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Report: Medicaid Spending Growth Near Record Low

By Mary Agnes Carey, CQ HealthBeat Associate Editor

October 10, 2006 -- An improved economy, combined with the Medicare drug benefit, contributed to the lowest rate of Medicaid spending growth in a decade, according to a survey released Tuesday by the Kaiser Family Foundation's Commission on Medicaid and the Uninsured.

The 50-state survey of Medicaid officials found that state revenues increased faster than Medicaid spending for the first time since 1998. According to the survey, Medicaid spending growth rates on average increased 2.8 percent for state fiscal 2006—the fourth consecutive year in which Medicaid spending growth has slowed—while state tax revenues on average increased 3.7 percent.

The survey also says that Medicaid's fiscal 2006 1.6 percent enrollment increase is the lowest rate since 1999—nearly half the 3 percent growth that Medicaid officials predicted for the year. According to the survey, positive economic conditions contributed to the slowdown in Medicaid enrollment growth.

Diane Rowland, the commission's executive director, said the report provides evidence that states not only know how to control Medicaid spending, but are also willing to revisit those changes when economic conditions improve.

"This news that the revenues are up a little and that spending is down does not mean that states are going to give up on cost containment," Rowland said in an interview. "But it does allow states to take stock of what they've done when they were squeezing the program and see if there are places where they really need to make some fixes," such as such as increasing provider rates.

The survey found that for fiscal 2007 five states plan to restrict eligibility while 26 plan to restore cuts from previous years, expand coverage to new populations, or make positive changes to Medicaid's application enrollment process.

States are contemplating the new options and implementing new requirements created by a budget-savings bill (PL 109-171) that President Bush signed into law earlier this year. Few states, however, have used the flexibility granted by the bill to change benefits and cost-sharing requirements for fiscal 2007, according to the Kaiser report.

The budget survey of state officials also found that the spending growth of 2.8 percent would have been even lower—1.7 percent—if states had not been required to help finance a portion of the new Medicare drug benefit, known as the "clawback" provision. The Medicare drug benefit requires the Medicare program to pay prescription costs for people in Medicaid who had previously been partially covered by the states. In turn, states are required to pay back to the government a smaller contribution—known as a "clawback"—from some of the money they save.

State Medicaid officials predict that growing health care costs and erosion of employer-sponsored health coverage will continue to put pressure on states to constrain Medicaid costs. For state budgets adopted for fiscal 2007, Medicaid spending growth is projected to increase 5 percent.

The survey also found that state Medicaid officials appear to have moved away from a primary focus on cost containment to a range of policies including expansion or restoration of eligibility and benefits, improving quality and changing the way long-term care services are delivered.

States are focusing on three particular areas for change in their Medicaid programs: disease management and quality initiatives to provide better long-term value for program dollars and improve health care for beneficiaries—especially high-cost cases—and reorienting long-term care services away from institutional settings, such as nursing homes, into home and community settings.

Other highlights of the report include:

  • Over half of states expect new citizenship documentation requirements that became effective in July to cause a decline in Medicaid enrollment. Most states also expect the impact of the budget-savings bill's asset-transfer provisions for Medicaid nursing home eligibility to be moderate or significant for beneficiaries, but the fiscal impact on the Medicaid program will be limited.
  • Kentucky, West Virginia, and Idaho—states that had been seeking Medicaid waivers before passage of the budget-savings bill—have used the new law to change benefits. Kentucky also implemented new cost-sharing options.

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