mandated

enrollment statewide—fewer still have enrolled more expensive

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

the most mature statewide mandatory program, has perhaps best proven

the ability to realize cost savings in managed care, cost savings it achieved

by devoting significant resources to its competitive bidding process.6

However, in recently expanding its managed care program, Oregon chose

to increase per capita payments to promote improved quality and access

and to look to the future for any cost savings. Officials from Minnesota,

which has a mature managed care program, and California, which is in the

midst of a large expansion, told us that managed care has had no

significant impact on the moderate decreases they experienced.7

 Given the

varying objectives, the ability of managed care to help control state

Medicaid costs and moderate spending growth over time is unclear.

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

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

expenditures nationwide. They are limiting the number of nursing home

beds and payment rates for nursing facility services while expanding home

and community-based services, a less-expensive alternative to institutional

care. For example, a New York official told us that the state is attempting

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

5

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

1996).

6

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

Oct. 4, 1995).

7

California considers its managed care program to be budget neutral, having no impact on spending

one way or another.

Page 6 GAO/T-HEHS-97-91
Medicaid: Decline in Spending Growth Due

to a Combination of Factors

facilities, establishing county expenditure targets to limit growth, and

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

nursing facilities. Our previous work showed that such strategies can work

toward controlling long-term care spending if controls on the volume of

nursing home care and home- and community-based services are in place.8

Potential for Higher

Expenditure Growth

in Future Years

Many of the factors that resulted in the 3.3-percent growth rate in 1996—

such as DSH payments, unemployment rates, and program policy

changes—will continue to influence the Medicaid growth rate in future

years. However, there are indications that some of these components may

contribute to higher—not lower—growth rates, while the effect of others

is more uncertain.

Without new limits, DSH payments can be expected to grow at the rate of

the overall program. While Louisiana’s adjustments to its DSH payments

resulted in a substantial reduction in its 1996 spending, other states’ DSH

spending began to grow moderately in 1995 as freezes imposed on

additional DSH spending were removed.9

 Although DSH payments are not

increasing as fast as they were in the early 1990s, these payments did grow

12.4 percent in 1995.

Even though the economy has been in a prolonged expansion, history

indicates that the current robust economy will not last indefinitely. The

unemployment rate cannot be expected to stay as low as it currently is,

especially in states with rates below 4 percent. Furthermore, any increases

in medical care price inflation will undoubtedly influence Medicaid

reimbursement rates, especially to institutional providers.

While states have experienced some success in dealing with long-term

care costs, the continued increase in the number of elderly people will

inevitably lead to an increase in program costs. Alternative service

delivery systems can moderate that growth but not eliminate it.

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

unclear. The recently enacted welfare reform legislation makes people

receiving cash assistance no longer automatically eligible for Medicaid. As

8

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

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

9

States whose DSH spending exceeded 12 percent of their total program spending in 1993 were not

allowed to increase DSH spending until it fell below 12 percent of total current program spending.

Page 7 GAO/T-HEHS-97-91
Medicaid: Decline in Spending Growth Due

to a Combination of Factors

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

services—may decrease, since some Medicaid-eligible people may be

discouraged from seeking eligibility and enrollment apart from the new

welfare process. On the other hand, states may need to restructure their

eligibility and enrollment systems to ensure that people who are eligible

for Medicaid continue to participate in the program. Restructuring their

systems will undoubtedly increase states’ administrative costs. The net

effect of these changes remains to be seen.

The potential for cost savings through managed care also remains unclear,

as experience is limited and state objectives in switching to managed care

have not always emphasized immediate cost-containment. Yet it is hoped

that managed care will, over time, help constrain costs. While Arizona’s

Medicaid managed care program has been effective, cost savings were due

primarily to considerable effort to promote competition among health

plans. The challenge is whether the state can sustain this competition in

the future.

Mr. Chairman, this concludes my statement. I would be happy to answer

any questions you or members of the Committee might have at this time.

Thank you.

Contributors For more information on this testimony, please call Kathryn G. Allen,

Assistant Director, on (202) 512-7059. Other major contributors included

William J. Scanlon, Lourdes R. Cho, Richard N. Jensen, Deborah A. Signer,

and Karen M. Sloan.

Page 8 GAO/T-HEHS-97-91
Page 9 GAO/T-HEHS-97-91
Appendix I 

Stability of Growth Rate for Federal

Medicaid Outlays, Fiscal Years 1995 and

1996

GAO developed a growth stability index that shows the direction and

magnitude of change in the growth rates of federal outlays between fiscal

years 1995 and 1996. An index of 1.0 indicates no change in the growth

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

1995-96 growth rates. For example, Colorado’s index of 1.37 ranks it as

having the largest decrease.

Table I.1: Growth Stability Index for

Federal Medicaid Outlays by State,

Fiscal Years 1995 and 1996

Percentage

growth,

fiscal year

1995

Percentage

growth,

fiscal year

1996

Growth

stability

index

State

ranking

based on

growth

stability

index

States and District of Columbia 11.00 3.18a 1.08

Alabama 10.63 3.71 1.07 26

Alaska 2.54 17.60 0.87 49

Arizona 2.70 4.58 0.98 43

Arkansas 8.76 7.50 1.01 38

California 13.73 2.80 1.11 21

Colorado 30.84 –4.66 1.37 1

Connecticut 10.68 11.51 0.99 40

Delaware 24.47 19.65 1.04 35

District of Columbia –0.51 –1.37 1.01 39

Florida 22.35 –4.28 1.28 4

Georgia 7.82 2.44 1.05 31

Hawaii 31.87 11.46 1.18 9

Idaho 12.99 5.46 1.07 24

Illinois 16.30 1.85 1.14 12

Indiana –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 10 GAO/T-HEHS-97-91
Appendix I 

Stability of Growth Rate for Federal

Medicaid Outlays, Fiscal Years 1995 and

1996

Percentage

growth,

fiscal year

1995

Percentage

growth,

fiscal year

1996

Growth

stability

index

State

ranking

based on

growth

stability

index

States and District of Columbia 11.00 3.18a 1.08

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

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

included in calculation.

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

(101547) Page 11 GAO/T-HEHS-97-91
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