What's Behind the Medicaid Cost Explosion?

As budget talks get going in state capitols across the country, cash-strapped officials are pinpointing Medicaid spending as one of the biggest causes of budget problems cropping up in state after state. Skyrocketing prescription drug prices, increased costs for home and community-based healthcare and coverage of more disabled people are the main factors in the explosion of Medicaid spending, experts say.

At a Washington, DC briefing hosted by the Kaiser Commission on Medicaid and the Uninsured, Diane Rowland, the commission's executive director, called Medicaid a "critical component of our nation's health care system."

She said the program covers 40 million low-income Americans, pays for nearly 40 percent of all births in the country, and plays a "distinctive role" for the elderly and disabled.

Although only one-quarter of Medicaid's enrollees are elderly or disabled, the same group accounts for almost two-thirds of the program's spending, largely because of prescription drug and nursing home costs.Medicare does not cover prescription drugs in its benefit package, so Medicaid in many cases picks up the tab for many elderly people.

Urban Institute researcher Brian Bruen said Medicaid is currently the largest source of federal funds, accounting for roughly 40 percent of all grants. But states are required to match anywhere from 50 to 82 percent of the Medicaid dollars, and also have to extend benefits to more and more people as new federal mandates are handed down.

Medicaid spending for fiscal year 1998 (which is the most recent data released by the government) totaled $176.3 billion, a figure that was $8.7 billion or 5.2 percent more than the states and federal government spent in 1997.

Spending also grew rapidly in the early 1990s. A 27.1 percent increase from 1990 to 1992 was due to health care inflation, the addition of seven million new enrollees and a jump in states' use of disproportionate share hospital payments, or money facilities get to cover treatment for patients who cannot pay, Bruen said.

Medicaid spending tapered off after 1992 and remained relatively low during the rest of the decade.

Bruen and colleagues said the major cost drivers now are prescription drugs and home and community-based care. Medicaid spent $11.7 billion on pharmaceuticals in 1998, $1.5 billion more than what was spent in 1997. Similarly, home care expenditures increased by $1.6 billion to $15.7 billion.Georgia Department of Community Health director Russ Toal said his state has seen an increase in the number of disabled people on Medicaid and the impact of eligibility expansions. "A 10 percent increase is certainly going to be true this year," he said.

"Our expenditures on drugs have more than doubled since 1995 alone, and they've quadrupled since 1990," Toal said. Last year, average pharmaceutical expenditures per recipient increased by 20 percent, a growth rate that's simply "unsustainable," he said.

Toal said Georgia suspects that pharmaceutical manufacturers may be overcharging state Medicaid programs.

"We've sent some evidence of that to both HCFA and the Department of Justice, and I hope that other states are doing the same," he said.

Toal's counterpart in Rhode Island, Department of Human Services director Christine Ferguson did not make similar accusations. She did, however, agree that it's hard for states alone to address the problem of rising drug costs.

Ferguson said insurance and pharmaceutical rates were "suppressed" during former President Clinton's health reform drive. "If there was serious discussion (of health care reform) at the federal level every couple of years, you might see the price come down again," she joked.

Medicaid spending currently accounts for 25 to 33 percent of Rhode Island's total budget, compared with 10 to 11 percent in Georgia. From 1998 to 2001, officials saw 4 percent annual increases in Medicaid, with subsequent leaps to 12.5 percent in 2000 and 18 percent in 2001.

"You've read that's all due to expansion in eligibility," Ferguson said. "In fact that's only about half of it. The other half is people with disabilities, because [use of health services] and drug costs are huge in comparison to [what] kids and families" use, she added.Rhode Island has some lessons to teach on how to cope with expanding Medicaid budgets, since lawmakers there have been dealing with the issue for several years. In an interview with Stateline.org, State Sen. Tom Izzo gave fellow policymakers some advice.

"During the last fiscal year, there was a spike," he says. " Our response as legislators initially was to cut back on RiteCare (the state's Medicaid program), but we opted instead to create...a small business insurance reform plan, and developed what we call RiteShare," Izzo says.

Rhode Island lost two major insurers--Harvard Pilgrim and Tufts--towards the end of 1999, and as a result, a number of people who previously had health insurance through employers migrated into RiteCare.

To prevent what's known as crowd-out, or people opting for Medicaid when they could get insurance through their jobs, lawmakers--with input from the business and insurance community--created the new program, which requires people who are eligible for employer-based insurance to enroll in such a plan.

The state then kicks in the employee's share of the cost toward the insurance, depending on that person's income level and other requirements.

Izzo suggests that lawmakers across the country approach Medicaid spending woes from a systems-wide perspective. "If we initially rushed in and cut back on RiteCare, we would have increased the number of uninsured in our state," he says.