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The Congress is now considering alternatives for reducing the cost of the Medicaid program. This paper, prepared at the request of the Senate Budget Committee, examines the background and consequences of a wide range of choices that would curb and refocus federal outlays for Medicaid. In keeping with the Congressional Budget Office's mandate to provide objective and impartial analysis, this study offers no recommendations.
Thomas J. Buchberger, of the Human Resources and Community Development
Division of CBO, prepared the paper, under the supervision of Paul B. Ginsburg
and Nancy M. Gordon. The author wishes to acknowledge the technical and
critical contributions of many people, particularly Malcolm Curtis, Cynthia
F. Gensheimer, John Holahan, Jack Knowleton, Sophie Korczyk, Lynn Paquette,
Andy Schneider, and Bruce Vavrichek. Numerous people at the U. S. Department
of Health and Human Services and officials of state Medicaid programs gave
useful technical assistance. Johanna Zacharias edited the manuscript, and
Toni Wright typed the many drafts and prepared the final paper for publication.
Alice M. Rivlin
Director
June 1981
SUMMARY
PART I. BACKGROUND AND REVIEW OF PROGRAM EXPERIENCE
Chapter I. Introduction
Chapter II. Eligibility Criteria and Coverage of the Poor
Chapter III. Benefits, Reimbursements, and Effects on Use of Health Care
Chapter IV. Factors Affecting Medicaid Expenditures
PART II. OPTIONS FOR MODIFYING MEDICAID
Chapter V. Overview of Options
Chapter VI. Target Eligibility Toward the Most Needy
Chapter VII. Benefit Restrictions
Chapter VIII. Alter Reimbursement Policies
Chapter IX. Modify the Federal Role in Financing Medicaid
Appendix I. Estimation of Medicaid Eligibility
| TABLES | |
| 1. | THE MEDICAID POPULATION, BY CATEGORY OF ELIGIBILITY: PERSONS ELIGIBLE AT SOME TIME DURING FISCAL YEAR 1980 |
| 2. | BREAKDOWN BY DEMOGRAPHIC CHARACTERISTICS OF THE POOR POPULATION ELIGIBLE AND INELIGIBLE FOR MEDICAID: FISCAL YEAR 1980 |
| 3. | PERCENTAGE OF U.S. POPULATION SEEING A PHYSICIAN, BY INCOME CLASS: 1963, 1970, AND 1976 |
Medicaid is the joint federal and state program that, since 1966, has paid for much of the medical care of specific categories of low-income Americans. Federal law governs certain aspects of Medicaid. In particular, it mandates coverage of two particular groups of low-income persons: single-parent families, and some two-parent families with one unemployed parent, that receive cash assistance through the Aid to Families with Dependent Children (AFDC) program; and aged, blind, or disabled persons who receive aid from the Supplemental Security Income (SSI) program. The federal government requires states to provide a basic set of services to people eligible for Medicaid, and to reimburse providers of those services in certain ways. Reimbursement levels for certain services are subject to federally established ceilings and in some instances, floors.
In other respects, however, states have certain flexibility in administering
Medicaid. Their influence on eligibility, for example, is considerable,
because states establish eligibility for AFDC, which, in turn, establishes
eligibility for Medicaid. (The same does not hold true for SSI recipients,
whose eligibility is determined primarily by federal criteria.) Furthermore,
states may voluntarily extend Medicaid coverage to additional groups of
people and expand the range of services covered. States also have considerable
discretion in how they reimburse physicians and certain other medical providers.
FEDERAL COSTS
The magnitude of Medicaid expenditures has reached what many legislators
consider to be critical levels. Funding for Medicaid reimbursement comes
from both state and federal sources. The federal share--determined by formula
and based on state expenditures, and varying inversely with state per capita
income--will exceed $18 billion in 1982, and under current policies, it
is likely to rise to $24 billion by the end of 1986.
THE MEDICAID POPULATION AND PROGRAM TARGETING
Recipients of AFDC and SSI constitute about 60 percent of the noninstitutional population eligible for Medicaid and 70 percent of those who receive program benefits; however, they account for only 57 percent of program expenditures. The remaining eligible population is demographically similar to the cash assistance population but for some reason does not actually receive transfer payments. For example, children who are members of low-income families that do not qualify for AFDC, perhaps because both parents are present, constitute a large portion of this group.
The Medicaid population--some 28.6 million in 1980--is a mix of persons
above and below the federal poverty level. Because of the program's combination
of federal and state eligibility criteria, many low-income people fail
to qualify for Medicaid; at the same time, a certain number of people with
relatively high annual incomes are covered. About 12 million persons with
incomes below the federal poverty threshold are now ineligible. On the
other hand, about 5 million of those eligible have annual family incomes
in excess of two times the poverty standard, in part because of the use
of monthly accounting periods in state determinations of AFDC eligibility.
Most of these 5 million persons are children.
HOW PROGRAM FUNDS ARE SPENT AND TO WHAT EFFECT
Program expenditures are heavily weighted toward institutional services, especially long-term care. Expenditures for care in nursing homes constitute 42 percent of program costs, and inpatient hospital care represents 28 percent. The remaining 30 percent goes primarily for physicians' sevices, outpatient hospital care, and medications.
The use of health-care services by low-income persons has increased during Medicaid's history. Large numbers of Medicaid recipients are cared for by practitioners specializing in Medicaid patients, rather than in the settings that serve many patients with higher incomes.
The health of the poor, along with that of the rest of the population,
seems to have improved somewhat, although Medicaid' s role in this change
cannot be readily distinguished from other factors. By at least one measure--infant
mortality--Medicaid appears to have had a beneficial effect on recipients'
health. Nevertheless, the health of the poor continues to lag behind that
of the general population.
FACTORS AFFECTING MEDICAID OUTLAYS
High and rising Medicaid expenditures have dominated attention during the current budgetary debate over funding for health services. Total program costs depend on four factors over which federal and state governments have varying degrees of control:
Not counting nursing home care, per recipient expenditures--which are determined by benefits, the price and use of care, and reimbursement levels--have risen less rapidly than national per capita health-care expenditures.
Eligibility
The size of the Medicaid population is a factor in the program's high cost. The largest increases in cost occurred before 1975, largely because of expansions of eligibility. The program reached its all-time peak in 1977, with 22.9 million recipients, and it could reach that level in 1982 as a result of increases in the AFDC recipient population.
Beyond 1982, a decline in the size of the largest segment of the eligible population will tend to reduce program costs. The number of persons eligible for Medicaid on the basis of receipt of AFDC and SSI is projected to decline. An increase in the proportion of disabled recipients of SSI--who are more expensive to serve--will limit any spending reductions associated with declines in the cash-assistance population.
Benefits
Broad coverage of medical services contributes to Medicaid's high cost. The addition of new services by the federal government since the beginning of the program has not been a major factor, however; Medicaid has always offered a wide array of services. Likewise, the occasional decisions by some states to add benefits after their programs were in operation have also played a relatively minor role.
The Price and Use of Medical Services
Purchasing in the private medical care market subjects Medicaid to the prevailing trends in the prices and use of medical care services. With the exception of nursing home care, Medicaid expenditures make up only a small share of the medical care market, and this limits the extent to which Medicaid can influence trends in the prices and use of medical care. Both the prices and use of medical care are expected to continue rising over the next five years, which will lead to higher Medicaid outlays.
Reimbursement Levels
States have not had full freedom to use what purchasing power they have
to obtain the lowest prices for some types of care. Federal law limits
state flexibility in setting reimbursement rates for institutional services
such as hospital care. Also, because states cannot purchase most types
of care through competitive bidding, they cannot buy certain supplies,
laboratory services, or other services at the lowest possible prices. States
have already used their wide discretion in physician reimbursement to set
fees significantly below those charged private patients; this in part:
explains the constrained increase in per recipient expenditures.
OPTIONS FOR REALLOCATING MEDICAID EXPENDITURES
The modifications in Medicaid now before the Congress would reduce program expenditures. Just as states have in the past tried to curb Medicaid costs without limiting eligibility, most current choices avoid direct reductions in numbers of people eligible. The Administration's proposal would limit federal financing of state programs. Other options would change the programs's benefits or the federal government's requirements for reimbursement to providers. In recent years, the eligibility changes the Congress has considered would have increased the number of low-income persons eligible for Medicaid. Observance of tight budgetary constraints would necessitate reducing expenditures for some current recipients if eligibility were granted to persons who cannot now qualify for Medicaid.
The options the Congressional Budget Office has examined include such reallocations to improve targeting. Other options would trim benefits, adjust reimbursement methods, or alter the federal role in Medicaid in some fundamental ways. (Ways to curb growing cost of long-term care, which are not now a focus of Congressional attention, are not examined here.)
Target Eligibility on the Most Needy
Incremental changes in Medicaid's eligibility criteria could extend coverage to some low-income persons not now qualified for Medicaid. For example, states could be required to cover all low-income children, regardless of whether or not their families qualify for AFDC. Mandatory Medicaid coverage for the 4.7 million low-income children now not eligible would raise federal Medicaid costs by somewhat more than $100 million in 1982.
Alternatively, better targeting could be achieved by terminating eligibility for some of the less needy, such as recipients of only the optional state payments that supplement SSI. Some 600,000 persons would lose automatic Medicaid eligibility, and federal Medicaid costs could fall by some $300 million in 1982.
Alternatively, the federal government could require states to adopt a minimum national eligibility standard; this would impose a degree of uniformity on eligibility policies. For example, providing acute care (but not nursing home care) through Medicaid to all those whose annual incomes were below 55 percent of the federal poverty standard, while excluding those with yearly incomes in excess of twice the poverty standard, would result in coverage of an additional 7 million persons now ineligible. At the same time, eligibility for about 5 million persons would end. Federal expenditures would rise by $1.9 billion in 1982, and state costs by $1.5 billion. Most of the people who would be newly eligible would be among categories that are currently ineligible for Medicaid regardless of income, such as single adults.
Change Benefits, Expand Cost Sharing, or Liberalize Reimbursement Policies
Federal support could be eliminated for certain services. For example, coverage of dental care could be cut to save about $360 million. The savings could be used either to trim expenditures or to expand eligibility.
Modifying federal law to require Medicaid recipients to share the costs of hospital and physicians' services could decrease expenditures by $700 million in 1982 because of lower payments to providers and reduced use of services. Although cost sharing may now be applied to some services, it has rarely been applied to the use of hospital and physicians' services. Use of this technique could cause some recipients to defer necessary care or result in some shifting of costs to other patients, however.
Allowing states to depart from the current "reasonable cost" method and exercise greater freedom in hospital reimbursement rate setting would probably lead to lower Medicaid expenditures for inpatient care. A number of states have demonstrated an interest in containing program costs by seeking to lower hospital reimbursement rates, but federal guidelines and administrative procedures have impeded such efforts. If states had greater flexibility in setting hospital reimbursement rates, they could set rates at whatever minimal levels would attract an adequate number of hospitals. Lower hospital reimbursements could, however, limit Medicaid patients' access to care and cause some of the costs of treating Medicaid patients to shift to other patients.
If states could buy laboratory services, drugs, and other equipment in volume through competitive bidding, about $90 million could be saved in 1982. The use of contract purchasing of care could be extended to hospital care. This could reduce federal costs by an additional $50 million in 1982, although Medicaid patients might lose some freedom of choice.
Modify the Federal Role in Financing Medicaid
Rather than modify eligibility, benefits, or reimbursement requirements, the federal government could alter the extent to which it shares Medicaid costs with the states. Either federal outlays could be limited, or calculation of the federal share could be modified.
Impose a Ceiling on the Federal Matching Funds to States. The Administration has proposed a cap--that is, an indexed limit--for federal Medicaid outlays that would save $900 million in 1982 by allowing only a 5 percent increase from the 1981 level. Spending in 1981 would be held at $100 million below the current base estimate for 1981. In future years, the cap on Medicaid expenditures would be adjusted to reflect changes in inflation as measured by the GNP deflator. Each state's share of the capped federal expenditures would be based on that state's percentage of federal Medicaid expenditures in 1981. The Administration plan would also give states greater flexibility to limit eligibility, restrict services, and lower reimbursement levels.
What effect the cap would have on people who are currently eligible cannot now be estimated, because states' responses to the cap are unpredictable. In part because the allocation of federal expenditures to some states would be significantly different from that of recent years, the effects would vary from state to state. States that would be most adversely affected by the cap are those in which Medicaid expenditures can be expected to rise most rapidly under current policies. Both higher-than-average growth in states' low-income populations and large price increases would not be accommodated under the cap. Also, states that have actively sought to restrain Medicaid costs in the past and those with the most limited programs would soon have to consider eligibility and benefit cuts.
Reduce the Minimum Federal Share. By lowering the statutory minimum matching rate from 50 to 40 percent, federal Medicaid expenditures could be reduced by about $700 million in 1982 and by $1.6 billion in 1986. The 13 states affected by the elimination of the minimum federal share could use state funds to replace lost federal support, but they would probably reduce eligibility, benefits, or reimbursement levels somewhat because of state budgetary constraints.
End States' Responsibility for Costs and Administration. The federal government could assume all responsibility for financing and administering Medicaid. This shift of responsibility could be effected either with or without a change to uniform eligibility criteria. The federal government might be better able than states to restrain increasing medical care prices and use of services, although there is no general agreement on this point. Also, the federal government would be in a better position to take advantage of any economies of scale in program administration. On the other hand, states might be in a better position to experiment because of their long experience administering Medicaid.
Provide Incentives for State Program Expansion. By matching state Medicaid outlays for some persons not now eligible, such as single persons and childless couples, the federal government could encourage expansion of Medicaid. The federal government could also give each state a supplemental grant for increased eligibility; but the reluctance of states to make additional expenditures and the uncertainty of future funding for supplemental grants would tend to limit the effect of this option.
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