ODDC- Understanding the Recent Growth in Medicaid Spending, 2000-2003,

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TITLE: Understanding the Recent Growth in Medicaid Spending, 2000-2003, January 26, 2005 http://content.healthaffairs.org/cgi/content/full/hlthaff.w5.52/DC1

Author:Author: John Holahan and Arunabh Ghosh, Policy Journal of the Health Sphere (Katherine Cargill-Willis 3/2/05)

Background: From 1995 to 1998 Medicaid spending grew 3.6 % annually, but grew 7.8% each year from 1998 to 2000. From 1998-2000, health care inflation was low throughout the entire health care sector. Several states adopted the State Children’s Health Insurance Program (SCHIP), and several used the Section 1931(b) provisions of welfare reform legislation or Section 1115 waivers to expand coverage. States also expanded home and community-based waiver programs and developed prescription drug programs for the elderly.

Between 2000-2002 spending grew about 12% for several reasons. Medicaid enrollment increased both because of the previous expansions and because the economic downturn made more people eligible for the program. Health care costs also rose more rapidly, led by prescription drug and hospital costs. Finally, Medicaid managed care was no longer providing states with the same savings it had provided in the mid-1990s.
Between 2002 and 2003 spending growth returned to 8.2%. Overall Medicaid spending grew from $205.7 to $275.5 billion between 2000-2003. By 2003, Medicaid covered many more Americans. There were few expansions of, and even some reductions, in eligibility standards during this period. Thus, more people were eligible under existing eligibility standards. States made policy choices that affected benefits and provider reimbursement rates, and in the end they controlled the rate of spending growth. Medicaid played its role as a safety net, providing coverage to those facing economic declines and loss of employer-sponsored coverage, but the result was a sharp increase in program costs.

This explosive growth has caused fiscal problems for state governments faced with depressed revenues. At the federal level, Medicaid spending is potentially a major target in the 2005 budget debate. It is expected that the Bush administration will propose policies to sharply curtail the growth in Medicaid spending. The nation’s governors, in anticipation of federal Medicaid cutbacks, have written to congressional leaders arguing against dramatic action.

Growth in Enrollment:

Seniors and People with Disabilities: Between 2000-2003 enrollment increased about 2.9%.

Families: Between 2000-2002 enrollment for families increased 11. 6% and another 7.1% between 2002 and 2003. Although several states cut back coverage and curtailed their efforts to increase participation rates, the slow economy increased the number of people below 200% of the federal poverty level making them eligible for Medicaid. There were also reductions in rates of employer-sponsored coverage. These occurred in part from reductions in employment in large firms and in industries with high rates of employer-based coverage, but also from rapid increases in insurance premiums. While the growth in enrollment among the seniors and people with disabilities was slower than for people without disabilities and children, it was much faster than the growth rate of the U.S. population and it cost more to serve these populations. Several reasons contribute to this difference:

The growth of Medicaid recipients using Home and Community-based (HCBS) services;
Life-saving medical technology that lengthens lives but leaves many people with disabilities;
Medication increasing the life spans of people with HIV/AIDS;
The increased recognition of chronic problems as disabilities;
The increased enrollment of the seniors may be due to higher participation rates in Medicaid because of the rapid rise in the cost of prescription drugs.
The baby boom that will eventually affect the size of the elderly population is now entering the 55–64 age range, ages at which the likelihood of disabilities increases.

Growth in Spending: Growth in Medicaid spending, either between 2002 and 2003 or over the entire period, was fairly well spread across all services, with a few exceptions. Overall growth in spending per enrollee between 2002 and 2003 was remarkably low: 4.2% compared to 6.1% annual spending rate between 2000 and 2003. This decrease in spending per enrollee was primarily due to a decrease in long-term care spending per enrollee: 1.0% from 2002 to 2003 compared with 7.2% from 2000 to 2002.

Acute Care: During 2000-2003, spending for acute care increased 13.4%, increasing 14.5% between 2000-2003 and 11.2% between 2002-2003. Between 2000 and 2002, nearly two-thirds of health spending growth was for acute care services and payments to Medicare for premiums and co-payments. Spending per enrollee increased 6.4 % from 2002 to 2003, only slightly below its rate in 2000–2002. Inpatient hospital spending per enrollee increased 6.1 % from 2002 to 2003 compared with 3.7 % from 2000 to 2002, while outpatient services declined from 6.2 % to –0.8 %.

Long-Term Care: During 2000-2003 spending for long-term care increased 8.4%, increasing 10.7% between 2000-2002, but only 3.8% between 2002 and 2003. The slower growth in long-term care from 2002 to 2003 is attributable to an absolute-dollar decline in nursing home spending. Less than 20% of Medicaid spending was attributable to long-term care.

Prescription Drugs: Medicaid drug spending rose from $16.6 billion in 2000 to $26.6 billion in 2003, an average of 17.1% annually. Drug spending slowed from 2002 to 2003, however, relative to the previous two years. Per enrollee spending grew at a slower rate from 2002 to 2003; 10%, compared with 13.9 % from 2000 to 2002.

Managed Care Plans: Spending on services provided by prepaid/managed care plans increased from $26.5 billion in 2000 to $41.5 billion in 2003, an average increase of 16.1% annually. Spending per enrollee increased 9.9% from 2002 to 2003 compared with 6.9% from 2000 to 2002.

Nursing Home Spending: Spending on nursing home care increased 4% annually over the 2000–2003 period but fell $2.9 billion (6%) between 2002 and 2003. Nursing home spending grew 9.5% annually between 2000 and 2002, probably because the increased use of upper payment limit (UPL) programs. Upper payment limit is the maximum amount paid to each Medicaid facility. These programs transfer funds from local governments or providers to the state government and the states make higher payments to nursing homes. The local share is usually returned to the local entity making the transfer to the state, and the state generates federal matching payments with little or no state or local contribution. The Benefit Improvements and Protection Act (BIPA) of 2002 limits UPL programs. The decrease in spending by 2003 may reflect movement out of nursing homes, but it more likely reflects decline of UPL programs. Spending per enrollee increased 6.2 % between 2000 and 2002 and fell 8.4% between 2002 and 2003, but this likely due to a decline in use of UPL programs.

Home/Personal Care Services: Spending on home/personal care increased from $22.3 billion in 2000 to $34.7 billion in 2003. Such spending is still about $10 billion less than spending on nursing home care. The annual rate of growth in spending during 2000–2003 for home/personal care was 15.9%, compared with 4% for nursing facilities and 5% per year for ICF-MRs. Per enrollee spending increased from 11.2 % in 2000–2002 to 13.9% in 2002–2003 for HCBS services, while the spending per person living in an ICF-MRs continued at a very low rate.

Disproportionate–Share Hospital (DSH) Payment Adjustments: Federal law requires state Medicaid programs “ to take into account the situation of hospitals that serve a disproportionate number of low-income patients with special needs” when determining payment rates for inpatient hospital care. The Balanced Budget Act (BBA) set out state-specific federal DSH allotments between 1998 and 2002. BIPA froze DSH allotments in 2001 and 2002 at 2000 BBA levels but then returned them to levels specified in the BBA for 2003, causing sizable reductions in several states. The Medicaid Prescription Drug, Improvement, and Modernization Act (MMA) of 2003 eased federal law restricting DSH payments; DSH payments were allowed to increase in 2004.

Medicare: Medicaid payments to Medicare grew from $4.7 billion to $6.3 billion during the period, including payments for Medicare premiums for all Medicaid dual-eligible. Spending increased 9.5 % between 2000 and 2002 and 10.4 % between 2002 and 2003. From 2002 to 2003, more than 80% of Medicaid spending growth was attributable to acute care services and payments to Medicare.

Growth in Spending vs. Spending per Enrollee:

Overall spending: During 2000-2002 overall spending on families increased 19%, while spending on seniors and people with disabilities 10% and the pattern continued through the next year. During 2002-2003 total spending increased 8.2%. Medicaid spending on seniors and people with disabilities increased only 5.5%, while spending on families increased 14.2%. Between 2000-2003, Medicaid spending grew 11.4% per year. Medicaid enrollment grew 8% per year, and spending per enrollee increased 3.1%. Spending for the seniors and people with disabilities grew 9% (5.9% per enrollee), and for families, 17.3% (6.5% per enrollee). This growth in spending on families was largely due to growth in enrollment. The slower growth in spending on the seniors and people with disabilities was attributable to both slower enrollment growth and slower growth in spending per enrollee- that is the decline in nursing home spending.

Spending Growth by Eligibility Group: Between 2000 and 2003, more than half (56%) of Medicaid spending was attributable to the aged and disabled. compared with 44% for families. Between 2000 and 2002, almost 60 % of the growth was by seniors and people with disabilities and about 41% for families. This pattern was somewhat reversed between 2002 and 2003 largely because of the decline in nursing home spending.

Children and families accounted for more the 40% of spending on inpatient hospital, physician, lab and x-ray, and outpatient hospital services and more than 60% of the spending on prepaid/managed care;
People with disabilities and seniors made up more than 70%; including 85% of spending on prescription drugs. This group accounted for more than half of the spending on hospital services and nearly all spending for long-term care.

Enrollment: During 2000-2003, enrollment increased 9.1% per year, spending per enrollee, 3.8%, and overall spending, 13.2%. Medicaid enrollment increased 5.9%, while spending per enrollee increased only 2.1%. The growth in spending per enrollee of 6.5 % per year for families was slower than the rate of growth in spending per person for private coverage. The slower growth in spending per enrollee reflects the change in the Medicaid population. Despite the much faster growth in enrollment, increases in Medicaid spending on families accounted for less than half of the growth in program spending over the 2000–2003 period. Seniors and people with disabilities, growing more slowly in numbers, are more costly per person that they account for more than half of the spending growth.

Policy Implications: Early indications are that the 109th Congress will seriously consider reining in Medicaid spending growth. But it is important to recognize that if there were tighter caps on Medicaid spending growth, enrollment would not have been allowed to increase. Without these enrollment increases in Medicaid, the number of uninsured Americans would have grown much more than it did, and there would have been strong pressure on local hospitals and clinics to increase the amount of free care provided. Cities, counties, and states would have had to finance this care with no federal matching payments.

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