Healthcare Cost Increases: How Do States Cope in a Changing Health Care Marketplace Vernon K. Smith,

1
Healthcare Cost Increases How Do States Cope in
a Changing Health Care MarketplaceVernon K.
Smith, Ph.D.Health Management Associates

• For
• HRSA State Planning Grant Meeting
• West Virginia Health Advisory Council
• November 22, 2002

2
What Medicaid Has Become The Largest Health
Program in America

• Health coverage for 47 million Americans in 2002
  (Medicare covers 40 million in 2002)
• Pays for over 1.3 million births annually
  (37 of U.S. total in
  1999)
• Covers 24 million children in 2002
  (U.S. Census counted
  72.3 million children in 2000)
• Pays for over half of HIV/AIDS care
• Pays for half of all nursing home care
• Increasingly fills the gaps in Medicare
• Covers 7 million low-income elderly and disabled
  persons also on Medicare for Rx, nursing home
  care, other services, premiums, coinsurance and
  deductibles

Sources CBO Medicaid Baseline March 2002, NGA ,
SAMHSA, U.S. Census, Kaiser Commission on
Medicaid and the Uninsured.
3
Medicaid Has Become The Financing Vehicle for
State and Local Health Care

• Finances state and local health care provided
  through public health, mental health and other
  agencies
• Pays for over half of all publicly financed
  mental health care In the U.S.¹
• Includes 14 billion in disproportionate share
  payments to hospitals³
• Unparalleled support for health care safety net
• Has become the largest single source of federal
  grants to states 44 of all federal funds to
  states in 2001²
• Spending this year will exceed 250 billion (in
  federal, state and local funds)

Sources ¹SAMHSA, ²NASBO, ³CBO March 2002
Medicaid Baseline.
4
Medicaids Role in the Health System 2000
Medicaid as a share of national spending
Total National Spending (billions)
1,130
412
422
92
122
SOURCE Heffler, S. et al., 2002. Based on
National Health Care Expenditure Data, Centers
for Medicare and Medicaid Services, Office of the
Actuary. Slide prepared by KCMU, 2002
5
Average Annual Growth Rates of Total Medicaid
Spending
SOURCE For 1990-1999 Urban Institute estimates
prepared for the Kaiser Commission on Medicaid an
the Uninsured, 2000. For 2001-2002 Smith, Ellis,
Gifford, Ramesh and Wachino, Medicaid Budget
Trends Results of a 2002 Survey, Kaiser
Commission on Medicaid and the Uninsured,
September 2002. Publication 4064.
http//www.kff.org/content/2002/4064/4064.pdf
6
Key Factors Causing Medicaid Spending Growth in
2002
Number of states listing factor among the Top
Three cost drivers
SOURCE Vernon Smith, Eileen Ellis, Kathy
Gifford, Rekha Ramesh and Victoria Wachino,
Medicaid Spending Growth Results of a 2002
Survey, Kaiser Commission on Medicaid and the
Uninsured, September 2002. Publication 4064.
http//www.kff.org/content/2002/4064/4064.pdf
7
U.S. Medicaid EnrollmentJune 1997 December 2001
Source Eileen Ellis, Vernon Smith and David
Rousseau, Medicaid Enrollment in 50 States
December 2001 Data Update, Kaiser Commission on
Medicaid and the Uninsured, October 2002.
Publication 4067. http//www.kff.org/content/2002
/4067/4067.pdf
8
U.S. Medicaid Enrollment IncreasesFY 1998 FY
2003
SOURCES FY 1998-2001 Eileen Ellis, Vernon Smith
and David Rousseau, Medicaid Enrollment in 50
States December 2001 Data Update, Kaiser
Commission on Medicaid and the Uninsured, October
2002. Publication 4067. For FY 2002-2003
Smith, Ellis, Gifford, Ramesh and Wachino,
Medicaid Spending Growth Results from a 2002
Survey, Kaiser Commission on Medicaid and the
Uninsured, September 2002. Publication 4064.
9
West Virginia Medicaid Enrollment
274
270
261
258
Source Eileen Ellis, Vernon Smith and David
Rousseau, Medicaid Enrollment in 50 States
December 2001 Data Update, Kaiser Commission on
Medicaid and the Uninsured, October
2002. Publication 4067. http//www.kff.org/conten
t/2002/4067/4067.pdf
10
Total SCHIP Enrollment in 50 Statesand the
District of Columbia
Monthly Enrollment in Thousands
Note SCHIP enrollment includes enrollment in
separate CHIP programs and CHIP-funded Medicaid
expansions. SOURCE Vernon K. Smith and David M.
Rousseau, SCHIP Program Enrollment June 2001
Update, Kaiser Commission on Medicaid and the
Uninsured, October 2002. Publication 4068.
11
State Childrens Health Insurance Program West
Virginia SCHIP Enrollment
20,593
15,653
8,935
329
Source Vernon Smith and David Rousseau, SCHIP
Program Enrollment June 2002 Update, Kaiser
Commission on Medicaid and the Uninsured, October
2002. Publication 4068.
12
U.S. Medicaid Enrollment Growth Children and
Families Vs. Aged and Disabled1998 - 2001
Most Enrollment Growth Since 1998 Has Been Among
Children
Note Based on data from 44 states. Source
Eileen Ellis, Vernon Smith and David Rousseau,
Medicaid Enrollment in 50 States December 2001
Data Update, Kaiser Commission on Medicaid and
the Uninsured, October 2002. Publication 4067.
http//www.kff.org/content/2002/4067/4067.pdf
13
Sources of Growth in U.S. Medicaid Expenditures,
by Eligibility Group 2001-2002
Most 2002 Spending Growth was Among Aged and
Disabled
Total Increase 15.7 billion
SOURCE Kaiser Commission on Medicaid and the
Uninsured analysis of CBO Federal Medicaid
baseline, March 2002.
14
Sources of Growth in U.S. Medicaid Expenditures,
Enrollment vs. Services 2001-2002
2002 Expenditure Growth for Was More
Services-Related than Enrollment-Related
9.0 billion
38
2.3 billion
2.1 billion
62
57
48
43
52
SOURCE Kaiser Commission on Medicaid and the
Uninsured analysis of CBO Federal Medicaid
baseline, March 2002.
15
All Health Care Spending in the U.S. Annual
Percentage Changes 1991-2002
Per Capita Annual Percentage Change
Source Milliman USA Health Cost Index, cited in
Strunk, Ginsburg and Gabel, Tracking Health
Care Costs Growth Accelerates Again in 2001,
Health Affairs Web Exclusive, 25September2002.
http//www.healthaffairs.org/WebExclusives/2106Str
unk.pdf
16
Prescription Drug Spending Annual Per Capita
Changes 1991-2002
Per Capita Annual Percentage Change
Source Milliman USA Health Cost Index, cited in
Strunk, Ginsburg and Gabel, Tracking Health
Care Costs Growth Accelerates Again in 2001,
Health Affairs Web Exclusive, 25September2002.
17
U.S. Prescription Drug Spending in 2001

• Up 13.8 Slowest growth since 1997
• Up 13.0 through June 2002
• Accounted for 21 of total spending growth in
  2001 (down from 34 in 2000)
• Slower growth in 2001 and 2002 credited to
• Three-tier copays
• Fewer new blockbuster drugs introduced
• Several significant drug patent expirations
• Medicaid or Health Plans serving Medicaid--
  cannot shift these costs to beneficiaries

Source Strunk, Ginsburg and Gabel, Tracking
Health Care Costs Growth Accelerates Again in
2001, Health Affairs Web Exclusive,
25September2002. http//www.healthaffairs.org/We
bExclusives/2106Strunk.pdf
18
Hospital Spending, Prices and QuantityAnnual
Percentage Change 1994-2002
12.0
All Hospital Spending
8.0
Quantity
3.6
Prices
Source Milliman USA Health Cost Index, cited in
Strunk, Ginsburg and Gabel, Tracking Health
Care Costs Growth Accelerates Again in 2001,
Health Affairs Web Exclusive, 25September2002.
19
Hospital Spending the Leading Contributor to
Cost Increases Last Year

• Accounted for 51 of cost growth
• (Up from just 18 percent in 1997)
• Inpatient costs up 7.1 (3rd year of increases
  after 5 years of decreases)
• Outpatient costs up 16.3 (4th year of double
  digit increases) driven by utilization
• Many hospitals at capacity, facing labor
  shortages
• Hospitals are in a stronger negotiating position
  with health plans, are refusing price discounts,
  and marketing directly to patients and doctors

Source Strunk, Ginsburg and Gabel, Tracking
Health Care Costs Growth Accelerates Again in
2001, Health Affairs Web Exclusive,
25September2002.
20
HMOs Retreating from Managed Managed Care

• More open networks, more choice
• More direct access to specialists
• Fewer utilization controls
• Less provider risk contracting
• More focused on premiums and profitability than
  market share

Source Strunk, Ginsburg and Gabel, Tracking
Health Care Costs Growth Accelerates Again in
2001, Health Affairs Web Exclusive,
25September2002.
21
Annual HMO Premium Increases 1998 2003
SOURCE 1989-2002, AAHP, Mercer and Robert
Hurley. 2003, Hewitt Associates
22
Insurance Premiums Compared to Other Indicators,
1988-2002
Chart 1
NOTE Data on premium increases reflect the cost
of health insurance premiums for a family of
four. SOURCE KFF/HRET Survey of
Employer-Sponsored Health Benefits 1999, 2000,
2001, 2002 KPMG Survey of Employer-Sponsored
Health Benefits 1988, 1989, 1990, 1993, 1996.
23
As Health Insurance Premiums Rise, More Persons
become Uninsured
Millions of People in U.S.
41.2 million (14.6 of population)
The 2001 increase would have been larger except
that Medicaid covered 1.9 million more people
than in 2000.
39.8 million (14.2 of population)
39.3 million
U.S. Census Bureau, September 30, 2002.
24
Employer Strategy Shift Costs to Employees

• Employees pay more through
• Three-tier drug copayments
• Higher deductibles, coinsurance and copays
• Tiered networks for hospitals and physicians
• Higher employee share of premiums
• Benefit Buy-down last year was 2-3
• Medicaid generally cannot shift these costs to
  beneficiaries

Source Strunk, Ginsburg and Gabel, Tracking
Health Care Costs Growth Accelerates Again in
2001, Health Affairs Web Exclusive,
25September2002. And, Health Management
Associates.
25
How are States Trying to Slow the Growth in
Medicaid Spending?

• Rx controls
• Rate cuts or freezes
• Eligibility cuts
• Benefit cuts
• Beneficiary copays
• Administrative actions

26
FY2003 Medicaid Pharmacy Policy and Payment
Changes in 40 States
SOURCE KCMU survey of Medicaid officials in 50
states and DC conducted by Health Management
Associates, June 2002.
27
Medicaid Programs Plan to Cut or Freeze Provider
Rates in 29 States in FY2003
SOURCE KCMU survey of Medicaid officials in 50
states and DC conducted by Health Management
Associates, June 2002.
28
FY2003 Benefit Cuts

• 15 states planned to reduce benefits
• Adult dental benefits were cut or restricted in
  eight states
• Other cuts included restrictions on home health,
  podiatry, chiropractic services, eyeglasses,
  psychological counseling and translator services

SOURCE KCMU survey of Medicaid officials in 50
states and DC conducted by Health Management
Associates, June 2002.
29
FY2003 Eligibility Cuts

• 18 states planned to reduce or restrict
  eligibility, or delay planned expansions.
• A few states enacted cuts that will eliminate
  coverage for persons now eligible for Medicaid
• Missouri cut 32,000 adults effective July 1 some
  restored by TRO
• Nebraska reduced eligibility for 25,000 children
  and adults
• Massachusetts plans to eliminate coverage for
  50,000 unemployed adults effective April 1, 2003
• Oklahoma proposed ending eligibility for 93,000
  adults and children

SOURCE KCMU survey of Medicaid officials in 50
states and DC conducted by Health Management
Associates, June 2002.
30
FY 2003 Eligibility Cuts

• New Jersey stopped accepting Family Care
  applications on June 16, 2002, dropped (section
  1931) income disregard for applicants, plans to
  increase reliance on charity care
• Missouri reduced the period of coverage for
  Transitional Medical Assistance or post-partum
  pregnancy-related care
• tightening eligibility by restoring asset and
  income reporting requirements for families and
  medically needy individuals
• restricting spend-down (e.g., by limiting
  countable expenses)
• Tennessee is actively redetermining eligibility
  for non-Medicaid TennCare enrollees expected
  reduction of 70,000 plus.

31
Other Current Medicaid Strategies to Control Cost
Growth FY 2003

• Copays New or higher copays for adults for
  vision, dental, podiatry, chiropractic, hearing
• 15 states
• Partially to reduce direct costs and partially to
  make beneficiaries more cost conscious
• Managed care expanded 12 states
• Both HMO and primary care case management (PCCM)
  being expanded to additional counties.
• Change from optional to mandatory enrollment.
• Moving disabled and elderly into managed care.

SOURCE KCMU survey of Medicaid officials in 50
states and DC conducted by Health Management
Associates, June 2002.
32
Other Current Medicaid Strategies

• Strategies to organize health care
• 21 states (Savings are not immediate)
• Disease management and case management
• Fraud and abuse controls, new or expanded
• 18 states
• Focus on increased program integrity
• Long Term Care
• 13 states
• New payment methods, expanded community services
• Maximizing Medicaid
• Using other sources (e.g., provider taxes) for
  non-federal share
• Medicaid-izing state health programs

SOURCE KCMU survey of Medicaid officials in 50
states and DC conducted by Health Management
Associates, June 2002.
33
States FY2002 and FY2003 Cost Containment
Strategies to Control Spending Growth
Reducing/ Freezing Provider Payment Rates
Reducing/ Restricting Medicaid Eligibility
Prescription drug cost controls
Reducing Medicaid Benefits
Increasing Beneficiary Co-Payments
SOURCE KCMU survey of Medicaid officials in 50
states and DC conducted by Health Management
Associates, June 2002.
34
Half the States Expected to Submit a Waiver in
FY 2003

• Many states plan to use waivers to add,
  restructure or refinance Medicaid coverage
• HIFA / Section 1115 waivers can add coverage for
  adults by restructuring benefits for other groups
  and using unspent SCHIP funds. States can use
  HIFA waivers to relieve fiscal pressures.
• Pharmacy Plus waivers can provide a
  Medicaid-funded low-income senior prescription
  drug benefit and, in at least some states,
  refinance existing state drug assistance
  programs.

SOURCE KCMU survey of Medicaid officials in 50
states and DC conducted by Health Management
Associates, June 2002.
35
What States Are Doing with a Medicaid Waiver
(HIFA or 1115 Waivers)

• Cover parents of children on SCHIP or Medicaid,
  using SCHIP funds
• Arizona, California, Illinois, New Mexico, Oregon
• Cover adults without children, using SCHIP funds
• Arizona, New Mexico, Oregon
• Cover adults without children, using Medicaid
  funds
• Maine
• Change the scope of SCHIP or Medicaid coverage
  and copays
• Illinois, Utah
• Subsidize private employer-sponsored health
  insurance, using SCHIP or Medicaid funds
• Illinois, Maine, New Mexico

Source Centers for Medicare and Medicaid Services
36
Medicaid Expenditure Growth RatesFY 2002 Actual
and FY 2003 Appropriated
SOURCE KCMU survey of Medicaid officials in 50
states and DC conducted by Health Management
Associates, June 2002. Note Percentages are
unweighted averages of all 50 states and DC.
37
Number of States with Medicaid Budget Shortfalls
FY 2000 (Actual)
FY 2003 (Projected)
FY 2002 (Actual)
FY 2001 (Actual)
NOTE 41 states indicated the likelihood of a
shortfall in FY2003 was 50 or greater. SOURCE
KCMU survey of Medicaid officials in 50 states
and DC conducted by Health Management Associates,
June 2002.
38
FY 2002 Was Toughest State Budget Year on Record

• A national recession pushed state budgets to
  their lowest point ever.
• Overall FY2002 budget shortfalls were estimated
  at 7.8 of revenues (previous high was 6.5 in
  1992.)
• Mid-year budget cuts in 39 states (previous high
  was 35 states in 1992)

Source National Association of State Budget
Officers, The Fiscal Survey of States, May 2002.
39
Change in Quarterly State Tax Revenue, FY
1999-2002
Things are
getting worse (and will get worser).
-- Don Boyd,
Rockefeller Institute, October 2002





1998 1999
2000
2001 2002
NOTE Data for 2002 preliminary. SOURCE
Rockefeller Institute of Government, State Fiscal
Brief, 2001 and 2002 and State Revenue Report,
September 2002
40
Average State Year-End Balances as a Percent of
Expenditures, FY 1996-2003
Percent of Expenditures
NOTE FY 2002 numbers are estimates and FY 2003
numbers are from Governors budget proposals.
SOURCE National Association of State Budget
Officers, May 2002.
41
Increases in State General Fund Spending FY
1996-2003
Percent Change
NOTE FY 2002 numbers are estimates and FY 2003
numbers are from NCSL Survey, July 2002. SOURCE
National Association of State Budget Officers,
May 2002.
42
In State Budgets, Medicaid Spending Is the
Biggest Issue

• Spending growth Medicaid vs. Total
  Budget
• FY2001 (actual).. 10.6 vs. 8.3
• FY2002 (estimated) 12.8 vs. 2.0
• FY2003 (appropriated) 4.8 vs. 1.8

Sources NASBO, The Fiscal Survey of States, May
2002, and Medicaid and Other State Healthcare
Issues The Current Situation. A Supplement to
the Fiscal Survey of the States. May 2002
. FY2003 Medicaid from HMA survey for Kaiser
Commission on Medicaid and the Uninsured June
2002 Budget from NCSL survey, July 2002.
43
Medicaid General Fund Spending as a Share of
Total State General Fund Spending1987 - 2002
16.0
14.4
14.4
10.5
8.1
Source National Association of State Budget
Officers, State Expenditure Report, 2002 and
previous years.
44
Outlook for 2003 Health-care costs are rising
even faster than feared.

• Wall Street Journal, October 2, 2002, reporting
  health benefit costs will rise by 15 in 2003,
  exceeding expected growth of 10 to 12,
  according to Towers Perrin survey of large firms.
  
• Medical claim costs are expected to increase 14
  to 16 next year, the highest increases in a
  decade
• The 2003 Segal Health Plan Cost Trend Survey
• Premiums will rise 15.4 in 2003, on top of the
  13.7 recorded this year. HMOs will rise 16
• New York Times, October 15, 2002, reporting on
  the Hewitt Associates survey of 139 markets.

45
Looking to the near future Oh my, the outlook
for FY 2004 is unbelievably bad. --State
Official

• Expect Medicaid enrollment to increase, with
  increasing growth among the elderly and disabled
  
• Expect Medicaid cost growth to outpace growth in
  state revenues and other state programs
• Restrictions on Medicaid financing strategies
  will limit federal funds, require more state
  funds
• Expect budget-driven pressure to examine all
  areas of Medicaid to slow spending growth

Source Health Management Associates