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 1996-97 was $4.1 billion of the $26 billion total. The State’s General Fund share was $9.3 billion, while the federal share was $12.6 billion. The entire $9.3 billion State share was disbursed through the Department of Health which serves as the fiscal agent for Medicaid in this State. Of this $9.3 billion State share, $5.4 billion was appropriated directly in the Department of Health’s budget for the “traditional” Medicaid population, the aged, blind and disabled, and those in need of financial assistance. Another $2.6 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 Prior to State Fiscal Year 1996-97, Medicaid spending was 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 Chapter 474 of the Laws of 1996.
3 During negotiations for the 1997-98 Budget, the Committee staff had estimated that the State Department of Health would spend $5.3 billion from the General Fund on a constant policy basis, that is, before the introduction of any new cost containment measures or other policy changes. This estimate was $350 million below the comparable Executive forecast (see New York State Assembly, Perspectives, “Trends in Medicaid Spending in New York State,” March 1997). As part of the final budget agreement with the State Legislature, the Executive reduced its constant-policy forecast by $100 million. As the fiscal year has unfolded, the Medicaid budget has also sustained the loss of over $140 million in audit recovery money that the Executive had estimated would be available to offset General Fund Medicaid spending by the Department of Health. Nevertheless, with the presentation of the Executive budget proposal in January 1998, the Executive still identified a surplus of $78 million. The Executive chose to use this surplus, together with additional unspent funds to accelerate payment in the current fiscal year of an extra weekly Medicaid cycle, worth $136 million, that would have occurred in the 1998-99 fiscal year, effectively acknowledging that their original estimates of payments to providers were over $300 million too high.
A review of the most recent spending data reveals lower growth than anticipated in all categories of Medicaid services except home-based long-term care. We are currently observing growth of 4.8 percent in the non-institutional fee-for-service category, well below the Committee staff’s prediction of 7.2 percent. Similarly, the 6.3 percent growth we are observing in outpatient care is slightly below the Committee staff prediction of 9.3 percent. Lower growth in outpatient spending may be due to a stronger economy and faster public assistance caseload declines than anticipated. While the Committee staff had anticipated a continuation of the decline in hospital inpatient spending, the decline was not of the magnitude we are currently observing (-7.3 percent). We observe home care services to be growing slightly faster than originally anticipated. While managed care spending was expected to rise by 21.0 percent, we are actually observing a decline of 4.4 percent. At this point, the lack of enrollment growth in managed care can be explained by the fact that the State failed to win federal approval of a waiver permitting a Statewide mandatory Medicaid managed care program until July 1997 and the first phase was not implemented until September. Nursing home services have grown more slowly than anticipated, exhibiting growth of 3.0 percent. Growth in nursing home spending in Medicaid may be down due to the active participation of over 75 percent of nursing home providers in a Medicare demonstration project. Participation in the project allows for a higher Medicare reimbursement rate, increasing the incentive to bill Medicare for eligible services.
4 The Budget agreement reached in August 1997 provided that the actions taken in Medicaid would be effective for two years.
5 According to the Congressional Budget Office, cash outlays by the U.S. Treasury to cover the federal portion of Medicaid spending grew by only 3.9 percent in the recently ended Federal Fiscal Year (FFY) 1997. Growth in FFY 1996 was a low 3.5 percent compared to 8.5 percent and 8.3 percent in FFY 1995 and FFY 1994, respectively. The Congressional Budget Office is still investigating the causes for the decline in spending growth. However, analysts believe that a continuing, strong national economy, falling public assistance caseloads, declining Supplemental Security Insurance Caseload growth and a large movement toward managed care have all contributed to lower than expected growth. For a more detailed discussion of the national trend, see John Holan and David Liska, “Reassessing the Outlook for Medicaid Spending,” The Fiscal Letter: A Quarterly Report on Government Finance Issues in the States, National Conference of State Legislatures, Vol. XIX, Summer 1997.
6 An 1115 waiver refers to Section 1115 of the Social Security Act, which authorizes the federal government to waive certain requirements of the Act. Such waivers are intended to permit demonstration projects with an experimental or research element, and often involve an expansion of eligibility. Under New York’s mandatory managed care plan, the State sought federal approval for expansion of Medicaid coverage to clients of the State’s Home Relief program which, as of November 1, 1997, became the Safety Net Assistance program. Before federal approval of the waiver, funding for services provided to this population was not fully eligible for federal participation.
7 Chapter 81 of the Laws of 1995.
8 Chapter 474 of the Laws of 1996.
9 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 Current Economic Conditions 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, from May 1988 to December 1992, compared to the thirteen-month downturn experienced at the national level according to the National Bureau of Economic Research’s official dating method, during the 1988-1992 period.
10 Chapter 630 of the Laws of 1996.
11 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.
12 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.”
13 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, in implementing its mandated Medicaid managed care plan, the State instituted a procurement process that resulted in lower than feasible premium rates and the subsequent withdrawal of some major providers from serving the Medicaid population.
14 A sixth category, managed care, which is a small but increasingly significant component of Medicaid spending, is forecasted by the Committee staff independently of the econometric model.
15 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.
16 For more detail on this choice, see New York State Assembly, Perspectives, “Trends in Medicaid Spending in New York State,” Summer 1996.
17 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.
18 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.
19 See Footnote 3 for a more detailed explanation of the Committee staff’s closeout for SFY 1997-98.