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New Studies on Medicaid Point to More Cost Containment Actions in FY 2005

October 21, 2004

The National Association of State Budget Officers (NASBO) and the National Governors Association (NGA) report that Medicaid costs increased faster than any other area of state spending in FY 2003, and are expected to consume a greater portion of total spending than elementary and secondary education for the first time in FY 2004. According to the "2003 State Expenditure Report", Medicaid grew an average of 8 percent in FY 2003, and the program’s expenses accounted for an estimated 21.4 percent of total spending, compared with 21.7 percent for elementary and secondary spending. Medicaid’s share of state general fund spending was 16.5 percent in FY 2003, compared with 35.5 percent for elementary and secondary education.

Overall state Medicaid costs are expected to grow at 12.1 percent in FY 2005. In FY 2003, 23 states states experienced Medicaid budget shortfalls, and 18 likely will experience budget shortfalls this year for a combined deficit of $7 billion.

The report highlights that even with comprehensive cost containment efforts and federal fiscal relief, Medicaid spending exceeded the amounts originally budgeted for the program.

On the heels of the NASBO and NGA report, the Kaiser Commission on Medicaid and the Uninsured released it annual survey of Medicaid cost containmment initiatives. This study, "The Continuing Medicaid Budget Challenge: State Medicaid Spending Growth and Cost Containment in FY 2004 and 2005," shows that all 50 states implemented actions designed to control Medicaid spending growth in FY 2004 and all states plan to implement cost containment measures in FY 2005.

For FY 2005, 47 states adopted plans to freeze or reduce provider payments, and 43 states planned pharmacy cost controls to reduce overall Medicaid expenditure growth.

One of the key findings of the Kaiser study is that more states plan to implement cost containment actions directed at the elderly and disabled populations through disease management programs in FY 2005. According to the report, several states are turning to these strategies because of the high costs of providing services to these populations and because they may have exhausted other options.

Click here (PDF, size not available) for more information about these studies.

Additional information is available by clicking here (PDF, 2621 KB).

Action Needed

Based on these reports, advocates will need to be vigilant in monitoring cost containment initiatives in their state, especially in the prescription drug area, as states report that growth in this area is the primary or secondary reason for higher Medicaid expenditure growth. Advocates must develop better relationships with their Medicaid officials and make clear arguments about how NAMI can assist their agencies, as well as working in broader coalitions. Medicaid agencies will be under intense pressure to rein in costs so advocates will need to identify cost containment intiatives early on such as waivers and new managed care regulations, outside of the legislative process.

In discussion with Medicaid officials, please reference the CMS technical assistance paper that was sent to State Medicaid Directors that encourages officials to implement alternative utilization management strategies instead of restrictive prescription drug cost containment approaches. (PDF, size not available)

For further information on the studies and CMS guidance referenced in this report, please contact Joel Miller, Acting Director, NAMI Policy Research Institute at 703-600-1109 or, or Steve Buck, Director, NAMI State Relations at 405-749-1366 or