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Prepared in response to numerous Congressional requests, this memorandum describes the assumptions underlying the projections of Medicaid spending issued by the Congressional Budget Office (CBO) in January 1997. The memorandum was written by Robin J. Rudowitz of the Health Cost Estimates Unit in CBO's Budget Analysis Division under the supervision of Paul N. Van de Water and Murray N. Ross. Linda Bilheimer of CBO's Health and Human Resources Division provided helpful comments.

Questions should be addressed to Robin Rudowitz.
 
 

SUMMARY AND INTRODUCTION

PROJECTING CASELOADS

• The Aged and Disabled
• Children and Adults
• The Impact of Welfare Reform on Medicaid Enrollment

PROJECTING BENEFITS

• Fee-for-Service Payments
• Managed Care
• Payments of Medicare Premiums

PROJECTING DISPROPORTIONATE SHARE PAYMENTS

PROJECTING ADMINISTRATIVE COSTS
 

TABLE
1.	CBO's January 1997 Baseline for Medicaid
BOX
1.	Provider Taxes and Voluntary Donations

 

In its current baseline, the Congressional Budget Office (CBO) has lowered its projections of growth in Medicaid spending by about 2 percentage points below its May 1996 projections. CBO had previously projected that Medicaid spending would increase at an average annual rate of 9.6 percent through 2002. The baseline adjustment has significant implications: even though projections of spending for Medicaid have been reduced, the program is still one of the largest and most rapidly growing entitlement programs, and it continues to be a major source of upward pressure on the deficit. Legislation will undoubtedly be introduced to curb the growth of the Medicaid program, and the baseline projections will serve as a benchmark against which to measure the effects of such proposals.

CBO now projects that federal outlays for Medicaid will grow from $92 billion in 1996 to $216 billion in 2007--an average annual growth rate of 8 percent (see Table 1 at the end of this memorandum). The largest component--spending for medical assistance payments--is projected to rise from about $80 billion in 1996 to $186 billion in 2007, and spending for payments to disproportionate share hospitals (so-called DSH payments) is estimated to climb from about $9 billion in 1996 to almost $20 billion in 2007. Administrative expenses account for the rest of the program's spending. About 50 percent of Medicaid's growth over the 1996-2007 period stems from higher payment rates, 15 percent from rising enrollment, and 35 percent from other factors such as increases in DSH payments, administrative costs, and use of health care services.

CBO's current projections of federal Medicaid spending over the 1996r2002 period are a sizable $90 billion less than its May 1996 projections. About one-third of that reduction is attributable to 1996 outlays that were almost $4 billion lower than CBO had previously anticipated. But other factors were at play. CBO also lowered its projection of the average annual rate of growth in spending over the 1996-2002 period from 9.6 percent to 7.7 percent as a result of revised projections of growth in enrollment, smaller expected increases in inflation, and lower projected use of services. Moreover, included in that reduction is $4 billion in cumulative savings resulting from provisions of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996. Most of Ihose savings stem from the provisions to limit Medicaid coverage for certain legal immigrants.

The growth in Medicaid has descended from the sky-high rates of the early 1990s. Spending for the Medicaid program jumped by between 20 percent and 30 percent a year from 1990 through 1992. Yet its growth wound down to an average of about 10 percent a year from 1993 through 1995 and to just 3,3 percent in 1996.

Two factors largely fueled the surge in spending in the early 1990s. First, the states used provider-specific taxes and voluntary donations plus intergovernmental transfers that generated additional federal matching funds to disproportionate share hospitals (see Box 1). Second, the states shifted services to the Medicaid program that they had previously funded without federal assistance--an activity that is commonly referred to as Medicaid maximization. As a result, states could obtain additional federal matching funds without committing any new resources of their own.
 

Other factors also contributed to the spiraling growth of Medicaid. They include the 1990-1991 recession, increased payment rates to providers, and federally legislated as well as state-initiated enrollment expansions (especially for coverage of poor pregnant women, children, and low-income Medicare beneficiaries).

Last year's unusually low growth rate--indeed, one of the smallest annual increases since Medicaid started in 1965--may be partly the result of general uncertainty about the outcome of proposals to reform the program as well as efforts by the states to make the most of any new system. (For example, anticipating passage of a proposal for a Medicaid block grant in 1996, a state could have increased the 1995 base on which its future federal funding would have been computed by shifting some spending from 1996 to 1995.) In any case, that uncertainty helped to precipitate an erratic spending pattern; federal expenditures did not increase at all above the 1995 level during the first half of 1996, but they then grew at an annual rate of more than 6 percent during the second half of the year.

CBO's current Medicaid projections reflect its forecast that rates of growth will be relatively low in the near term and somewhat higher thereafter, as pressures for higher spending reemerge. Those pressures are likely to come from several sources. First, CBO believes that savings from expanding enrollment in managed care are not likely to be large in the long run. Current fee-for-service reimbursement rates are already low, and the beneficiaries moving into managed care account for a relatively small share of Medicaid spending. Developing appropriate and cost-saving models of managed care for elderly and disabled beneficiaries (particularly those in long-term care), who account for the bulk of Medicaid expenditures, will be difficult. Second, states still have the ability to secure additional federal funds at no expense to themselves by simply using Medicaid maximization techniques or intergovernmental transfers. Finally, pressures for greater use of health care services continue to exist in a number of areas, including noninstitutional long-term care (such as home health services), prescription drugs, and other acute care services.

A growth rate of 8 percent a year in Medicaid falls within a wide range of plausible outcomes. In the light of experience, the rate of growth of Medicaid spending could easily exceed 10 percent a year, whereas growth below 6 percent in the long run is far less likely.

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