Association for Public Policy Analysis & Management

In recent decades, developing and expanding home and community-based services (HCBS) as alternatives to institutional long-term care have become a priority for most states. Three benefits account for the majority of Medicaid HCBS spending: a mandatory home health benefit; a personal care service (PCS) State Plan option and section 1915(c) waivers. While all states are required to provide home health to those who qualify for institutional care, the other two program features are utilized at states’ option. Since 1975, all states have had the option of offering PCS as a Medicaid State Plan benefit. However, unlike the tremendous growth experienced by 1915(c) waivers, the PCS benefit is yet to be adopted by all states. By 1979, 10 states had adopted the program and this number grew to 25 by the end of 1990. Currently, 32 states (including DC) have adopted the PCS State Plan option. If a state elects to adopt PCS as a State Plan option, then under federal requirements, it has to provide the benefit to all eligibles who meet a pre-established need criteria. Scholars have argued that the entitlement nature of the program has led to concerns over runaway expenditures, which has prevented a less than nation-wide adoption of the PCS State Plan option. Surprisingly, despite these concerns, there has been little empirical work that examines whether the PCS program does in fact lead to an increase in Medicaid expenditures. This paper extends the existing literature on the PCS State Plan benefit in two ways. First, using longitudinal data, I empirically examine the effect of state adoption of the PCS benefit on Medicaid expenditures over the 1975-2009 period. I find evidence of “woodwork effect” or increased expenditures due to induced demand in the early period of the PCS program. This effect of the PCS benefit on aggregate Medicaid expenditures goes away over time as alternative programs like 1915(c) come into existence. There is also suggestive evidence that states that never adopt the PCS benefit face higher predicted costs of adoption as compared to those that eventually adopt. Second, I also analyze the effect of the PCS program specifically on Medicaid nursing home expenditures. PCS may lead to an increase in overall Medicaid expenditures, but simultaneously may also lead to a decreasing use of nursing home services by individuals eligible for Medicaid. Over the 1995-2009 period, the presence of PCS State Plan benefit did not influence a change in nursing home expenditures suggesting an inability of this benefit to aid in “rebalancing” away from a state’s “institutional bias.”