By any measure, Medicaid spending has increased dramatically:

• Between 1984 and 1994, combined federal and state Medicaid spending nearly quadrupled from $36.7 billion to $135.5 billion. Federal Medicaid expenditures increased from $20.1 billion to $77.4 billion, while state expenditures increased from $16.5 billion to $58.2 billion. Although the number of Americans covered by Medicaid increased from 21.0 million to 33.5 million, spending on elderly beneficiaries increased faster in inflation-adjusted dollars than outlays for other groups.^[43]

  Medicaid grew from 1 percent of the federal budget in 1970 to 6 percent of the federal budget in fiscal year 1995.^[44] Between 1987 and 1994, Medicaid as a proportion of state general fund spending increased from 8.1 percent to 13.3 percent.^[45]

  The Congressional Budget Office has estimated that without changes, total Medicaid spending will increase by more than 10 percent annually over the next five years, reaching $262 billion by 2002.^[46]

Some analysts argue that the growth rate in Medicaid expenditures is unsustainable and that rapidly increasing health care spending is "crowding out" spending on other public programs. State governments, for instance, have faced increasing Medicaid costs in the face of slow tax revenue growth and balanced budget requirements. In some cases, increased spending on Medicaid has required cuts in other programs. In the early 1990s, Medicaid surpassed higher education as the second-largest state spending program.^[47]

Public and private health care cost acceleration in the United States has far exceeded the rate of inflation throughout the rest of the economy for decades. A variety of factors has contributed to health care inflation, led by the proliferation of enormously expensive medical technology as well as the growth of labor-intensive services such as home health care. Beyond those forces pushing up health care costs generally, Medicaid confronts additional spending pressures:^[48]

• Those receiving Medicaid are among the least healthy Americans. About 68 percent of Medicaid spending covers services for disabled, blind, and nursing-home-confined elderly. Those beneficiaries require extremely costly health care.^[49] Medicaid spending per elderly recipient ($9,792) is more than nine times greater than the average for dependent children ($1,079).

  The Boren amendment. Passed in 1980, the Boren amendment required states to set "reasonable" payment rates for nursing facilities and hospitals. Subsequent lawsuits filed by nursing homes forced some states to raise their payments substantially.^[50]

  Nursing home standards.In 1987, the U.S. Congress passed legislation that made nursing home standards more rigorous. The cost of these requirements is reflected in the Medicaid program.

  Federally mandated expansions in coverage. In three separate pieces of legislation passed in 1988, 1989, and 1990, Congress required states to provide Medicaid benefits to an increasing percentage of infants, children, and pregnant women from low-income households.

  Sullivan v. Zebly. This 1990 U.S. Supreme Court case retroactively changed Supplemental Security Income -- and, therefore, Medicaid -- eligibility criteria for children. According to the Urban Institute, this decision doubled the number of children eligible for SSI.

  Economic downturn.The national recession of the early 1990s severely hurt many states, including those in New England, the Mid-Atlantic, and the Far West. As unemployment rates increased, the number of people eligible for Medicaid grew as well.

  Demographic changes. The population of elderly Americans has increased dramatically in recent years. (See Figure K.) In fact, individuals over the age of eighty-five constitute the fastest-growing segment of the population; between 1995 and 2005, the number of Americans over the age of eighty-five is projected to increase 41.2 percent, compared to a 9.4 percent increase for the entire population.^[51] This trend has increased Medicaid spending since the majority of Medicaid expenditures are for the eldest of older Americans.

About 42 percent of Americans living in poverty are not covered by Medicaid.^[52] Most of those uninsured poor do not qualify because they have no children, they are not disabled, and they are not pregnant.

In a two-parent family with one parent working full time, only the children are eligible for coverage unless the mother is pregnant. The father is never eligible.^[53]

While Medicare covers virtually everyone over age sixty-five, only Americans facing severe deprivation are eligible for Medicaid. Because opinions vary widely about who most needs and deserves Medicaid, political horse trading and compromises at both the federal and state level have determined who receives coverage and who does not. The resulting eligibility rules are complex, confusing, and often arbitrary.

To deter fraud, applying for Medicaid requires demonstrating eligibility with financial documents and passing time-consuming and cumbersome verification checks. In some states, application forms exceed thirty pages, and many of these forms are difficult to understand. Documentation required ranges from pay stubs to utility receipts to automobile titles and so forth. (See box) Some who are eligible do not apply because of the hassles involved. Others do not apply because they are unaware that they are eligible.^[54]

Low reimbursement rates to doctors discourage them from providing care to Medicaid patients. About a third of the nation's doctors limit the number of Medicaid patients they see, and a quarter report that they will not see Medicaid patients at all.^[55] (See Figure L.) As a result, beneficiaries must rely heavily on care in clinics and hospital emergency rooms and outpatient departments. Such care is often more expensive than the services private doctors provide.

Federal law sets fewer guidelines for paying doctors than it does for paying hospitals or nursing homes. As a result, Medicaid cuts usually reduce payments to doctors more than they decrease compensation to hospitals and nursing homes.

Unlike physicians, hospitals cannot legally refuse to serve patients. But lower payment rates from Medicaid to hospitals compared with Medicare and private insurance may lead to poorer service for Medicaid patients.

An estimated 10 percent of Medicaid outlays are squandered on fraud, according to a recent study published by the U.S. General Accounting Office.^[56] The size and complexity of the system, with every state administering the program as it sees fit, creates opportunities for private health care providers and state employees to engage in abuse. Relatively little fraud is attributable to individuals who are not eligible for Medicaid receiving coverage by submitting false information.

Because most managed care companies such as health maintenance organizations and preferred provider organizations seek profits, there is a risk that they will give short shrift to a mostly poor Medicaid population in light of the program's low reimbursement rates. In Florida, for example, Medicaid HMOs have been sanctioned for quality problems. Anticipating such problems, some states have created boards to review the quality of care and improve monitoring of managed care providers.^[57] Still, many states have had difficulty recruiting the best managed care plans to serve Medicaid patients.^[58]

Managed care plans have little desire to cover the Medicaid beneficiaries who cost the program the most: the elderly in nursing homes and the disabled. The preventive services that managed care plans emphasize to reduce costs will not alleviate the expensive needs of those groups.

A survey of twelve studies that examined the impact of managed care on Medicaid costs found mixed results. Seven reported a decrease in costs to state Medicaid agencies, two reported cost increases, and the remainder showed unchanged, variable, or ambiguous results.^[59]

Managed care works best for individuals who remain covered for an extended period of time because ongoing preventive and primary care helps to deter the need for high-cost emergency services and intensive treatment. Because of the turnover in the Medicaid program population as eligibility changes, the purported health benefits to enrollees of managed care may be diminished.^[60]

One reason why converting Medicaid to a block grant program has gained popularity is that the federal government imposed more than thirty mandates on states between 1987 and 1992 related to program eligibility, reimbursement, and services.^[61] Most of those requirements were intended to reduce variability among the states and create more consistency in the coverage available to low-income Americans. But state officials believe they ought to have greater flexibility to decide how the money is spent because Medicaid constitutes a growing portion of state budgets.

Disputes often arise between the states and the federal government about whether particular bills are covered or not and the extent to which the federal government should contribute.^[62]

The rapid growth of Medicaid spending is only partly due to expanding eligibility or services to poor people. Earlier in this decade, states employed clever fiscal strategies that sizably boosted their federal reimbursements without significantly raising their own contributions. Although recent congressional legislation closed these loopholes for voluntary provider taxes and disproportionate share hospital funds, they played an important role in expanding federal Medicaid outlays.^[63]

• Voluntary provider taxes. Under this loophole, states would tax or ask for donations from hospitals and other health care providers, return the money to those providers in the form of higher reimbursement rates or lump sums, and then collect federal matching funds for those payments. Those arrangements enabled the states to claim more money from Washington without having to spend additional funds of their own.^[64] Recent legislation aimed at restricting such state financing schemes have slowed growth rates substantially.

  Disproportionate share hospital funds. The federal portion of DSH payments ballooned from $449 million in 1988 to $16.8 billion in 1994.^[65] As in the case of health care provider taxes, DSH payments have been employed as vehicles to increase federal matching payments. Earlier in the decade, a state was able to make a DSH payment, containing both state and federal Medicaid funds, to a designated hospital. The hospital would immediately return the payment to the state through an intergovernmental transfer, and the state would enjoy a net benefit from the federal DSH payment. These funding schemes were curtailed under the 1993 Omnibus Budget Reconciliation Act.^[66]

  Shifting state health programs to Medicaid. In recent years, many states have transferred state-funded health programs to their Medicaid budgets. That has had the effect of cutting state expenditures for those programs by at least 50 percent, depending upon the state's federal matching rate. There are no reliable estimates of the magnitude of program shifting that has occurred through the "Medicaiding" of state health programs.