The Decline In Medicaid Spending Growth In 1996

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This policy brief was prepared for the Kaiser Commission on Medicaid and the Uninsured.

Note: This report is available in its entirety in the Portable Document Format (PDF).

Medicaid spending grew by only 2.3 percent in 1996, the lowest rate of growth in the history of the program. After a period of explosive growth between 1988 and 1992, averaging over 20 percent per year, Medicaid spending slowed to 9-10 percent per year between 1992 and 1995.¹ In 1996, Medicaid financed acute and long-term care services for 41.3 million people at a cost of $155.4 billion. Spending growth in 1996 was extremely low, and slow growth seems to have continued in 1997. The primary reason for the low rate of growth in 1996 was a nearly 20 percent drop in disproportionate share hospital (DSH) payments. A reduction in adult and children enrolled through cash assistance in response to state welfare reforms and an improving economy as well as moderation in enrollment growth of elderly and disabled beneficiaries also contributed to the slowdown.

Medicaid spending growth has slowed to unprecedented levels and, for the first time in the program's history, enrollment has fallen. This policy brief updates earlier analyses conducted for the Kaiser Commission on Medicaid and the Uninsured by researchers at the Urban Institute. It critically examines Medicaid enrollment and spending trends from 1990 to 1996, highlighting periods of extensive growth between 1990 and 1992, moderate growth between 1992 and 1995, and limited growth between 1995 and 1996. It then reviews the primary factors contributing to the dramatic slowdown in both spending and enrollment growth between 1995 and 1996. The final section presents preliminary estimates of spending for 1997 and projects Medicaid spending growth over the next five years.

Medicaid Spending: 1990 to 1992

Between 1990 and 1992, Medicaid grew at an extraordinary 27.1 percent annual growth rate, with expenditures increasing from $73.7 billion to $119.9 billion in just two years. During the same period, Medicaid spending on the elderly and disabled increased by 16.7 and 17.6 percent per year, respectively, while expenditures on adults and children increased by 21.4 and 23.8 percent per year, respectively (Table 1). Disproportionate share payments increased by over 250 percent per year. There were several reasons for these high growth rates.

Notes from this section

1. John Holahan, Diane Rowland, Judith Feder, and David Heslam, "Explaining the Recent Growth in Medicaid Expenditures," Health Affairs 12 (Fall 1993): 177-193; Diane Rowland, Judith Feder, John Holahan, Alina Salganicoff, and David Heslam, The Medicaid Cost Explosion: Causes and Consequences. The Kaiser Commission on the Future of Medicaid. Washington, D.C.: The Henry J. Kaiser Family Foundation, 1993.

Note: This report is available in its entirety in the Portable Document Format (PDF).

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.

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