Number A-8 in Series, Assessing New Federalism: Issues and Options for States
This brief draws heavily from previous and ongoing work sponsored by the Kaiser Commission on the Future of Medicaid.
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.
Medicaid, financed jointly by the federal government and the states, is the dominant public program for financing basic health and long-term care services for low-income Americans.
In 1994, the program spent $137 billion and financed a wide range of services for more than 34 million people. Even so, Medicaid covers only 46 percent of the poor and near-poor in this country, primarily because eligibility depends, not only on income, but also on eligibility for cash public assistance programs (such as welfare or Supplemental Security Income) or membership in particular demographic groups (such as low-income children or pregnant women). Although a wide range of Medicaid services are federally mandated, other services are provided only at state option. Within a state, Medicaid spending varies substantially by beneficiary group.
This brief provides a summary of Medicaid financing, eligibility, services, and spending patterns to help readers understand the basic dimensions of this complex program.
Administration and Financing
Medicaid is administered by the states. However, federal guidelines require states to cover specific categories of people and types of benefits. States that meet the federal eligibility and benefit guidelines receive federal matching payments that finance a share of Medicaid expenditures, based on a state’s per capita income. For the richest states, the federal government finances 50 percent of total Medicaid expenditures in the state. For the poorest states, the federal share rises to 80 percent.
Within the federal guidelines, states have considerable flexibility in establishing their own financial eligibility criteria, benefit packages, and payment policies. As a result of this flexibility, as well as income differences among states, there are large state-to-state variations in coverage and expenditures. In 1994, for example, the most generous states covered 60 percent of their low-income populations (those beneath 150 percent of the poverty line), compared with under 40 percent at the other end of the spectrum. Total per capita Medicaid expenditures varied from a high of over $4,800 per low-income person in the highest-spending state to a low of just under $1,000. The states with the highest per capita expenditures generally have the lowest federal match because they tend to be the richest states. 1
Eligibility
Historically, Medicaid eligibility has been tied to eligibility for cash assistance, primarily through the Aid to Families with Dependent Children (AFDC) and Supplemental Security Income (SSI) programs. In recent years Congress and many states have expanded Medicaid coverage to poverty-related groups like children and pregnant women who do not qualify for cash assistance despite their low incomes. In addition, states have the option to cover other "medically needy" persons who do not qualify for welfare programs but incur large medical or long-term care expenses. Some states have expanded coverage beyond traditional categories—for example, to nondisabled adults without children—through what are known as Section 1115 waivers. Childless, nondisabled adults have traditionally not been eligible under standard Medicaid eligibility rules, regardless of how poor they are or how high their medical expenses may be.
The recently enacted Temporary Assistance to Needy Families (TANF) program, which replaces AFDC, retains current rules for Medicaid eligibility largely intact. TANF work requirements and the possibility of separate enrollment procedures for the two programs may result in lower Medicaid participation rates, nevertheless. 2
The major beneficiary groups, how they qualify, and how Medicaid expenditures are allocated among them are shown in table 1. Even after the recent expansions in coverage, the majority of beneficiaries (58.1 percent in 1994) still qualify because they also receive cash assistance.
About half of all Medicaid beneficiaries are children. The program served 17.1 million low-income children in 1994—9.5 million in families receiving cash assistance and 7.6 million in families not receiving cash assistance. Nondisabled, low-income adults are the second largest group (7.9 million), mainly adults with children receiving cash assistance and low-income pregnant women. Some 3.8 million low-income elderly persons relied on Medicaid to supplement their Medicare coverage and to help pay for institutional and community-based long-term care services in 1994. Medicaid also paid for acute and long-term care services for 5.4 million blind and disabled beneficiaries in that year.
The distribution of beneficiaries is not matched by the distribution of Medicaid expenditures. Total Medicaid expenditures amounted to $137.1 billion in 1994, of which $120.2 billion was spent on direct payments to beneficiaries. The remaining $16.9 billion (12.3 percent) was spent on disproportionate share hospital (DSH) payments.
DSH payments are not made on behalf of specific beneficiaries. Rather, they provide additional financial assistance to hospitals that serve more than their "share" of low-income and Medicaid beneficiaries. Between 1988 and 1992, DSH payments ballooned as states used provider taxes and intergovernmental transfers to pay the state DSH share, passing provider funds through the state treasury to leverage federal dollars and then returning both to DSH institutions. Legislation in 1991 and 1993 largely ended the growth in DSH payments by imposing limits on the amounts permitted.
Although nondisabled adults and children in low-income families make up almost three-quarters (73.1 percent) of Medicaid beneficiaries, they account for only about one-third (32.3 percent) of all direct Medicaid spending. By contrast, the elderly and persons with disabilities constitute only one-quarter (26.9 percent) of total beneficiaries, yet are responsible for two-thirds (67.7 percent) of total direct spending.
Service Coverage
Federal guidelines require coverage of a broad range of services:
- Inpatient and outpatient hospital physician services;
- Laboratory and X-ray services;
- Nursing homes and home health care;
- Early and periodic screening, diagnosis, and treatment (EPSDT) services for children under age 21;
- Family planning; and
- Rural health clinics and federally qualified health centers.
Additional services can be covered at the option of the state. The most frequently offered optional services are prescription drugs, clinic services, prosthetic devices, and intermediate care facilities for the mentally retarded.
The distribution of Medicaid spending among services is shown in figure 1.
Acute care services accounted for just over half of Medicaid spending in 1994 (51.9 percent). Inpatient hospital care is by far the most important acute care service category (accounting for 18.9 percent of total Medicaid expenditures). Physician services, outpatient care, and drugs each account for roughly 5 to 7 percent of total Medicaid expenditures. The Medicare/HMOs category includes Medicaid payments for the Medicare premiums and cost-sharing obligations of low-income elderly and disabled beneficiaries (who have dual eligibility) and payments to health maintenance organizations (HMOs) and similar organizations for services delivered to Medicaid beneficiaries in managed care environments. In 1994, such payments totaled 7.4 percent of Medicaid spending—$10.2 billion, of which $3.4 billion went for Medicare premiums and cost-sharing and $6.8 billion to HMOs and other managed care plans. Other acute care services (6.9 percent of total spending) include such items as case management, family planning, dental and vision care, and EPSDT.
Long-term care services account for the remaining one-third (35.8 percent) of direct Medicaid expenditures. Most of this goes for nursing home care (20.6 percent of total expenditures). Home health care and institutional care for the mentally retarded each accounted for somewhat over 6 percent of total expenditures.
Service Spending by Eligibility Group
Different enrollment groups use different types of services in the Medicaid program. Acute care use is shown in
table 2; long-term care use is shown in
table 3.
For nondisabled children, of the $23.3 billion spent on direct services, the vast majority ($21.7 billion) was spent on acute care, with hospital inpatient care and HMO payments together accounting for over half (58 percent) of the total. The remaining $1.6 billion went to long-term care, mainly mental health services ($1.1 billion) and home health care ($0.3 billion). For nondisabled adults, virtually all direct Medicaid spending went to acute care services, half to inpatient care and HMO payments combined.
For persons with disabilities and the elderly, Medicaid serves a very different need. Of the $45.3 billion in direct Medicaid spending on blind and disabled beneficiaries, $25.7 billion (57 percent) went for acute care, with the other $19.6 billion (43 percent) going to long-term care. Disabled beneficiaries are heavy users of hospital inpatient care, intermediate care facilities for the mentally retarded, and home care.
For the elderly, the amount spent on long-term care services rises to 77 percent ($27.7 billion) of total direct expenditures of $36.1 billion. Over 80 percent of the long-term care expenditures for the elderly went for nursing home care ($23.2 billion for SNF/ICF care and $0.6 billion for ICF-MR care). The heavy preponderance of Medicaid spending for the elderly on long-term care is a direct result of the high costs associated with long-term care and the limited coverage of institutional long-term care in Medicare or private insurance.
Differences in health needs of the populations covered by Medicaid translate into vastly dissimilar levels of spending per beneficiary across eligibility categories (figure 2). Medicaid spent, on average, $1,360 per nondisabled child and $1,974 per nondisabled adult beneficiary in 1994, almost all of it for acute care. Per-beneficiary spending for the elderly and persons with disabilities, many of whom need long-term care services, is significantly higher. In 1994, Medicaid spent $9,437 and $8,421, respectively, per elderly and blind/disabled beneficiary. Elderly and disabled Medicaid beneficiaries who are not cash recipients are often in institutions and have particularly high average expenditures—$12,534 for the elderly and $12,954 for the blind and disabled in 1994.
Discussion
Three main implications flow from this overview:
- Medicaid is the major public source of health care coverage for the low-income population in the United States. Children—a potentially at-risk group of particular policy concern at the moment—account for half of the Medicaid population. Adults in families with children account for another 23 percent of Medicaid enrollment. Efforts to reduce Medicaid expenditures that result in tightened eligibility for these groups are likely to increase the numbers of uninsured, unless the downward trend in employer-based health insurance coverage is reversed.
- Although Medicaid is usually thought of as a program for the AFDC population, about 60 percent of total program expenditures go to the elderly and disabled. These are the populations for whom Medicaid provides assistance with both acute and long-term care. Therefore, to be successful, efforts to reduce Medicaid expenditures substantially will likely require controlling expenditures for these groups. Options states are adopting include the use of managed care and efforts to restructure the long-term care financing and delivery system. Because able-bodied adults and children account for only about 28 percent of total Medicaid expenditures, efforts to reduce spending by enrolling these groups in Medicaid managed care are not likely to reduce total program expenditures substantially.
- The Medicaid program contributes almost $17 billion in DSH payments to hospitals that provide care to low-income individuals. These payments typically help finance care for the low-income uninsured who are not eligible for Medicaid. The large increases in Medicaid expenditures between 1988 and 1992 were due partially to dramatic increases in DSH payments. Federal legislation in 1991 and 1993 has placed limits on the states’ ability to use this mechanism. The ramifications of this change for the financial viability of community hospitals are not yet clear. But the resulting slowdown in DSH payment growth has been a major factor contributing to the lower rates of growth in overall Medicaid expenditures in the last few years. 3
Tables, Figures, Charts and Graphs
Notes
1. For detailed information by state, see Holahan, John, and David Liska (1997), "Variations in Medicaid Spending among States," New Federalism: Issues and Options for States, series A, no. A-3, Urban Institute (January).
2. See Ku, Leighton, and Teresa A. Coughlin (1997), "How the New Welfare Reform Law Affects Medicaid," New Federalism: Issues and Options for States, series A, no. A-5, Urban Institute (February).
3. See Holahan, John, and David Liska (1997), "Reassessing the Outlook for Medicaid Spending Growth," New Federalism: Issues and Options for States, series A, no. A-6, Urban Institute (March).
About the Author
David Liska is a research associate at the Urban Institute. His recent research has focused on the Medicaid program and state and national health care reform.
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