The Decline in Medicaid Spending Growth in 1996: Why Did It Happen? – Issue Paper

The Decline In Medicaid Spending Growth In 1996:Why Did It Happen?

September 1998

Medicaid spending grew by only 2.3 percent in 1996, the lowest rate of growth in the history of the program. After a period of explosive growth between 1988 and 1992, averaging over 20 percent per year, Medicaid spending slowed to 9-10 percent per year between 1992 and 1995.¹ In 1996, Medicaid financed acute and long-term care services for 41.3 million people at a cost of $155.4 billion. Spending growth in 1996 was extremely low, and slow growth seems to have continued in 1997. The primary reason for the low rate of growth in 1996 was a nearly 20 percent drop in disproportionate share hospital (DSH) payments. A reduction in adult and children enrolled through cash assistance in response to state welfare reforms and an improving economy as well as moderation in enrollment growth of elderly and disabled beneficiaries also contributed to the slowdown.

Medicaid spending growth has slowed to unprecedented levels and, for the first time in the program's history, enrollment has fallen. This policy brief updates earlier analyses conducted for the Kaiser Commission on Medicaid and the Uninsured by researchers at the Urban Institute. It critically examines Medicaid enrollment and spending trends from 1990 to 1996, highlighting periods of extensive growth between 1990 and 1992, moderate growth between 1992 and 1995, and limited growth between 1995 and 1996. It then reviews the primary factors contributing to the dramatic slowdown in both spending and enrollment growth between 1995 and 1996. The final section presents preliminary estimates of spending for 1997 and projects Medicaid spending growth over the next five years.

Medicaid Spending: 1990 to 1992

Between 1990 and 1992, Medicaid grew at an extraordinary 27.1 percent annual growth rate, with expenditures increasing from $73.7 billion to $119.9 billion in just two years. During the same period, Medicaid spending on the elderly and disabled increased by 16.7 and 17.6 percent per year, respectively, while expenditures on adults and children increased by 21.4 and 23.8 percent per year, respectively (Table 1). Disproportionate share payments increased by over 250 percent per year. There were several reasons for these high growth rates.

Table 1 Medicaid Expenditures by Group and Type of Service, 1990-1996 Year Average Annual Growth 1990 1992 1995 1996 1990-96 1990-92 1992-95 1995-96 Total Expenditures (billions) $73.7 $119.2 $157.4 $161.0 13.9% 27.1% 9.7% 2.3% Benefits Only By Service $69.2 $97.7 $133.1 $140.3 12.5% 18.8% 10.9% 5.4% Acute Care 37.0 55.3 79.4 84.7 14.8 22.3 12.8 6.6 Long-Term Care 32.3 42.4 53.7 55.6 9.5 14.6 8.2 3.5 By Group $69.2 $97.7 $133.1 $140.3 12.5% 18.8% 10.9% 5.4% Elderly 23.6 32.1 40.9 42.4 10.3 16.7 8.4 3.7 Blind and Disabled 25.9 35.8 52.1 56.6 13.9 17.6 13.3 8.6 Adults 8.8 13.0 16.8 16.9 11.5 21.4 9.1 0.6 Children 11.0 16.8 21.4 23.3 14.2 23.8 11.4 4.5 DSH $1.3 $17.7 $18.8 $15.1 49.7% 263.4% 2.0% -19.6% Administration $3.2 $3.8 $5.4 $5.6 10.0% 9.8% 12.8% 2.3% Source: Urban Institute estimates based on data from HCFA-2082 and HCFA-64 reports.
Note: Does not include the U.S. Territories or accounting adjustments. Acute care services include inpatient, physician, lab and x-ray, outpatient, clinic, EPSDT, dental, vision, other practicioners, payments to managed care organizations, payments to Medicare, and all other unspecified care services. Long-term care includes nursing facilities, intermediate care facilities for the mentally retarded, mental health services, and home health services. DSH refers to disproportionate share hospital payments. Payments to Medicare are distributed among aged, blind, and disabled enrollees. Payments to managed care are primarily distributed.

The major reason is the aggressive use of DSH payments often financed by provider taxes and donations. The DSH payments grew at an average annual rate of 263 percent, accounting for about $1.3 billion in 1988 and growing to more than $17 billion by 1992. A second reason was the high rate of inflation in health care prices (8.3 percent per year between 1990 and 1992), which affects Medicaid provider payment rates. States became increasingly adept at shifting services previously financed by other programs into Medicaid. This allowed states to use federal matching funds to replace programs previously funded entirely by the state.

Expenditures also seem to have grown during this period because of significant increases in health care utilization. Medicaid began covering a population with greater needs, including pregnant women, AIDS patients, and people with problems with drugs and alcohol. In addition, states increased the provision of Early and Periodic Screening, Diagnosis, and Treatment (EPSDT) services to children.The final reason is a large increase in the number of beneficiaries. In the late 1980s, Congress enacted a series of expansions of coverage for pregnant women, infants and children. By 1990, Medicaid programs were required to cover all pregnant women, infants, and children under age 6 with family incomes up to 133 percent of the Federal Poverty Level (FPL), and they were given the option to expand coverage to pregnant women and infants up to 185 percent of the FPL. States were also required to cover children below the FPL born after September 30, 1983; in effect, older children were scheduled to be phased in one year at a time until all children through age 18 are covered by the year 2002.² In addition, states were required to cover Medicare premiums and cost sharing for all Medicare-eligible persons with incomes below the FPL and to cover premiums for Medicare-eligibles with incomes between 100 and 120 percent of poverty. Finally, the SSI program grew for a number of reasons, particularly as a result of court decisions and Congressional mandates that extended coverage to learning-disabled children.Medicaid Spending: 1992 to 1995

Medicaid spending growth fell after 1992, increasing by only 9.7 percent per year on average between 1992 and 1995 (Table 1). There were three principal reasons for the reduction in the rate of growth: slower enrollment growth, slower growth of spending per enrollee, and a leveling off of DSH payments. First, enrollment growth among adults and children declined because of improving state economies and tougher AFDC work requirements imposed by states. In addition, the Medicaid expansions to pregnant women and children were more fully phased in and began to experience lower rates of growth. Growth rates among the blind and disabled also declined, because the court decisions and coverage changes responsible for the increases in enrollment of disabled children in the 1988 to 1992 period were fully phased in. Finally, enrollment growth among the elderly also declined because of a slowdown in enrollment of Qualified Medicare Beneficiaries (QMBs) as well as a decline in the number of elderly receiving cash assistance through SSI.

Table 2 Medicaid Expenditures, Enrollment, and Expenditures per Enrollee, 1990-1996 Year Average Annual Growth 1990 1992 1995 1996 1990-96 1990-92 1992-95 1995-96 Total Expenditures Benefits Only (billions) $69.2 $97.7 $133.1 $140.3 12.5% 18.8% 10.9% 5.4% Total Enrollment (millions) 28.9 35.8 41.7 41.3 6.2% 11.3% 5.3% -1.0% Elderly 3.4 3.8 4.1 4.1 3.1 5.1 2.9 0.0 Blind and Disabled 4.0 4.9 6.4 6.7 8.8 9.8 9.3 5.2 Adults 6.7 8.3 9.6 9.2 5.5 11.4 5.0 -4.1 Children 14.7 18.8 21.6 21.3 6.4 13.1 4.8 -1.6 Expenditures per Enrollee $2,400 $2,732 $3,192 $3,397 6.0% 6.7% 5.3% 6.4% Elderly 6,906 8,504 9,965 10,336 7.0 11.0 5.4 3.7 Blind and Disabled 6,410 7,348 8,182 8,447 4.7 7.1 3.6 3.2 Adults 1,312 1,557 1,750 1,837 5.8 8.9 4.0 5.0 Children 747 897 1,078 1,145 7.4 9.5 6.3 6.2 Source: Urban Institute estimates based on data from HCFA-2082 and HCFA-64 reports.
Note: Does not include the U.S. Territories. Expenditures shown do not include disproportionate share hospital payments, administrative costs, or accounting adjustments. States are not consistent in the way they report payments to Medicare or to managed care organizations (MCOs). For states where reported data are either missing or appear unreliable, formulas were used to distribute these payments to appropriate enrollee groups. Payments to Medicare are distributed among aged, blind, and disabled enrollees. Payments to MCOs are primarily distributed to adults and children. Enrollees are people who sign up for the Medicaid program for any length of time in a given fiscal year.

Second, spending per enrollee also declined from 6.7 percent to 5.3 percent per year (Table 2). There are a number of possible explanations, including the reduction in health care inflation (5.1 percent between 1992 and 1995). Another factor explaining the lower growth in spending per enrollee could be rapid growth in Medicaid managed care which may have achieved at least short-term savings in several states in these years. Finally, DSH payments began to level off due to 1991 and 1993 legislation restricting the use of these payments. The 1991 legislation banned the use of private donations, and severely restricted the kind of provider taxes the state could employ. The 1991 legislation also limited the growth of DSH payments to that of overall program expenditures and also capped DSH payments at 12 percent of program expenditures. The 1993 legislation made it illegal for states to pay a hospital more than what the hospital was losing through uncompensated care or through low Medicaid reimbursement rates. This severely restricted states' ability to pay large amounts of money to specific hospitals, which in turn reduced Medicaid expenditures in some states.

The Projected Slowdown

In 1997, both the Urban Institute (UI) and the Congressional Budget Office (CBO) projected that Medicaid spending growth would continue to slow down. They projected that Medicaid spending would increase by 7.5 percent (UI) and 7.7 percent (CBO), through the year 2002. However, the most recent experience for 1993 was 2.3 percent and recent evidence suggests that future spending will continue to slow. There were three principal reasons for these lower projected rates of expenditure growth. First, enrollment growth was likely to slow down for a number of reasons. One is that the majority of mandated expansions of coverage for pregnant women and children had already been implemented and had achieved relatively high participation. In addition, cash assistance AFDC rolls were expected to decline due to the rapidly growing economy, state efforts to reduce welfare program participation, and the recent enactment of the Temporary Assistance to Needy Families (TANF) program, which promised to cut welfare enrollment even further. Finally, the number of disabled beneficiaries was expected to grow, but at a slower rate, reflecting the lower rate of increase in SSI enrollment. Since the disabled are a high-cost population, slower growth in enrollment could have a significant effect on expenditures.

Second, spending per enrollee was expected to moderate due to the increased use of managed care and low health care inflation. Long-term care spending was likely to remain low because of limits on the rate of growth in nursing home beds and the use of community-based alternatives to nursing home care, particularly for the disabled. Third, the 1991 and 1993 DSH legislation seemed to have successfully restricted states' ability to expand DSH payments. For these reasons, both the Urban Institute and the CBO projected Medicaid spending to grow by about 7.5 percent through 2002.Return to top

The Decline In Medicaid Spending Growth In 1996:Why Did It Happen?
Policy Brief Part 1 Part 2 Part 3