New National Health Expenditure Projections Contain Several Key Findings Relevant to Medicaid 

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New National Health Expenditure (NHE) projections recently issued by the Office of the Actuary at the Centers for Medicare and Medicaid Services included several key findings related to the Medicaid program:

  • Aging of the population. In its new NHE projections, the CMS actuaries unsurprisingly find that the aging of the baby boom generation is “anticipated to increase the share of [Medicaid] enrollment accounted for by relatively more expensive aged and disabled beneficiaries who tend to have disproportionately higher use and intensity of care provided relative to nonaged or nondisabled beneficiaries.”  That, in turn, will increase the expected overall annual growth in Medicaid per-beneficiary costs in later years.

    This is noteworthy because proposals to convert virtually the entire Medicaid program to a “per capita cap” do not account at all for these higher per-beneficiary costs in coming decades.  Congressional Republican proposals in 2017, for example, to repeal the Affordable Care Act would have replaced the current federal Medicaid financing system under which the federal government pays a fixed share of states’ Medicaid costs with a fixed amount of federal funding per beneficiary, irrespective of states’ actual costs. Those fixed cap amounts would have been set based on states’ historical spending increased annually by a national growth rate — as low as general inflation starting in 2025 —which was expected to fall well short of projected Medicaid per-beneficiary costs over the next ten years.  But the cap proposals also included no specific adjustments for the fiscal impact of the aging of the population, particularly as seniors on Medicaid move from “young-old” age to “old-old” age.  (There are also no adjustments for higher-than-anticipated costs due to a new breakthrough drug or treatment.)  Aging would thus make the federal Medicaid funding cuts under the per capita cap even deeper over the long run as states would be 100 percent responsible for any higher-than-expected per-beneficiary spending, on top of the explicit funding cuts imposed under the cap.  That would be particularly damaging for states expected to have a more rapidly growing share of seniors who are aged 85 and older: such seniors have average Medicaid costs that are 2.5 times higher than those who are aged 65-74.

 

  • Medicaid expansion spending per beneficiary. For years, opponents of the Medicaid expansion in states that have not yet adopted it have argued that the expansion would be too costly for their states.  Some have misleadingly cited earlier analysis from the CMS Office of the Actuary that raised its estimates of expansion costs for 2014 and 2015 from initial projections as evidence.  Those revised estimates reflected state payments to Medicaid managed care plans related to the expansion that were higher than the Office of the Actuary had originally assumed.  States generally set higher rates because they believed there would be pent-up demand for health care services among previously uninsured expansion enrollees.As the Office of the Actuary has repeatedly acknowledged, however, these higher estimates did not account for “risk-sharing” provisions in managed care contracts under which plans would return some of their payments to state Medicaid programs if actual costs turned out to be lower than expected. The Office of the Actuary has expected their estimates of expansion costs to be revised downward towards their original projections once states reported the actual impact of risk-sharing arrangements on their Medicaid expansion costs.  In its new NHE projections, the Office of the Actuary finds that in 2017, Medicaid spending was projected to have grown more slowly than in 2016 as “managed care organizations returned a portion of these funds to the government in 2017 because the payments exceeded the actual costs of providing care in 2014-2016.”  The size of these recoveries from risk-sharing, however, are expected to be smaller in 2018 than in 2017.

 

  • Prescription drug spending. According to the CMS Office of the Actuary, among the largest health care goods and services, “prescription drugs are projected to experience the fastest average annual spending growth in 2017-2016 (6.3 percent per year).  This trend primarily reflects faster anticipated growth in drug prices, which is attributable to a larger share of drug spending being accounted for by specialty drugs over the coming decade.”  Higher drug costs are thus expected to place greater fiscal pressures on state Medicaid programs over the next ten years.  It is thus critical that the federal government and states take steps to rein in high drug launch prices and large annual price increases but without adversely affecting low-income Medicaid beneficiaries’ access to needed medications.
Edwin Park
Edwin Park is a Research Professor at the Georgetown University McCourt School of Public Policy.

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