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Managing Medicaid.

After some years of skyrocketing Medicaid costs, new management techniques and a flourishing economy seem to have them under better control.

Is Medicaid a voracious giant, pausing briefly before starting again to chomp away at state budgets? Or have the states managed to get it on a slim-down diet, holding onto the hope of a binge on tobacco settlement money in case its appetite returns?

Recouping tobacco-related costs from the industry may not lie in the immediate future for most states, but Medicaid spending appears to be under control for the moment. A variety of reasons accounts for the spending slowdown, including a healthy economy, shifts of some groups into managed care programs and federal legislation that to some extent has restricted state strategies to increase federal matches.

For FY 1998, states plan to spend $63.2 billion on Medicaid, up only 4.5 percent from last year. In California and New York, the states with the largest budgets, general fund Medicaid appropriations for FY 1998 grew less than the Congressional Budget Office's predicted 2.7 percent inflation rate. Seven other states are expecting to spend the same or even less on Medicaid than they did last year. The majority of states plan increases of 6 percent or less. Texas, the third largest Medicaid state, is looking at 5.6 percent growth.

Is this relative stability in spending likely to continue? It's hard to be certain, but the outlook is cautiously hopeful for the next five years. Stability depends largely on a robust American economy. New federal legislation and demographic trends will broaden participation in Medicaid, but state shifts to managed care, a revamp of disproportionate share payments and provider taxes, and medical price containment may help dampen significant spending increases. Pressures for higher spending will probably re-emerge after 2002, says the CBO.


Medicaid began in 1965 as a cooperative state and federal effort to provide health care coverage for the needy. It is now the nation's largest program of health-related services for the poor, with more than 33 million people enrolled. It provides health care for many elderly that Medicare doesn't cover (most notably nursing home costs), for people receiving welfare benefits and for millions of children from working poor families. It is the second-largest category of state general fund spending (around 13 percent of the total) - behind elementary-secondary education, but ahead of higher education and far outstripping corrections and welfare spending.

Within national guidelines, each state establishes its own Medicaid eligibility standards; determines the type, amount, duration and scope of services; sets the payment rate for services; and administers its own program. States receive federal matching payments based on their expenditures and the state's per capita income. The federal match ranges from 50 percent to 80 percent of Medicaid expenditures.

Various changes to Medicaid have been offered recently: Congressional leaders proposed in 1995 to replace the Medicaid program with block grants to states. The administration has suggested keeping Medicaid as an entitlement, but with a federal per-enrollee spending cap. Both proposals would provide broad state spending discretion and may receive further attention in the future.

Even without sweeping program changes, federally legislated welfare reform will affect Medicaid. Those who qualify for welfare also qualify for Medicaid, so the connection between Medicaid and welfare continues. But a healthy economy has replaced recession, and welfare rolls are shrinking. Decreases in welfare caseloads may trigger related drops in Medicaid. Florida's FY 1998 budget includes $115 million of unspent Medicaid money because of lower than anticipated caseloads. New Jersey is carrying forward $72 million of unneeded appropriations.

Even with the connection, welfare caseload decreases do not translate directly and immediately into Medicaid decreases. Medicaid continues to be available to people who receive welfare assistance for even part of a year. Families that leave welfare for work remain eligible for Medicaid for at least a year. For these reasons, it's probably a little too early to determine what, if any, state Medicaid spending decreases can be attributed to welfare decreases.


Growth in Medicaid spending earlier in this decade arose in part from federal legislation that broadened eligibility and created enrollment increases. Federal law after 1990 required coverage for pregnant women, infants and children under age 6 (for families with incomes up to 133 percent of the federal poverty line) whether or not a family received welfare benefits. More recent federal and state legislation has continued the extension of Medicaid coverage to increasing numbers of children whose families may or may not be receiving welfare. Even though just two-fifths of such eligible children were enrolled in Medicaid in 1994, outreach efforts could raise the participation rates. Medicaid covers nearly half of all newborn babies. A quarter of all kids up to age 14 (15 million) now receive Medicaid benefits.

By 2002, Medicaid will extend coverage to all children under age 19 in families with below-poverty incomes. Fortunately for state budgets, this group is less costly than other Medicaid beneficiaries: children under 21, who made up more than half the Medicaid population in 1995, accounted for less than a quarter of payments to service providers. These young people tend to be healthy, although children with special needs have higher individual costs than the group as a whole. New federal guidelines for children's health insurance will affect Medicaid in ways yet unknown, since states are still in the process of deciding if they will keep children covered under Medicaid or go to different state plans.

Expanded coverage for youngsters is just one part of demographic effects on Medicaid. Another part is coverage for the oldest recipients, whose individual medical costs are considerably higher. The Health Care Financing Administration tracks the number of Medicaid recipients and associated service costs. In 1995, the average annual Medicaid service provider payment for the 1.2 million recipients age 85 and over was $13,406, compared with $6,896 for the 2.8 million recipients ages 45 to 64 and $1,150 for the 6.8 million recipients ages 6 to 14.

A population with an increasing proportion of old folks who need expensive medical care will place an ever-heavier load on the Medicaid system. Medicaid now pays for half of all nursing home expenditures, covering two-thirds of the 1.7 million elderly residents. Such long-term care currently accounts for more than a third of all Medicaid expenditures. The Census Bureau projects a 21 percent increase in the 85-and-over population between 1996 and 2002, from 3.7 million to 4.5 million. As more people live longer, the proportion of Medicaid spending on our oldest residents will grow as well. Minnesota and North Dakota report increased nursing home costs in this year's budgets although New York reports the opposite.


If eligible populations are increasing, can the spending appetite of the Medicaid giant be controlled for long? Yes, say the proponents of managed care. They believe that managed care can help keep costs under control, and it is indeed possible that managed care has been a major contributor to the slowdown in Medicaid spending.

Beginning in 1991, enrollment in Medicaid managed care grew faster than overall enrollment. Total enrollment in Medicaid grew from 28.3 million to 33.2 million between 1991 and 1996. The managed care population leaped from 9.5 percent to 40.1 percent of total Medicaid enrollment. The federal Balanced Budget Act of 1997 expanded state authority to mandate managed care for Medicaid recipients, although it exempted the costliest groups: children with special health care needs and low-income people enrolled in both Medicare and Medicaid who either have disabilities or are over 65.

Managed care controls costs primarily through the use of capitation - paying a fixed amount per enrollee for a required set of services, rather than reimbursing providers on a fee-for-service basis. Unlike fee-for-service, where the state is dealing with hundreds of individual doctors, clinics and hospitals, managed care limits the state to contracting with just a few health plans. Proponents say it helps to discourage the use of unnecessary services such as emergency room care for nonemergencies, broadens the range of services available to participants and offers continuity of care. Critics, however, say managed care lowers the quality of services and puts cost controls ahead of good patient care.

The Kaiser Commission on the Future of Medicaid found in 1996 that successful managed care programs have saved somewhere between 5 percent and 15 percent over fee-for-service programs, with the quality of care being about the same. Studies of the Arizona Health Care Cost Containment System (AHCCCS) show that the program cost 8 percent less than fee-for-service programs in a 1990 evaluation and 11.3 percent less in 1993.

U.S. General Accounting Office studies show that Arizona's managed care program for recipients of long-term care, which covers about 20,000 people, has been very effective in controlling the growth of expenditures. For aged beneficiaries under AHCCCS, annual costs grew an average of 9.5 percent, compared with 17.2 percent under fee for service.

Other efforts to control nursing home spending through alternative approaches like home- and community-based care may help explain why the Urban Institute can report that growth in spending per enrollee fell more for the elderly and the blind and disabled than it did for families, even though families were the population most affected by growth in managed care.


Rhode Island $1,286 $1,274
New York 1,207 21,944
Massachusetts 1,163 7,083
Maine 1,087 1,351
New Hampshire 1,013 1,177
Connecticut 996 3,262
Louisiana 896 3,899
Vermont 885 521
Minnesota 862 4,014
West Virginia 856 1,563
Pennsylvania 836 10,075
New Jersey 817 6,523
Tennessee 805 4,285
Kentucky 795 3,088
Michigan 795 7,624
Ohio 789 8,820
Maryland 780 3,957
Missouri 746 3,995
Hawaii 734 869
Wisconsin 707 3,648
Delaware 692 502
North Dakota 690 444
Illinois 689 8,164
Florida 669 9,631
Alabama 659 2,818
Washington 659 3,648
Colorado 631 2,413
Oregon 627 2,007
California 616 19,647
Montana 593 521
Indiana 592 3,455
Georgia 585 4,304
South Dakota 580 425
Arizona 580 2,567
Arkansas 577 1,448
Kansas 570 1,467
Mississippi 561 1,525
South Carolina 558 2,065
North Carolina 556 4,072
Oklahoma 550 1,814
Nevada 542 869
Virginia 541 3,609
Iowa 535 1,525
Wyoming 521 251
Texas 515 9,843
Nebraska 514 849
New Mexico 496 849
Idaho 373 444
Utah 299 598
United States 725 193,000

Source: State Policy Reports 15:17, Sept. 1997.

Alaska not available

Nearly all states are involved in managed care. Only Alaska, Maine, South Carolina, Vermont and the Virgin Islands reported no enrollment in managed care programs as of early 1997. But total spending on managed care is still limited. To date, most states have kept managed care enrollment to the lowest cost group - the healthy adults and children who make up more than two-thirds of Medicaid beneficiaries. They account for just about a third of Medicaid expenditures. Potentially, the greatest cost savings lie with managing the care of the highest service users - people of all ages with serious disabilities or chronic diseases. Few states have attempted to do this, mainly due to concerns that individuals with complex medical needs who have longstanding relationships with physicians might be forced to choose new providers. State officials want to be sure that health plans have the experience to care adequately for people with disabilities and the elderly.

New York received approval in July 1997 for a Medicaid demonstration proposal that would enroll more than 2.4 million people in managed care plans. As part of the demonstration, fully capitated special needs plans are being established for people whose care requires intensive case management - individuals with HIV/AIDS, seriously and persistently mentally ill adults and seriously emotionally disturbed children. Nursing home care, though, will continue to be provided on a fee-for-service basis.


Managed care is just one of many answers to controlling Medicaid spending, and it needs a great deal of additional study. If managed care is one answer, changes in disproportionate share hospital (DSH) payments could be another.

In the 1990s, DSH payments played a large role in the growth of Medicaid spending. The largest jump - from $5.3 billion to $17.5 billion - took place between 1991 and 1992. DSH spending stood at $15 billion in 1996, nearly 12 percent of the entire Medicaid budget. States make these payments to "disproportionate share" hospitals that serve large numbers of poor patients. The DSH payments help hospitals cover potential losses due to low Medicaid reimbursement rates or no compensation at all from poor, nonpaying patients. When fiscal conditions were especially tight in the early 1990s, states looked for ways to increase the amounts they spent on DSH because the payments generate federal matching funds. States also adopted taxes on medical providers that served similar purposes and the escalation in Medicaid spending began. The Balanced Budget Act of 1997 will restructure DSH programs in a number of states. A cutback in federal Medicaid money previously directed toward DSH providers also may affect state spending decisions. The Urban Institute has estimated that from 1998 to 2002, federal spending on Medicaid DSH payments will be about $5.8 billion less than it would have been before passage of the act - an 11 percent decrease in spending nationally.

Major components in the medical care price index are services, including both professional and hospital services and health insurance premiums not paid by employers or the government. Projecting medical costs is difficult, but hindsight can help explain some of the decreases in recent spending. Medical care price inflation was roughly double the general rate of price inflation between 1988 and 1995. It dropped from an average of 8.2 percent between 1988 and 1992 to 5.1 percent between 1992 and 1995. The most recent inflation figure for medical care prices was 2.5 percent between October 1996 and October 1997, compared to a general price change for all goods and services of 2.1 percent. Continued low inflation and efforts in the medical industry to manage costs will undoubtedly help to restrain growth in Medicaid spending.

Predictions are that the days of double-digit growth rates in Medicaid are over, at least for most states and for now. Additional substantial increases in the number of beneficiaries are unlikely and cost growth may be offset by better management. All bets are off, though, if the economy takes a nosedive.


The Congressional Budget Office (CBO) estimates that the average annual growth of Medicaid could range between 6 percent and 10 percent between 1997 and 2002; the Urban Institute projects growth of 7.5 percent. By comparison, annual growth in Medicaid spending between 1988 and 1992 averaged 22 percent. That growth rate dropped to an average of 9.5 percent between 1992 and 1995, and to just 3.3 percent in 1996.


The expectation of substantial state funds from tobacco settlements may be nothing but smoke, at least in the near future. Universal resolution of Medicaid reimbursement claims against the tobacco industry by Congress will not occur before next year, if it comes at all.

As proposed, the settlement would result in substantial funds to states. How states would use these funds is uncertain. Some might choose to substitute them for general funds, while others might increase spending in areas like education. In some cases, the money would be earmarked for health purposes.

The future of a congressionally approved settlement is up in the air, but states continue to seek individual settlements with the tobacco industry. Forty-one states are suing major cigarette companies. Florida has already settled a liability lawsuit against tobacco companies for $11.3 billion. Payments are likely to be gnawed at by attorneys' fees as high as 25 percent. Anticipating such costs, Colorado's lawmakers may have to approve as much as $10 million for the state attorney general to handle the tobacco suit in-house. An outside law firm could charge as much as $500 million in contingency fees if it were to win the potential $2 billion award on behalf of the state.

Requirements to repay the feds the value of Medicaid matches paid in earlier years also may erode states' tobacco settlements. As State Policy Reports editor Hal Hovey points out, to the extent that amounts paid to states are determined to be recovery of Medicaid costs, the federal government can claim a share of the settlement money in proportion to its share of the original Medicaid outlay - anywhere from 50 percent to 80 percent, depending on the state. For these reasons, states probably should not count too heavily on tobacco settlement windfalls to balance Medicaid spending growth.

Judy Zelio tracks tax and spending issues for NCSL.
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Author:Zelio, Judy
Publication:State Legislatures
Date:Feb 1, 1998
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