Mr. Chairman and Members of the Subcommittee: 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. In addition, you have asked us to comment on aspects of the administration’s fiscal year 1998 proposal for the Medicaid program. My remarks today focus on two broad issues: (1) key factors that explain the 3.3-percent growth rate in fiscal year 1996 and their implications for future Medicaid spending and (2) the administration’s proposal to contain Medicaid cost growth through decreases in disproportionate share hospital (DSH) payments and per capita caps, and to increase state flexibility. 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. Our comments on the administration’s proposal are based on a review of budget documents and previous work we have conducted. in the 1996 growth rate, so a variety of factors—such as a downturn in the economy—could result in increased growth rates in subsequent years. Finally, the administration’s proposal for Medicaid reform would further control spending by reducing DSH expenditures and imposing a per capita cap, while providing the states greater flexibility in program policy and administration for their managed care and long-term care programs. These initiatives should produce cost savings. However, in controlling program spending, attention should be given to targeting federal funds appropriately and ensuring that added program flexibility is accompanied by effective federal monitoring and oversight. 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 constitutes a considerable portion of 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 the levels of the mid-1980s. Then, in fiscal year 1996, the growth rate fell to 3.3 percent. In analyzing the growth rate for 1996 we found that no single spending growth pattern was evident across the states nor did we find a single factor that explained the decrease in growth. Rather there was a confluence of factors, some of which are unlikely to recur, while others are part of a larger trend. Future spending will potentially be higher if the economy weakens and as the elderly population continues to grow. to the next because of major changes in program structure or accounting variances that change the fiscal year in which a portion of expenditures is reported. To determine the stability of the growth rates among states, we compared states’ growth rates in fiscal year 1995 with those in fiscal year 1996. Our analysis showed that states could be placed in one of five categories, as shown in table 1. (See app. I for specific state growth rates.) 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 effect on spending growth patterns because their combined share of Medicaid outlays is only 4 percent. many states’ growth rates. The convergence of these factors resulted in the historically low 3.3-percent growth rate in fiscal year 1996 Medicaid spending. The growth rate changes in those states that experienced large decreases in 1996 were largely attributable to three factors not expected to recur: substantial decreases in DSH funding, slowdowns in state-initiated eligibility expansions, and accelerated 1995 payments in reaction to block grant proposals for Medicaid. In 1991 and 1993, the Congress acted to bring under control DSH payments that had grown from less than $1 billion to $17 billion in just 2 years. 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, was Louisiana—a state that has had one of the largest DSH programs in the nation. It experienced a substantial decrease in its 1996 growth rate as its DSH payments continued to decline. 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. aggregate Medicaid spending limits, which would be calculated using a base year. Officials from a few states told us that, in response to the 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, 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. 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. 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 effect 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 might not have been possible in periods with higher inflation because institutional providers might challenge state payment rates in court, arguing they had not kept pace with inflation. With inflation down, states can restrain payment rates with less concern about such challenges. 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 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 populations that may need more care and are more expensive to serve—such as people with disabilities and the elderly. 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.However, other states have emphasized objectives besides cost control in moving to managed care. 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 effect on the moderate decreases they experienced. Given the varying objectives, the ability of managed care to help control state Medicaid costs and moderate spending growth over time is unclear. 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, such as limiting the number of participating beneficiaries and having waiting lists, are in place. 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.