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Projecting the Cost of Medicaid: Limitations of the Medical Price Index

Executive Summary

Date: February 1st, 2005

The New Hampshire Department of Health and Human Services (DHHS) has prepared a plan for Medicaid reform, "GraniteCare," that projects some future costs of health care using the Medical Price Index (MPI) component of the US Department of Labor’s Consumer Price Index (CPI) as an adjustment for inflation. DHHS therefore projects certain costs per person to increase at 4.2% per year.1
 
We urge DHHS to use a different measure, the projected increase in health care spending per capita that is prepared by the Office of the Actuary, Centers for Medicare and Medicaid Services (CMS), US Department of Health and Human Services. This measure projects future cost increases at 6.5% per year. We believe this to be a much more realistic inflation factor to use for Medicaid.
 
DHHS has proposed major policy changes to the state’s Medicaid program. The department is currently negotiating with CMS for approval to make the policy changes and to receive additional federal funds for some purposes in exchange for "savings" in other areas of the program. Eventually any such policy changes will probably be wrapped in a request by New Hampshire to the federal government for a formal waiver of certain federal rules and regulations for the program.
CMS will require any proposed reform in Medicaid to cost less than the projection of costs without reform. Projected "savings," therefore can be calculated only off the baseline projection. In making its baseline projection and in its reform projections, DHHS uses the MPI, an index that measures only price changes in certain services and does not incorporate changes in technology, acuity levels, and medical practice, all of which contribute to increased costs. As a result, the DHHS estimate of the financial savings to be achieved by the GraniteCare reforms are probably too low. This increases the risk that the state will violate any cost ceiling associated with the waiver and could then owe the federal government the return of federal funds in subsequent years.
 
For example, DHHS currently estimates that without policy change Medicaid will cost $1.533 billion in year 2010 and that the department’s proposed policy changes will result in spending of $1.395 billion in that year, yielding a savings of $138 million. If the cost of the program is actually $1.60 billion in 2010, it will appear that the state had failed to achieve its cost-saving goal. If, on the other hand, a more refined projection of the cost of the unaltered program in 2010 is $1.75 billion and the actual cost turns out to be $1.60 billion, the state would have been correct in anticipating a savings of $150 million.

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