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Medicaid Cost Containment:

Andy Schneider, Medicaid Policy LLC; Jeanne Lambrew, Center for American Progress; and Yvette Shenouda, Jennings Policy Strategies

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Medicaid costs are high on the health policy agenda. Medicaid, the health care program for low-income Americans, is funded jointly by the federal and state governments, with the federal government paying on average 57 percent of the cost. It is the second most costly federal health care program (after Medicare) and the most costly health program for most, if not all, states. Between 2000 and 2003, Medicaid spending grew by one-third, largely as the result of enrollment growth driven by the economic downturn. The Congressional Budget Office (CBO) projects that, over the next five years, federal Medicaid spending will grow an average of 7 percent per year, from $183 billion to $260 billion. At some point during this year, CBO estimates, Medicaid will provide health or long-term care coverage to over 58 million people, or about one out of every five Americans.

Given these trends, policymakers are taking great interest in controlling Medicaid spending growth without intentionally harming the tens of millions of low-income Americans that the program covers. To inform the debate over Medicaid cost containment, this paper examines the distribution of Medicaid spending among Medicaid beneficiaries in the community. Specifically, it focuses on the distribution of Medicaid spending among the non-institutionalized beneficiaries as reported in the 2002 Medicare Expenditures Panel Survey (MEPS). An explanation of this data source and its limitations is found in the Appendix. Our main findings are:

  • High-cost cases account for nearly three-fourths of Medicaid spending in the community. Seventy-two percent of Medicaid spending was attributable to only 10 percent of Medicaid beneficiaries in the community. Medicaid spending is more concentrated among its most expensive beneficiaries than is Medicare or employer-sponsored health insurance spending. Medicaid spending on these individuals during 2002 equaled or exceeded $7,770. These high-cost beneficiaries are more likely than other Medicaid beneficiaries to be women, poor, non-Hispanic white and rural residents. Nearly one in three of the top 10 percent of high-cost Medicaid beneficiaries is also eligible for Medicare as well (i.e., dual eligible).
  • Most Medicaid spending for high-cost beneficiaries in the community is for hospital care and home health services. Nearly two-thirds of all the costs paid by Medicaid for high-cost beneficiaries in the community were for hospital care (40 percent) and home health (24 percent). Another 18 percent of spending for this population was on prescription drugs. Over half (56 percent) of high-cost Medicaid beneficiaries were hospitalized in the last year.
  • Chronic illnesses are common among high-cost beneficiaries in the community. A large fraction of high-cost beneficiaries in the community have chronic health problems that require medical management, including heart disease (28 percent), asthma (25 percent) and diabetes (19 percent).
  • Medicaid is a major payer for high-cost people in the U.S. Among all individuals in the community, not just Medicaid beneficiaries, Medicaid pays for about one-fourth (24 percent) of the top 10 percent most costly individuals. To put this in perspective, this is over 30 times more than the number of people served by medical high-risk pools nationwide (181,441). These data understate Medicaid's role in paying for high-cost cases because they exclude nursing home residents and other institutionalized beneficiaries, for whom Medicaid is the dominant payer.

These data raise a number of important questions about Medicaid cost containment policies currently under consideration. Common among these options are two that are potentially problematic for high-cost Medicaid cases and the providers that treat them: (1) increasing copayment requirements, and (2) reducing the scope of covered benefits for certain populations. If state Medicaid programs impose higher copayments on hospital and home health services and prescription drugs, will the high-cost individuals who now use these critical services be deterred from using these services and, if so, what effects will the reduction in the use of services have on their health status? Similarly, if benefits are scaled back, what are the implications for high-cost Medicaid populations, who are heavy users of hospital services, home health care, and prescription drugs, and for the providers that now treat them? Alternatively, policymakers could explore using medical management to improve quality and possibly reduce spending on high-cost Medicaid cases.

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