Sheldon Silver, Speaker
Herman D. Farrell, Jr., Chair

March 1997                                                                      from . . . New York State Assembly's
                                                                                                   Committee on Ways & Means

Trends in Medicaid Spending in New York State

This paper is the second in a series which presents the New York State Assembly Ways and Means Committee staff’s approach to analyzing historic patterns and projecting Medicaid spending, featuring the outlook for the 1997-98 fiscal year.² The Committee staff’s forecasting efforts focus on the traditional health care expenditures administered by the New York State Department of Health.³ The State Department of Health is expected to disburse $5,340 million in State funds for Medicaid for the 1996-97 fiscal year.⁴ For State Fiscal Year (SFY) 1997-98, the Committee staff is projecting that the Department of Health will spend $5,277 million in State funds for the Medicaid program, assuming that those policies currently in effect for the 1996-97 fiscal year will remain in effect during SFY 1997-98.⁵ This paper will demonstrate the consistency of the Committee staff’s projection of Medicaid growth with developments currently taking place within the State’s health care industry.

Medicaid services are provided to three major types of clients: the aged, blind, and disabled who require expensive long-term care in addition to other services; the mentally disabled; and children, families, and single adults in temporary need of assistance due to their financial circumstances (see Figure 1). Although the aged, blind and disabled account for about 67 percent of total program costs, they comprise less than one third of all Medicaid recipients. Over 40 percent of the more than two million people who received care through the Medicaid program on an average monthly basis during the 1995-96 fiscal year were dependent children although children account for only about 14 percent of program costs. The focus here will be on the two populations which comprise the “traditional” Medicaid population: the aged, blind and disabled; and those in need of assistance due to their financial circumstances.

The Medicaid program is operated by the states according to federal guidelines. Medicaid costs are shared by the federal, State, and county governments. The federal government covers roughly half of the overall cost, the State about one third, while local governments are responsible for the remaining portion. Medicaid provides its government-financed services through a broad array of local health care providers including hospitals, clinics, doctors, dentists, and pharmacists. Nursing homes and home care agencies serve the smaller, but typically more costly population of the elderly and the disabled.

As the Medicaid program is administered in New York, eligible persons include: low-income elderly and disabled beneficiaries of the Supplemental Security Insurance program; elderly and severely ill persons who have exhausted their assets paying for long-term or chronic medical care; pregnant women up to 185 percent of the federal poverty level; and children up to age fourteen whose family income ranges between 100 percent to 185 percent of the poverty level, depending on the age of the child. Until this year, cash grant recipients under the Aid to Families with Dependent Children and Home Relief programs were automatically eligible for Medicaid as well. Under federal welfare reform, however, eligibility for Medicaid will now be determined separately. Children under twenty-one may also be eligible for Medicaid when family income is below 100 percent of the poverty level. Coverage is also available for certain classes of elderly persons who need help paying the premiums and co-payments required under Medicare.

A brief history of total Medicaid spending growth since the 1981-82 State fiscal year is presented in Figure 2. It is evident from this graph that the period of the early 1990’s was a period of extraordinary spending growth. During this period, the rate of medical cost inflation substantially exceeded the growth in the general price level. In addition to the brisk rise in medical care prices, the rate of growth in Medicaid spending reflects program policy changes, such as deliberate efforts on the part of government to seek out and extend benefits to eligible individuals. In 1990, eligibility was expanded for pregnant women up to 185 percent of the federal poverty level. Outreach efforts have probably been most successful for elderly and disabled clients, the costliest populations to serve.

A substantial portion of the demand for Medicaid services is generated by individuals and families who either receive cash grants under the State’s public assistance programs, or, though not qualifying for cash grants, have lost their health care benefits due to joblessness. Therefore, growth in Medicaid spending is also a reflection of changes in the overall economy. The after-effects of the erosion of the real estate market and the decline of the stock market, combined with both federal defense cuts and corporate downsizing, caused the recession of the early 1990’s to be much deeper for New York than for the nation as a whole because of its heavy economic reliance on those sectors. Hence, it is not surprising that the State Medicaid program’s period of strongest growth occurred during the recession of the early 1990’s. High demand for services combined with continued high rates of medical price inflation forced Medicaid spending growth into the double digits by the 1989-90 fiscal year, peaking just under 24 percent during SFY 1991-92.

In response to the great fiscal pressure produced by these high rates of growth, New York, like many other states, initiated major efforts to contain costs. As a result, spending growth for the 1992-93 fiscal year fell below six percent and has not since returned to the high levels of spending growth which were common during the last recession (see Figure 2). Nor is it likely such high levels of spending will return in the present health care environment. The industry is experiencing significant restructuring, given the growing importance of managed care and the need to control costs. Change is being felt in every sector, impacting not just Medicaid but all aspects of health care. The extent of this change is clearly reflected in the decline in the growth of medical care prices which has been witnessed over the last few years. The medical services component of the Consumer Price Index for the Northeast Region has fallen steadily since peaking at 9.7 percent during the 1990-91 State fiscal year (see Figure 3). Medical price inflation fell below four percent during 1996 and is expected to average only 3.8 percent during SFY 1997-98.

Growth in the State’s Public Assistance caseload is highly correlated with changes in the economy. Administrative actions, however, can also influence the size of the population being served. Since the end of 1994, county governments have been putting unprecedented effort into reducing their welfare caseloads. Between April and December 1996, the Home Relief program, the State’s cash assistance program for single adults, experienced a decline in caseload of 18.1 percent, while the number of Aid to Families with Dependent Children recipients fell by 6.9 percent. A significant portion of this dramatic decline is beyond what would have occurred due to economic forces alone, and is expected to produce reductions in Medicaid spending beyond what last year’s improvement in the economy would have produced. The impact of this decline is most visible in hospital inpatient spending. It remains to be seen what impact federal welfare reform will have on the State’s Medicaid program although at this time no savings are anticipated.

With the passage of the 1995-96 and the 1996-97 State Budgets, the Legislature and the Governor approved comprehensive plans aimed at containing costs within the State’s Medicaid program and providing savings to the General Fund. In SFY 1995-96, a plan to save the General Fund over $1 billion was approved. Of this amount, $650 million was directly related to efforts to control provider costs. The remaining savings were achieved through a variety of revenue actions that have the effect of maximizing federal reimbursement without a commensurate State General Fund increase.

With passage of the 1996-97 State Budget, the Legislature continued actions from the previous year that were due to expire and approved new cost containment measures that together resulted in $334 million in savings to the State’s General Fund due to cuts to Medicaid providers. These provisions were comprised of provider reimbursement rate reductions and policies designed to encourage more efficient delivery of service. Additional General Fund savings of $289 million were again achieved through revenue actions to maximize federal reimbursement.

As Medicaid expenditures are shared by the federal, State, and local governments, the savings to the General Fund alone understates the total impact of the State's cost containment policies on health care providers. The General Fund savings of $650 million translates into a revenue loss to providers of $1,229 million. Similarly, the all payor impact of the $334 million in General Fund savings adopted in SFY 1996-97 was expected to be about $1,043 million. The distribution of the two-year impact by major provider type is presented in Figure 4. The effect of these efforts has been restrained growth in those sectors that have been targeted for control, namely hospital inpatient services, nursing homes, and long term home-based care.

Hospital Inpatient Services

The 1980’s and the early 1990’s saw dramatic growth in hospital inpatient services, the largest category of Medicaid services. This growth can be attributed to changes in program policy, the rapid growth in medical prices, as well as growth in the demand for hospital services due to the downturn in the State economy. During the early 1990’s, growth in hospital inpatient spending was amplified by growth in the federal government’s Disproportionate Share program. In 1986, the Federal Budget Reconciliation Act allowed state Medicaid programs to make supplemental payments to hospitals that serve a disproportionate number of low-income patients. The federal government agreed to provide half of every dollar spent on such “disproportionate share adjustments.” The impact of this program has been to shift some of the cost of Medicaid from the State and local governments to the federal government. While Disproportionate Share funding had the welcomed effect of easing the State’s financial burden, it also resulted in an overall increase in the size of Medicaid, as services which formerly were delivered outside the program were included under the Medicaid umbrella in order to draw federal reimbursement. This policy change accelerated the growth of Medicaid spending during the transition period of the early 1990’s.

The growth in hospital and clinic spending is the result of an increase in the price of health care, as well as increases in the demand for inpatient and outpatient services. The rise in spending due to an increase in demand alone can be more accurately measured by adjusting total spending by the rate of medical care inflation. Isolating spending increases due to an increase in demand permits an illustration of how closely demand for hospital and clinic care is related to the state of the economy. This is done in Figure 5, where economic growth is measured by an index of current economic conditions developed by the Ways and Means Committee staff.⁶

During the mid-1980’s, when the State economy was experiencing strong job growth, the rate of growth in Medicaid hospital and clinic spending declined significantly. When the economy weakened in the late 1980’s, spending began to rise again. The growth in spending peaked above 20 percent during the 1991-92 fiscal year. Since the end of 1992, the State economy has experienced moderate growth and State growth in Medicaid costs has declined. Modest economic growth is expected to continue through the current fiscal year and into the 1997-98 fiscal year as well. The resulting creation of new employment is expected to be a continued source of downward pressure on hospital inpatient services, as well as on outpatient services although to a lesser degree.

More recently, however, additional factors have had a constraining effect on hospital inpatient spending. Specifically, the overall restructuring of health care delivery, with its emphasis on shorter hospital stays and more community-based support services; the expansion of managed care; the elimination of a statutory hospital reimbursement methodology in New York, and the enactment over the past two years of deliberate actions to contain costs have all contributed to a decline in hospital inpatient expenditures. National debate surrounding the rapid rate of health expenditure growth brought the health care industry to the realization that the nation would no longer tolerate the rate of medical price growth exhibited through the early 1990’s. The industry has taken steps to streamline, as evidenced by the large numbers of recent hospital mergers. In addition, some public hospitals are now in the processing of changing their corporate structure so that they can become involved in the development of health networks and joint ventures with other health care providers. Moreover, hospitals are demonstrating an increased interest in sponsoring their own managed care plans in order to develop new revenue streams and to maintain a sizable client base.

An important component of the restructuring of health care has been the emergence of the managed care industry as the fastest growing component of health care spending. Managed care, which utilizes a capitated payment structure, is seen as a cost-effective alternative to more traditional fee-for-service medical care. Moreover, it offers the opportunity for better and more efficient health care because of its emphasis on preventive primary care. While managed care had been the fastest growing component of Medicaid spending in New York, quality control issues and enrollment abuses have kept growth relatively flat for the current fiscal year. Tightened regulation of the industry with passage of a mandatory Medicaid managed care act and a comprehensive consumer managed care act should preclude many of the former abuses and accelerated growth is expected during the upcoming fiscal year. The growth in managed care is linked to the actual decline in fee-for-service spending which has been observed in hospital inpatient, physician, dental, eye, lab and x-ray, and rehabilitation and therapy services.

In addition to self-directed industry restructuring, New York State recently moved to a deregulated hospital reimbursement system with the passage last July of the Health Care Reform Act of 1996. Prior to its enactment, New York’s hospitals had operated since 1983 under a tightly regulated rate reimbursement system known as the New York Prospective Hospital Reimbursement Methodology (NYPHRM) which exerted significant government control over hospital financing. The passage of the Health Care Reform Act marked a conscious move away from the strict regulatory environment of NYPHRM and towards a system of negotiated rates. As the Legislature noted in the preamble to the Act: “This legislation will promote competition in the health care marketplace by increasing reliance on market incentives while reducing the role of regulation.”

Coupled with the impact of the new Health Care Reform Act are the effects of the statutory cost containment measures that have been implemented over the last two years. These actions have resulted in the loss of nearly $1 billion in total Medicaid funds to the hospital sector.⁷ These actions have had the effect of prohibiting hospital reimbursement for Medicaid services from growing with inflation, thus reinforcing the influence of competitive market forces.

Hospital Outpatient and Clinic Services

While economic growth and corresponding new employment exert the same downward pressure on outpatient and clinic services as on inpatient services, this downward pressure is being counterbalanced by industry restructuring which has directed more and more services formerly delivered as an inpatient to an outpatient setting. During the State’s most recent recession, outpatient services grew at double-digit rates, peaking at almost 30 percent during SFY 1991-92. The rate of spending growth subsequently began to decline, falling to 3.4 percent in the 1994-95 fiscal year. Spending then began to rise once again the following year, and has remained high.

Outpatient services represent an area where cost-reducing advances in medical technology have promoted an increase in utilization. For this reason, those forces that are diminishing the demand for hospital inpatient services are less visible in the growth of hospital outpatient and clinic services and, consequently, we are continuing to witness growth in this sector. For this reason as well, the effect of cost containment measures enacted over the past two fiscal years ($18 million in SFY 1995-96 and $5 million in SFY 1996-97) eliminating inflation increases and rate enhancements and lowering reimbursement for administration have not noticeably decelerated growth.

Nursing Home Services

Since the primary users of long-term care are the aged, blind, and disabled, fluctuations in nursing home spending are not closely related to the economy. Demand for nursing home services is affected by changes in prices, the Supplemental Security Income caseload, and related populations. The demand for nursing home services has grown steadily since the early 1980’s, accelerating significantly in the early 1990’s. Medicaid costs for nursing home services grew by over 30 percent during SFY 1991-92 and 14 percent during the following year. A substantial effort has been made since the late 1980’s to find clients who are statutorily eligible for cash and non-cash services but are not receiving them. Outreach efforts have probably been most successful for elderly and disabled clients, the populations most likely to require nursing home services. Over 85 percent of nursing home spending is for elderly, blind, and disabled clients who due to the high cost of institutional long-term care have qualified for Medicaid benefits by spending down their incomes.⁸

More recently, however, efforts to encourage the use of home-based care, combined with close regulation of bed expansion, have successfully limited growth in nursing home spending. Underlying growth fell to an estimated 5.7 percent in the 1995-96 fiscal year from 7.4 percent in the previous year.⁹ Moreover, the continued selective use of alternatives to institutional care has contributed to a reported modest decline in capacity utilization, which industry experts are attributing to a reduction in the average nursing home stay.

In addition, the State has taken steps to curb nursing home growth through the implementation of cost containment initiatives totaling over $200 million State share during the past two fiscal years. These measures have been directed at freezing inflation increases, lowering rates and barring rate increases through the appeals process. Cost reducing measures have also encouraged the exhaustion of alternative funding sources, such as the federal Medicare program, promoting a more efficient usage of State Medicaid dollars. As a result we have witnessed a deceleration in the growth of nursing home services.

Home-based Long-term Care

High rates of nursing home utilization and their high cost of care comprise one of the factors which make New York’s Medicaid program costly. In order to contain these high costs, the State has encouraged the utilization of home-based long-term care services such as Personal Care and Home Health Care. Personal care services assist an individual with non-medical care deemed by a physician to be essential to the recipient’s health. Home health care includes medical services prescribed by a physician in accordance with a plan of treatment for the recipient and administered under the supervision of a registered nurse. These services provide a less expensive alternative (roughly a third of the cost) to more costly institutional nursing home care. Hence, demand for these services grew at double-digit rates from the mid-1980’s until the early 1990’s, peaking at close to 30 percent growth during SFY 1986-87, but remaining close to 20 percent through the 1991-92 State fiscal year.

To reduce yet further the cost of long-term care services, the State has encouraged increased utilization of systems that promote efficiencies in the delivery of home-based care. These systems include the use of the Personal Emergency Response System and Shared Aide. These programs improve the efficiency of service-time allocation through the use of a more flexible, task-oriented system which minimizes idle time spent by the home attendant. Spending for personal care has actually declined for the last two fiscal years. However, until recently, home health care had been continuing its expansion as clients who require skilled nursing care are diverted from costly institutional to less expensive home-based settings.

The most recent spending data shows evidence of significant belt-tightening on the part of the home health industry as a result of government actions to control costs. Prior year cost containment efforts were mainly directed at promoting greater efficiency in the delivery of personal care services in New York City. These efforts appear to have been successful in controlling runaway costs. Additional cost containment actions enacted with the 1996-97 budget also targeted the home health industry that had been experiencing burgeoning growth as personal care services dipped. This two-pronged approach to reduce costs has resulted in slower spending growth in this sector.

There are several alternative methods for projecting budgetary expenditures. An acceptable method must be able to account for the spending levels observed in the past. If the projection method can not accurately track the historical data, it can hardly be trusted to accurately foretell the future. A valid method must capture all of the relevant factors that affect the level of spending. For example, the previous discussion indicated that the economy is an important factor determining Medicaid spending growth.¹⁰ Excluding the economy from the analysis, it would be impossible to fully explain the decline in spending growth observed between SFY 1983-84 and SFY 1987-88, as well as the subsequent increases in growth through SFY 1991-92 (see Figure 2). Only by including in the analysis all of the factors which significantly affect spending growth can expected shifts in these factors be reflected in the projection. Finally, a sound approach to forecasting must comprise a rigorous set of criteria by which the results can be evaluated.¹¹

With these standards in mind, the New York State Assembly Ways and Means Committee staff chose its approach to forecasting Medicaid expenditures. In contrast to the methodology adopted by the Committee staff, many states employ a baseline budgeting method to forecast expenditures. Under this approach, the analyst takes the previous year’s level of spending, subtracts non-recurring expenditures, trends the result forward according to a set of assumptions regarding price and utilization growth, and finally, adds in the cost of new initiatives. Often, this methodology does not take into account how changes in the larger society, such as changes in the rate of joblessness, affect the demand for the services being funded. The consequences of relying on this methodology to construct a projection for Medicaid spending are clear. During the State’s long recession of the early 1990’s, Medicaid spending was underestimated for four consecutive years by those who used a baseline budgeting approach. Subsequently, after the economy emerged from recession, that same baseline approach overestimated Medicaid spending for several years. This suggests that an important factor was systematically excluded in constructing the forecast, namely, the state of the economy. By design, a baseline budget approach excludes economic conditions from the analysis. By taking into account the turning points in the economy, the Committee staff model is able to more accurately capture the change in the trend in Medicaid spending growth due to this factor.

Carefully examining those critical factors that determine Medicaid spending allows us to project total spending for the next fiscal year. These factors include the rate of growth in medical costs, changes in demand for Medicaid services due to changes in the rate of job growth, the overall restructuring of the health care industry, as well as government policy actions. However, as the previous discussion makes clear, these factors do not operate uniformly on the various categories of Medicaid spending. For example, the shift away from institutional settings toward outpatient or home-based settings will tend to increase demand for hospital outpatient and home-based long-term care, at the expense of hospital inpatient and nursing home services. We therefore decompose total spending into five major components: hospital inpatient services, outpatient services, nursing homes, long-term home-based care, and non-institutional fee-for-service spending, in order to make projections.¹² This enables us to properly assess the effects of the various forces that operate differentially on each area.¹³

To measure spending growth due to medical care price inflation, we incorporate the medical services component of the Consumer Price Index for the Northeast Region published by the U.S. Department of Labor.¹⁴ In the case of hospital inpatient and outpatient services, service demand reflects the state of the economy.¹⁵ In addition, demand for hospital inpatient services is related to the growth in managed care enrollment and growth in the Income Maintenance caseload independent of economic trends. The inclusion of managed care enrollment accounts for the decline in the demand for hospital inpatient services due to restructuring within the health care industry. Changes in the demand for nursing home services reflects the caseload of the Supplemental Security Income program which serves the aged, blind, and disabled. In addition to the incorporation of the above factors, demand for outpatient, nursing home, home-based care, and non-institutional fee-for-service spending is projected using a sophisticated method of extrapolating past spending patterns into the future.

Finally, the following program policies that significantly affected spending growth are also taken into account. During the 1991-92 fiscal year, hospitals accelerated their billing practices in response to Executive administrative actions. As indicated above, disproportionate share spending also expanded during this period. Administrative outreach efforts increased the nursing home population beyond what is represented by growth in the SSI caseload during 1991 and beyond. By the end of 1993, spending for personal care services began to fall due to successful cost containment efforts by the New York City government. Finally, an acceleration of the use of hospital outpatient and clinic services in place of inpatient and private practitioner care is found as of the first half of 1995.

Based on ten months of expenditure data, Assembly Ways and Means Committee staff estimates that General Fund Medicaid spending by the Department of Health for SFY 1996-97 will be $5,277 million, a decline of 2.3 percent from the previous fiscal year.¹⁶ As the prevailing policy in both the 1995-96 and 1996-97 fiscal years has been one of cost containment, this decline represents the true underlying growth (in this case an actual decline) in Medicaid spending. For SFY 1996-97 not only were the actions adopted in SFY 1995-96 continued, but new cost containment measures were enacted as well. Had new cost containment not been adopted for the 1996-97 fiscal year, Committee staff was estimating that spending would have grown by 3.5 percent under a constant policy scenario, that is, if only those policies adopted in SFY 1995-96 were continued.

Using its estimate of SFY 1996-97 spending base, Ways and Means Committee staff estimates that projected Medicaid spending in SFY 1997-98 will grow by only 0.9 percent to $5,327 million. The Committee staff’s projections of Medicaid growth reflect a “constant policy scenario.“ Adoption of a constant policy approach permits the identification of the true underlying growth in Medicaid spending by the Department of Health are presented in Table 1 by major category of service.

*The total for 1996-97 includes $26.4 million for which the State will be reimbursed during the next fiscal year.
**The total for 1996-97 includes $18 million in non-recurring spending related to federal audit settlements.
***These adjustments include offsets to the General Fund from various sources including the federal government. The total value of these offsets is based on NYS Division of the Budget estimates adjusted for consistency with the Committee staff's hospital inpatient spending projection.

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The prevailing policy during the last two fiscal years has been one of cost containment. Cost containment has been a deliberate attempt on the part of government to control the growth in State Medicaid spending and to introduce economies and efficiencies in the system. Provisions which produced General Fund savings of over $623 million were enacted for the 1996-97 fiscal year. These provisions were comprised of provider reimbursement rate reductions and policies designed to encourage more efficient delivery of service, together with revenue-generating actions that maximize federal reimbursement. All of the cost containment measures enacted with the 1996-97 budget will expire unless direct legislative action is taken to preclude their termination. Absent such action, Medicaid spending for SFY 1997-98 can be expected to rise above and beyond what the underlying trends embodied in the constant policy growth rates would prescribe.

The constant policy growth rates found in Table 1 reflect current trends in the health care industry. The 2.8 percent decline in hospital inpatient spending reflects the continuing decline in the demand for inpatient services, as well as the impact of cost containment actions that have effectively prohibited the price of inpatient care from rising. The decline in demand for inpatient services is due to the continuing shift of service delivery from inpatient to outpatient settings, the improvement in the economy, the decline in the Public Assistance caseload, as well as the rise in managed care. While managed care growth has remained relatively flat in SFY 1996-97, growth is expected to rise in SFY 1997-98. Also contributing to the declining growth is the impact of cost containment measures placed on this sector over the past two fiscal years and the effects of a newly deregulated reimbursement system which should spur competition.

Growth in outpatient spending of 9.3 percent is consistent with the recent trend toward increasing substitution of outpatient services for inpatient services in an environment governed by all of the same forces which account for the decline in inpatient spending. Growth in nursing home spending of 5.6 percent reflects continued growth in the demand for long-term care services in an environment that prefers home-based to institutional settings, as well as lower price growth. Home-based care growth of 0.2 percent is consistent with an increasing demand for such services in a climate where fear of potential rate reductions, coupled with governmental intervention to require efficiencies, has produced evidence of conscious efforts toward industry belt-tightening. Non-institutional fee-for-service care growth of 7.2 percent reflects the same forces influencing the decline in demand for hospital inpatient and outpatient care, offset by an increasing demand for high-priced prescription drugs. Finally, growth in spending for managed care services of 21.0 percent reflects stepped-up voluntary enrollment following renewed confidence in the industry after a period of close government scrutiny over quality control issues, together with a phase in of the mandatory managed care program.

In comparison to Committee staff, the Executive’s estimates of Medicaid spending for both SFY 1996-97 and SFY 1997-98 reflect higher growth in nearly every sector, resulting in higher levels of spending. For SFY 1996-97, the Division of the Budget estimates that spending by the Department of Health will be $5,340 million, or $34 million above Committee staff’s estimate of $5,306 million. Starting from this higher spending base, the Division estimates that under a constant policy approach Medicaid spending in SFY 1997-98 will grow by 5.1 percent, as compared to Committee staff’s -0.1 percent. These differences place the Executive $317 million higher than Committee staff. With little empirical evidence to support expanding costs, it is difficult to justify such higher growth.

For SFY 1997-98, the Governor has proposed a package of new cost containment initiatives designed to contain growth in Medicaid program costs by $839 million and to achieve General Fund savings of $905 million. The enactment of any of these proposals by the Legislature would produce a spending projection below the constant policy projections presented here.

The Committee staff’s projections of lower spending growth anticipate that the trend toward lower underlying spending growth, which began during the 1992-93 fiscal year, will continue through the next fiscal year due to the following factors:

• The improvement in the State’s economy.
• The decline in medical care price growth.
• The rise in managed care.
• The shift from institutional to home-based long-term care.
• More efficient provision of home-based care.
• The decline in the Public Assistance caseload.
• The continuation of cost containment efforts.

Clearly, the days of unbridled Medicaid growth observed in the early 1990’s are over. The various forces at work on the State’s health care industry, its self-initiated restructuring and belt tightening, the decline in medical price inflation, the growth in managed care, and government intervention to control costs, coupled with a stable State economy, are all contributing to a deceleration in Medicaid spending. There appears to be a strong impetus for this trend to continue well into the next fiscal year and beyond. Nevertheless, policymakers should be mindful of the need for maintaining the viability of the Medicaid program and for assuring continued access to quality health care for its recipients in contemplating future actions to control costs. Concern for the continued “good health” of the health care industry during this period of transition should be taken into consideration, especially as this industry is an important contributor to the New York economy. Absent such concern, the good health of not only the poor, elderly and disabled, but of all New Yorkers is in jeopardy

1.  The State and federal shares of Medicaid spending are disbursed through the State budget. The State does not budget the local government share which in SFY 1995-96 was $3.6 billion of the $25 billion total. The State’s General Fund share was $9.1 billion, while the federal share was $12.3 billion. Of the $9.1 billion state share, $5.4 billion was disbursed by the Department of Health for the “traditional” Medicaid population, the aged, blind and disabled, and those in need of financial assistance. Another $2.4 billion funded programs administered by the State’s mental hygiene agencies. The remaining $1.3 billion was appropriated elsewhere. The analysis in this paper is limited to those expenditures administered by the Department of Health so that the focus can stay on “traditional” Medicaid.

2.  New York State Assembly Ways and Means Committee, “Trends in Medicaid Spending in New York State,” 1996.

3.  Medicaid spending was, until this year, reported as part of the Department of Social Services. Transfer of authority for the Medical Assistance Program to the Department of Health was effectuated with the SFY 1996-97 Budget.

4.  Last summer, the Committee staff estimated that the State Department of Health would spend $5,929 million without the introduction of any new cost containment measures. As part of the budget agreement between the State Legislature and the Executive, however, new cost containment measures were adopted, subsequent to the publication of the staff’s estimate. After adjusting for these policy changes and other administrative actions, the Committee staff’s spending projection would have been $5,217 million. Based on ten months of spending data, the Committee staff’s analysis is that the original forecast was essentially correct. In March 1997, the Director of the Budget chose to make payments which otherwise would have been made during the 1997-98 fiscal year. The current estimate is that the year will end $90 million above the adjusted projection. The Division of the Budget, on the other hand, has revised its original spending projection three times. First, in the Governor’s March 1996 Contingency Plan, the estimate was reduced by $80 million. Later, the estimate was decreased by another $100 million in the enacted budget in July. With the release of the Governor’s 1997-98 proposed budget, the Division’s estimate was further reduced by $30 million to $5,340 million, which is still $34 million above Committee staff’s estimate when the estimates are presented on a comparable basis.

5.  Looking at year to year changes from a constant policy perspective enables one to examine the underlying growth in the system.

6.  For a detailed discussion of the methodology used to construct the Index, see New York State Assembly Ways and Means Committee, “A New Composite Index of Coincident Index for the New York State Economy”, 1995. The methodology used to construct the index was based on James H. Stock and Mark W. Watson, “A Probability Model of the Coincident Economic Indicators” in Leading Economic Indicators, edited by K. Lahiri and G. H. Moore, Cambridge University Press, 1991 and James H. Stock and Mark W. Watson, Business Cycles, Indicators, and Forecasting, University of Chicago Press, 1983. The index combines four indicators of economic activity and therefore serves as a broader measure of the state’s economic health than any single measure can provide. The New York economy endured about 54 months of recession compared to the thirteen-month downturn experienced at the national level according to the National Bureau of Economic research’s official dating method.

7.  The State’s share of savings from these cuts to hospitals was approximately $250 million. As the State’s share represents only 25 percent of Medicaid funding for hospitals, the total loss to the industry is closer to $1 billion.

8.  Although only 14 percent of nursing home spending is generated by cash grant beneficiaries, the overall growth in spending has closely mirrored growth in the Supplemental Security Insurance (SSI) program, the federal government’s cash assistance program for the elderly and disabled. The SSI caseload grew by almost eight percent during SFY 1991-92 and over ten percent during both the 1992-93 and 1993-94 fiscal years.

9.  Actual growth in nursing homes for the SFY 1995-96 was 5.2 percent due to cost containment.

10.  The National Association of State Budget Officers points to the economic environment as one of the Medicaid forecaster’s primary considerations. “The number of people eligible for and utilizing Medicaid services will be correlated to the condition of the state economy. For example, if the economy is expanding and unemployment rates are falling, estimators will expect that fewer people will be eligible for Medicaid. Conversely, as the state’s economy begins to contract, jobs will be lost and more people will meet the income test for Medicaid eligibility.” Quote attributed to Marcia A. Howard in “Good Practices in Medicaid Estimating,” National Association of State Budget Officers, June 1990.

11.  The statistical approach to forecasting offers an objective set of standards by which to evaluate the model, as well as the accuracy of the forecast. Methods such as ex post simulation and the construction of such measures as the root mean squared error permit tests of the model’s performance by assessing how closely the model can reproduce the historical data series. How well the turning points in the data are captured is another important standard by which to judge a projection method. On the importance of these criteria for the purposes of forecasting, see, for example, Robert S. Pindyck and Daniel L. Rubinfeld, Econometric Models and Economic Forecast, McGraw-Hill, 1985.

12.  Managed care is a small but increasingly significant component of Medicaid spending. Managed care enrollment grew very rapidly beginning in the late 1980’s, but enrollment in this State has been restrained for more than a year due to policy and administrative changes. Following an audit by the U.S. Health Care Financing Administration which uncovered numerous violations, the State Department of Health ordered the suspension of managed care enrollment among nine of the largest private managed care providers in New York City in the summer of 1995. Subsequently, enrollments dropped and have remained relatively flat throughout the current fiscal year. It is anticipated, however, that enrollment numbers will begin to rise again in the next fiscal year. As managed care enrollment is regulated by the Health Department and closely monitored by the Division of the Budget, the rate of quarterly growth implicit in the enrollment forecast contained in the Governor’s proposed SFY 1996-97 Budget was adopted by the Ways and Means Committee staff in formulating its managed care projection.

13.  More technically, we have estimated a five-equation econometric model. To account for the fact that all five types of spending are vulnerable to common shocks, such as the restructuring of the health care industry, we estimated the five equations simultaneously using a method known as seemingly unrelated regression. This method takes into account the cross-equation error covariances, thereby increasing the precision of the estimates. The more precise the estimates, the more confidence one can have in the accuracy of the forecast. A rigorous process of model selection was applied, governed by well-accepted selection criteria. A more detailed discussion can be found in the previously cited econometrics text by Pindyck and Rubinfeld.

14.  For more detail on this choice, see “Trends in Medicaid Spending in New York State” 1996.

15.  The Ways and Means Medicaid projection incorporates the previously discussed index of current economic activity as its measure of the state of the New York economy.

16.  Final numbers for any fiscal year are subject to administrative discretion including timing of settlement payments with the federal government and timing of transfers to the Medicaid account from various agencies. These end of year actions can cause tens and possibly hundreds of millions of dollars of variability in year end results.