Does substituting home care for institutional care lead to a reduction in Medicaid expenditures?

In 1981 Congress introduced Home and Community Based Services (HCBS) waivers in an attempt to contain Medicaid long-term care expenditures. This paper analyzes the efficacy of the waiver program. To date, little is known about its impact on cost containment. Using state-level Medicaid data on expenditures and the number of individuals participating in HCBS waivers between 1992 and 2000, this study estimates the impact of HCBS waivers on total Medicaid expenditures as well as on Medicaid institutional, home health and pharmaceutical expenditures. A fixed effects model is used to analyze Medicaid expenditures using variation in the size of HCBS waiver programs across states and over time. The results, robust across multiple specifications, show increases rather than decreases in total Medicaid spending as well as increases in the other Medicaid spending categories analyzed. This implies that there is no evidence of substitution from institutional care to the HCBS waiver program or that cost-shifting is occurring. In fact, the large magnitude of the estimated spending increases suggests the waivers may induce more people to enter the Medicaid program.