Medicaid:

Sustainability of Low 1996 Spending Growth Is Uncertain

HEHS-97-128: Published: Jun 27, 1997. Publicly Released: Jun 27, 1997.

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Pursuant to a congressional request, GAO reviewed Medicaid's spending growth rate, focusing on: (1) the dominant factors affecting trends in Medicaid spending growth from fiscal years 1989 to 1995; (2) key factors that contributed to the low spending growth rate for fiscal year (FY) 1996 and variations in states' Medicaid spending growth for the most recent 2-year period; and (3) the implication of these factors for future Medicaid spending.

GAO noted that: (1) the Medicaid spending growth rate increased dramatically in the early 1990s, rising to almost 29 percent in 1992, with expenditures growing from almost $60 billion in FY 1989 to $157 billion in FY 1995; (2) factors that help explain this trend include: (a) escalating disproportionate share hospital (DSH) payments made to hospitals that cover a large proportion of low-income and Medicaid beneficiaries; (b) the increasing cost of providing services (the prices paid for services and the average costs of services per beneficiary); and (c) the growing number of program beneficiaries; (3) each of these factors prevailed to increase spending growth at different times; (4) for example, from fiscal years 1990 to 1992, the contribution of DSH payment increases soared from 6 to 46 percent of total spending growth until those payments were brought under control in 1993; (5) while DSH payment contributions erratically increased and decreased, the impact of additional beneficiaries on overall expenditure growth steadily increased due in part to mandated and optional eligibility expansions; (6) by FY 1995, however, as Medicaid spending growth had abated substantially, the contribution of these factors had decreased; (7) the dramatically low Medicaid expenditure growth rate in FY 1996 masked wide variations in states' Medicaid growth; (8) one state's Medicaid expenditures decreased by 16 percent, another's increased by 25 percent; (9) most states, however, accounting for 80 percent of FY 1996 federal Medicaid outlays, had moderate decreases or minimal changes from their previous year's spending growth; (10) a combination of factors, some affecting only certain states and others common to many states, explains the low FY 1996 growth rate; (11) a number of other states GAO contacted attributed lower growth rates to a generally improved economy and state initiatives to limit expenditure growth through program changes such as managed care programs and long-term care alternatives; (12) the low 1996 Medicaid spending growth rate of 3.3 percent appears to be an anomaly not likely to persist in subsequent years; (13) the factors that reduced growth in FY 1996 will continue to affect future Medicaid spending; (14) the net effect of factors, such as DSH spending and the future economy, however, are unknown; (15) some of these factors may contribute to higher growth in the near future; (16) in addition, if the economy declines, enrollment in Medicaid would probably increase; and (17) the possible effects of other factors are less predictable.

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