Medicaid Update: Expenditures and Beneficiaries in 1994 – Policy Brief

Medicaid Expenditures and Beneficiaries: 1994 Update

October 1998

Medicaid is the nation's major public financing program for low-income Americans. After several years of rapid increase in the early 1990s, enrollment and spending growth have moderated and returned to historical levels. For the second consecutive year, annual growth in Medicaid spending was under 10 percent. The estimates presented in this policy brief are based on analyses prepared by The Urban Institute and update previous analyses conducted for the Kaiser Commission on the Future of Medicaid.

Medicaid in 1994

In 1994, Medicaid financed health care services for 34.2 million low-income individuals at a cost of $137.1 billion federal and state dollars. Spending including administrative costs and other adjustments totaled $143.7 billion. Medicaid serves multiple roles for the populations it covers. For adults and children in low-income families, it provides health care coverage for medical care. For persons with special needs and disabilities, and for the nursing home elderly, it also finances long-term care assistance. For low-income elderly and disabled Medicare beneficiaries, it pays for Medicare's premium and cost-sharing requirements and can provide coverage for additional services.

• Adults and children in low-income families continue to comprise nearly three quarters of Medicaid enrollment, yet account for only 28 percent of program spending.

  In 1994, the Medicaid program covered health care services for 17.1 million children and 7.9 million low-income adults at a cost of $23.3 billion and $15.5 billion, respectively (Figure 1, Tables 1 and 2). This low-income population is generally comprised of adults and children in AFDC families; low-income infants, children and pregnant women; medically needy individuals, and those with coverage extended through Section 1115 Demonstration waivers.

• Blind and disabled persons comprise 16 percent of Medicaid enrollment, but spending on their acute and long-term care account for one third of program costs.

  In 1994, 5.4 million nonelderly people with developmental disabilities, severe mental illness, and physical disabilities received Medicaid assistance. Because of their complex health care needs, they often require both expensive acute and long-term care assistance. Spending on services for this population was $45.3 billion in 1994.

• The elderly population accounts for 11 percent of enrollment and 26 percent of program spending.

  Medicaid financed services for 3.8 million elderly persons at a cost of $36.1 billion. In addition to financing acute and long-term care services, Medicaid also pays Medicare's cost sharing, premiums, and deductibles for approximately 3.7 million low-income Medicare beneficiaries (QMBs and SLMBs).

• The eligibility groups covered by Medicaid have very different per beneficiary costs because of their diverse health care needs.
  Average spending per beneficiary was $1,360 per child and $1,974 per low-income adult (Figure 2). In contrast, average spending was $8,421 for blind and disabled persons and $9,437 for elderly people. Because of their often extensive acute care as well as long-term health care needs, per beneficiary spending is considerably higher for the elderly and disabled than for low-income adults and children.

Medicaid pays for a wide spectrum of services including acute medical and long-term care services. It also pays for HMO and Medicare premiums, as well as special payments to hospitals that care for a disproportionately large share of uninsured individuals and Medicaid beneficiaries, known disproportionate share hospitals (DSH).

• Slightly over half (52%) of Medicaid spending on services for beneficiaries was for acute care.

  Inpatient hospital care spending accounted for 19 percent of spending; prescription drug payments, 6 percent; and physician and outpatient care, 13percent of spending (Figure 3). About 7 percent of Medicaid spending paid for premiums to HMOs and other managed care plans as well as to Medicare.

• Long-term care services constitute over one third (36 percent) of Medicaid costs.

  In 1994, about 21 percent of spending went to nursing homes and 6 percent covered home care expenses for persons living in the community. Another 7 percent financed care in intermediate care facilities for the mentally retarded (ICF-MR) and the remaining 2 percent covered mental health services.

• Payments to disproportionate share hospitals accounted for 12 percent of total program spending for services.

  Medicaid spent $16.9 billion on DSH payments in 1994. DSH payments are declining as a share of Medicaid spending.

Recent National Trends

Enrollment

Medicaid enrollment has risen steadily in recent years. Over the past four years, enrollment has increased by 10 million people from 24 million in 1990 to over 34 million in 1994 (Figure 4). From 1990 to 1992, Medicaid enrollment rose an average of 11.3 percent per year. This growth occurred in response to federal and state expansions in eligibility and the economic recession that increased the number of people eligible for Medicaid coverage. Enrollment is growing more slowly, increasing 5.4 percent from 1993 to 1994 compared to an 8.8 percent increase from 1992 to 1993 (Table 1).

• Medicaid enrollment grew by 1.8 million persons in 1994.

  Two thirds of the new enrollment in 1994 was among children (46 percent) and low-income adults (23 percent). While the number of persons eligible for Medicaid increased, the rate of growth in enrollment has generally slowed (Table 1). Enrollment among the disabled population rose 7.8 percent, marking a reduction from 11.6 percent in 1993. Although low-income children and adults accounted for the majority of the new beneficiaries, enrollment in these populations only rose 5.5 percent and 4.9 percent, respectively.

• The share of beneficiaries who qualify for Medicaid because they receive Aid to Families with Dependent Children (AFDC) or Supplemental Security Income (SSI) is declining.

  In 1988, nearly three quarters (72 percent) of Medicaid beneficiaries qualified for Medicaid because they received cash assistance (Figure 5). By 1994, this number had fallen to 58 percent. This is occurring because Medicaid was expanded in recent years to extend eligibility to certain populations who are low-income, but do not qualify for cash assistance. Although enrollment in both populations is rising, average annual growth in the cash assistance population was 3.7 percent between 1988 and 1994 compared to 15.4 percent for populations who qualify because of poverty-related eligibility such as pregnant women, infants, young children, and Qualified Medicare Beneficiaries (QMBs), or through the medically needy option.

Costs

The rapid rate of Medicaid spending growth seen in the early 1990s has largely subsided. From 1993 to 1994, Medicaid spending rose only 7.6 percent, substantially lower than earlier projections exceeding 10 percent annual growth. In the early 1990s, growth in Medicaid spending peaked at 28 percent. Earlier Kaiser Commission analyses found that this rapid growth was equally attributable to three major factors: medical price inflation, rapid enrollment growth, and state financing mechanisms that permitted states to receive additional levels of federal support.

• The rate of Medicaid spending growth has slowed dramatically.

  From 1993 to 1994 , Medicaid spending increased 7.6 percent, rising from $127.4 billion to $137.1 billion (Figure 6). This was the smallest annual net increase in the past four years. Reductions in spending growth reflect federal limits on state use of provider taxes and donations, caps on DSH payments, a slowing in the rate of medical price inflation, and lowered enrollment growth.

• Payments to disproportionate share hospitals fell nearly 1 percent from 1993 to 1994, dropping from 17.0 billion to 16.9 billion.

  This marks a dramatic departure from 1991 when growth in payments for DSH peaked, increasing over 250 percent in one year (Table 2). Federal legislation enacted in 1991 which capped DSH spending has effectively curtailed the growth in these payments.

• The relative contribution of the factors that drive growth in spending have changed.

  Growth in Medicaid spending can be attributed to three basic factors: enrollment, the average amount spent per beneficiary, and DSH payments. DSH payments, which had accounted for nearly half of the increase from 1991 to 1992 when growth was fastest, were a negative contributor to growth (-1.3 percent). In other words, if the decline in DSH payments had been the only change in Medicaid, spending would have actually fallen by $125 million. Because DSH payments were down, the relative contribution of enrollment to spending increase was larger at 71 percent, even though actual enrollment growth was only 5.4 percent.

• The rapid growth in Medicaid managed care enrollment is influencing the distribution of costs.

  From 1993 to 1994, the share of spending growth attributable to hospital inpatient care, hospital outpatient, clinic and physician care either fell or stayed the same. In contrast, payments to HMOs accounted for 18 percent of the total growth in Medicaid spending, up from 10 percent in the prior year. While this may not reflect actual changes in spending, it does represent a shift in how Medicaid accounts for its expenditures. As growth in managed care continues, particularly in capitated payments, it will become increasingly difficult to know how spending is allocated by service.

State Variations: 1992 to 1994

Medicaid is jointly financed by the states and federal government, but states administer the program and have considerable latitude in setting eligibility levels, scope of benefits, and provider payment rates. Consequently, sizable variation is evident in enrollment and spending growth and per beneficiary costs at the state level.

• The rate of enrollment growth differs considerably from state to state.

  Every state reported an increase in enrollment in the 1992 to 1994 period, but the size of the increase varied measurably. Although the average for the nation was a 7.1 percent increase in the number of beneficiaries, in states such as Tennessee and Montana, enrollment growth exceeded 20 percent (Table 4). In contrast, the rise in enrollment was under 2 percent in Massachusetts and Minnesota, states that already had relatively broad programs.

• Broad variation is seen in average state spending per beneficiary.

  Average spending per beneficiary is determined in large part by the breadth of the state's program, the composition of the Medicaid population, and local costs for health care services. Overall, spending per beneficiary was lowest in the South and highest in the Northeast. The US average was $4,011. States ranged from a low of $2,167 per beneficiary in Tennessee to a high of $6,447 per beneficiary in New York.

• Because states have made different decisions in program structure, there are also large differences in the rate of growth in Medicaid spending.

  Nationally, program spending on services grew at an average annual rate of 9.1 percent between 1992 and 1994, ranging from a high of 20.7 percent in Hawaii and low of a reduction of 0.2 percent in Rhode Island. State policies on scope of benefits, eligibility, provider payment levels, DSH payments, and use of managed care all affect the growth in Medicaid spending.

This policy brief is based on an analysis conducted by the Urban Institute for the Kaiser Commissionon the Future of Medicaid. The full report “Medicaid Beneficiaries and Expenditures: National and State Profiles and Trends, 1988 to 1994” can be obtained from the Kaiser Commission by calling 1-800-656-4533.

The Kaiser Commission on the Future of Medicaid was established by the Henry J. Kaiser Family Foundation in 1991 to serve as a forum for analyzing, debating, and proposing future directions for Medicaid reform. The Commission and the Foundation are wholly separate from The Kaiser Permanante Medical Care Program and the Kaiser Industries.

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