Health Spending and the Future of Medicaid

The journal Health Affairs held a news conference at the National Press Club on Tuesday to announce the results of the annual health spending report compiled by the Centers for Medicare and Medicaid Services at the Department of Health and Human Services. The conference also kicked off the release of the January/February issue of Health Affairs, which is devoted to Medicaid.

Katherine Levit, Director of the National Health Statistics Group of the Centers for Medicare and Medicaid services, presented the new health expenditures data for 2001. National health expenditures rose to $1.4 trillion in 2001, up 8.7% from 2000. Health expenditures are now 14.1% of GDP, up .8% from last year. While hospital and physician services were larger contributors to health spending, prescription drug expenditures were the fastest growing component, increasing at 15.7% in 2001. Levit said the increase in prescription drug spending in 2001 was due to increased quantity and volume, not prices. The 15.7% increase was a smaller increase than in 2000. Levit attributed the slower increase to a declining rate of new drug development and more cost sharing measures like three-tiered drug programs. Levit also said the rate of growth for direct-to-consumer advertising of prescription drugs appears to be declining, due to fewer product introductions.

Total public sector health funding grew by 9.4% in 2001, exceeding private funding growth by 1.2 percentage points, according to the report. The growth in Medicare spending was 7.8%, while the growth in Medicaid spending was 10.8%. Medicaid spending growth was the fastest growth rate since 1993. “The acceleration was fueled by an estimated 8.5% increase in enrollment–one impact of the recession–along with state program expansions for uninsured populations, relaxed eligibility standards, and increased use of creative financing measures such as Upper Payment Limit (UPL) programs,” said the report.

Alan Weil of the Urban Institute said states cannot decrease Medicaid costs by rolling back services or increasing cost-sharing. These types of Medicaid cuts would just shift costs to other state programs, according to Weil. Nonetheless, he predicted states would cut reimbursement rates to providers and cut eligibility and benefits for beneficiaries in response to state budget problems. “There is a fundamental mismatch of what we expect Medicaid to do and how we ask it to do it,” said Weil. He suggested allowing individuals to decide how to spend Medicaid money may be a better solution. The “cash and counseling programs” in some states have proven that many disabled people are capable of making their own decisions and can spend the money more efficiently, according to Weil. “It’s a promising direction to go.”

Ray Scheppach, Executive Director of the National Governors Association, emphasized the lack of tax revenue as the primary problem behind state budget crises. He said the first thing states should do is fundamental tax reform that would increase corporate taxation and tax Internet sales. He then proposed additional federal aid to Medicaid in the short run and having the federal government take back some Medicaid costs in the long run, including federalizing dually eligible Medicare/Medicaid populations.

“Medicaid was not the right vehicle at any time,” said David Parrella, Connecticut’s Medicaid director. Medicaid costs in Connecticut have doubled in one year. “Medicaid does not have the flexibility to tailor benefits to working families and is a bad deal for our health insurance safety net,” said Parrella. He said across-the-board increases in the federal FMAP funding formula are not likely. “[They] are just as likely [to become law] as block grants to the states,” said Parrella. Instead, Parrella suggested states eliminate some optional Medicaid services and cut back eligibility for adults and SCHIP programs in the short term. In the long term, Parrella said giving states more flexibility, enacting a Medicare drug benefit, and reforming long-term care financing would help.

Congressional aides said there will be many congressional hearings on the Medicaid program this year. They said areas that might be discussed are:


  • One-time federal aid to states
  • Federalizing dual eligible populations
  • FMAP formula changes
  • Disproportionate Share Hospital (DSH) payment reforms
  • Making the HIFA waiver program more transparent
  • Expansion of family-directed care waivers
  • Long-term care financing alternatives
  • Moving state drug payment from Average Manufacturer Price (AMP) to Average Wholesale Price (AWP)

–Joe Moser
Galen Institute

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The journal Health Affairs held a news conference at the National Press Club on Tuesday to announce the results of the annual health spending report compiled by the Centers for Medicare and Medicaid Services at the Department of Health and Human Services. The conference also kicked off the release of the January/February issue of Health Affairs, which is devoted to Medicaid.

Katherine Levit, Director of the National Health Statistics Group of the Centers for Medicare and Medicaid services, presented the new health expenditures data for 2001. National health expenditures rose to $1.4 trillion in 2001, up 8.7% from 2000. Health expenditures are now 14.1% of GDP, up .8% from last year. While hospital and physician services were larger contributors to health spending, prescription drug expenditures were the fastest growing component, increasing at 15.7% in 2001. Levit said the increase in prescription drug spending in 2001 was due to increased quantity and volume, not prices. The 15.7% increase was a smaller increase than in 2000. Levit attributed the slower increase to a declining rate of new drug development and more cost sharing measures like three-tiered drug programs. Levit also said the rate of growth for direct-to-consumer advertising of prescription drugs appears to be declining, due to fewer product introductions.

Total public sector health funding grew by 9.4% in 2001, exceeding private funding growth by 1.2 percentage points, according to the report. The growth in Medicare spending was 7.8%, while the growth in Medicaid spending was 10.8%. Medicaid spending growth was the fastest growth rate since 1993. “The acceleration was fueled by an estimated 8.5% increase in enrollment–one impact of the recession–along with state program expansions for uninsured populations, relaxed eligibility standards, and increased use of creative financing measures such as Upper Payment Limit (UPL) programs,” said the report.

Alan Weil of the Urban Institute said states cannot decrease Medicaid costs by rolling back services or increasing cost-sharing. These types of Medicaid cuts would just shift costs to other state programs, according to Weil. Nonetheless, he predicted states would cut reimbursement rates to providers and cut eligibility and benefits for beneficiaries in response to state budget problems. “There is a fundamental mismatch of what we expect Medicaid to do and how we ask it to do it,” said Weil. He suggested allowing individuals to decide how to spend Medicaid money may be a better solution. The “cash and counseling programs” in some states have proven that many disabled people are capable of making their own decisions and can spend the money more efficiently, according to Weil. “It’s a promising direction to go.”

Ray Scheppach, Executive Director of the National Governors Association, emphasized the lack of tax revenue as the primary problem behind state budget crises. He said the first thing states should do is fundamental tax reform that would increase corporate taxation and tax Internet sales. He then proposed additional federal aid to Medicaid in the short run and having the federal government take back some Medicaid costs in the long run, including federalizing dually eligible Medicare/Medicaid populations.

“Medicaid was not the right vehicle at any time,” said David Parrella, Connecticut’s Medicaid director. Medicaid costs in Connecticut have doubled in one year. “Medicaid does not have the flexibility to tailor benefits to working families and is a bad deal for our health insurance safety net,” said Parrella. He said across-the-board increases in the federal FMAP funding formula are not likely. “[They] are just as likely [to become law] as block grants to the states,” said Parrella. Instead, Parrella suggested states eliminate some optional Medicaid services and cut back eligibility for adults and SCHIP programs in the short term. In the long term, Parrella said giving states more flexibility, enacting a Medicare drug benefit, and reforming long-term care financing would help.

Congressional aides said there will be many congressional hearings on the Medicaid program this year. They said areas that might be discussed are:


  • One-time federal aid to states
  • Federalizing dual eligible populations
  • FMAP formula changes
  • Disproportionate Share Hospital (DSH) payment reforms
  • Making the HIFA waiver program more transparent
  • Expansion of family-directed care waivers
  • Long-term care financing alternatives
  • Moving state drug payment from Average Manufacturer Price (AMP) to Average Wholesale Price (AWP)

–Joe Moser
Galen Institute

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About the author