```
Medicaid: Restructuring Approaches Leave Many Questions (Letter Report,
04/04/95, GAO/HEHS-95-103).

Pursuant to a congressional request, GAO provided information on various
proposals for restructuring the Medicaid Program, focusing on the: (1)
different restructuring approaches and their implications for
federal-state financing and program administration; and (2) need to
establish a reserve fund to offset state tax losses and increased
enrollments.

GAO found that: (1) using block grants to fund state Medicaid programs
would increase states' control over federal expenditures and
administrative flexibility, which could result in increased operational
efficiency and effectiveness; (2) on the other hand, if states reduce
their Medicaid contributions, they would be more at risk for controlling
program spending; (3) the block grant and cap proposals have not
addressed how much administrative flexibility states would receive; (4)
federalizing the Medicaid program would reduce program inequities and
administrative costs, but the federal government would face difficulties
in meeting localities' individual needs and operating conditions; (5)
the impact of splitting Medicaid into long-term and acute-primary care
programs would depend on the how the split is made and how
responsibilities are distributed between the federal and state
governments; (6) there has been little quantitative analysis on the
potential effects of restructuring Medicaid on financing and
administrative functions; and (7) states' Medicaid spending is sensitive
to economic conditions and a reserve fund could be one way to assist
states during economic downturns if strict limits are placed on federal
contributions.

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

 REPORTNUM:  HEHS-95-103
     TITLE:  Medicaid: Restructuring Approaches Leave Many Questions
      DATE:  04/04/95
   SUBJECT:  Financial analysis
             Health care cost control
             Medicaid programs
             Federal/state relations
             Intergovernmental fiscal relations
             State-administered programs
             Financial management
             Welfare benefits
             Health services administration
             Block grants
IDENTIFIER:  AFDC
             Aid to Families with Dependent Children Program
             Supplemental Security Income Program
             New Federalism Program
             Food Stamp Program
             Special Supplemental Food Program for Women, Infants, and 
             Children
             WIC
             Job Opportunities and Basic Skills Training Program
             JOBS Program
             
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Cover
================================================================ COVER

Report to the Chairman, Committee on the Budget, House of
Representatives

April 1995

MEDICAID - RESTRUCTURING
APPROACHES LEAVE MANY QUESTIONS

GAO/HEHS-95-103

Restructuring Medicaid

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

  AFDC - Aid to Families with Dependent Children
  CBO - Congressional Budget Office
  HCFA - Health Care Financing Administration
  JOBS - Job Opportunities and Basic Skills
  SSI - Supplemental Security Income
  WIC - Special Supplemental Food Program for Women, Infants, and
     Children

Letter
=============================================================== LETTER

B-260621

April 4, 1995

The Honorable John R.  Kasich
Chairman, Committee on the Budget
House of Representatives

Dear Mr.  Chairman: 

Medicaid is a federal-state health entitlement program for the poor,
disabled, and medically needy.  The program accounts for a
significant portion of the federal budget, and Medicaid expenditures
continue to increase each year.  The federal government spent about
$75 billion for Medicaid in fiscal year 1993, and the Congressional
Budget Office (CBO) estimates that this figure will climb to almost
$150 billion by fiscal year 2000.  In addition to rising costs,
concerns have been raised about the many federal requirements,
insufficient administrative control by the states, and variation in
states' eligibility requirements and benefits for the poor. 

Over the years, various remedies have been discussed and proposed to
restructure the Medicaid program.  One approach calls for providing
federal funding through block grants to the states and giving them
increased responsibility for administering the program.  Another
would turn Medicaid into a program that is entirely funded and
administered by the federal government.  Other proposals suggest
splitting Medicaid into two programs, one encompassing acute and
primary care and the other long-term care.  These proposals vary in
assigning responsibilities to the federal and state governments for
funding and administering each of the two programs. 

This report responds to your request that we provide information on
previously discussed proposals for restructuring Medicaid.  You asked
us to compare the different restructuring approaches and discuss
their implications for federal-state financing and administration of
the program.  You also asked us to provide information on the need to
establish a federal "rainy day" fund if restrictions, such as block
grants, were placed on federal revenues paid to states.  Such a fund
would mitigate the effects of potential reductions in state tax
revenues and increased eligibility during recessionary periods. 
Finally, you requested that we provide the most recent data available
on the amount of federal Medicaid funds provided to each state (see
app.  I). 

   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Different advantages and disadvantages for each of the three basic
approaches to restructuring Medicaid have been cited by observers and
proponents of the approaches. 

Using block grants to assist the states in funding their own programs
would allow for greater control over federal expenditures, could
increase states' administrative flexibility, and could result in
greater operational efficiency and effectiveness.  On the other hand,
unless state contributions were required, some have predicted that
substantial reductions in current state Medicaid spending would
almost certainly occur.  Also, since states would be responsible for
100 percent of additional costs, this approach would put them at
greater risk for controlling program spending. 

Federalizing the Medicaid program (that is, 100 percent federal
financing and administration, with no state involvement) would likely
reduce inequities that result because of variation among the states
in eligibility requirements and benefits.  Such an approach, however,
would greatly increase federal Medicaid costs in order to replace
previous state contributions just to maintain the current level of
benefits across the states.  Also, designing and administering a
national program that appropriately reflects the differences in local
needs, preferences, medical prices, and health care delivery systems
would be a very large and complex undertaking. 

The impact on the federal and state governments of splitting Medicaid
into two programs would depend on how the split is designed and which
responsibilities the governments assume.  A split could combine
elements of both the federalization and the block grant approaches. 

We found that all the discussions we identified to restructure
Medicaid have focused on the altered financing arrangements and
lacked other information on how elements of program design (for
example, eligibility criteria, services covered, and provider
payments) would be structured.  Further, little quantitative analysis
has been done to determine any of the potential effects of
restructuring. 

Our statistical analysis demonstrates the important influence of the
business cycle on Medicaid spending.  A rainy day fund could be one
way to assist states during economic downturns if strong limits are
placed on federal contributions.  We found that in at least 22
states, including 8 of the 10 largest states, Medicaid spending is
sensitive to state economic conditions.  On average, Medicaid
spending rises by 6 percent for every 1 percentage point increase in
the unemployment rate. 

   BACKGROUND
------------------------------------------------------------ Letter :2

Medicaid is a jointly funded federal-state entitlement program.  It
was established in 1965 to provide medical assistance to qualifying
low-income people.  Under broad federal guidelines, each state
designs and administers its own Medicaid program that the Department
of Health and Human Services' Health Care Financing Administration
(HCFA) must approve for compliance with federal laws and regulations. 
The federal government matches state expenditures for services
without a limit on federal outlays.  The federal matching rate for
each state is determined by the state's average per capita income and
ranges from 50 to 83 percent.  The federal government also oversees
state administration of the program. 

States are required to give Medicaid coverage to certain groups of
people, including those eligible for Aid to Families with Dependent
Children (AFDC) and Supplemental Security Income (SSI) programs. 
However, they have considerable latitude in setting eligibility
standards for the AFDC population and certain other groups.  States
can also choose to include optional groups, such as the medically
needy and people requiring institutional care who do not meet the
income requirement.  States must also cover certain basic services,
such as inpatient and outpatient hospital care, physician services,
laboratory and X-ray services, and preventive health services for
children.  They can choose to include additional services, such as
prescription drugs and dental, vision, and transportation services. 
Therefore, states vary considerably in the eligibility groups and
services they cover, which results in significant spending variations
among states, per beneficiary and overall. 

The Congress has expanded the scope of the program over the years. 
While coverage of persons in the AFDC and SSI cash assistance
programs still makes up the majority of the program, Medicaid now
covers non-AFDC low-income children and pregnant women and low-income
Medicare beneficiaries.  These federally legislated program
expansions, along with mandated increases in required services, have
contributed to the escalation of Medicaid program costs in recent
years. 

After growing 10 percent or less per year through most of the 1980s,
at the end of the decade and in the early 1990s Medicaid became one
of the fastest growing items in the federal budget and in most state
budgets.  Federal spending for the Medicaid program in fiscal year
1994 was about $81 billion, and state spending was about $61 billion. 
During fiscal year 1993, approximately 18 percent of the total state
spending was for Medicaid, with 11 percent from state-only sources. 
Figure 1 illustrates total federal and state Medicaid spending since
1981, and shows that it has more than tripled since 1985.  The growth
in spending has moderated recently, although CBO still projects
federal expenditures will be about $100 billion in fiscal year 1996
and climb to almost $150 billion in fiscal year 2000. 

   Figure 1:  Medicaid Spending,
   1981-94

   (See figure in printed
   edition.)

To obtain information on Medicaid restructuring approaches and their
implications for federal-state financing and administration, we
contacted representatives of various organizations and conducted a
computerized literature search.  To assess the need for a rainy day
fund, we performed a state-by-state statistical analysis of the
relationship between unemployment and Medicaid spending.  To provide
information on federal Medicaid payments to the states, we collected
the most recent data available from HCFA.  Our scope and methodology
are discussed in greater detail in appendix II. 

   RESTRUCTURING MEDICAID
------------------------------------------------------------ Letter :3

Since the early 1980s, several very different ideas and proposals
have been discussed and set forth to fundamentally alter the
financing and administrative structure of the Medicaid program.  In
1981, the administration proposed a 5-percent cap on annual increases
in federal Medicaid spending along with a significant reduction of
federal Medicaid requirements.  The administration later proposed
that the federal government have sole responsibility for funding and
administering Medicaid in exchange for the states completely taking
over the AFDC and Food Stamp programs.  In 1984, the National Study
Group on State Medicaid Strategies proposed splitting Medicaid into
two separate programs:  acute and primary care, with the federal
government responsible for funding and administration; and long-term
care, with the states responsible for administration and with funding
shared by the federal government and the states.  A recent proposal
has suggested essentially reversing the division of responsibility,
with the federal government taking on long-term care and state
governments taking on acute and primary care. 

Also recently, legislation has been proposed that would federalize
Medicaid while giving the states complete responsibility for the
AFDC, Food Stamp, and Job Opportunities Basic Skills training
programs (JOBS); and the Special Supplemental Food Program for Women,
Infants, and Children (WIC).  In February 1995, the Cato Institute
proposed that the federal government use block grants to provide
Medicaid funds to the states.\1 A block grant approach, as experts
have discussed, could require state contributions and could increase
state responsibility and authority for administering the program. 

These differing proposals make up three basic approaches to
restructuring the Medicaid program:  (1) changing it to a block grant
program or otherwise capping federal expenditures, (2) federalizing
the program, or (3) splitting Medicaid into two separate programs. 
These three approaches are discussed below.  Appendix III summarizes
the key elements of each approach. 

--------------------
\1 Cato Handbook for Congress (Washington, D.C.:  Cato Institute,
Feb.  1995). 

      FEDERAL BLOCK GRANTS AND
      CAPS ON FEDERAL MATCHING
      CONTRIBUTIONS
---------------------------------------------------------- Letter :3.1

To limit federal expenditures, proposals have been made to replace
the existing open-end federal matching of state spending with either
a block grant or a cap on federal spending.  A block grant
arrangement would involve lump-sum federal payments to pay for
Medicaid services.  A federal cap on expenditures would place a limit
on the amount of state spending the federal government would be
willing to match.  Under either approach, states would administer
their own program with the federal money.  With a block grant, or if
their spending exceeded the cap, states would pay 100 percent for any
additional spending.  The presumed advantage to the states is
increased flexibility on how to spend the federal funds. 

An analysis of Medicaid financing options published in 1983 made
several observations on the use of block grants.\2 First, it
suggested that federal Medicaid block grants be made conditional on
specified state contributions to the program.  The analysis indicated
that unless states are required to contribute to the Medicaid
program, federal funding would have to be much greater to maintain
average spending levels.  This is because without federal matching of
state spending, states would have a reduced incentive to contribute
to the program and could be expected to reduce their spending
substantially.  The analysis further said that state Medicaid
spending is responsive to the federal matching rate.  Poorer states
with high federal matching rates would face very high increases in
the price of incremental services and thus would be the least likely
to supplement a federal grant. 

Second, the analysis suggested that need-based factors be considered
in establishing the federal grant levels and the state contributions,
such as the number of poor people, local medical care prices, and the
cost of living, to ensure a uniform average benefit per person below
a specified fraction of the poverty level.  Also, the amount of any
required or expected state contributions could be set to equalize the
burden on taxpayers among states.  Taking these considerations into
account would mitigate inequities resulting from block grant formulas
based on historical funding.  Such an approach is used today for
block grants that combine former categorical programs.\3

It has been suggested recently that consideration should be given to
applying a cap on a per capita basis rather than on an aggregate
basis.  These caps would constrain spending in different ways.  A per
capita cap would allow for increases in spending due to increased
caseload, but would otherwise restrict spending.  An aggregate cap
would set an absolute limit on federal spending in each state. 

Discussions of block grants or caps on federal spending seem to take
for granted that states would receive the necessary flexibility to
redesign their programs to meet spending targets.  Our previous work
on caps on federal expenditures indicates that while caps would
achieve savings, they would have little effect on longer-term growth
trends unless the Congress adjusted or gave states the flexibility to
adjust eligibility and benefit formulas.\4

However, how much flexibility states would have under a Medicaid
block grant or cap has not been addressed by the proposals.  Prior
discussions provide no details regarding what federal requirements
would be maintained or rescinded. 

Block grants created in the early 1980s gave states broad discretion
in deciding what specific services and programs to provide, as long
as they directly related to the goals of the program.  However, over
time the Congress placed additional constraints on states; for
example, requiring that a minimum portion of funds be used for a
specific purpose, which in effect recategorized them.  Many of these
restrictions were imposed because of congressional concerns that
states' decisions were not consistent with national objectives. 

Block grants and spending caps put states at full risk for the
management of the program.  Staying within specified funding levels
would require states to accurately forecast spending due to program
options.  In our previous work, the majority of federal agency
officials from mandatory programs reported that accurately projecting
mandatory program spending was difficult.\5 While some see putting
states at risk for the program spending increases as a problem,
others see it as promoting efficiency. 

--------------------
\2 Thomas W.  Grannemann and Mark V.  Pauly, Controlling Medicaid
Costs:  Federalism, Competition, and Choice (Washington, D.C.: 
American Enterprise Institute for Public Policy Research, 1983). 

\3 Block Grants:  Characteristics, Experience, and Lessons Learned
(GAO/HEHS-95-74, Feb.  9, 1995). 

\4 Budget Policy:  Issues in Capping Mandatory Spending
(GAO/AIMD-94-155, July 18, 1994). 

\5 See GAO/AIMD-94-155, July 18, 1994. 

      FEDERALIZING MEDICAID
---------------------------------------------------------- Letter :3.2

Another approach to restructuring Medicaid is to fully federalize the
program.  This approach calls for uniform national benefits and
eligibility criteria in place of the wide variation that currently
exists across the states.  Under a federalized program, the federal
government would have sole responsibility for the financing and
administration of the Medicaid program. 

In the early 1980s, the administration proposed to federalize the
Medicaid program.  This proposal, part of the New Federalism
initiative, called for a major reshaping of the fiscal relationship
between the federal and state and local governments.  It called for a
federal takeover of Medicaid in exchange for a state takeover of the
full cost of the Food Stamp and AFDC programs.\6 This exchange was
termed the "swap component" of the initiative.  The administration
believed that this exchange would make welfare less costly and more
responsive to the needs of the poor because it would be designed and
administered by those closer to the people that it served.  To
equalize the financial burden that the states would assume in
administering these programs, the federal government would take over
the Medicaid program. 

One argument for federalizing Medicaid was that it would allow for
better control of medical costs.\7 This could be achieved through the
federal government's exercising its influence as the sole purchaser
of medical services for both the Medicare and Medicaid programs to
obtain lower prices for services. 

Another argument for federalization is that it would address the lack
of uniformity in benefits and eligibility requirements among
recipients.  Besides the obvious benefit of equity among
beneficiaries, other benefits of federalization might include the
reduction in the financial and administrative burden of Medicaid on
the states and the elimination of persons migrating from states with
low welfare benefits to those with higher benefits.\8

There are many concerns, however, associated with the federalization
of the Medicaid program.  The federal government would face a serious
challenge in defining uniform eligibility and service coverage for
the country.  If a federal program with generous services was
adopted, it would substantially increase the cost of the Medicaid
program.  Federal Medicaid costs would greatly increase even if the
current level of benefits was maintained across the states.  A
bare-bones approach that would limit federal spending could result in
states that wished to maintain something close to the current levels
of eligibility and service coverage having to finance and administer
the additional services.\9

Experts have said that eligibility criteria and benefits might need
to be adjusted to reflect variations in living costs among states and
localities.  The federal government may have a difficult time taking
advantage of local circumstances to operate the program at maximum
efficiency.  For example, some areas may prefer to have more
eligibles than extra, high-cost services.  Also, the cost of certain
services may be very high in some areas, and the use of alternative,
lower cost services may be more efficient.\10

Separating federal and state administration of Medicaid and other
welfare programs will not eliminate what some believe is the more
important problem--the need to restructure incentives for states,
providers, and recipients to promote better use of Medicaid
resources--and unnecessary reorganization of such enormous programs
could be disruptive to program operations.  Furthermore, some
observers believe that deregulation of Medicaid at the federal level,
modification of financial arrangements, and transfer of control to
states are preferable to federalization.\11

--------------------
\6 A similar proposal to federalize Medicaid, outlined in S.140, was
recently introduced in the Senate.  In exchange for the federal
government assuming full cost of the Medicaid program, states would
assume full cost of the WIC, Food Stamp, JOBS, and AFDC programs. 

\7 See Controlling Medicaid Costs, 1983. 

\8 See Controlling Medicaid Costs, 1983, and John Holahan and others,
Balancing Access, Costs, and Politics (Washington, D.C.:  Urban
Institute Press, 1991). 

\9 See Controlling Medicaid Costs, 1983 and John F.  Holahan and Joel
W.  Cohen, Medicaid:  The Trade-Off Between Cost Containment and
Access to Care (Washington, D.C.:  Urban Institute Press, 1986). 

\10 See Controlling Medicaid Costs, 1983. 

\11 See Controlling Medicaid Costs, 1983. 

      SPLITTING THE MEDICAID
      PROGRAM
---------------------------------------------------------- Letter :3.3

Other alternatives to restructure Medicaid involve splitting it into
two separate programs.  One proposal would split it by type of
service, with the federal government responsible for funding and
administering acute and primary care and the states responsible for
long-term care.  Another would essentially reverse the roles for each
level of government, with the federal government responsible for
long-term care and the states responsible for acute and primary care. 

A proposal to split Medicaid by type of service was put forth in 1984
by the National Study Group on State Medicaid Strategies.\12

The group was composed of nine state Medicaid, public health, and
human service administrators.  Under this plan, Medicaid would be
split into (1) a federally financed and administered acute and
primary care program with services provided by and payments made
directly to prepaid capitated plans and (2) a federal- and
state-funded but state-administered long-term care program.  Federal
financing for long-term care would be provided through per capita
payments indexed for inflation and to reflect growth in the at-risk
populations. 

The acute and primary care program would provide basic health care
benefits (ambulatory and short-term institutional) for low-income
individuals and families.  Eligibility would be based on financial
need and would not be tied to eligibility for cash assistance
programs.  A uniform, national eligibility level would be established
at a set percentage (for example, 55 percent) of the national poverty
level.  Individuals with higher incomes would be entitled to coverage
if their medical bills were so high that their incomes and assets
fell below the established standard. 

The long-term care program would provide a full range of
institutional and community care services to low-income persons in
two major service populations:  the functionally impaired elderly and
disabled, and the mentally retarded and developmentally disabled. 
States would provide services within broad federal criteria and
guidelines. 

The National Study Group argued that this split allowed the problems
and needs of persons requiring these types of services to be
addressed more thoroughly.  By increasing states' flexibility over
the long-term care component, states would have the freedom to find
innovative ways to efficiently deliver long-term care services.  The
National Study Group believed that this approach might also clarify
federal and state program responsibilities.  Some have concluded that
the advantages to this type of split would be that it would eliminate
many of the current interstate inequities in the acute and primary
care component of Medicaid by making uniform national eligibility and
benefit levels.  It would also eliminate inequities within the states
by doing away with Medicaid program ties to cash assistance
programs.\13

A very recent proposal has suggested essentially reversing the
responsibilities that the National Study Group's proposal assigns to
the federal and state governments.  It would require the federal
government to create and operate a national long-term care program, a
task that is likely more challenging than taking responsibility for
the acute care component.  Medicaid programs have been the
predominant purchasers of long-term care, and program policies have
shaped the long-term care market.  The considerable variation in
those policies has resulted in extensive variation in the volume and
types of services across states.\14 As a result, the task of
designing national benefit policies would be compounded by
consideration of whether local service systems would have the
capacity to fulfill them.  Further, federalization might weaken a key
element of long-term care cost containment efforts.  States have
historically been aggressive about trying to limit the number of
nursing home beds out of concern about their share of Medicaid
spending--a concern that would not exist under a federalized program. 

Proposals to exchange responsibilities are not necessarily
budget-neutral for either the federal government or individual state
governments.  Depending on the programs exchanged, a proposal could
be budget-neutral or not.  Among programs, Medicaid is several times
larger than others mentioned.  Within Medicaid, acute and primary
care services expenditures are far greater than the amount spent on
long-term care. 

--------------------
\12 Restructuring Medicaid:  An Agenda for Change (Washington, D.C.: 
The Center for the Study of Social Policy, Jan.  1984). 

\13 See Trade-Off Between Cost Containment and Access, 1986. 

\14 Medicaid Long-Term Care:  Successful State Efforts to Expand Home
Services While Limiting Costs (GAO/HEHS-94-167, Aug.  11, 1994). 

   THE BUSINESS CYCLE AND A RAINY
   DAY FUND
------------------------------------------------------------ Letter :4

Our analysis of Medicaid spending for federal fiscal years 1980
though 1993 clearly demonstrates the important influence of the
business cycle.  A rainy day fund or similar mechanism would be one
way to assist states during recessionary periods if strong limits are
placed on federal contributions.  Independent of other factors,
Medicaid expenditures tend to increase during recessions--as more
individuals qualify for benefits--and decrease during economic
expansions--as individuals leave the rolls.  In general, an increase
in the unemployment rate of 1 percentage point is associated with
about a 6-percent increase in Medicaid expenditures.  A fall in the
unemployment rate causes a commensurate decrease in Medicaid
expenditures.  A rainy day fund might prevent states from having to
reduce benefits, limit enrollment, or increase taxes during economic
downturns.\15

After controlling for long-term trends, we found a statistically
significant relationship between Medicaid expenditures and the
unemployment rate in 22 states, including 8 of the 10 largest states
in terms of total expenditures:  California, Florida, Massachusetts,
Michigan, New Jersey, New York, Ohio, and Pennsylvania.\16 \17
Spending in these 22 states accounted for over 63 percent of total
Medicaid spending, or approximately $79.1 billion in fiscal year
1993. 

Lack of statistical significance does not necessarily mean the
relationship does not exist in the remaining states.  Other factors
(such as spending on disproportionate share hospitals) may have
confounded the data and made it impossible to isolate the specific
influence of economic activity in some states.\18 Alternatively, some
state programs may be much less sensitive to changes in economic
activity. 

Figures 2 and 3 illustrate the effect of the business cycle on
Medicaid spending in New York and California.  Between 1980 and 1993,
annual spending increases averaged 11.5 percent in New York and 10.5
percent in California; these overall trends in expenditures are shown
with the dashed lines in the figures.  The solid lines show how the
business cycle--measured by the unemployment rate--affects spending
relative to the trend.  In the early 1980s, the recession caused high
unemployment (8.6 percent in New York, 9.8 percent in California) and
increased Medicaid spending above the long-term trend.  The economic
recovery that began in the mid-1980s reduced unemployment (to 4.4
percent in New York and 5.2 percent in California) and lowered
Medicaid spending relative to the long-term trend. 

   Figure 2:  New York Medicaid
   Spending

   (See figure in printed
   edition.)

   Figure 3:  California Medicaid
   Spending

   (See figure in printed
   edition.)

The impact of economic recessions on Medicaid spending is
proportionately greater in some states than for the country as a
whole.  This is true for two reasons.  First, some Medicaid programs
are much more sensitive than others to statewide economic conditions. 
Second, individual state unemployment rates are subject to much
greater changes than are national unemployment rates.  For example,
between 1980 and 1993, the largest 1-year increase in the national
unemployment rate was 1.7 percentage points.  At the state level, the
largest annual increase occurred in West Virginia, where the
unemployment rate jumped 3.9 percentage points in 1983. 
Massachusetts, one of the 10 states with the largest Medicaid
expenditures, experienced a 1-year unemployment rate increase of 2.8
percentage points in 1991.  Our analysis suggests that this increased
unemployment added 17.6 percent, or $590 million, to Massachusetts'
Medicaid spending that year. 

How large a Medicaid rainy day fund is needed cannot be determined
without specifying how it would be used, structured, and financed. 
Its size would depend, in part, on the expected depth and breadth of
the recessions the rainy day fund was meant to bridge.  The
conditions that would trigger the use of the fund also matter; a fund
designed only to meet increased expenses directly resulting from an
economic recession--and not unexpected spending increases incurred
for other reasons--could be smaller than a fund with broader
objectives.  The size would also depend upon whether a single
national rainy day fund was created or each state maintained its own
fund.  Because economic recessions hit some geographical areas harder
or at different times, a single national fund--by diversifying the
risk--could be smaller than the aggregate of 50 separate state funds. 

A rainy day fund could be established as a revolving loan fund,
financed initially by an appropriation and subsequently by loan
repayments and possibly interest payments.  This structure is similar
to the Unemployment Insurance program, which permits states to borrow
from the federal unemployment trust fund when their balances are
insufficient to pay benefits.  States are required to pay interest on
loans, however, which has tempered the demand for loans. 
Alternatively, a Medicaid rainy day fund could be financed by an
appropriation and serve as an additional specified amount of funds
available for payments to states under certain conditions. 

--------------------
\15 State tax revenues are also cyclically sensitive.  They generally
decline during recessions, while Medicaid eligibility and
expenditures increase.  For this report, we did not conduct any
quantitative analyses of such effects on state tax revenues. 

\16 This fundamental relationship may not be obvious from a casual
inspection of the data because other factors, such as medical
inflation, changes in utilization, and enrollment increases caused by
normal population growth, also affect Medicaid spending. 

\17 The remaining 14 states are Connecticut, Delaware, Hawaii,
Indiana, Maine, Maryland, Minnesota, Missouri, New Hampshire, North
Dakota, Rhode Island, Utah, Vermont, and Virginia. 

\18 Because available HCFA data do not separately identify
disproportionate share hospital payments before 1993, these payments
could not be excluded from the analysis. 

   AGENCY COMMENTS
------------------------------------------------------------ Letter :5

Program officials from HCFA and the Department of Health and Human
Services' Office of the Assistant Secretary for Planning and
Evaluation commented on a draft of this report.  We have

We are sending copies of this report to the Secretary of Health and
Human Services, the Administrator of the Health Care Financing
Administration, and the Assistant Secretary for Planning and
Evaluation.  We will also make copies available to others on request. 

If you or your staff have any questions about this report, please
call me on (202) 512-4561 or Richard Jensen on (202) 512-7146.  Ron
Viereck, Aleta Hancock, Carla Brown, and James Cosgrove also
contributed to this report. 

Sincerely yours,

William J.  Scanlon
Associate Director
Health Financing and Policy Issues

MEDICAID EXPENDITURES, FISCAL YEAR
1993
=========================================================== Appendix I

                   (Dollars in thousands)

State                  Federal         State         Total
----------------  ------------  ------------  ------------
New York           $10,263,276   $10,152,189   $20,415,465
California           7,122,922     7,026,776    14,149,698
Texas                4,761,080     2,644,917     7,405,997
Pennsylvania         3,222,982     2,573,717     5,796,699
Ohio                 3,192,868     2,106,343     5,299,211
Illinois             2,628,783     2,597,134     5,225,917
Florida              2,810,093     2,286,183     5,096,276
New Jersey           2,390,784     2,367,690     4,758,474
Michigan             2,539,435     1,999,501     4,538,936
Massachusetts        2,127,897     2,112,367     4,240,264
Louisiana            2,611,684       944,893     3,556,577
North Carolina       1,966,127     1,028,773     2,994,900
Georgia              1,807,117     1,102,486     2,909,603
Indiana              1,804,877     1,053,825     2,858,702
Tennessee            1,831,339       883,598     2,714,937
Washington           1,347,782     1,095,609     2,443,390
Connecticut          1,172,956     1,159,943     2,332,899
Missouri             1,393,812       919,310     2,313,122
Minnesota            1,257,490     1,029,617     2,287,107
Wisconsin            1,313,952       860,174     2,174,127
Maryland             1,037,895     1,018,729     2,056,624
Kentucky             1,369,587       546,108     1,915,695
Virginia               942,274       924,408     1,866,682
South Carolina       1,241,829       512,212     1,754,041
Alabama              1,193,754       480,503     1,674,257
Arizona                962,580       497,149     1,459,730
West Virginia          934,215       297,488     1,231,703
Mississippi            962,308       263,928     1,226,236
Oklahoma               810,051       364,067     1,174,118
Colorado               619,003       508,829     1,127,832
Arkansas               789,432       279,208     1,068,640
Oregon                 643,506       393,845     1,037,351
Iowa                   643,593       384,022     1,027,615
Kansas                 537,857       383,138       920,996
Maine                  546,291       338,230       884,521
Rhode Island           455,158       392,449       847,606
District of            356,699       352,787       709,486
 Columbia
New Mexico             437,194       154,356       591,550
Nebraska               361,037       227,335       588,372
Utah                   377,418       130,448       507,866
Nevada                 230,528       207,681       438,208
New Hampshire          218,889       213,880       432,770
Hawaii                 200,595       197,524       398,119
Montana                238,598        97,637       336,235
Idaho                  222,450        93,428       315,878
Alaska                 169,943       145,216       315,159
North Dakota           202,103        79,495       281,598
South Dakota           193,796        79,971       273,767
Vermont                164,466       108,814       273,280
Delaware               135,923       131,149       267,071
Wyoming                 96,401        46,675       143,076
==========================================================
Total              $74,862,631   $55,795,752  $130,658,383
----------------------------------------------------------

SCOPE AND METHODOLOGY
========================================================== Appendix II

To obtain information on Medicaid restructuring approaches and their
implications for federal-state financing and administration, we
contacted representatives of the organizations listed below and
requested any pertinent reports or other documents.  We also
conducted a literature search using computerized databases to obtain
various other related publications such as reports, journal articles,
books, studies, and proposed congressional bills. 

ORGANIZATIONS GAO CONTACTED

Alpha Center for Health Planning
American Enterprise Institute
American Medical Association
Association for Health Care Policy Research
Cato Institute
Center for Strategic and International Studies
Center for the Study of Social Policy
Heritage Foundation
Intergovernmental Health Policy Project
Kaiser Commission on the Future of Medicaid
National Center for Policy Analysis
National Governors' Association
Progressive Policy Institute
Urban Institute

To provide information on the need to establish a rainy day fund if
restrictions were placed on federal Medicaid payments to the states,
we analyzed the sensitivity of Medicaid spending to the business
cycle.  We collected annual state unemployment information from the
Bureau of Labor Statistics and combined federal-state Medicaid
spending data for each of the states and the District of Columbia
from HCFA for federal fiscal years 1980 through 1993.  We used
standard multivariate statistical techniques to estimate the separate
influence of unemployment on Medicaid expenditures for each state,
after controlling for long-term spending growth. 

To provide information on actual federal Medicaid payments to the
states, we collected the most recent data available from HCFA.  We
did our work in accordance with generally accepted government
auditing standards. 

APPROACHES TO RESTRUCTURING
MEDICAID
========================================================= Appendix III

               Block grants/
               cap on         Federalizatio  Federal/state
               spending\a     n\b            split\c
-------------  -------------  -------------  ---------------
Goal
------------------------------------------------------------
               Control        Eliminate      Better serve
               federal        states'        needs of
               costs          variation in   distinct
                              eligibility    populations
               Increase       and services
               state                         Clarify federal
               flexibility    Redefine       and state
                              federal-       responsibilitie
                              state          s
                              relationship
                                             Control costs

Federal role
------------------------------------------------------------
               Block          Fully fund     Assume
               grants:        program        responsibility
               Provide                       for acute and
               grants         Administer     primary care
                              program        program
               Possibly
               establish      Establish      Share in
               minimum        policy and     funding (block
               program        requirements   grants) and
               requirements                  establish
                                             minimum
               Cap:                          requirements
               Match state                   for state long-
               funds to cap                  term care
               limit                         programs

               Establish
               minimum
               program
               requirements

State role
------------------------------------------------------------
               Block          None           Assume
               grants:                       responsibility
               Administer                    for long-term
               program                       care program
                                             with federal
               Establish                     government
               policy                        sharing funding
               and
               requirements

               Possibly
               contribute
               funds

               Cap:
               Contribute
               funds

               Administer
               program

               Take on
               greater
               policy and
               requirements
               setting
               responsibilit
               y

Benefits

               Not addressed  National       Basic acute and
                              benefit        primary care
                              package        benefits; full
                                             range of health
                                             and social
                                             long-term care
                                             services

Eligibility
------------------------------------------------------------
               Not addressed  National       All persons
                              standards      with incomes
                                             less than a
                                             federally
                                             designated
                                             percentage of
                                             the poverty
                                             level for acute
                                             and primary
                                             care;
                                             functionally
                                             impaired
                                             dependent
                                             persons within
                                             the federal
                                             guidelines for
                                             long-term care
                                             eligibility

Administration
------------------------------------------------------------
               States         Federal        Federal
               responsible    government     government
                              responsible    responsible for
                                             acute and
                                             primary care;
                                             states
                                             responsible for
                                             long-term care

Financing
------------------------------------------------------------
               Block          Federal        Federal
               grants:        government     government
               Federal        fully funds    fully funds
               grants         program        acute and
                                             primary care;
               No mandatory                  federal
               state                         government and
               contribution,                 states share
               or some state                 funding of
               contribution                  long-term care
               supplementing
               the federal
               contribution

               Cap:
               Federal
               matching of
               state funds
------------------------------------------------------------
\a Block grants are discussed in Controlling Medicaid Costs, 1983,
and proposed in Cato Handbook for Congress, 1995.  In 1981, the
administration proposed a 5-percent cap on annual increases to
federal Medicaid spending along with reduced federal requirements. 

\b The administration proposed to federalize the Medicaid program in
the 1983 budget.  As part of the proposal, the states would have
assumed complete responsibility for the AFDC and Food Stamp programs. 
S.140 would federalize Medicaid and give the states complete
responsibility for the AFDC, Food Stamp, JOBS, and WIC programs. 
Federalization was also discussed in Controlling Medicaid Costs,
1983. 

\c A proposal to split Medicaid into two programs is contained in
Restructuring Medicaid:  An Agenda for Change, 1984. 

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