Medicaid Spending Growth in the Great Recession and Its Aftermath, FY 2007-2012
Data Sources and Methods
The main source for spending data for this analysis is the Medicaid Financial Management Reports (Form 64) from the Center for Medicare and Medicaid Services (CMS) for federal fiscal years 2007 to 2012, which are used to obtain aggregate spending. These CMS-64 data are available by state and by spending category, but are not available by eligibility group.
Data on enrollment come from a survey of all 50 states and the District of Columbia conducted by Health Management Associates (HMA) for the Kaiser Commission on Medicaid and the Uninsured (KCMU). These data provide point in time enrollment for June of each year. Total enrollment data were reported two main groups: 1) aged and individuals with disabilities; and 2) child, parent, and other non-aged, non-disabled adults (referred to as “family enrollment”).
A third data source, the Medicaid Statistical Information System (MSIS), provides individual- level spending and enrollment data stratified by service type and eligibility group. Data from the 2009 MSIS1 are used to estimate spending growth by eligibility group. This data enables us to estimate adjusted per enrollee spending growth rates in a way that accounts for differences in service use across eligibility groups. The MSIS data are similarly used to deconstruct total spending growth over time into increases in enrollment and spending per enrollee by eligibility group. Appendix B provides more detail on how the MSIS is incorporated into this analysis.
Beginning with FY 2010 data, the CMS-64 used new spending categories, which aim both to capture additional spending categories (e.g., those related to provisions under health reform) and to increase consistency across states in how certain types of spending (e.g., “other practitioner”) are classified. To compare the FY 2010 data to previous years, we relied on an updated crosswalk of spending categories from CMS to map the new categories to the previous years’ categories. This crosswalk allows us to examine trends over time, but it is possible that some services shifted categories in some states as a result of this change.
Drug manufacturers are required to pay rebates to the federal and state governments for outpatient prescription drugs as a condition of Medicaid coverage for the drug. In most cases, we report net drug expenditures (that is, outlays after accounting for rebates), which represent total program spending for prescription drugs. In some cases, specified in the text, we also report spending for prescription drugs excluding rebates.
This paper presents data on changes in Medicaid’s enrollment and spending per enrollee between FY 2007 and FY 2012 and examines various reasons for the growth in Medicaid spending over the period. It is beyond the scope of this paper to definitively assign causality. We speculate on likely causes of changes in spending growth rates, relying considerably on existing surveys of state Medicaid offices conducted by Health Management Associates for the Kaiser Commission on Medicaid and the Uninsured. These are, however, hypotheses, and actual reasons for changes in spending growth in specific categories and in specific states may differ.
Overview of Enrollment and Spending
While the recession that began in December 2007 officially ended in June 2009, families continue to feel its effects. After dropping 2.1 percent in 2009, US GDP increased at a fairly constant rate from 2010 through 2012 (Appendix Table A1). The unemployment rate reached a high-water mark of 9.6 percent in 2010 but has been falling since then. However, at 8.1 percent in 2012, it remained much higher than the pre-recession unemployment rate of 4.6 percent in 2007.Additionally, the unemployment rate does not take into account the 8 million people who are working part-time, but would prefer to work full-time, or the 800,000 people who have given up looking for a job.2 Both real median income and real per capita incomes remain below pre-recession and recession levels. Altogether, these indicators show that the economy is improving, but slowly.
During periods of economic downturn, people lose employment and income and are more likely to qualify for Medicaid; thus, program enrollment increases more rapidly as economic conditions worsen. Medicaid enrollment increased from 42.3 million in 2007 to 54.1 million in 2012 (Appendix Table A2). With an average annual growth rate of 5.7 percent, family enrollment comprised the majority of the enrollment growth between 2007 and 2012. As the recession deepened, family enrollment growth jumped from 3.3 percent to over 9 percent. However, as economic conditions began to improve, the family enrollment growth rate slowed to 5 percent between 2010 and 2011, and then even further to 2.3 percent between 2011 and 2012 (Figure 1). It is likely that not yet released data from FY 2013 and 2014 will see an uptick in enrollment because of provisions in the ACA.
Medicaid enrollment of the aged and individuals with disabilities grew at a comparatively steady rate between 2.7 percent and 4.0 percent over the 2007 to 2012 period. Between 2011 and 2012, for the first time since before the recession, enrollment of the aged and disabled grew more quickly than enrollment of families. Additionally, enrollment growth among the aged and individuals with disabilities has exceeded the rate of growth of the overall US population. There are several possible reasons why Medicaid enrollment growth of the aged and individuals with disabilities is faster than overall population growth. First, the population is aging: in 2012, many “baby boomers” began turning 65 and many others entered the 55-64 age range, when the likelihood of disability increases. In addition, new medical technologies and advances in pharmaceuticals save, improve, and lengthen lives for many—and increase the number of people living with disabilities, many of whom rely on Medicaid to pay for their care. There has also been an increased ability to recognize and treat chronic conditions, particularly mental health problems, which may contribute to enrollment growth among the disabled. Last, there is evidence that during the recent recession, individuals with disabilities were more likely to become unemployed sooner and apply for disability benefits.3 It is likely that the slow-down in Medicaid enrollment of the aged and disabled between 2011 and 2012 is because of the slow-down in layoffs and slow improvement of the economy.4
Because more people qualify for Medicaid during economic downturns, growth in Medicaid spending generally tracks the rate of growth in the economy. As shown in Figure 2, spending on medical services in Medicaid increased by an average annual rate of 5.6 percent over the 2007-2012 period. Annual Medicaid spending growth was highest at the peak of the recession, 2008-2009, and slowed somewhat as economic conditions slowly improved. In June 2011, the enhanced federal match expired and in 2012 spending growth slowed dramatically to 0.5 percent.
Medicaid Spending Growth by Service Category, 2007-2012
Table 1 and Figure 3 show levels of Medicaid spending and average annual growth rates in spending by service category. Total spending grew from $330.3 billion in 2007 to $429.2 billion in 2012. Focusing on only medical services (i.e., excluding payments to Medicare, disproportionate share hospital (DSH), adjustments, and administrative expenses), spending increased from $292.7 billion in 2007 to $383.6 billion in 2012. Average annual growth in medical service spending over this period was 5.6 percent. During the economic downturn and its lingering effects, Medicaid spending on total acute care consistently grew faster than spending on total long-term care. Over the entire 2007 to 2012 period, total acute care spending grew by an average of 7.1 percent per year, while long-term care grew by less than half of that amount, an average of 2.7 percent per year (Figure 3).
|Table 1: US Medicaid Expenditures, by Spending Category and Year, FY 2007-2012|
|Expenditure Category||Expenditures (in billions)||Average Annual Growth Rate|
|Total Medical Services||292.7||309.3||336.7||357.8||381.5||383.6||5.70%||8.90%||6.30%||6.60%||0.50%||5.60%|
|Hospitals & Physicians2||82.3||82.6||90.3||93.3||103.6||95.2||0.40%||9.30%||3.30%||11.10%||-8.10%||3.00%|
|Medicaid Managed Care2||60.7||70.1||80.5||90.5||101.8||117.5||15.40%||14.80%||12.50%||12.50%||15.40%||14.10%|
|Other Acute Care2,3||26.3||27.2||28.8||36.2||37.1||38.4||3.30%||6.00%||25.50%||2.50%||3.60%||7.80%|
|Prescribed Drugs Excluding Rebates||22.4||23.7||25.5||27.3||29.8||23.2||6.00%||7.50%||7.30%||9.00%||-22.00%||0.80%|
|Prescription Drug Rebates2||-7.3||-8.4||-9.8||-11.5||-15.1||-14.7||14.90%||15.80%||17.90%||31.60%||-2.90%||14.90%|
|Institutional Long-Term Care2||64.3||66||68.2||66.6||68.1||67.4||2.70%||3.30%||-2.30%||2.20%||-0.90%||1.00%|
|Home Health/Personal Care2,4||43.1||47||52||54.1||55||55.2||9.20%||10.70%||3.90%||1.60%||0.50%||5.10%|
|Inpatient Hospital – DSH||13||14.4||14.7||14.7||14.3||14.3||11.10%||1.90%||0.10%||-2.20%||0.00%||2.10%|
|Mental Health Facility – DSH||2.5||3.3||3||2.9||2.9||2.7||34.20%||-9.20%||-4.20%||1.00%||-7.20%||1.80%|
|Medical Services Adjustments6||-5.2||-5.5||-7.3||-6.9||-7.5||-8||4.10%||33.90%||-6.00%||9.00%||7.30%||8.90%|
|SOURCE: Urban Institute estimates based on data from Medicaid Financial Management Reports (HCFA/CMS Form 64). Annual expenditures reflect nominal spending for the federal fiscal year.
1. The “Acute Care” total here includes EPSDT screening spending, which amounted to 0.9B, 1.0B, 1.2B, 1.3B, 1.3B, and 1.2B in FFY 2007, 2008, 2009, 2010, 2011, and 2012, respectively.
2. The CMS-64 was revised beginning with FY 2010 data and this FY 2010-2012 category may not be comparable to that of previous years.
3. Includes dental, other practitioners, abortion, sterilization, PACE programs, emergency services for undocumented aliens, and other care services.
4. Includes home health services, home- and community-based waiver services, personal care, and related services.
5. Includes premiums paid for those dually eligible for Medicaid and Medicare as well as Medicare deductibles and coinsurance for Qualified Medicare Beneficiaries (QMBs).
6. Includes collections for overpayments.
7. Includes immigration status verification system, preadmission screening, family planning, nurse aide training, external quality review, and enrollment broker costs.
Since low-income families are more likely to rely on Medicaid for acute care services than for other types of services, changes in their Medicaid enrollment mostly impacts Medicaid acute care spending. Indeed, the growth rate in acute care spending peaked between 2008 and 2009, the same year that enrollment growth peaked for families. As family enrollment slowed following the recession, the growth in acute care spending slowed slightly but still remained high through 2011. Then in 2012, acute care spending grew less than 1%. As states expand their Medicaid programs, it is likely that acute care spending will comprise most of Medicaid spending growth.
Within acute care, the fastest-growing category of spending was Medicaid payments to managed care organizations, which increased from $60.7 billion in 2007 to $117.5 billion in 2012.5 The average annual increase in payments to managed care organizations was 14.1 percent during this period. This category of spending includes Medicaid capitated payments to managed care plans for the delivery of benefits to Medicaid enrollees. Plans include both comprehensive plans as well as limited benefit plans that provide just a subset of services such as behavioral health or dental care. Unfortunately, the data do not enable us to determine what managed care plans paid for specific services or providers.
The growth in spending on managed care reflects overall Medicaid enrollment growth as well as more services being provided and new populations being covered through managed care. For example, states are making policy changes such as expanding use of Medicaid managed care to disabled populations (who have greater health needs than non-disabled parents and children), using managed care for long-term care needs, and instituting mandatory, rather than voluntary, enrollment of beneficiaries into managed care.6 Thus, the double-digit growth throughout the period may be more reflective of the number and types of enrollees receiving services, as well as the additional services provided through managed care, all causing shifts in spending from other service categories, rather than higher per capita spending growth compared to fee-for-service. Further analysis adjusting for differences in the underlying health risk of enrollees and differences in the benefit package would be required to explore whether spending for enrollees in capitated arrangements was rising at a higher or lower rate than for similar enrollees in fee-for-service Medicaid in the same state. Looking forward, we anticipate that managed care will continue to grow in the next several years as most newly eligible Medicaid enrollees will receive their health benefits through managed care.
Hospitals and Physicians
Spending on hospitals and physicians increased from $82.3 billion in 2007 to $95.2 billion in 2012, an average annual increase of 3.0 percent, but fluctuated from year to year. The slow growth in 2008 was likely due to very high levels of hospital spending in a select number of states in 2007, which skewed the national growth rate up for that year7 and led to lower spending growth in 2008. Spending on hospitals and physicians then increased by 9.3 percent in 2009, increased more slowly by 3.3 percent in 2010, increased by 11.1 percent in 2011, and then dramatically fell by 8.1 percent in 2012. Some of the fluctuation is likely attributable to methodology changes in the CMS-64 data reporting in 2010 that shifted some spending in this category to “other acute care.”8 The drop in the national hospital and physician growth rate may also be attributable in part to states needing to balance their budgets as the enhanced federal match rate ended, as well as natural spending adjustments to the slowly improving economy. It also may reflect a shift away from fee-for-service spending. Finally, policy changes in states that comprise large shares of Medicaid spending, such as California, can have impacts on national trends, especially when broken out at the service level.9
Spending on prescription drugs was the only category of Medicaid spending with a negative average growth rate over the 2007 to 2012 period. This negative growth rate is mostly due to spending drops in 2011 and especially in 2012, which is most likely due to a key policy change in 2010 causing drug services to shift to managed care. Prior to the ACA, states were required to pay for prescription drugs through a fee-for-service system in order to participate in the Medicaid Drug Rebate Program (MDRP). However, the ACA revised this regulation, allowing for states to recoup rebates through the MDRP for drugs purchased through a managed care organization.10 As states have moved the management of prescription drug services into managed care, our data has captured that spending as part of the managed care category.
In addition, since the early 2000s, states have been making concerted efforts to control the cost of drugs, implementing such policy measures as preferred drug lists, prior authorization requirements, state maximum allowable costs for generic drugs, and incentives to use generics over brand-name drugs.11 Though states garner considerable savings through these measures and manufacturer rebates, they report growing concern over increases in expenditures for specialty drugs to treat complex conditions, such as high-cost injectables, infusion, oral, or inhaled therapies; sometimes, expenditures for specialty drugs may be billed as a medical benefit rather than a pharmacy benefit. For this reason, pharmacy benefits are still a target for state cost control activity.12
Long-term care includes a range of services that we categorize into two main components: (i) institutional long-term care, such as care provided in nursing facilities and intermediate care facilities for the intellectually and developmentally disabled (ICF-I/DD), and (ii) home health and personal care, which includes home and community based service waivers. Compared with acute care spending, Medicaid spending on long-term care grew more slowly from 2007 to 2012. Over this period, total long-term care expenditures increased from $107.4 billion in 2007 to $122.7 billion in 2012, an average annual growth of 2.7 percent.
With an average annual growth rate of 5.1 percent over the 2007 to 2012 period, spending on home health and personal care grew faster than spending on institutional services, which grew at an average of 1.0 percent. In fact, in two years, 2010 and 2012, Medicaid spending on institutional services fell, while Medicaid spending on home health services continued to grow, although increasingly more slowly. As a result of this difference in growth rates, overall spending on home health and personal care services has moved closer to the level of expenditures for institutional services over the period.
In recent years, states have sought to “rebalance” the provision of long-term care services by shifting resources from institutional to community-based care. To that end, a majority of states have expanded the availability of home and community-based services, while policy action around institutional care has focused on limiting these services.13 The relatively high growth in home and community-based care from 2007 to 2009 may represent a substitution of these services for institutional care. The slow and negative growth in institutional service spending may reflect slow enrollment of aged within that period, since this is the population most likely to use nursing home care.
Other Spending Categories
Payments to Medicare programs (e.g. premiums, deductibles, and some cost sharing for dual eligible beneficiary enrollment in Medicare Part A and Part B) increased from $11.0 billion in 2007 to $14.5 billion in 2012.14 Growth in payments to Medicare was particularly high in 2010, when it reached 13.7 percent. Most of this increase is attributable to increases in payments for Medicare Part B premiums, which were raised by about 14 percent in 2010 after low increases in the preceding years.15 However, in 2012, the standard Medicare Part B premium lowered from $115.40 per month to $99.90 per month, and as a result, Medicaid spending on Medicare premiums fell by 3.7 percent.
Overall disproportionate share hospital (DSH) spending grew by an average of 2.0 percent from 2007 to 2012, with a larger increase in 2008 (14.9%) and declines in 2009, 2010, 2011, and 2012 (-0.2%, -0.7%, -1.6%, and -1.2%, respectively). Since 2004, DSH spending has remained relatively stable, except in 2007, when it dropped from about $17.1 billion to about $15.4 billion. This was partially due to large drops in spending by a few key states that account for about 30 percent of DSH spending in other years (data not shown). DSH spending levels may also reflect some states’ redirection of DSH funds to finance waiver coverage. In 2008, combined spending in these key states returned to close to 2006 levels, and national DSH spending also returned to a level closer to that in 2006 (data not shown). Because of Medicaid expansion, and other provisions in the ACA, there should be fewer uninsured people in the U.S., meaning that there will be less of a need for DSH spending. Consequently, the ACA decreases DSH spending over the next decade.16
Spending Growth per Enrollee
Growth in spending per enrollee by service over the entire 2007-2012 period is illustrated in Figure 4. These estimates adjust spending per enrollee to control for the effect of the changing composition of Medicaid enrollment, as described in the Methods text box and in Appendix B. The growth rate in spending per enrollee for a specific service reflects the growth rate of the spending on that service divided by the enrollment growth rate, where the enrollment growth rate is weighted to reflect increases in enrollment in proportion to the use of that specific service among a particular type of enrollee. For example, enrollment growth of the aged and individuals with disabilities, rather than that of families, predominantly impacts the growth of institutional long-term care use. Thus, when calculating the spending per enrollee of institutional long-term care growth, the growth rate of enrollment is weighted to reflect that each aged or disabled enrollee contributes more to long-term care spending than a non-disabled, non-elderly enrollee.
Overall, Medicaid medical service spending per enrollee grew by an average of 1.3 percent per year over the 2007 to 2012 period, with federal spending per enrollee growing by an average of 1.5 percent per year and state spending per enrollee growing by an average of 1.0 percent per year (Appendix Table A3).
Acute care spending per enrollee increased by an average of 2.4 percent per year. Within acute care, managed care spending per enrollee grew the fastest on average. Long-term care spending per enrollee fell by 0.7 percent on average per year, representing average annual growth in community-based care but a decline in average annual growth for institutional care.
Figure 5 and Appendix Table A4 show how the annual growth rate in Medicaid spending per enrollee by service type changed over the 2007 to 2012 period. Per enrollee acute care spending increased between 2 and 5 percent each year until 2012, when it fell by 1.7 percent. Within the “acute care” category, there was some year-to-year variation in growth per enrollee by service.
Long-term care spending per enrollee increased steadily in 2008 and 2009 (by 2.6% each year), then fell in 2010, 2011, and 2012 (by 3.1%, 2.0%, and 3.2% per year, respectively). In 2010, this decline is driven by a 5.8 percent drop in per enrollee spending for institutional long-term care. However, in 2011 and 2012, per enrollee spending for both institutional and community-based long-term care fell.
Deconstructing Growth into Enrollment and Spending per Enrollee
Total spending is a function of the number of people in the program and spending per enrollee. This section parses out the growth in total spending into increases in enrollment and spending per enrollee from 2007 to 2012 (see Appendix Table A5). As in the previous section, these estimates are adjusted for changes in enrollment composition and differential mix of service use across eligibility groups, described in more detail in Appendix B. In short, the analysis uses the 2007 MSIS data to calculate baseline spending by eligibility group; it then uses eligibility group-specific spending growth rate estimates to calculate subsequent years’ spending by eligibility group. These spending growth rate estimates are weighted to account for different mix of service use among different eligibility groups. Because total spending in this analysis is calculated using growth rates applied to the 2007 levels, total spending differs slightly from the estimates in previous tables.
Overall annual spending increases for the aged and individuals with disabilities were relatively low from 2007 to 2011, increasing by 5.5 percent, 6.7 percent, 4.0 percent and 4.5 percent each year, and then fell by 0.9 percent in 2012 (Figure 6). In both 2008 and 2009, the increase in spending for this group was due to both low enrollment growth (2.7% and 3.5%) and relatively slow growth in spending per enrollee (2.8% and 3.1%). In 2010 and 2011, enrollment continued to rise as in preceding years, but a nearly flat increase in spending per enrollee led to lower overall spending growth for this group. Then in 2012, spending per aged or disabled enrollee fell, and as a result, for the first time over the 2007-2012 period, total spending for aged and disabled enrollees also fell.
Total spending for families increased by 8.7 percent in 2008, and then increased dramatically by 14.0 percent in 2009. Between 2009 and 2011, the growth rate began to return to earlier levels, increasing by 12.4 percent in 2010, and 9.8 percent in 2011. Then in 2012, spending for families grew considerably more slowly at 2.6 percent (Figure 7). The growth in spending per enrollee certainly does affect the growth in spending, but in contrast to the aged enrollees, the acceleration in family enrollment due to the recession was the root cause over this period for the acceleration in total spending. Spending per enrollee for families grew at a fairly stable rate over the period, until 2012, when it barely grew at all. Thus, in 2012, the growth in family enrollment alone drove the growth in total family spending.
Medicaid Spending Growth in Context
Over the entire 2007-2012 period, and for each year through 2011, Medicaid expenditure growth on medical services exceeded increases in national health expenditures and GDP (Appendix Table A6). For example, over the entire period, Medicaid expenditures on medical services increased annually by 5.6 percent on average while national health expenditures increased by 3.9 percent on average and GDP increased by 2.3 percent on average.
The higher growth in Medicaid spending during the economic downturn and its lingering effects is predominantly explained by changes in enrollment. On a per enrollee basis, overall growth in Medicaid spending during this period was slower than growth by other purchasers (Figure 8). Overall per enrollee spending on medical services increased by an average of 1.3 percent per year from 2007 to 2012, while national health expenditures per capita increased on average by 3.1 percent annually and private health insurance per enrollee increased by an average of 4.7 percent per year. The growth rate of average annual spending per enrollee on acute care services (2.4%) was lower than both the average annual growth in NHE per capita and the average annual growth in private health insurance per enrollee (4.7%).
Both the 2007 to 2012 per enrollee growth in Medicaid total service spending and per enrollee growth in Medicaid acute care spending were below the growth in the consumer price index (CPI) for medical care (an indicator of the change in prices of medical care), which averaged 3.4 percent per year from 2007 to 2012. Medicaid spending on medical services per enrollee did grow faster than GDP per capita, which increased at just 0.8 percent on average annually over the period. Together, the comparison of Medicaid to other health spending indicators suggests that while Medicaid acute care spending may be growing faster than growth in the economy, Medicaid has done considerably better in controlling per capita costs than has private coverage.
Growth in Medicaid spending per enrollee from 2007 to 2012 was lower than the increases in national health expenditures per capita and the growth of private health insurance per enrollee due to an aggressive set of cost containment policies implemented by states in general. These include lower fee-for-service payment rates, consistent expansion of Medicaid managed care programs, an array of policies to control prescription drug costs, and expansion of home health and community-based services intended to reduce the level of institutionalization.17 Many policymakers are hopeful that efforts to target high-cost Medicaid populations, particularly individuals dually eligible for Medicare and Medicaid, will produce efficiencies that could further reduce the rate of spending growth in Medicaid.
Beyond these approaches, it is difficult to see ways to reduce Medicaid spending growth on a per capita basis without serious impacts on access to needed care and the quality of care available. Cost-containment efforts that go beyond Medicaid and affect expenditures for the entire population (that is, system-wide efforts to “bend the cost growth curve”) are likely to be required for there to be any additional progress in controlling spending in Medicaid, which is already growing more slowly than other payers on a per capita basis.
This KCMU issue brief was prepared by Katherine Young of the Kaiser Family Foundation and Lisa Clemans-Cope, Emily Lawton, and John Holahan of the Urban Institute.