Medicaid Spending

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Executive Summary

Total Medicaid spending rose by roughly 25% between federal fiscal year (FY) 2000 and FY 2002, increasing from $205.8 billion to $257.6 billion. At the same time, dramatic declines in state revenues have placed great pressure on state budgets, resulting in state efforts to curtail spending growth. Medicaid, the largest item in most state budgets after education, has been the target of costcontainment efforts in all 50 states and the District of Columbia.

This brief explores the factors underlying Medicaid spending growth. Rapid Medicaid spending growth has been driven, in part, by enrollment increases resulting from the loss of income and private insurance coverage during the current economic downturn, together with continued increases in hospital and prescription drug costs that have affected the entire health care sector. Despite slower enrollment growth for the aged and disabled than for children and nondisabled adults, the aged and disabled accounted for almost 60% of the spending growth. Although current growth rates may be high relative to state fiscal capacity, per enrollee spending growth is below levels seen in the private health care market.

Rapid enrollment growth among children and nondisabled adults can largely be attributed to the economic downturn, which resulted in declining incomes and lower rates of employer-sponsored insurance among low-income Americans. Medicaid enrollment grew in response. If Medicaid enrollment had not increased, the number of uninsured Americans would have increased sharply. As it was, data from the 2002 CPS (2001 data) showed that public program enrollment was sufficient to offset the decline in employer-sponsored insurance for children, but not for adults. As a result, the number of uninsured adults increased by 1.5 million, with further reported increases possible when the 2003 CPS is released (2002 data) later this month.

Medicaid spending per enrollee increased by 8.6% per year between 2000 and 2002. However, this is lower than the rates of increase in health care spending per person observed for those with private insurance and considerably lower than the rise in private health insurance premiums. Medicaid spending also increased because of rising health care costs in general. In particular, prescription drugs continue to increase at double-digit rates, with spending per enrollee increasing at about 15% per year. Medicaid is a large payer for prescription drugs because of the relatively poor health and levels of disability among its beneficiary population. Nearly half of all Medicaid drug spending went to elderly and disabled beneficiaries who were also covered by Medicare. Other acute care services such as outpatient hospitals, clinics, and prepaid managed care also had high rates of growth. In contrast, most long-term care services did not grow at particularly rapid rates. The exception was spending for home and community based services, which increased at about 12% per year.

While enrollment growth among children and nondisabled adults far exceeded the growth in the number of aged and disabled, the latter are far more expensive on a per enrollee basis. Increases in enrollment of the aged and disabled far exceeded growth in the general population, and this growth is likely to continue. Indeed, the program is affected by demographic changes that are outside of its control, such as increased rates of disability that are, in part, related to the aging of the population. Increased numbers of aged and disabled enrollees is leading to greater use of acute care and long-term care services. As a result, almost 60% of the growth in Medicaid spending over the last two years was due to increases in spending on aged and disabled individuals (Figure 1).

Interestingly, growth in acute care services among the aged and disabled was more of a contributor to growth in Medicaid spending for these populations than was growth in long-term care services (53% versus 47%), due to high use of prescription drugs and presumably technology-intensive acute care services.

Early indications are that spending growth in the program has moderated during FY 2003, with data through July 2003 suggesting an annual growth rate of 8.3%. State efforts to reduce the rate of enrollment growth through eligibility cutbacks, together with benefit reductions and provider payment freezes, have all likely contributed to this slowdown. State revenues have shown little signs of rebounding, however, and ongoing budget shortfalls will continue to place pressure on states to reduce spending growth in their Medicaid programs. While some of the factors that have driven Medicaid expenditures upward will fade as the economy improves—such as enrollment growth in response to the economic downturn—the effects of rising health care costs and demographic change on Medicaid expenditures will not. As a result, Medicaid will continue to place pressure on state budgets even with an economic recovery.

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Disclaimer: The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.