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Medicaid Spending Growth in the Great Recession and Its Aftermath, FY 2007-2012

The 2007 to 2012 period encompasses one of the worst economic downturns since the Great Depression, as well as the start of a slow recovery that is still in progress. Although the Great Recession technically ended in 2009, its effects have been felt much longer, with unemployment levels and household incomes slow to return to pre-recession levels. In large part due to this environment, Medicaid enrollment has increased rapidly over the FY 2007 to 2012 period. Throughout its history, the Medicaid program’s spending patterns have nearly always tracked enrollment growth,1 and the FY 2007 – 2012 period is no exception. During this period, Medicaid enrollment rose from 42.3 million to 54.1 million and spending on medical services (that is, excluding administrative and other non-service spending) rose from $292.7 billion in FY 2007 to $383.6 billion in FY 2012– an average annual increase of 5.6 percent. As states expand their Medicaid programs as part of health reform, we can anticipate that both spending and enrollment will jump in the next few years, although the spending jump will mostly be at the federal level.

In this paper, we use CMS administrative data to track Medicaid spending by service or category from FY 2007 through FY 2012.2 We then use enrollment data to calculate the spending per enrollee growth by service during this period. Finally, we calculate spending by eligibility group over this period, and in the process deconstruct spending growth into enrollment growth and spending per enrollee growth. Details on the methodology are available in the “Data Sources and Methods” text box in this brief and Appendix B at the end of the brief.

Overall Spending Trends

Our analysis finds that Medicaid spending growth peaked in the 2007 to 2011 period due to recession-driven enrollment growth. In 2012, however, spending growth slowed to near record lows. Enrollment growth over the 2007-2011 period occurred primarily because of the economic downturn, federal protections against eligibility restrictions, and decisions to expand Medicaid eligibility in some states. Non-disabled adults and children, who we will refer to as “families,” comprised the majority of the Medicaid enrollment growth during the 2007-2011 period. However, in 2012, enrollment growth for families slowed, and that year, Medicaid spending grew by just 0.8 percent. This slow growth in 2012 reflects the slow-down in enrollment growth as well as state efforts to mitigate the effects of the end of enhanced federal match rate in June 2011.3

Managed care is playing an increasingly dominant role in Medicaid spending. Growing at 14.1 percent on average per year, managed care grew steadily and faster than any other service category over the 2007 to 2012 period.The fast growth in managed care spending is due to both overall increased Medicaid enrollment as well as state policy decisions to expand the number and type of enrollees in managed care and services provided. For example, many states are now providing prescription drug services through managed care since provisions in the ACA enable them to obtain drug rebates for prescription drugs purchased through a managed care organization. In addition, states are expanding use of Medicaid managed care for individuals with disabilities and instituting mandatory enrollment of beneficiaries into managed care. Finally, more long-term care services are being provided through managed care.

Medicaid Spending Trends and Enrollment

When examined on a per enrollee basis, Medicaid medical service spending grew by 1.3 percent per year on average during the 2007-2012 period. Acute care spending per enrollee grew by 2.4 percent a year on average, with steady growth each year until 2012, when it dropped by 1.7 percent. Long-term care spending per enrollee fell by an average of 0.7 percent per year from 2007 to 2012. This fall in long-term care spending per enrollee could likely reflect states’ efforts to restructure their long term care services, as well as the growing importance of managed care.

Over the 2007-2012 period, Medicaid spending on services for families grew much faster than Medicaid spending on services for the aged and individuals with disabilities. Medicaid spending on services for families grew particularly rapidly from 2008 to 2010, due to high enrollment levels at the peak of the recession. As the enrollment growth rate for families approached a pre-recession level in 2011 due to improving economic conditions, the total spending growth rate for families also approached a pre-recession level. Spending per enrollee for families grew fairly constantly from 2007 through 2011 but barely increased in 2012, in large part due to states’ reaction to the expiration of the enhanced federal match rate. The Medicaid spending growth rate on services for the aged and individuals with disabilities fluctuated year to year, with the enrollment growth rate slowly increasing or remaining stable each year over the 2007-2012 period. This incremental spending growth is likely attributed to an increased ability to diagnose and treat chronic health issues, such as mental health conditions; the effects of the recession; and the aging baby-boomer population.

Medicaid Spending Trends in Context

Medicaid spending per enrollee on medical services grew more slowly than underlying medical care inflation, national health expenditures per capita, and the growth in private health insurance spending per enrollee. Reflecting increasing enrollment due to the recession, Medicaid spending, both on medical services and overall, rose faster than growth in national health expenditures and gross domestic product (GDP) from 2007 to 2012. On a per enrollee basis, however, growth in Medicaid service spending during the economic downturn was slower than both growth in national health expenditures per capita and growth in private health insurance spending per enrollee. Although average Medicaid service spending per enrollee rose faster than average per capita growth in GDP during this period (which was 0.8%), other health indicators also show a much higher rate of increase compared to GDP per capita. Further, the growth in Medicaid service spending per enrollee was well below the growth in the medical care consumer price index (CPI), an indicator of the change in prices of medical care. Thus, the increase in Medicaid service spending may be reflective of it being a purchaser of relatively costly goods (i.e., health services), but it has been able to keep cost increases below that of other sectors of the health system.

Introduction