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MassHealth and State Fiscal Health: A New Look at the Effects of ...

MassHealth and State Fiscal Health: A New Look at the Effects of ...


ecovery of liens, estate recoveries, third party recoveries, pharmaceutical rebates, or returns from similar rate adjustments or settlements. Instead of these revenues reverting to the state treasury, the Medicaid program may retain these revenues and then spend them. The Commonwealth accounts for these retained revenues in an identified line item Figure 3 Medicaid Retained Revenue (see Figure 3). The inclusion of these figures Expenditures and Drug Rebates has led to better transparency in understanding ($ millions) the revenues and expenditures associated with the Medicaid program. Nevertheless, the Retained Fiscal Revenue Drug expenditures associated with these revenues do not always represent a new expenditure of state dollars. In particular, retained revenues include the amount generated by pharmaceutical manufacturer’s rebates paid to the Medicaid program. The way these rebates are accounted for has the effect of artificially increasing the total Medicaid budget, because rebates are a price discount rather than a new revenue. 8 In a simplified example, if a given medication costs $15 dollars per dose, and the pharmaceutical company provides the state with a rebate of $5 dollars a dose, the net cost to the state is $10 a dose. The state records this as a $15 expenditure, with $5 of Year 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Expenditures 62.9 65.0 64.5 64.1 58.7 65.0 75.0 70.0 70.0 70.0 70.0 197.3 Rebates 57.0 47.0 60.2 72.9 100.6 124.5 143.0 162.2 200.6 199.1 260.2 291.6 revenue that helps to pay the expense. To Sources: Office of the Comptroller, Office of Medicaid track Medicaid spending, however, we adjust for these retained revenues by recording the net cost of $10 (in this example), rather than a cost of $15 and revenue of $5. In our adjustments to the figures reported by the Office of the Comptroller, we do not include the drug rebate totals as revenues, and we do not include the value of the drug rebate totals in our spending totals. This accounting adjustment, which is necessary for making accurate year-to-year spending comparisons, has a significant impact on Medicaid spending totals. If we did not make this adjustment, reported spending on the Medicaid program would be overstated in FY 2005 by $292 million. 8 In not considering these rebates as revenue, we follow the Internal Revenue Service’s common sense principle that rebates are not actually income, they are discounts. If an individual receives a rebate after purchasing a product, that amount is not considered taxable income. Similarly, if the state receives a rebate when purchasing drugs, that amount is a discount, not new revenue. 8

The Bottom Line: Adjusted Medicaid Spending The total adjusted spending numbers (see Figure 4) indicate that between FY 1994 and FY 2005, Medicaid spending increased from $3.3 billion to $5.9 billion. See the chart in Appendix A for a compilation of the adjustments we have made to the official Medicaid spending numbers. Fiscal Year SBFR Reported Spending ($ millions) Figure 4 Adjusted Medicaid Spending Adjustments ($ millions) Adjusted Spending ($ millions) 1994 3,313.1 (57.0) 3,256.1 Annual Change 1995 3,398.2 (47.0) 3,351.2 2.9% 1996 3,415.9 (60.2) 3,355.8 0.1% 1997 3,455.5 (72.9) 3,382.6 0.8% 1998 3,665.8 (101.4) 3,564.4 5.4% 1999 3,856.5 (124.5) 3,732.0 4.7% 2000 4,270.0 (143.0) 4,127.0 10.6% 2001 4,642.3 (162.2) 4,480.1 8.6% 2002 5,259.3 (200.6) 5,058.7 12.9% 2003 5,485.1 (199.1) 5,286.0 4.5% 2004 5,742.4 (198.7) 5,543.7 4.9% 2005 5,977.2 (50.3) 5,926.9 6.9% Avg. annual growth rate 1994-2005: 5.6% Sources: Executive Office of Administration and Finance, Office of Medicaid, Massachusetts Budget and Policy Center There was a wide range in the annual rates of growth in Medicaid spending: almost no nominal growth between FY 1995 and FY 1996, and growth of almost 13 percent between FY 2001 and FY 2002 when the economic recession hit. There was also wide variability in the Medicaid spending growth rate between the first and second halves of the economic cycle. Between FY 1994 and FY 1999, Medicaid spending grew on average 2.8 percent per year. Between FY 2000 and FY 2005, Medicaid spending grew on average 7.5 percent per year. Over the course of the entire period analyzed, the average annual growth rate in Medicaid spending was 5.6 percent. 9 9 Because of the wide variation in the rates of change in Medicaid spending year to year, it is most useful to look at the long-term trends in the program rather than annual changes. Instead of focusing on annual changes, we focus on the average annual 5.6 percent growth in spending in the program. 9

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