Medicaid

Growth in Medicaid spending rose dramatically in the early 1990s, reaching almost 29 percent in 1992, with expenditures increasing from nearly $60 billion in fiscal year 1989 to $157 billion in fiscal year 1995. Factors that help explain this trend include (1) escalating disproportionate share hospital payments made to hospitals that cover large numbers of low-income and Medicaid beneficiaries, (2) the increasing cost to provide services, and (3) the growing number of program beneficiaries. By fiscal year 1995, however, the contribution of these factors had decreased. The dramatically low Medicaid growth rate in fiscal year 1996 masked wide variations in states' Medicaid growth. Most states, however, saw modest decreases or minimal changes from their previous years' spending growth. Some states' increases in Medicaid enrollment leveled off after state-initiated program expansions in prior years. Several other states attributed lower growth rates to a better economy and to state initiatives, such as managed care and long-term care alternatives, designed to limit expenditure growth. Whether the low 1996 Medicaid spending growth rate of 3.3 percent will be sustained in subsequent years is uncertain.

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.