Managing Medicaid

By Zelio, Judy | State Legislatures, February 1998 | Go to article overview

Managing Medicaid

Zelio, Judy, State Legislatures

After some years of skyrocketing Medicaid costs, new management techniques and a flourishing economy seem to have them under better control.

Is Medicaid a voracious giant, pausing briefly before starting again to chomp away at state budgets? Or have the states managed to get it on a slim-down diet, holding onto the hope of a binge on tobacco settlement money in case its appetite returns?

Recouping tobacco-related costs from the industry may not lie in the immediate future for most states, but Medicaid spending appears to be under control for the moment. A variety of reasons accounts for the spending slowdown, including a healthy economy, shifts of some groups into managed care programs and federal legislation that to some extent has restricted state strategies to increase federal matches.

For FY 1998, states plan to spend $63.2 billion on Medicaid, up only 4.5 percent from last year. In California and New York, the states with the largest budgets, general fund Medicaid appropriations for FY 1998 grew less than the Congressional Budget Office's predicted 2.7 percent inflation rate. Seven other states are expecting to spend the same or even less on Medicaid than they did last year. The majority of states plan increases of 6 percent or less. Texas, the third largest Medicaid state, is looking at 5.6 percent growth.

Is this relative stability in spending likely to continue? It's hard to be certain, but the outlook is cautiously hopeful for the next five years. Stability depends largely on a robust American economy. New federal legislation and demographic trends will broaden participation in Medicaid, but state shifts to managed care, a revamp of disproportionate share payments and provider taxes, and medical price containment may help dampen significant spending increases. Pressures for higher spending will probably re-emerge after 2002, says the CBO.


Medicaid began in 1965 as a cooperative state and federal effort to provide health care coverage for the needy. It is now the nation's largest program of health-related services for the poor, with more than 33 million people enrolled. It provides health care for many elderly that Medicare doesn't cover (most notably nursing home costs), for people receiving welfare benefits and for millions of children from working poor families. It is the second-largest category of state general fund spending (around 13 percent of the total) - behind elementary-secondary education, but ahead of higher education and far outstripping corrections and welfare spending.

Within national guidelines, each state establishes its own Medicaid eligibility standards; determines the type, amount, duration and scope of services; sets the payment rate for services; and administers its own program. States receive federal matching payments based on their expenditures and the state's per capita income. The federal match ranges from 50 percent to 80 percent of Medicaid expenditures.

Various changes to Medicaid have been offered recently: Congressional leaders proposed in 1995 to replace the Medicaid program with block grants to states. The administration has suggested keeping Medicaid as an entitlement, but with a federal per-enrollee spending cap. Both proposals would provide broad state spending discretion and may receive further attention in the future.

Even without sweeping program changes, federally legislated welfare reform will affect Medicaid. Those who qualify for welfare also qualify for Medicaid, so the connection between Medicaid and welfare continues. But a healthy economy has replaced recession, and welfare rolls are shrinking. Decreases in welfare caseloads may trigger related drops in Medicaid. Florida's FY 1998 budget includes $115 million of unspent Medicaid money because of lower than anticipated caseloads. New Jersey is carrying forward $72 million of unneeded appropriations.

Even with the connection, welfare caseload decreases do not translate directly and immediately into Medicaid decreases. …

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