In existence since 1965, Medicaid is a means-tested entitlement program that finances the delivery of primary and acute medical services, as well as long-term care, to nearly 60 million people at an estimated cost to the federal and state governments of roughly $333 billion in FY2006, making it as large as Medicare, the federal health care program for the elderly and certain individuals with disabilities. Among major domestic entitlement programs, only Social Security costs more. Each state designs and administers its own Medicaid program under broad federal guidelines. For states, it is the second largest spending item after education. Medicaid is expected to represent 2.5% of GDP in FY2006. The expenditure growth is even more striking. Program spending increased by more than 49% between 2000 and 2005, exceeding growth in general and medical inflation, and the rates of growth in spending for both Medicare and Social Security over the same period. Medicaid spending has grown partly because medical care keeps getting more expensive, and because over time, federal law has been expanded significantly to cover more people and more benefits. Certain state financing mechanisms have also played a role in increased spending under Medicaid. As Medicaid entered the 1980s and 1990s, more attention—and blame—for steadily rising Medicaid costs was attributed to the economic incentive to provide more care under the fee-for-service (FFS) delivery system, in which payments are made for each unit of service delivered. Under this system, Medicaid budgets were somewhat unpredictable, and outlays were significantly affected by the quantity and types of care provided. It was also unclear whether state Medicaid programs were getting good value for their ever increasing Medicaid dollars. Following the lead in the private sector among large employers, many states began to turn to managed care for their Medicaid programs. The goal, then and today, is both to rein in Medicaid costs by making payments on a predetermined, per-person-per-month basis, rather than for each unit of service delivered, and to provide a better, coordinated system of care for beneficiaries, with an emphasis on preventive and primary care services. But Medicaid managed care has not fully achieved either goal yet. Data from FY2003 (most recent available) indicate that while about two-thirds of Medicaid beneficiaries nationwide participate in some form of managed care, the majority of expenditures still occur in the FFS setting, mainly because expensive long-term care services are rarely offered through managed care. In addition, while there are some data suggesting improvements in the quality of care delivered in Medicaid managed care, commercial (employer-based) and Medicare managed care plans continue to do better on some measures of effectiveness. Before getting into the specifics of how care is delivered under Medicaid, it is important to understand who is eligible for the program and the range of benefits that may be covered. The Medicaid statute (Title XIX of the Social Security Act) defines more than 50 distinct population groups as being potentially eligible. Some eligibility groups are mandatory, meaning that all states must cover them; others are optional. To qualify for Medicaid coverage, applicants' income (e.g., wages, Social Security benefits) and often their resources or assets (e.g., value of a car, savings accounts) must meet program financial requirements . These requirements vary considerably among states, and different rules apply to different population groups within a state. Medicaid eligibility is also subject to categorical restrictions —generally, it is available only to specific categories of people, including the elderly, persons with significant disabilities, members of families with dependent children, and certain other pregnant women and children. Other individuals (e.g., childless adults with no disability) are not eligible for Medicaid no matter how poor they are, unless they are covered under a special waiver. In recent years, Medicaid has been extended to additional groups with specific characteristics, including certain women with breast or cervical cancer and uninsured individuals with tuberculosis. Medicaid benefits are identified in the federal statute and regulations as either mandatory or optional, and include a wide range of medical care, items and services. Examples of benefits that are mandatory for most Medicaid groups include (1) inpatient hospital services (excluding services for mental disease), (2) laboratory and x-ray services, (3) physician services, and (4) nursing facility services for persons age 21 and over. In addition to prescribed drugs that are offered by all states, other optional benefits covered by many states include for example: (1) routine dental care, (2) physician-directed clinic services (frequently for mental health care), (3) therapies (e.g., physical, occupational and speech), and (4) transportation (in order to receive medical care). In general, most Medicaid beneficiaries, whether covered via a mandatory or an optional eligibility group, are entitled to all the standard mandatory and optional benefits offered by a state Medicaid program. Under the recently enacted Deficit Reduction Act of 2005 (DRA; P.L. 109-171 ), as of March, 31, 2006, states may offer new packages of benefits to certain groups of Medicaid beneficiaries. This new benefit option includes benchmark and benchmark-equivalent coverage that is nearly identical to the plans offered through the State Children's Health Insurance Program (SCHIP), with some additions. Nearly all states operate their SCHIP programs under managed care arrangements. Under DRA, benchmark coverage includes the care and services available through: (1) the standard Blue Cross/Blue Shield preferred provider plan under the Federal Employees Health Benefits Plan (FEHBP), (2) health coverage for state employees, (3) health coverage offered by the largest commercial HMO in the state, and (4) Secretary-approved coverage, which may include any other package of benefits that the Secretary of Health and Human Services (HHS) determines will provide appropriate coverage for the targeted population. Benchmark-equivalent coverage must include certain services, and must have the same actuarial value as one of the benchmark plans, with at least 75% of the actuarial value for selected services. A number of groups are explicitly exempted from mandatory enrollment in this new benefit option, including most individuals with special needs living in both the community and long-term care settings. Other groups can be required to enroll in the new benefit option, including most generally healthy children and certain adults (e.g., some parents and childless adults with no disability). There are two major types of service delivery systems under Medicaid—fee-for-service and managed care. These two approaches to delivering services to Medicaid beneficiaries differ in important ways across several key dimensions, including: choice of providers for beneficiaries, how much professional management and coordination of medical care is provided, which entity has direct oversight responsibilities for service delivery, how states pay providers for services rendered, and assuring access to and quality of care. In many cases, these two delivery systems are not entirely independent approaches to providing medical care under Medicaid. In a number of states, there are hybrid models that combine various features of fee-for-service and managed care for a given population or set of interrelated services. At a given point in time, beneficiaries may obtain all their services under a single system of care, or different sets of services under each system simultaneously (e.g., primary and acute care under managed care arrangements, and long-term care such as home health services or on-going rehabilitative services under the fee-for-service delivery system). Each of these features of delivery systems is described in more detail below. The fee-for-service (FFS) delivery system was the predominant system of care both within and outside of Medicaid until about the mid-1990s. Under FFS, beneficiaries have unrestricted provider choice; that is, they can seek services from any Medicaid participating provider. Hence, beneficiaries are largely responsible for their own medical care management and coordination. The term "fee-for-service" evolved as a short-hand way to describe the method used to reimburse providers for services rendered. For Medicaid, payment rates for each type of service are set by the state within broad federal guidelines. The state directly (or through a fiscal intermediary) pays each participating provider for each covered service received by a Medicaid beneficiary. That is, each individual service rendered is paid a specified amount or rate. In essence, there is a one-to-one correspondence or "match" between payments and the quantity and types of care actually delivered. Until the late 1990s, states had to obtain waivers of certain Medicaid rules to require that Medicaid beneficiaries get their services through managed care. For example, authority provided by Section 1915(b) of the Social Security Act was used by many states to waive the requirements that services be available statewide (so that managed care could be implemented in specific sub-state regions), and that beneficiaries have freedom of choice among all Medicaid providers (so that managed care enrollees could be required to receive certain services from a specified subset of managed care providers). Section 1115 of the Social Security Act provides additional flexibility to test benefit package and service delivery innovations. This authority has also been used to implement managed care demonstrations. In FY1998, nearly all states had at least one such waiver for some population subgroups or regions. The Balanced Budget Act of 1997 (BBA-97; P.L. 105-33 ) eliminated the need for waivers that many states complained were unnecessarily complex and time-consuming. BBA-97 also included managed care provisions that established standards for quality and solvency, and provided additional protections for beneficiaries (described below). Under Medicaid managed care, beneficiaries choose (or are assigned to) a primary plan as a "medical home." In turn, these plans provide care coordination and management. State Medicaid agencies must contract with at least two plans, or may offer one plan with a choice of at least two plan providers. Comprehensive, traditional plans like health maintenance organizations (HMOs) make available to enrolled beneficiaries a broad range of preventive, primary and acute care services.