Study explains reasons behind recent Medicaid spending growth

Medicaid spending increased to $276 billion by fiscal year (FY)2003, up one-third from FY2000, according to a new web-exclusive article released today by the peer-reviewed journal Health Affairs and commissioned by the Kaiser Commission on Medicaid and the Uninsured. Increased program spending was largely driven by rapid increases in enrollment of children and parents in low-income families.

Urban Institute researcher and study author John Holahan concludes that, “Medicaid played its role as a safety net, providing coverage to those facing economic declines and loss of employer sponsored insurance, but the result was a sharp increase in program costs.” He added, “Medicaid enrollment growth undoubtedly kept the uninsurance rate from increasing more than it otherwise would have during this period.”

For FY2000-03, Medicaid spending grew at an average of 10.2 percent annually. However, state Medicaid cost containment actions—ranging from curbing provider payment rates to reducing benefits—and a slowing of enrollment growth served to moderate Medicaid spending growth in FY2003. The 7.1 percent growth in FY2003 is comparable to the increases the program experienced in the late 1990s. See Figure 1.

“We know states are struggling with Medicaid spending and the pressure it puts on other state priorities, but this study shows that Medicaid costs actually grew at a slower rate than private insurance costs. The real problem is rising health care costs and the states ability to pay the bill, and not that Medicaid spending is out of control,” said Diane Rowland, executive director of KCMU.

Growth in Medicaid Spending vs. Private Insurance Spending

Comparing Medicaid’s purchase of acute care services to private insurance costs shows the program’s cost increases are below those of private insurance. The average growth rate of per enrollee Medicaid costs for acute care from FY2000-03 was 6.9 percent—lower than the 9 percent increase in per enrollee costs of the privately insured and substantially lower than the growth in employer-sponsored insurance premiums (12.6 percent). See Figure 2.

Although Medicaid purchases health care services in the marketplace for 75 percent of its beneficiaries, that is merely one of the roles the program plays in the American health system. The bulk of Medicaid spending (70 percent) finances health and long-term care for the 25 percent of beneficiaries who are elderly or individuals with disabilities. The federal and state governments share joint responsibility in funding the program.

What Drove Medicaid Spending And Enrollment Growth?

Between FY2000-03, 68 percent of the growth in Medicaid spending was attributable to acute care and 30 percent to long-term care due to the faster growth in enrollment of children and non-disabled adults into the program during the period. During this time period, 90 percent of Medicaid’s total enrollment growth (8.4 million) was from families with only 10 percent from the elderly and individuals with disabilities.

Although families dominated Medicaid enrollment growth from FY2000-03, they only accounted for 44 percent of Medicaid spending growth. The elderly and individuals with disabilities accounted for 56 percent of spending growth. Although the elderly and individuals with disabilities are a minority of the Medicaid population, they are responsible for the majority of program costs due to their intensive use of services.

The Health Affairs article, “Understanding the Recent Growth in Medicaid Spending, 2000-2003” is available online. A webcast of today’s policy briefing releasing the article in Washington, D.C can be viewed online after 5 p.m. EDT.