Medicaid and SCHIP
Recent HHS Approvals of Demonstration Waiver Projects Raise Concerns Gao ID: GAO-02-817 July 12, 2002States provide health care coverage to about 40 million uninsured, low-income adults and children under two federal-state programs--Medicaid and the State Children's Health Insurance Program (SCHIP). To receive federal funding, states must meet statutory requirements, including providing certain levels of benefits to specified populations. Under section 1115 of the Social Security Act, the Secretary of Health and Human Services (HHS) can waive many of the statutory requirements in the case of experimental, pilot, or demonstration projects likely to promote program objectives. Since August 2001, HHS has approved four of 13 waiver proposals from states to either expand health insurance to uninsured populations or extend pharmacy coverage to low-income seniors, consistent with the new goals. Of the nine proposals still under review, five seek to expand coverage to uninsured populations, while four would provide pharmacy benefits for low-income seniors. GAO has both legal and policy concerns about the extent to which the approved waivers are consistent with the goals and fiscal integrity of Medicaid and SCHIP. The legal concern is that HHS has allowed Arizona to use unspent SCHIP funding to cover adults without children, despite SCHIP's objective of expanding health coverage to low-income children. GAO found that HHS' approval of the waiver to cover childless adults is not consistent with this objective, and it is not authorized. A related policy concern is that HHS used its waiver authority to allow Arizona and California to use SCHIP funds to cover parents of SCHIP and Medicare-eligible children with no regard to cost effectiveness when the statute provides that family coverage may be provided only if it is cost-effective to do so--that is, with no additional costs beyond covering the child. An opportunity for the public to learn about and comment on pending waivers has not been consistently provided in accordance with policy adopted by HHS in 1994. At the federal level, since 1988 HHS has not followed established procedures to publish notification of new and pending section 1115 waiver applications in the Federal Register with a 30-day comment period.
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Director: Team: Phone:GAO-02-817, Medicaid and SCHIP: Recent HHS Approvals of Demonstration Waiver Projects Raise Concerns
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United States General Accounting Office:
GAO:
Report to the Committee on Finance, U.S. Senate:
July 2002:
Medicaid And SCHIP:
Recent HHS Approvals of Demonstration Waiver Projects Raise Concerns:
GAO-02-817:
Contents:
Letter:
Results in Brief:
Background:
HHS Has Approved Four Section 1115 Waivers to Expand Insurance or Drug
Coverage:
HHS Has Not Always Ensured That Approved Waivers Are Consistent With
the Goals and Fiscal Integrity of Medicaid and SCHIP:
HHS Policy to Ensure Public Input to Waivers Has Not Been Consistently
Followed:
Conclusions:
Matters for Congressional Consideration:
Recommendations for Executive Action:
Agency and State Comments and Our Evaluation:
Appendix I: Description of Four Recent Section 1115 Waiver Approvals:
Appendix II: Section 1115 Waiver Applications under Review:
Appendix III: HHS Office of the General Counsel Response to GAO
Inquiry:
Appendix IV: Comments from the Department of Health and Human Services:
Appendix V: Comments from the State of Arizona:
Appendix VI: Comments from the State of Illinois:
Appendix VII: Comments from the State of Utah:
Appendix VIII: GAO Contact and Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: Highlights of Four Section 1115 Waivers Approved Under HHS‘s
Flexibility Initiatives:
Table 2: Description of Section 1115 Waivers Approved for Arizona,
California, Utah, and Illinois:
Table 3: Section 1115 Waiver Applications Under Review by HHS, June 3,
2002:
Abbreviations:
CMS: Centers for Medicare and Medicaid Services:
CBO: Congressional Budget Office:
CRS: Congressional Research Service:
EPIC: Elderly Pharmaceutical Insurance Coverage:
EPSDT: Early and Periodic Screening, Diagnostic and Treatment:
FMAP: Federal Medical Assistance Percentage:
FOIA: Freedom of Information Act:
FPL: federal poverty level:
HCFA: Health Care Financing Administration:
HHS: Department of Health and Human Services:
HIFA: Health Insurance Flexibility and Accountability:
OMB: Office of Management and Budget:
PAAD: Pharmaceutical Assistance to the Aged and Disabled:
SCHIP: State Children‘s Health Insurance Program:
TANF: Temporary Assistance for Needy Families:
[End of section]
United States General Accounting Office:
Washington, DC 20548:
July 12, 2002:
The Honorable Max Baucus:
Chairman:
The Honorable Charles Grassley:
Ranking Minority Member:
Committee on Finance:
United States Senate:
States provide health care coverage to about 40 million low-income
uninsured adults and children largely through two federal-state
programs”Medicaid and the State Children‘s Health Insurance Program
(SCHIP). Medicaid generally covers low-income families and elderly and
disabled individuals, while SCHIP provides health coverage to children
in families whose incomes, while low, are above Medicaid‘s eligibility
requirements. To receive federal funding, which covered on average about
57 percent of Medicaid expenditures and 72 percent of SCHIP
expenditures in 2001, states must meet certain statutory requirements
including providing a certain level of benefits to specified
populations. Under section 1115 of the Social Security Act, the
Secretary of Health and Human Services (HHS) can waive many of the
statutory requirements in the case of experimental, pilot, or
demonstration projects that are likely to promote program objectives.
As part of their responsibility to protect the fiscal integrity of the
programs, traditionally, HHS and the Office of Management and Budget
(OMB) have had a policy that all approved waiver projects be ’budget
neutral“ for the federal government”that is, the proposed project
cannot result in federal expenditures that are higher than they would
have been without the project.
Within the past year, HHS indicated that it would allow states greater
latitude in using section 1115 waivers to modify the Medicaid and SCHIP
programs and would expedite its consideration of state proposals.
Specifically, the department announced two new section 1115 initiatives
to expand health coverage to uninsured populations and to provide
prescription drug coverage to low-income seniors using section 1115
waivers. One initiative, the Health Insurance Flexibility and
Accountability Initiative (HIFA), focuses on proposals for covering
more uninsured people while at the same time not raising program costs.
Another initiative, called Pharmacy Plus, encourages states to expand
access to prescription drug coverage to low-income seniors not eligible
for Medicaid, again while not raising program costs.
The increased emphasis on using section 1115 waivers and these two new
initiatives have raised concerns about whether HHS can both expedite its
approval process and at the same time provide adequate review and
oversight of waiver proposals that could change how, and to whom,
program services are delivered. The expedited reviews have also raised
concerns about the adequacy of the public‘s ability to review and
comment on the proposed changes. At your request, we reviewed section
1115 waiver requests involving expanding coverage to the uninsured or
providing seniors drug coverage that HHS has received since the first of
these initiatives was put into effect in August 2001. Specifically, we
examined three questions regarding the section 1115 waiver proposals
submitted and approved in line with HHS‘s goals of expanding health
coverage and providing prescription drug benefits to low-income
elderly:
1. What types of waiver proposals have been submitted and approved?
2. Has HHS ensured that the approved waivers are consistent with the
goals and fiscal integrity of Medicaid and SCHIP?
3. To what extent has there been opportunity for public input in the
expedited process?
Our work is based on a review and analysis of section 1115 waiver
proposals for new demonstration projects submitted since August 2001
and related to expanding insurance or providing pharmacy coverage in
line with the two new initiatives. We analyzed HHS data on section 1115
waiver proposals for new programs submitted from August 2001 to May
2002, and documented the type, number, and outcome of these proposals.
For the four approved waivers, we reviewed waiver proposals, HHS
decision memorandums and approval letters, approved waiver
applications, waiver terms and conditions, and operational protocols
when available, and documentation of the states‘ public process and
budget neutrality justifications. We also discussed these initiatives
and waiver approvals with officials at HHS, the Centers for Medicare
and Medicaid Services (CMS, the agency within HHS with the lead role in
receiving and reviewing the applications), [Footnote 1] OMB, and
relevant state agencies. To obtain information on the opportunity for
public input to the waiver-approval processes and any related research
studies, we also contacted several health research and advocacy
organizations including the Center for Budget and Policy Priorities,
the National Health Law Program, and the Kaiser Commission on Medicaid
and the Uninsured. We examined the statutory provisions governing the
Medicaid and SCHIP programs and the section 1115 waiver authority, and
obtained HHS‘s opinion on a legal question through written
correspondence. Finally, we relied upon our past reports and
testimonies on the approval of section 1115 waivers and other issues.
[Footnote 2] We conducted our work from December 2001 through June 2002
in accordance with generally accepted government auditing standards.
Results in Brief:
Since August 2001, HHS has approved 4 of 13 waiver proposals from states
to either expand health insurance to uninsured populations or extend
pharmacy coverage to low-income seniors, consistent with the new
initiatives‘ goals. Three of the approved waivers, from Arizona,
California, and Utah, aim to reduce the number of uninsured, while
Illinois‘s extends drug coverage to low-income seniors. Arizona‘s and
California‘s HIFA waivers use unspent SCHIP funds to cover uninsured
low-income adults not otherwise eligible for Medicaid. California‘s
waiver allows the state to use SCHIP funds to cover the parents of
children who are enrolled in Medicaid and SCHIP, while Arizona‘s waiver
allows the state to cover previously uninsured low-income adults,
including those with no children. Utah‘s waiver extends limited medical
coverage, with an enrollment fee and cost sharing, to previously
uninsured low-income adults by increasing cost-sharing requirements and
reducing optional benefits to certain current Medicaid beneficiaries.
Illinois‘s Pharmacy Plus waiver extends pharmacy benefits to many low-
income seniors under the assumption that making this benefit available
will avoid these individuals‘ spending down their resources and
becoming eligible for Medicaid, thus reducing Medicaid‘s nursing home,
hospital, and other medical costs. Of the nine proposals still under
review, five seek to expand coverage to uninsured populations, while
four would provide pharmacy benefits for low-income seniors.
We have both legal and policy concerns about the extent to which HHS
has ensured that the approved waivers are consistent with the goals and
fiscal integrity of Medicaid and SCHIP. The legal concern is that,
under the Arizona waiver, HHS has allowed the state to use unspent
SCHIP funding to cover adults without children, despite SCHIP‘s
statutory objective of expanding health coverage to low-income
children. In our view, HHS‘s approval of the waiver to cover childless
adults is not consistent with this objective, and is not authorized.
Allowing the expenditure of unspent SCHIP funds on childless adults
could prevent the reallocation of these funds to states that have
already exhausted their allocations, as required by the Congress. A
related policy concern is that HHS used its waiver authority to allow
Arizona and California to use SCHIP funds to cover parents of SCHIP-
and Medicaid-eligible children without regard to cost effectiveness,
when the statute provides that family coverage may be provided only if
it is cost effective to do so”that is, with no additional costs beyond
covering the child. For the Utah and Illinois waivers, we believe that
HHS has not adequately ensured that approved demonstration projects
will be budget neutral. In both cases, the projections of what the
states would have spent without the waiver included certain costs that
were either inappropriate or impermissible for assessing budget
neutrality. For the Utah waiver, we estimate that if the project is
fully implemented, the cost could be $59 million higher for the 5-year
waiver than it would have been without the waiver. For Illinois, we
estimate this amount to be at least $275 million. As a result, the
federal government is at risk to spend more than it would have had the
waivers not been approved.
Opportunity for the public to learn about and comment on pending
waivers has not been consistently provided in accordance with policy
adopted by HHS in 1994. At the federal level, HHS has not, since 1998,
followed the process it established in 1994 to publish notification of
new and pending section 1115 waiver applications in the Federal
Register with a 30-day comment period. HHS officials indicated that
they now consider the public notice and comment on waivers a state,
rather than federal, responsibility and HHS‘s recent policy has been to
refer interested parties to states for copies of waivers it is
reviewing. But for one recently approved waiver, advocates were unable
to get a copy of the application until after the waiver was approved,
despite a Freedom of Information Act (FOIA) request. HHS‘s 1994 policy
also directs states to ensure that public input is obtained before a
waiver is submitted. For the four recent approvals, however, public
input at the state level varied greatly, and some provider and advocacy
groups we contacted raised concerns about access to information and
various aspects of some of the approved waivers, such as the benefit
reduction and increased cost sharing in the Utah waiver. In May, HHS
reaffirmed that states need to follow the 1994 public process policy
and also committed to publishing applications on its Web site, but did
not similarly affirm its commitment to follow the policy at the federal
level, specifically the federal notice and comment period.
This report includes three matters for congressional consideration. The
Congress should consider amending title XXI of the Social Security Act
to (1) specify that SCHIP funds are not available to provide health
insurance coverage for childless adults and (2) establish, for parents
or guardians of SCHIP-eligible children, which statutory objectives
should take precedence”those of title XXI to provide family coverage
only if it is cost effective, or those of section 1115 that allows the
Secretary to waive the cost effectiveness test. The Congress should
also consider requiring the Secretary of HHS to improve the federal
public notification and input process for state Medicaid and SCHIP
section 1115 demonstration proposals under consideration.
This report also includes three recommendations to the Secretary of HHS.
We are recommending that the Secretary (1) amend the approval of the
Arizona waiver to prevent future use of SCHIP funds on childless adults,
and deny any pending or future state proposals for this purpose, (2)
better ensure that valid methods are used to demonstrate budget
neutrality, and use these methodologies to adjust the federal
obligation under the Utah and Illinois waivers as appropriate, and (3)
provide for a federal public input process that includes, at a minimum,
notice in the Federal Register and a 30-day comment period.
In commenting on a draft of this report, HHS disagreed with our
recommendations. HHS stated that, in its view, (1) approving the use of
SCHIP funds for childless adults in Arizona‘s waiver met the broad
objectives of SCHIP in providing health insurance coverage to those who
were previously uninsured, (2) its methods for assuring budget
neutrality are appropriate, and (3) the opportunity for public comment
is adequate. Because HHS did not provide additional evidence or
information on its position beyond what we had earlier considered, we
maintained these recommendations to the Secretary and elevated two of
the issues for the Congress to consider, as indicated above”the
appropriateness of spending SCHIP funds on childless adults and the
need for a minimum federal public process.
We also provided a copy of a draft of this report to OMB and the states
of Arizona, California, Illinois, and Utah. OMB and California declined
to provide written comments. Arizona, Illinois, and Utah provided
comments similar to HHS‘s on our findings related to their state waiver
proposals.
Background:
Medicaid and SCHIP are the nation‘s largest health-financing programs
for low-income people, accounting for about $232 billion in federal and
state expenditures in 2001 to cover about 40 million people. Medicaid
was established in 1965 under title XIX of the Social Security Act to
provide health care coverage to certain categories of low-income
families and aged and disabled individuals. SCHIP was established in
1997 under title XXI of the Social Security Act to provide health care
coverage to children living in low-income families whose incomes exceed
the eligibility requirements for Medicaid. Both are federal-state
programs whereby, within broad federal guidelines, states have
considerable flexibility in whom and what they cover.
Medicaid establishes a framework that states must follow in order to
receive federal funding, known as federal matching payments, for a share
of a state‘s Medicaid program expenditures. [Footnote 3] States are
required to cover certain groups of individuals and offer a minimum set
of services, such as physician, hospital, and nursing facility
services, as well as early and periodic screening, diagnostic, and
treatment (EPSDT) services for individuals under the age of 21.
[Footnote 4] States can also receive federal matching payments to cover
additional optional groups of individuals. For example, while states
are required to cover children under age 6 in families with incomes at
or below 133 percent of the federal poverty level (FPL), children in
families above this level may also be covered at a state‘s option.
States may also choose to provide optional services”such as vision and
dental services and prescription drugs”but if they do so, they must
provide the same benefits to all covered beneficiaries. At present,
nearly two-thirds of Medicaid expenditures are for optional populations
and services, largely for long-term care services. Medicaid is an open-
ended entitlement, meaning the federal government will pay its share of
state expenditures for people covered under a state‘s approved Medicaid
plan, and enrollment for those eligible cannot be limited.
Like Medicaid, SCHIP is administered by states under broad federal
guidelines to offer coverage to children in families with incomes up to
200 percent of the FPL who do not qualify for Medicaid. [Footnote 5]
The federal government pays a higher share of states‘ expenditures
under SCHIP than under Medicaid. [Footnote 6] SCHIP programs must
provide a benefit package that meets certain standards. [Footnote 7] In
contrast to Medicaid, SCHIP is not an open-ended entitlement. The
Congress in 1997 appropriated a fixed amount for the
program”specifically, $40 billion in federal matching funds over 10
years (fiscal years 1998 through 2007) for SCHIP purposes. Annual
allotments are made to states for use over a 3-year period and the
Secretary is required to determine an appropriate procedure for
redistributing the unused SCHIP funds to those states that have already
spent their SCHIP allotments. In certain circumstances states may
restrict enrollment if their allotment of federal funds has been
expended,8 but to date, SCHIP spending for most states has fallen well
below allotment levels for a variety of reasons. According to the
Congressional Research Service, despite the fact that 42 states began
their SCHIP programs in late 1997 or 1998, new programs take time to
get off the ground and the participation rates have been lower than
expected. [Footnote 9]
Section 1115 of the Social Security Act gives the Secretary of HHS broad
authority to (1) allow states to provide services or cover individuals
not normally eligible for Medicaid and SCHIP, and (2) provide federal
funds for services and populations not otherwise eligible for a federal
match. Title XIX governing Medicaid is one of several titles to which
section 1115 specifically applies, and the Congress, in establishing
SCHIP, extended section 1115 to SCHIP ’in the same manner“ as it
applies to Medicaid. According to one report, in 2001 more than 20
percent of total federal Medicaid spending was governed by section 1115
demonstration terms and conditions rather than usual Medicaid rules.
[Footnote 10] Past demonstrations have significantly influenced the
development of Medicaid policy, for example, by allowing states to
restrict the enrollment of beneficiaries to managed care. The first
statewide section 1115 waiver was approved for Arizona in 1982,
requiring managed care for all beneficiaries and paying health plans
a fixed amount per person to provide all covered services. Other
examples of large-scale changes approved through waivers include
programs begun in Oregon and Tennessee in the early 1990s. Recognizing
its fiduciary obligations, HHS has since the early 1980s required that
states justify that their section 1115 waiver demonstrations will not
cost the federal government more money than the programs would have
cost without the waivers. However, we have previously reported that
section 1115 demonstration waivers approved for several states in the
mid-1990s were not budget neutral. [Footnote 11]
HHS‘s HIFA initiative, using the section 1115 authority, gives states
flexibility to increase cost sharing and reduce benefits for some
program beneficiaries in order to help fund coverage for uninsured
populations within existing Medicaid and SCHIP program resources. HIFA
allows states to provide different benefit packages to different groups
of people covered under the waiver. To be considered, proposals must be
statewide and seek to coordinate coverage with private health insurance
options for low-income uninsured individuals. Responding to states‘
expressed concerns about HHS‘s prolonged review process for pending
waivers, HHS has promised more expedited reviews and decisions. To
facilitate this, as part of its HIFA initiative HHS has developed a
standard template for states to use in applying for the waivers.
Like HIFA, the Pharmacy Plus initiative uses section 1115 waiver
authority. The Secretary introduced the Pharmacy Plus initiative in
January 2002 to encourage states to provide pharmacy benefits to low-
income elderly populations. While HHS has described the initiative in
budget and other documents, it has not published an application template
and policy guidelines.
HHS Has Approved Four Section 1115 Waivers to Expand Insurance or Drug
Coverage:
Since HHS announced the HIFA initiative in August 2001, states submitted
13 proposals for section 1115 demonstration waivers designed to respond
to HHS‘s goals of covering more low-income uninsured individuals and
expanding pharmacy benefits as of May 1, 2002. [Footnote 12] Eight of
these 13 are designed to expand coverage for the uninsured, including 6
HIFA applications and 2 expansions that were not submitted in HIFA
format, that is, using the HIFA template and following all of the HIFA
principles. Five waivers proposed to expand pharmacy benefits, as
envisioned by the Pharmacy Plus initiative. As of May 1, HHS had
approved 4 of the proposals: 2 HIFA waivers for Arizona and California;
an expansion offering primary and preventive care for the uninsured in
Utah; and a pharmacy benefit waiver in Illinois. The remaining
proposals were still under review as of early June 2002.
Four Waivers Have Been Approved Quickly to Expand Coverage:
HHS has approved four section 1115 demonstration waivers to expand
coverage for the uninsured and pharmacy benefits since August 2001.
Formal review times for three of these four waivers, which averaged just
3-1/2 months (109 days), ranged from 60 days for the Utah application
to 182 days for the Illinois pharmacy demonstration. [Footnote 13]
These review times compare with roughly 10 months‘ review, on average,
for approved section 1115 waivers submitted in 2000 or earlier. These
average review times do not include preliminary discussions and reviews
of draft proposals and concept papers that state and federal officials
indicated occurred for varying lengths of time before formal
application, depending on the particular waiver.
The HIFA demonstrations approved for California and Arizona both allow
expansions using unspent SCHIP funds, but the two differ in the
populations to be added. The California waiver will add coverage for
uninsured low-income parents, caretaker relatives, and legal guardians
of children who are enrolled in Medicaid and SCHIP, testing whether
covering these individuals will increase enrollment of eligible
children and improve their continuity of care. The approved Arizona
waiver will use unspent SCHIP funds to cover childless adults as well
as parents of Medicaid and SCHIP children. HHS‘s terms and conditions
for the approved Arizona waiver specify that SCHIP children are the
first priority for coverage, then parents of SCHIP- and Medicaid-
enrolled children, and last priority, childless adults. [Footnote 14]
Arizona was, however, allowed to retroactively cover childless adults
effective November 2001, and parental coverage is not required until
October 2002. In response to an objective of the HIFA initiative, both
the Arizona and California waiver approvals include feasibility studies
of whether and how an employer-sponsored insurance component might be
incorporated into the demonstrations.
The Utah waiver will expand coverage to some formerly uninsured adults
for primary care and preventive services, but exclude other services,
such as inpatient hospital and specialist care. In addition to
enrollment fees and cost sharing for services used by this expansion
population, the waiver will be funded by increased cost sharing and
limits on some optional services for certain groups of currently
eligible adults, including some with mandatory eligibility. Among the
optional services being limited are mental health services, vision
screening, and physical therapy. [Footnote 15]
Illinois received approval for the first Pharmacy Plus waiver. The
Illinois Senior Care program will expand pharmacy coverage to low-income
seniors, most of whom participate in an existing state-funded pharmacy
benefits program. The premise as to how the waiver program can be
implemented without committing additional federal resources is that
expanded access to medically necessary drugs will help keep seniors
healthier and avoid medical expenses, including hospitalization and
nursing home placement, that would reduce their incomes to the level of
Medicaid eligibility. Table 1 presents highlights about the section
1115 waivers approved for Arizona, California, Utah, and Illinois. (See
app. I for further details about these four waiver programs.)
Table 1: Highlights of Four Section 1115 Waivers Approved Under HHS‘s
Flexibility Initiatives:
State and waiver: Arizona HIFA Demonstration Waiver;
Highlights:
* Waiver approval: The first approved HIFA waiver was submitted on
September 20, 2001, and approved in 84 days on December 12, 2001.
* Populations served: Arizona will expand coverage to two groups: (1)
an estimated 27,000 childless adults at or below 100 percent of FPL,
effective retroactively November 1, 2001, and (2) an estimated 21,250
parents of Medicaid- and SCHIP-enrolled children with family incomes
above 100 and at or below 200 percent of FPL, effective October 1,
2002.
* Cost: Federal spending over 5 years for childless adults is estimated
at $414 million ($126 million in unspent SCHIP funding plus $288
million in Medicaid funding). In addition, an estimated $144 million in
unspent SCHIP funds would cover the expansion to parents.
State and waiver: California Parental Coverage Expansion HIFA Waiver;
Highlights:
* Waiver approval: Using an application originally submitted in
December 2000, California revised and resubmitted its proposal as a
HIFA application on January 16, 2002, and it was approved in 10 days on
January 25, 2002.
* Populations served: California will expand coverage to an estimated
275,000 custodial parents, caretaker relatives, and legal guardians of
Medicaid and SCHIP children, with family incomes at or below 200 percent
of FPL.
* Cost: Federal spending over 5 years is estimated at $1.6 billion (66
percent of the estimated total cost of $2.4 billion). Unspent SCHIP
funds will be used to cover the expansion.
State and waiver: Utah Primary Care Network Waiver;
Highlights:
* Waiver approval: The Utah demonstration was submitted December 11,
2001, and approved February 8, 2002, after 60 days‘ review.
* Populations served: Utah will offer benefits limited to primary and
preventive care to two adult expansion groups: (1) 16,000 parents with
incomes under 150 percent of FPL and (2) 9,000 childless adults, many
from a state-only program, with incomes under 150 percent of FPL.
Individuals in the expansion groups will pay a $50 annual enrollment
fee plus charges for the services they use, such as $5 per office visit
and $30 for an emergency room visit. About 17,600 current mandatory
eligible people and some optional medically needy eligible people will
receive somewhat reduced benefits (e.g., there will be limits on
vision, physical therapy, chiropractic, dental, and mental health
services) with cost sharing increased to $3 per physician visit, $2 per
prescription, and $220 for each hospital admission.
* Cost: Federal spending over 5 years is estimated at about $422
million in Medicaid funds (71 percent of the estimated total cost of
$595 million). The state is expected to contribute at least the
equivalent of its previous state-only program budget.
State and waiver: Illinois Senior Care Program Waiver;
Highlights:
* Waiver approval: Submitted July 31, 2001, the first Pharmacy Plus
waiver was approved in 182 days on January 28, 2002.
* Populations served: Up to an estimated 256,500 individuals aged 65
and older with incomes at or below 200 percent of FPL will be covered
for prescription drugs with primary care coordination. The program was
implemented June 1, 2002, with about 140,000 participants primarily
from the state-only pharmacy program. Depending on whether their
incomes are above or below FPL, participants may pay $1 for generic or
$4 per brand name prescription for benefits up to a cap of $1,750,
after which they will pay 20 percent of each prescription plus a nominal
copayment.
* Cost: Federal spending over 5 years is capped at an estimated $7
billion, or 50 percent of the approximately $14 billion aggregate cap
on spending for the total Medicaid population aged 65 and older. The
state will contribute at least what was spent on its previous state-
only program, plus savings from reduced nursing home and hospital
expenditures for the estimated 7,500 seniors per year who will be
diverted from Medicaid eligibility.
Source: HHS approval letters, approved waiver applications for each
state, and other documents.
[End of table]
Nine Waiver Proposals Are Still under Review:
As of June 3, 2002, 9 of the 13 section 1115 waiver proposals to expand
coverage and pharmacy benefits were still under review by HHS (see app.
II for highlights of these proposals). Most were submitted since January
2002. These proposals included pending HIFA applications from Illinois,
Maine, Michigan, and New Mexico. Three of these proposals would use
unspent federal SCHIP funds to expand coverage to various groups,
including children, parents, and in some cases, childless adults. Most
of the HIFA applications require increased cost sharing for the
expansion groups, and one proposal would reduce benefits for an
optional eligibility group. One additional proposal under review from
Washington, which was not submitted in HIFA format, would also expand
coverage for uninsured individuals, including childless adults using
unspent SCHIP funds. [Footnote 16] Four states”Connecticut, New Jersey,
South Carolina, and Wisconsin”had pharmacy benefit waiver proposals
under review that were consistent with the Pharmacy Plus concept. In
all cases, pharmacy benefits would be expanded to low-income seniors
who are not currently eligible for Medicaid, and the states would fold
in participants from state-only funded pharmacy programs. [Footnote 17]
HHS Has Not Always Ensured That Approved Waivers Are Consistent With the
Goals and Fiscal Integrity of Medicaid and SCHIP:
HHS has not, with its recent approvals of waivers under the new
flexibility initiatives, consistently ensured that waivers are in line
with program goals and are budget neutral. Under the first approved
HIFA waivers, HHS is allowing the use of unspent federal SCHIP funding
to cover adults, including adults who have no dependent children. When
the Congress established SCHIP, it required the Secretary to
redistribute unspent funds to states that had exhausted their
allotments to use for the program purposes of covering children. These
waivers raise legal and policy concerns in light of SCHIP‘s stated
purpose of expanding health coverage to low-income children. Similarly,
HHS did not adequately ensure that the waivers will be budget neutral.
Our review of the documents supporting the traditional budget
neutrality test used in the two states subject to this requirement”Utah
and Illinois”found that HHS‘s review process did not adequately ensure
that the costs to the federal government for the Medicaid program would
be no higher under the waivers than they would have been without the
waivers. [Footnote 18] The approval of the Illinois waiver also raises
questions about the potential financial risk for the state and
implications for covered elderly beneficiaries, and the extent to which
HHS is ensuring that waivers are fiscally sound.
Allowing SCHIP Funding for Adults Raises Legal and Policy Concerns:
SCHIP is a program created specifically for low-income children. The
program is designed to enable states to initiate and expand health
assistance to low-income, uninsured children in an effective,
efficient, and coordinated manner. In establishing SCHIP, the Congress
directed that funds made available under the program be used only for
program purposes. Further signaling the importance of spending SCHIP
funds on uninsured children, the Congress also provided for the
Secretary to redistribute states‘ annual allotments remaining unspent
after a 3-year period of availability to states that have exhausted
their SCHIP allotments. In April 2002, CMS announced that 18 states and
territories would receive $1.6 billion in reallocated funds because
they had exhausted their own allotments. [Footnote 19] Given the
statutory objective of reducing the number of uninsured children,
however, HHS‘s approvals of waivers that allow states to use unspent
SCHIP funds on adults raise certain legal and policy questions about
appropriate uses of the SCHIP allotments.
In our view, HHS has not established that its approval of SCHIP funding
for childless adults in Arizona was reasonable and, therefore,
authorized. Arizona plans to use $126 million in unspent federal SCHIP
funds for childless adults. In approving the Arizona waiver, HHS stated
that the Arizona project would demonstrate whether covering single
adults and childless couples will improve the overall health of the
community and reduce overall rates of uninsurance, and asserted that
this result would ’promote the objectives of the Act.“ However, HHS did
not assert that insuring these childless adults would improve the
provision of health assistance to low-income children. We are not aware
of any basis for suggesting that the use of SCHIP funds to cover
childless adults would promote the objectives of SCHIP.
In response to our concern that the HIFA policy and Arizona approval are
inconsistent with statutory objectives, HHS‘s Office of General Counsel
stated that section 1115 provides considerable legal flexibility to
authorize the use of program funds for items, services, or activities
that would not normally be paid under the program. In a letter to us
(reprinted in app. III), HHS also wrote:
’the language of section 1115 permits approval of demonstration
projects based on the overall purposes of all of the listed Social
Security Act programs (rather than segregating each program). In other
words, in approving a Medicaid or SCHIP demonstration, the Secretary
may consider the likelihood of promoting the objectives of the programs
authorized under any of the titles of the Social Security Act listed in
section 1115.“ [Footnote 20]
The structure and language of section 1115 do not support HHS‘s
interpretation of its authority. Section 1115 identifies the titles of
the Social Security Act for which demonstration projects may be
authorized. It also lists the statutory provisions within each title
containing the requirements or expenditure limitations that may be
waived [Footnote 21] and clearly indicates that waiver of requirements
or expenditure limitations are to correspond to the associated titles
of the Social Security Act. [Footnote 22] As a result, we believe that
section 1115 requires HHS to justify that a demonstration project will
likely assist in promoting the objectives of the particular title of
the Social Security Act in which the waived program requirements or
expenditure limitations appear. [Footnote 23] With respect to
programmatic requirements or expenditure limitations applicable to
SCHIP funds, section 1115 requires HHS to establish that a
demonstration project would promote the objectives of title XXI, which
established SCHIP. As stated above, HHS has not asserted that the use
of SCHIP funds to cover childless adults would promote the statutory
objectives of the program, although it contends that the Arizona
waiver, considered in its entirety, does serve program objectives.
HHS‘s interpretation of section 1115 effectively eliminates the
distinctions among the programs authorized under the identified titles
of the Social Security Act and would allow the agency to waive
requirements or authorize otherwise impermissible expenditures under
one program to promote the objectives of any other program. If HHS were
to take this interpretation to an extreme, it could bypass funding
limitations and mechanisms established for individual programs by
funding any of the programs authorized in the identified titles of the
Social Security Act with funds made available for any other title. This
interpretation of section 1115 is particularly problematic in the
context of SCHIP, given the congressional direction that allocated
funds not spent for program purposes be redistributed to states that
have exhausted their allotment.
Arizona‘s use of SCHIP funds for childless adults raises two additional
concerns. First, Arizona had already received approval from HHS to use
Medicaid funds to expand coverage to certain childless adults. As a
result of the waiver, the federal government will now pay about 77
percent of the costs under the SCHIP matching rate, instead of about 66
percent if this same population was covered under Medicaid. [Footnote
24] Second, if Arizona expends all of its federal SCHIP allotment, it
arguably could qualify for reallocated unspent federal SCHIP funds from
other states. It could then apply these reallocated funds to childless
adults. [Footnote 25]
HHS‘s approval of Arizona‘s and California‘s use of unspent federal
SCHIP funds to cover parents illustrates the changing policy with
regard to the use of waiver authority to allow states to cover adults.
In creating SCHIP, the Congress authorized states to cover the entire
family”both the parents or custodians and their children”if it was cost
effective to do so. The cost-effectiveness test for family coverage
specifies that the expense of covering both adults and children in a
family must not exceed the cost of covering the children. Under these
circumstances, achieving cost-effectiveness appears possible only when
the cost to SCHIP of covering a family is subsidized by employer
contributions or other state funds. This stringent cost-effectiveness
test clearly showed congressional priority for covering children over
their parents. However, we reported in 1999 that some states and
advocacy groups were seeking increased flexibility to tailor their
SCHIP programs to cover uninsured parents through the use of section
1115 waiver authority. [Footnote 26] CMS, then called the Health Care
Financing Administration, had questioned requests for section 1115
waivers to cover parents during the first year of SCHIP‘s
implementation, expressing a concern that the SCHIP goal of providing
insurance to low-income children should not be circumvented by the
waiver process. The agency had indicated to states that the purpose of
section 1115 waivers was to test innovative approaches and not to waive
statutory provisions that the states found objectionable. In our first
report on SCHIP implementation in 1999, we noted that, as of April 1,
1999, only two states had been able to demonstrate cost-effectiveness
and had received approval to use SCHIP funds to cover adults in
families with children. [Footnote 27]
Since our earlier report, HHS has changed its policy and no longer
requires that states demonstrate the cost-effectiveness of family
coverage in section 1115 waiver proposals. On July 31, 2000, HHS
announced to states that it would consider section 1115 waivers to use
unspent federal SCHIP funds to cover parents of SCHIP- and Medicaid-
eligible children, but was silent on the application of the cost-
effectiveness test. Since this announcement, four states, in addition
to Arizona and California, have requested and obtained approval for
these types of waivers. [Footnote 28] In our view, this change raises
broad policy questions about the use of section 1115 authority to waive
those statutory requirements that states have found objectionable but
that the Congress put in place clearly to demonstrate the priority of
SCHIP to fund insurance coverage for children. It further raises the
issue of which statutory objectives should take precedence”the
Congress‘s direction to allow family coverage only if states could
demonstrate its cost-effectiveness, or the Secretary‘s authority under
section 1115 to allow states to spend money on individuals other than
children.
Budget Neutrality Not Ensured in Utah and Illinois Waivers:
Our review of the supporting documentation for the Utah and Illinois
waiver approvals found inadequate justification that the waivers would
be budget neutral”that is, the initiatives would result in no more cost
to the federal government than under the existing program. To establish
that a waiver is budget neutral, HHS requires the state to compare
estimated program costs under two scenarios: (1) costs if the existing
program was continued (’without-waiver“ costs) [Footnote 29] and (2)
costs with the new waiver program (’with-waiver“ costs). We found that
the states‘ estimates of without-waiver costs included inappropriate
costs in Utah and impermissible costs in Illinois. Including these
amounts inflated each state‘s estimate and inappropriately increased
the amount the federal government could pay in the absence of the
proposed waiver.
* Utah‘s without-waiver estimate was inflated because it included the
estimated cost of services for a new group of people who were not being
covered under the existing Medicaid program. By including these costs,
the state in effect inflated the without-waiver costs by about $59
million”10 percent”over the 5-year life of the waiver. Without this
amount, Utah‘s waiver would not be budget neutral. The costs for this
group were included based on the ’hypothetical population“ concept,
under which HHS has previously allowed states to include the costs of
populations that they could have hypothetically covered under Medicaid
as an optional group, but did not actually cover. In 1995, we reported
that states were using this hypothetical argument to justify higher
without-waiver costs, making budget neutrality easier to achieve. We
concluded that, because state officials indicated that cost containment
was a primary consideration in seeking section 1115 waivers, it was
questionable that these states would have added optional eligibility
groups to their Medicaid programs without the waiver. [Footnote 30] For
Utah, however, the use of this methodology goes beyond our earlier
concern because the group in question does not meet the criteria for
designation as a hypothetical population. The group could not have been
covered without a waiver, because it will receive a limited primary-
care-only benefit package that would not be allowed under Medicaid‘s
rules for comprehensive coverage. During the review process, some
officials within HHS voiced concerns about allowing the use of this
methodology; however, the waiver was still approved by HHS as a matter
of policy.
* Illinois‘s without-waiver estimate was inflated for a different
reason: it failed to account for mandatory reductions in program costs
planned for the 5-year course of the waiver. These reductions pertain
to the state‘s use of upper payment limit (UPL) arrangements. [Footnote
31] We and the HHS Inspector General have reported numerous times about
state funding arrangements that inappropriately generated excessive
federal matching funds, including UPL abuses. [Footnote 32] The
Congress and HHS subsequently revised the upper payment limits and
required states to reduce their claims for these excessive payments
over the next several years. [Footnote 33] Over the course of its 5-
year waiver, Illinois will have to reduce its claims by $1.4 billion in
accordance with these requirements. [Footnote 34] Over this time
period, the state‘s total payments to the facilities involved in the
UPL arrangements will decline by 39 percent. [Footnote 35] Based on
this decrease, we estimate that at least $275 million in impermissible
UPL expenses are included in the estimate. [Footnote 36] This occurred
because Illinois‘s calculations of without-waiver costs did not reflect
the required reduction in UPL expenses. Rather, the Illinois without-
waiver cost estimate projected increases in UPL payments by 51 percent
over the 5-year life of the waiver. [Footnote 37] It appears that, in
reviewing Illinois‘s budget neutrality justification, HHS did not
consider the extent to which any UPL-related impermissible funds were
included. The Secretary has the authority, however, to revisit this
decision and to require the state to recalculate its estimated without-
waiver costs to appropriately account for the reduction in the amount
of UPL expenses.
We have previously reported similar concerns with the approval of
demonstration waivers that were not budget neutral and that could
increase federal Medicaid expenditures. In our 1995 report, we found
that, contrary to the administration‘s assertion, the approved spending
limits for demonstration waivers in Oregon, Hawaii, and Florida were
not budget neutral. At that time, we warned that the granting of
additional section 1115 waivers merited close scrutiny in part because
of the potential budgetary impact. [Footnote 38]
Illinois Waiver Approval Raises Questions about the Extent That HHS Is
Ensuring That Waivers Are Fiscally Sound:
Another concern related to HHS‘s approval of the Illinois waiver is the
extent to which the agency‘s oversight ensures that approved waivers are
fiscally sound, in particular related to their likelihood of achieving
projected savings. This concern is separate from budget neutrality; it
centers instead on whether the waiver project is placing the Medicaid or
SCHIP programs in a vulnerable position. The waiver may put Illinois at
financial risk even if federal budget neutrality is maintained. A major
premise behind this initiative is that the prescription drug benefit
will pay for itself by preventing low-income elderly individuals from
becoming Medicaid eligible because of high health care costs, such as
those for hospital and nursing home care. The Congressional Budget
Office (CBO), OMB, and CMS‘s own actuary, however, have not accepted
this premise, in assessing the cost of a Medicare prescription drug
benefit. There are many reasons for this caution. According to a
preliminary assessment by CBO, Medicare beneficiaries without any drug
coverage already consume a large number of prescription drugs, and any
additional or more expensive drugs beneficiaries might receive in
gaining coverage would probably provide less-dramatic improvements in
health than the drugs they are already taking. CBO‘s assessment stated
that greater use of drugs, especially in an older population, would
increase the chances of side effects, allergic reactions, medication
errors, and other adverse drug events, which could increase the use of
hospitals, emergency rooms, and other health care services. CBO found
that research indicating there might be some savings in providing a
Medicare prescription drug benefit have been difficult to interpret,
and concluded that the magnitude of any savings would probably be quite
small. CBO stated that recent evidence has suggested that the net
effect of providing coverage may be to lower the cost of other
services, but that the studies are difficult to interpret, especially
in the context of a Medicare drug benefit, and that more evidence is
expected from evaluations of state-level drug programs for low-income
elderly people. [Footnote 39]
While Illinois‘s approved waiver is intended to evaluate the extent to
which a drug benefit may be able to generate cost savings, it makes
several risky assumptions with regard to the extent of savings,
potentially setting a precedent for other states‘ Pharmacy Plus
proposals. In Illinois, many of the people who would gain drug coverage
under the waiver are already receiving some drug coverage benefits
under an existing, more limited, state-funded program. Despite this,
the success of the Illinois waiver relies on assumptions that (1)
providing the expanded prescription drug benefit under the waiver will
divert 7,500 people by keeping them from becoming Medicaid-eligible,
when an estimated 20,000 elderly individuals normally enter Medicaid in
a given year, (2) this high diversion rate will occur immediately, the
first year that the drug benefit is provided under the waiver, and (3)
once diverted, aged individuals would stay out of Medicaid for at least
5 years. The waiver‘s underlying assumptions offer little margin of
error. For example, if only half of the projected number of seniors are
diverted in the first year of the waiver, we estimate that the cost of
the waiver could increase by $339 million. The implications for elderly
Medicaid beneficiaries of not achieving the high rate of savings could
be significant. HHS limited total federal risk for this waiver by
establishing an aggregate ’cap“ for payments to the state for all
services to the elderly, including the drug benefit. However, this cap
also means that once the state has spent up to this limit then it
cannot receive additional federal matching funding for Medicaid
services for the elderly. One assessment of the Illinois financing
approach noted that, for any number of reasons, Illinois could find the
costs of operating its new drug program or of serving elderly Medicaid
beneficiaries to be higher than expected. If the state is unable to
achieve savings from diverting people from Medicaid, then as Illinois
officials acknowledge, it may need to choose other options. Such
options could include cutting spending on elderly Medicaid
beneficiaries, cutting spending on its prescription drug program, or
paying for any unanticipated program costs entirely with state funds.
The state could also roll back eligibility for optional elderly
beneficiaries, increase cost sharing, reduce provider reimbursement
rates, reduce the size of the waiver benefit, or eliminate the waiver
altogether. [Footnote 40]
HHS officials stated that this approval represents a true demonstration
or policy experiment, in that the waiver will test whether it is
possible to provide a drug benefit without increasing costs. Officials
also pointed out that the federal risk was limited by the aggregate cap
approach. As indicated earlier, four states have pending waiver
proposals similar to Illinois‘s Pharmacy Plus waiver.
HHS Policy to Ensure Public Input to Waivers Has Not Been Consistently
Followed:
HHS has not consistently followed its stated policy to ensure that
people who may be affected by waivers have the opportunity to learn
about and comment on waiver proposals. Recognizing that people who may
be affected by a demonstration project ’have a legitimate interest in
learning about proposed projects and having input into the decision-
making process,“ [Footnote 41] HHS established policies and procedures
in a 1994 Federal Register notice for both a federal- and state-level
public notice and comment process. [Footnote 42] HHS has not provided a
federal level notice and comment period in line with the policy since
1998, and instead has relied on states to have a public process. The
extent of public input varied greatly among the four states with
recently approved waivers. Although HHS recently affirmed the public
input requirements for states, its new streamlined review process under
HIFA may not be sufficient to guarantee effective public involvement at
the federal level.
HHS Has Not Followed Its Stated Federal Process For Public Input Since
1998:
The 1994 notice specifies HHS‘s intent to publish regular notices of all
proposals for section 1115 waivers it receives and to allow a 30-day
period to receive and review written comments before taking official
action. The notice describes the policies and procedures HHS will be
guided by when reviewing section 1115 applications, but is not legally
binding. We found that the last Federal Register notice of a section
1115 application submission and 30-day comment period was published in
1998. According to an HHS official, the current agency policy does not
include publication of notices with a 30-day comment period while
applications are under review at HHS because the states are considered
to be a more appropriate forum for public input. Our discussions with
HHS officials during the spring of 2002 indicated that current agency
policy was not to release copies of pending waiver applications to
interested parties, but to refer them to states. In May, the Secretary
stated that the agency would publish waiver applications and background
information on its Web site as soon as possible after receipt; HHS
officials subsequently clarified to us that this includes applications
that have been formally submitted but not yet approved. We were able to
find copies of all but one of the pending HIFA proposals on CMS‘s Web
site, along with CMS contact names and phone numbers for each proposal.
However, copies of any Pharmacy Plus or other section 1115 proposals
that were not in the HIFA format were not yet available on the CMS Web
site.
One problem with HHS‘s decision to defer to the states is that states
have not always released copies of pending waivers when requested by
interested parties. Advocates reported such difficulty obtaining a copy
of Arizona‘s waiver application that one organization requested a copy
from HHS under the Freedom of Information Act (FOIA) after the
application had been submitted for review. [Footnote 43] The FOIA
request was made on November 15, 2001, and the agency responded in
January 2002 stating that it was responding to requests in order of
receipt and would notify the requester ’as soon as possible“ about the
availability of the documents. Meanwhile, the waiver had already been
approved in December 2001. The approved waiver is now posted on the
agency‘s Web site, but was not available to the public during the time
it was under review.
State Compliance with the 1994 Policy Varied Widely in Recently Approved
Waivers:
The 1994 policy contains provisions for state-level public
participation, including a list of one or more approaches states are
expected to follow. These include:
* public meetings with copies of the proposal and opportunities to
comment;
* using a commission where meetings are open to the public;
* legislation containing the outline of the waiver proposal; [Footnote
44]
* formal notice and comment through the state‘s administrative
procedures act with notice given at least 30 days prior to submission
of the waiver;
* publication of notice in a newspaper of general circulation including
information on how to obtain a copy and submit comments, with a comment
period of at least 30 days; or;
* any similar process providing an opportunity for interested parties
to learn about and comment on the proposal. [Footnote 45]
Such state-level activities allow the public to be informed of and
comment on proposed demonstration programs, but do not necessarily
guarantee consensus on a state‘s planned waiver. We found wide
variation in the approaches and level of effort states made to seek and
incorporate public comment on written copies or descriptions of the
waiver proposals, as well as the degree of controversy concerning the
state proposals, as illustrated in the following examples.
* California had an extensive public process as well as a statute
providing authorization to seek a waiver. [Footnote 46] In addition,
California conducted extensive outreach activities, including mailing
hundreds of copies of the waiver application and soliciting comments,
holding public hearings, and presenting the approach at a special
legislative hearing.
* Illinois, like California, had a statute authorizing the state to
seek a waiver for the pharmacy program expansion, which allowed the
state to claim federal financial participation. [Footnote 47] The
interest groups we contacted did not raise concerns about the adequacy
of the public process.
* Utah provided opportunity for groups to discuss the proposed waiver
through meetings that state officials held with provider groups and
committees involved with improving health coverage in the state. Despite
these meetings, advocates and others indicated that in their view the
public process was inadequate given the significance of the state‘s
proposal and planned tradeoffs. Participants in some of these meetings
indicated they had little or no opportunity to formally comment on and
influence the waiver proposal.48 Among other issues, advocates and
providers expressed concern about reduced optional benefits and
increased cost sharing for current beneficiaries, the planned enrollment
fee and co-payments, and lack of specialty services and inpatient
hospital coverage for the waiver expansion population. Specialty
physicians and hospitals would be expected to contribute their services
on a volunteer basis, and community health centers would receive lower
payments for the expansion group. [Footnote 49] After the waiver was
approved, state officials indicated that inpatient hospital specialty
physician services would be reimbursed, with state-only funds, under
certain circumstances.
* Arizona did not release copies of its proposal until after it was
approved. Officials indicated that this was because they were
negotiating the waiver with HHS and did not want to release a document
that was changing. Arizona‘s HIFA waiver application stemmed from a
proposition approved by state voters in 2000 to extend Medicaid
coverage to low-income childless adults, and a state law enacted in
spring 2001 to provide coverage to parents of SCHIP- and Medicaid-
eligible children. Although the HHS policy lists legislation as an
acceptable way to fulfill the public process requirement, there was a
significant change in Arizona‘s waiver application request from what
was originally authorized. The section of the HIFA waiver covering
childless adults with SCHIP funding was not included in the state
statute or otherwise made public before the waiver was approved.
Streamlined Review Process Raises Additional Concerns:
HHS‘s new initiatives further reduce the information states must provide
on the extent of their public process. Prior to HIFA, states were
required to indicate in their section 1115 applications specifically
how they complied with HHS‘s policy for a public process. The 1994
policy directed states to include a narrative description of their
public process with their applications, which became part of the
administrative record for the waiver‘s approval. Such documentation
provided a basis for HHS to determine whether the state provided an
effective notice and comment process. Consistent with the agency‘s
commitment to streamlining the waiver approval process, the HIFA waiver
application template allows states to simply check a box indicating
that they followed a public process that allowed beneficiaries and
other interested stakeholders to comment on the proposal. No
description of the state‘s public process is required.
HHS has recently emphasized to states that a public process is a
priority, but has not similarly committed to a federal-level process.
On May 3, 2002, CMS sent a letter to all state Medicaid directors
encouraging the use of a public participation process, and stating that
the agency would continue to review section 1115 waiver applications to
ensure adherence to the 1994 policy. The letter did not, however,
indicate that HHS intended to address public input at the federal level
in line with its stated policy. The extent to which HHS‘s notice to
states will ensure a process that provides for appropriate public input
and consideration of comments remains to be seen. Concerns about the
lack of an appropriate public process have been voiced in other states
with pending HIFA waivers.
Conclusions:
In providing section 1115 program demonstration authority under the
Social Security Act, the Congress has indicated its willingness to allow
states to experiment with innovative approaches in certain public
programs to enhance their reach and effectiveness, including coverage of
populations that might otherwise be ineligible for those programs. Over
the years, many uninsured people in various states have benefited from
such experimentation, receiving health insurance coverage otherwise
unavailable to them. Using this same authority, HHS has recently
committed to work with states to provide additional flexibility and more
expedited approvals, including developing specific initiatives, such as
HIFA and Pharmacy Plus. While only a handful of demonstrations have
been approved to date, several other states have similar waivers under
consideration that will likely be influenced by prior decisions and
precedents.
Our review of recently approved waivers, however, raises certain legal
and policy concerns that indicate the need to clearly establish
purposes and populations for which SCHIP funds may be spent. While
section 1115 authority provides the Secretary with broad discretion in
approving demonstrations that further the program‘s objectives, it also
creates the opportunity for HHS to approve state-operated programs that
may not be consistent with program objectives established by the
Congress. In exercising the section 1115 authority available for the
SCHIP program, recent HHS approvals have allowed SCHIP funds to be
spent on individuals other than the statute‘s stated target population:
uninsured low-income children. At issue is the appropriateness of
covering two distinct groups of adults: childless adults and parents or
other custodians of SCHIP- and Medicaid-eligible children. With respect
to childless adults, we believe that HHS has not presented a reasonable
basis for authorizing states to cover childless adults under SCHIP.
Furthermore, allowing states to cover parents with SCHIP funds without
demonstrating its cost effectiveness allows limited program funds to be
spent on individuals not targeted in the statute. In this regard, it is
not clear which statutory objectives should take precedence”those of
the SCHIP statute, which allows for family coverage only to the extent
that it does not exceed the cost of insuring eligible children, or
section 1115 authority, which allows certain statutory provisions”such
as cost-effectiveness tests”to be set aside.
Flexibility and program experimentation must be accompanied by
accountability, as the HIFA name implies. Fiscal accountability is an
important aspect of the Medicaid and SCHIP federal-state partnerships to
ensure, among other things, that both the federal and state governments
pay their fair share of program costs. We found, however, that HHS‘s
review did not adequately ensure that two newly approved waivers were
budget neutral, as required as a condition of section 1115 waiver
approvals, because their ceilings included inappropriate or
impermissible costs. Consequently, these waivers have put the federal
government at increased financial risk. HHS approval of waivers that
were based on use of inappropriate methods for demonstrating their
budget neutrality is not a new problem, as we have earlier reported.
However, as more states pursue additional flexibility in their Medicaid
and SCHIP programs, HHS has an opportunity”if not an obligation”to
develop more specific and consistent criteria on acceptable
methodologies to predict permissible future costs and to ensure greater
accountability in guarding against inappropriate federal financial
risk.
Accountability should also entail a process of public input that is
adequate to allow for the expression of issues and concerns that
affected parties may have. Expediting the waiver review and approval
process is an important goal. But it is also important to allow for
public input into new and pending program proposals to help assure that
proposals are consistent with overall program goals and that the
benefits of waiving certain provisions justify forgoing their original
purposes. Doing so at the state level facilitates informing those
potentially most affected by new program approaches. However, a federal-
level notice and comment opportunity is also important because approved
waivers represent federal policy that may have influence beyond a
single state. It also provides for a more visible and transparent
process for all affected and interested parties, including the
Congress”something that may be better accomplished at the federal
level. For these reasons, we believe there is a need to adhere to some
minimal federal input process for waiver proposals, such as the HHS
policy established in 1994”in response to earlier concerns about the
lack of an open process”that provided for notification in the Federal
Register and a 30-day comment period.
Matters for Congressional Consideration:
We believe the Congress should address three issues we identified in the
course of our work. Two issues pertain to the availability of SCHIP
funding to provide health insurance coverage to two distinct groups of
adults: childless adults and parents or guardians of SCHIP-eligible
children. The third pertains to the need for an improved federal-level
process for public notification and input for state applications for
Medicaid and SCHIP section 1115 demonstration projects.
In our view, HHS‘s use of section 1115 authority to allow states to use
SCHIP funds to cover childless adults is not consistent with the
program‘s statutory objectives to expand health coverage to uninsured,
low-income children. Therefore, SCHIP funds should not be available for
this purpose. Further, states‘ use of SCHIP funds to cover childless
adults decreases the amount of unspent SCHIP funds available for
redistribution in future years to states with unmet SCHIP needs. HHS
disagrees with our view, asserting that the objectives of the Arizona
HIFA waiver must be viewed as a comprehensive approach in providing
health insurance coverage to those who were previously uninsured,
including childless adults and parents. Because of the difference in
our positions on whether SCHIP funds are available to cover childless
adults, we are raising this to the attention of Congress for
resolution. Resolving this issue is important not only for the Arizona
waiver but also because of the precedent it sets for additional
pending section 1115 demonstration applications currently under
consideration and for the future availability of SCHIP funds for
uninsured, low-income children.
Therefore, the Congress should consider amending title XXI of the Social
Security Act to specify that SCHIP funds are not available to provide
health insurance coverage for childless adults. In addition, the
Congress should establish, for parents or guardians of SCHIP-eligible
children, which statutory objectives should take precedence”those of
title XXI, which allow for family coverage only to the extent it does
not exceed the cost of insuring eligible children, or section 1115
authority, which allows certain statutory provisions”such as cost-
effectiveness tests”to be set aside.
The Congress should also consider requiring the Secretary of HHS to
improve the public notification and input process at the federal level
to ensure that beneficiaries and groups affected by Medicaid and SCHIP
section 1115 demonstration waiver proposals receive opportunity to
review and comment on proposals before they are approved.
Recommendations for Executive Action:
To ensure that SCHIP funds are spent only for authorized purposes, we
recommend that the Secretary of HHS:
* amend the approval of Arizona‘s HIFA waiver to prevent future use of
SCHIP funds on childless adults, and;
* deny any pending or future state proposals to spend SCHIP funds for
this purpose.
To meet its fiduciary responsibility of ensuring that section 1115
waivers are budget neutral, we recommend that the Secretary of HHS:
* better ensure that valid methods are used to demonstrate budget
neutrality, by developing and implementing consistent criteria for
consideration of section 1115 demonstration waiver proposals, and;
* reconsider Utah and Illinois‘s budget neutrality justifications, in
light of our conclusions that certain costs were inappropriate or
impermissible and, to the extent appropriate, adjust the limit on the
federal government‘s financial obligation for these waivers.
To improve the opportunity for public input into HHS consideration of
state Medicaid and SCHIP program proposals that waive statutory
requirements, we recommend that the Secretary of HHS provide for a
federal public input process that includes, at a minimum, notice of
pending section 1115 waiver proposals in the Federal Register and a 30-
day comment period in line with HHS‘s 1994 policy.
Agency and State Comments and Our Evaluation:
We provided a draft of this report for comment to HHS, OMB, Arizona,
California, Illinois, and Utah. OMB and California declined to provide
written comments. In its general comments, HHS emphasized that
increasing access to health insurance and providing prescription drugs
to senior citizens are among its top priorities, and that given the
current state of the economy, its actions to increase coverage through
waivers are appropriate if not imperative. HHS also highlighted its
history of using section 1115 waivers in the Medicaid program to expand
health insurance coverage for individuals who would not otherwise be
eligible for the program. HHS also commented that, since January 2001,
the agency has approved nearly 1,800 Medicaid and SCHIP state plan
amendments, managed care waivers, home- and community-based waivers,
and section 1115 waivers and amendments, but noted that, because of the
scope of our study, our report focused on only 4 of them. We reviewed
new section 1115 demonstration waivers in line with the goals of HHS‘s
new HIFA and Pharmacy Plus initiatives”initiatives of particular
interest because of the significance of their goals and HHS‘s plans to
grant states new flexibility to achieve them”and only 4 had been
approved at the time we conducted our work. We also considered, in
addressing certain issues such as budget neutrality, earlier HHS
actions and our own prior work.
HHS disagreed with each of our three recommendations for executive
action. Arizona, Illinois, and Utah also disagreed with various aspects
of our findings leading to these recommendations. A summary of their
concerns and our evaluation follows. HHS‘s and states‘ comments are
included in appendixes IV through VII.
SCHIP Funding for Adults:
With regard to our recommendation that the Secretary amend the approval
of Arizona‘s HIFA waiver to prevent future use of SCHIP funds on
childless adults, and deny any pending or future state proposals for
this purpose, HHS commented that our analysis was extremely narrow and
did not recognize that the approval of the Arizona HIFA waiver promotes
the objectives of SCHIP by providing health insurance coverage to those
who were previously uninsured. HHS and Arizona both commented that the
approved section 1115 SCHIP demonstration waiver prioritizes spending
SCHIP (title XXI) funds for children. States are not permitted to limit
or cap children‘s enrollment, and are required to ensure the
availability of funds for children over funding adult expansion
populations. We revised the report to better clarify these priorities
and requirements for the Arizona waiver. HHS also noted that there were
no states that were entitled to redistributed SCHIP funds that did not
receive such funds as a result of expenditures on section 1115
demonstrations.
We acknowledge that covering the uninsured is an important public policy
goal and that HHS has established coverage of children as a priority for
use of SCHIP funds in the Arizona waiver terms and conditions. We also
acknowledge that states that received redistributed funds in 2002 were
not affected by HHS‘s approval of the Arizona waiver. However, any
unspent SCHIP funds available for redistribution to states in future
years to cover uninsured low-income children would be reduced because
of the Arizona approval, and any similar approved state proposals.
We continue to believe that neither HHS nor Arizona has adequately
explained how the objectives of the SCHIP statute”to provide health
assistance to uninsured low-income children”is promoted by insuring
childless adults. In its comments, HHS introduced a new rationale for
this approval: that these adults could become parents or caretaker
relatives in the future. This statement does not clarify how SCHIP
funds used for this purpose would likely support the program‘s
objectives. To the contrary, HHS‘s assertion that it may use SCHIP
funds for childless adults suggests that it could approve virtually any
demonstration project and, thus, effectively eliminates the requirement
that section 1115 demonstration projects be likely to promote the
objectives of the particular program for which they are authorized.
Similarly, HHS‘s discussion of the broader community benefits of the
Arizona HIFA waiver does not clarify how it would likely promote the
provision of health assistance to low-income children. In its detailed
comments (number 12), HHS indicated that our discussion of the scope of
the Secretary‘s authority under section 1115 is unnecessary and
overbroad in view of the HHS position that the Arizona HIFA waiver”in
its entirety”will promote SCHIP objectives. As indicated, our
discussion was included in response to HHS‘s position that the
Secretary need not exercise the section 1115 waiver authority on a
program-by-program basis. Because our positions differ on whether SCHIP
funds are allowable for this purpose, we believe it is important for the
Congress to address this issue. Resolving it is also important because
the Arizona waiver approval sets precedent for future waiver approvals
and funding commitments that could potentially impact on SCHIP funds
available for redistribution to states with unmet SCHIP needs. As a
result, we elevated this issue to a matter for congressional
consideration.
Neither HHS nor the states commented on the draft report‘s matter for
congressional consideration concerning the use of section 1115 authority
to approve spending SCHIP funds on parents or guardians of SCHIP-
eligible children without regard to the statutory cost-effectiveness
test.
Budget Neutrality:
HHS, Utah, and Illinois disagreed with our findings supporting the
recommendation that the Secretary better assure that valid methods are
used to demonstrate budget neutrality. For Utah‘s estimate, HHS and Utah
stated that the methods used to assure budget neutrality were valid.
They commented that including the costs of a hypothetical population in
the without-waiver costs was appropriate because the state has ’current
law“ flexibility to cover that population at its own option, that is,
the state could have covered the expansion population through its
Medicaid program and thus should be allowed to consider the associated
costs of their coverage as without waiver costs. We continue to
maintain”despite HHS‘s disagreement both currently and in response to
our 1995 report”that states should not be allowed credit for the costs
of covering certain hypothetical populations in their without-waiver
cost estimates. Indeed, the Medicaid statute provides states wide
latitude in terms of covered populations and services and payment rates
for those services, and the federal government will pay its share of
covered expenditures in an open-ended manner when the states cover the
services under their state Medicaid plan. If states choose, however, to
pursue broader authority under section 1115, they are required to meet
the budget neutrality test. In the case of Utah and other states we
have examined in the past, states had previously chosen not to cover
such optional populations. In our view, to allow the inclusion of
hypothetical costs for hypothetical populations not previously
covered”in an attempt to demonstrate budget neutrality of new section
1115 demonstration proposals”turns the test of budget neutrality into a
rather hollow exercise.
Regarding our conclusion that HHS allowed Illinois to include
impermissible UPL costs in its baseline, HHS and Illinois each raised a
different concern. HHS indicated that the final regulation implementing
the UPL reduction was not in place at the time of the Illinois waiver
approval. We disagree. The final rule that set new UPLs for nonstate-
governmental facilities, including a 150-percent UPL for nonstate-
government-owned hospitals and a mandated phase-out of payments
above this limit, was published in January 2001 and effective March
2001, well before the Illinois waiver was approved in January 2002. A
second rule, to which HHS may have been referring, reduced the UPL for
nonstate-government-owned hospitals from the 150-percent level to 100
percent of what Medicare would pay and was effective May 2002. We
revised the report to clarify the effective dates of these two rules.
HHS in its comments recognized that the UPL reduction may now apply, and
indicated that it was reviewing the budget neutrality cap in light of
the new rules.
Illinois disputed that its budget neutrality projections are inflated by
impermissible costs. The state said that other spending authority found
in the Medicare, Medicaid and SCHIP Benefits Improvement and Protection
Act (BIPA) could have been used by the state in its waiver projection
which would have offset the impact of the inappropriately included UPL
funds. Illinois officials indicated that these costs that could be
incurred in future years should have been considered in our assessment
of their without-waiver estimate. However, the budget neutrality
justification that Illinois submitted to, and was approved by, HHS did
not include these hypothetical costs in the ceiling. The state in its
comments did not provide any evidence that it intended, in the absence
of the waiver, to modify its program so that some of these hypothetical
costs would be incurred by the population covered by the waiver.
Illinois officials also indicated that, even if these BIPA-related
costs were not considered, that several technical corrections should be
made to our estimate of impermissible costs. After the state provided
additional documentation for its budget neutrality analysis, we
adjusted our estimate of impermissible UPL costs accordingly, to $275
million from $356 million. We note, however, that our methodology and
estimate are conservative. We reduced the amount of UPL payments
included in the without-waiver estimate at a lower rate than what would
actually occur, because the detailed data needed to determine the
actual and higher rate of reduction were not available at the time of
our review. We maintain that our estimate, which remains higher than the
estimate that the state developed using its own calculation, is a
reasonable approximation of the impermissible costs included in
Illinois‘s justification, and that HHS should revisit the Illinois
budget neutrality justification and source documentation in light of
this finding as it has committed in its comments to do.
Illinois and HHS also disagreed with our conclusions about the fiscal
soundness of the Illinois Pharmacy Plus demonstration, restating that
the premise that the low-income elderly who are provided prescription
drug coverage will be less likely to become eligible for the Medicaid
program is valid. Illinois stated that our report fails to cite any of
the studies that show drug coverage can reduce other medical costs. In
the course of our work, we reviewed all of the supporting research that
Illinois cited in its waiver application. [Footnote 50] While the cited
studies indicated that access to prescription drugs yielded positive
health benefits for people in poor health, all of them focused on
access for people already diagnosed with specific conditions, such as
diabetes, heart disease, and human immunodeficiency virus (HIV). In our
view, the cited research did not sufficiently support Illinois‘s theory
that a full pharmacy benefit for the general near-poor elderly
population will yield the amount of savings that the state depends on
for its budget neutrality commitment. Illinois also commented that we
did not identify the full range of actions the state could take should
its estimated savings not materialize, such as establishing an
enrollment cap for the waiver population or increasing cost sharing. We
modified our report to clarify this point.
We do not question that some savings from providing a prescription drug
benefit to low-income elderly may be realized and agree that the premise
may be appropriate for an evaluation. Our major observation remains”
that HHS is allowing a high level of risk for the state and its elderly
beneficiaries in the Illinois demonstration, given the specific
assumptions the state has made regarding the substantial savings it
expects to gain from offering a drug benefit to this elderly low-income
population. The state assumes that a drug benefit can largely pay for
itself by diverting thousands of people from becoming Medicaid-eligible
and from entering nursing homes. The state assumes this high diversion
rate even though the majority of the people expected to be covered
under the waiver already receive some drug benefit, albeit a more
limited one, under the state‘s existing drug program. A broader point,
as we report, is that the diversion premise is being accepted and
applied on a broad scale before its validity is tested. HHS has
encouraged states to submit Pharmacy Plus waivers and several have done
so.
Public Process:
HHS disagreed with our recommendation that the Secretary of HHS
should improve the federal public process, commenting that the current
opportunity for public comment in the waiver process is more than
adequate at both the federal and state levels. HHS stated that CMS
currently posts some proposals on the CMS Web site, such as HIFA
proposals, and intends to post all pending and approved proposals on the
Internet in the future. However, HHS did not specify when in the future
it would do so. When we checked CMS‘s Web site, we were able to find
copies of all but one of the pending HIFA proposals, but none of the
Pharmacy Plus proposals and none of the pending proposals requesting
section 1115 waiver authority that were not presented in the HIFA
standard format. Consequently, reliance on the Web site provides an
incomplete source of public information and does not substitute for the
widely accepted Federal Register notice process. Our broader point
remains that because of the variation in the level of public process at
the state level, and because a waiver approval in one state sets
precedent for others, a more formal and consistent federal approach is
needed to ensure that people potentially affected by waivers are aware
of the proposals and have a structured venue for providing input prior
to their approval. It would also provide a centralized focus on issues
of national public policy interest for the Medicaid and SCHIP programs
that is otherwise absent when relying on individual states as the focal
point for public dialogue. Because HHS disagreed with our
recommendation to improve the public notification and input process at
the federal level, we elevated this issue to a matter for congressional
consideration.
Utah suggested that we reconsider the discussion in the draft report of
the state‘s public process and the concerns raised at the state level
with its waiver. The state indicated that the concerns expressed about
the waiver were apart from whether there was appropriate notice and
opportunity for comment. We agree and have revised the report
accordingly. We have retained, however, some discussion of the concerns
with the waiver that groups we contacted felt were not adequately
considered during the state‘s public process. We believe it helps
demonstrate the importance of public input, particularly when proposed
demonstration projects are viewed as controversial.
Other Comments:
HHS and the states provided other comments that were not specific to our
recommendations. Illinois and Utah expressed concerns that the report
implied that HHS‘s expedited review was too fast to provide an adequate
review. Utah, for example, indicated that much negotiation between the
state and HHS took place before the waiver was formally submitted. It
was not our intent to link the amount of time that applications were
under consideration with the results of HHS‘s approval process for
individual waivers. We revised the report to reflect that more time may
be spent than indicated by formal approval times, because states and
HHS may negotiate waiver proposals prior to their formal submission. We
note, however, that beneficiary advocates raised concerns that these
’behind-the-scenes“ negotiations also result in less public awareness
and scrutiny of the specific components of the proposals and that the
expedited review times of the formal proposals may leave less time for
public input and discussion of the written proposals. We believe that
these concerns further support the need for a public process at the
federal level once the state has submitted its proposal, to ensure
adequate public notification of the proposals‘ specific components.
Finally, HHS provided additional technical comments. We revised the
report to address these comments as appropriate.
As arranged with your offices, unless you release its contents earlier,
we plan no further distribution of this report until 30 days after its
issuance date. At that time, we will send copies of this report to the
Secretary of Health and Human Services, the Administrator of the
Centers for Medicare and Medicaid Services, the Director of the Office
of Management and Budget, and others who are interested. We will also
make copies available to others upon request. In addition, the report
will be available at no charge on the GAO Web site at [hyperlink,
http://www.gao.gov].
If you or your staff have any questions, please contact me at (202) 512-
7119. Another contact and other major contributors are included in
appendix VIII.
Signed by:
Kathryn G. Allen:
Director, Health Care”Medicaid and Private Health Insurance Issues:
[End of section]
Appendix I: Description of Four Recent Section 1115 Waiver Approvals:
As of May 1, 2002, HHS had approved 4 of the 13 section 1115 new
demonstration waivers submitted and under review since August 2001.
[Footnote 51] These include the first 2 HIFA waivers, for Arizona and
California; the expansion of primary care for uninsured individuals in
Utah; and the first Pharmacy Plus waiver for Illinois. The table below
provides further specific details about these 4 approved waivers.
Table 2: Description of Section 1115 Waivers Approved for Arizona,
California, Utah, and Illinois:
Name and type of waiver: Waiver goals;
Arizona: Arizona HIFA Demonstration: To expand coverage to uninsured
low-income adults, including conducting a feasibility study of employer-
sponsored insurance;
California: California Parental Coverage Expansion HIFA: To expand
coverage to uninsured low-income parents in order to increase
enrollment and continuity of care for SCHIP and Medicaid children,
including conducting a feasibility study of employer-sponsored
insurance;
Utah: Utah Primary Care Network: To expand primary care coverage to
uninsured low-income adults[A];
Illinois: Illinois Senior Care Program: To extend pharmacy benefits to
low-income seniors.
Name and type of waiver: Sources of funding;
Arizona: Arizona HIFA Demonstration: Unspent SCHIP allotment and
Medicaid (federal and state matching payments);
California: California Parental Coverage Expansion HIFA: Unspent SCHIP
allotment and tobacco settlement funds;
Utah: Utah Primary Care Network: Medicaid (federal and state matching
payments);
Illinois: Illinois Senior Care Program: Medicaid (federal and state
matching payments).
Name and type of waiver: Submission and approval dates;
Arizona: Arizona HIFA Demonstration: Sept. 20, 2001, and Dec. 12, 2001;
California: California Parental Coverage Expansion HIFA: Dec. 20, 2000
” original submission Jan. 16, 2002 – revised submission in HIFA format
Jan 25, 2002 – HIFA approval date;
Utah: Utah Primary Care Network: Dec. 11, 2001, and Feb. 8, 2002;
Illinois: Illinois Senior Care Program: July 31, 2001, and Jan. 28,
2002.
Name and type of waiver: Review time[B];
Arizona: Arizona HIFA Demonstration: 84 days;
California: California Parental Coverage Expansion HIFA: 10 days for
HIFA application; 401 days from original submission date;
Utah: Utah Primary Care Network: 60 days;
Illinois: Illinois Senior Care Program: 182 days.
Name and type of waiver: Implementation date;
Arizona: Arizona HIFA Demonstration: Phase I: childless adults, Nov. 1,
2001 (retroactive implementation); Phase II: parents, Oct. 1, 2002;
California: California Parental Coverage Expansion HIFA: January 1,
2003 – possible start date, but under consideration by state
legislature;
Utah: Utah Primary Care Network: July 1, 2002 –planned start date;
Illinois: Illinois Senior Care Program: June 1, 2002 – actual start
date.
Name and type of waiver: Target populations;
Arizona: Arizona HIFA Demonstration: Phase I: childless adults at or
below 100% FPL; Phase II: parents of children in Medicaid or SCHIP
between 100% and 200% FPL;
California: California Parental Coverage Expansion HIFA: Custodial
parents, caretaker relatives, and legal guardians of Medicaid and SCHIP
children, at or below 200% FPL;
Utah: Utah Primary Care Network: Adults age 19 and older below 150%
FPL, including childless adults from state-only program, and parents;
Illinois: Illinois Senior Care Program: Seniors age 65 and older, at or
below 200% FPL, not otherwise eligible for Medicaid; many from state-
only pharmacy benefit program.
Name and type of waiver: Number of people in waiver (5 years);
Arizona: Arizona HIFA Demonstration: Phase I: 27,000 childless adults;
Phase II: 21,250 parents” both groups estimated, no enrollment caps[C];
California: California Parental Coverage Expansion HIFA: 275,000
adults”estimated, no enrollment cap[C];
Utah: Utah Primary Care Network: 9,000 childless adults, and 16,000
parents ” both groups are enrollment caps;
Illinois: Illinois Senior Care Program: Up to 256,500 seniors ”
estimated, enrollment cap.
Name and type of waiver: Covered benefits;
Arizona: Arizona HIFA Demonstration: Childless adults and parents
receive comprehensive benefits plan comparable to SCHIP for children;
California: California Parental Coverage Expansion HIFA: Parents
receive comprehensive benefits plan similar to SCHIP children
(comparable to state employees);
Utah: Utah Primary Care Network: Expansion adults receive primary care
and preventive services only, no hospital or specialty physician
services;[D] about 17,600 current mandatory eligible adults and
optional medically needy adults who are not aged, blind or disabled
receive reduced benefits[E];
Illinois: Illinois Senior Care Program: Seniors receive assistance in
paying for prescription drugs, with primary care coordination; eligible
beneficiaries have the option of premium and copayment assistance in
paying for private insurance.
Name and type of waiver: Cost sharing;
Arizona: Arizona HIFA Demonstration: Phase I: childless adults have the
same cost-sharing as Medicaid: copayments from $1 office visit to $5
nonemergency visit to emergency room; Phase II: parents have the same
cost sharing as SCHIP: family premiums not to exceed $25 per month, $5
nonemergency visit to emergency room, overall limit 5% annual family
income;
California: California Parental Coverage Expansion HIFA: Parents will
pay premiums based on income: $10 per parent per month for families at
or below 150% FPL; $20 per parent per month for families above 150%
FPL; plus copayments, for example, $5 for an office visit or emergency
care, capped at $250 per household per year;
Utah: Utah Primary Care Network: Expansion adults pay $50 annual
enrollment fee plus copayments, for example, $5 office visit, $30
emergency room visit. Current mandatory eligible adults have no
enrollment fee (optional medically needy adults have $50 enrollment
fee), but have copayments, for example, $3 office visit, $6
nonemergency visit to emergency room, $220 for each hospital admission;
Illinois: Illinois Senior Care Program: Seniors with household incomes
below the FPL pay no charge per prescription until reaching the benefit
cap of $1,750. Seniors with household incomes at or above FPL pay $1
generic or $4 per brand name prescription, until reaching the $1,750
cap. Above the cap, participant pays 20% of each prescription plus a
nominal copayment.
Name and type of waiver: Research plans/evaluation;
Arizona: Arizona HIFA Demonstration: Outcome measure: reduce the rate
of uninsurance by 1% overall; Report on feasibility study of employer-
sponsored insurance;
California: California Parental Coverage Expansion HIFA: Research
question: will enrolling parents increase enrollment and
continuity of care for children? Report on feasibility study of
employer-sponsored insurance;
Utah: Utah Primary Care Network: Research plans being refined;
Illinois: Illinois Senior Care Program: Outcome measures: overall
decrease in Medicaid hospital and long-term care stays; related cost
savings to Medicare.
Name and type of waiver: Estimated 5-year waiver costs;
Arizona: Arizona HIFA Demonstration: Federal share: Phase I: childless
adults SCHIP: $126 million; Medicaid: $288 million; total: $414
million; Phase II: parents SCHIP: $144 million;
California: California Parental Coverage Expansion HIFA: Federal share:
estimated $1.6 billion (66% of total $2.4 billion);
Utah: Utah Primary Care Network: Federal share: Estimated $422 million
(71% of the total $595 million);
Illinois: Illinois Senior Care Program: Federal share: estimated $7
billion (50% of the total $14 billion).
[A] The Utah waiver approval also includes a separate demonstration
population of high-risk pregnant women with assets exceeding the state
maximum who will receive the full Medicaid benefits package.
[B] Review time is the elapsed time from date of submission to date of
approval; It does not include any discussions HHS may have had with a
state before a waiver was formally submitted for review.
[C] While Arizona and California do not have specific enrollment caps,
enrollment is limited by the amount of unspent SCHIP funds available.
[D] Although the Utah waiver proposal, as approved, would provide no
hospital or specialty physician services for individuals receiving
primary care, state officials have since stated that they intend to
cover limited inpatient physician specialty services, if pre-
authorized, from state-only funds.
[E] The individuals with mandatory eligibility who will receive reduced
benefits include adults age 19 and older who are eligible through
section 1925 Transitional Medical Assistance or section 1931 Temporary
Assistance for Needy Families (TANF), and adults age 19 through 64 who
are medically needy and not aged, blind, or disabled. Benefit
reductions for these groups affect optional services by placing some
limitations on vision, physical therapy, chiropractic, dental, and
mental health services. In addition, these recipients will pay $3 per
physician visit (instead of $2) and $2 per prescription (instead of
$1).
Sources: HHS approval letters and approved waiver applications for each
state.
[End of table]
[End of section]
Appendix II: Section 1115 Waiver Applications under Review:
Nine of the 13 section 1115 waiver applications submitted since August
2001 to expand coverage for the uninsured and pharmacy benefits were
still under review by HHS as of June 3, 2002. [Footnote 52] These
proposals”including 4 HIFA applications, 1 uninsured expansion not in
HIFA format, and 4 pharmacy proposals”are briefly described below.
Table 3: Section 1115 Waiver Applications Under Review by HHS, June 3,
2002:
State and waiver: Connecticut ConnPACE Pharmacy Program Waiver;
Highlights:
* Waiver submission: March 6, 2002; under review for 90 days as of June
3.
* Populations served: The waiver would expand eligibility for a
comprehensive prescription drug benefit, by waiver year 5, to an
estimated 104,000 individuals age 65 and older and the disabled age 18
and older with incomes up to 300 percent of the FPL. Drugs covered
would be the same as those covered under the current state-only
program. Participants would pay an annual registration fee of $25 and
$12 to $20 per prescription.
* Cost: The waiver would be financed by federal and state Medicaid
payments, estimated to be $1.9 billion over 5 years, including savings
from reduced use of Medicaid long-term care services and delayed spend-
down to Medicaid eligibility. The state would also contribute about $76
million per year in state-only funds.
State and waiver: Illinois KidCare Parent Coverage HIFA Waiver;
Highlights:
* Waiver submission: February 15, 2002; under review for 109 days as of
June 3.
* Populations served: The waiver would make health insurance coverage
available to an estimated 318,200 individuals, the majority of whom
would be parents of Medicaid and SCHIP children with incomes at or
below 185 percent of FPL. Coverage would also be offered to low-income
and uninsurable adults and children in several small state-funded
programs, such as those for hemophilia, renal dialysis, and immigrant
and other low-income children. Benefits would vary by group, ranging
from the state‘s approved SCHIP plan (Medicaid benefits without home
and community-based waiver services and abortion services) to limited
types of services specifically for individuals with hemophilia or renal
disease. Cost sharing will also vary by group. Newly eligible parents
with incomes above 150 percent and at or below 185 percent of FPL, for
example, would pay monthly premiums of from $15 (for one covered
person) to $40 (five or more) plus copayments of $3 to $5 per
prescription, $5 per medical visit, and $25 for each non-emergency
visit to an emergency room. Current eligibles and several expansion
groups would be offered the option of premium assistance for private
insurance in lieu of state-administered coverage.
* Cost: Federal spending over 5 years is estimated at $861 million (66
percent of the total estimated cost of $1.3 billion). Funding would
come from Medicaid, SCHIP, and state general revenues.
State and waiver: Maine Care for Childless Adults HIFA Waiver;
Highlights:
* Waiver submission: February 22, 2002; under review for 102 days as of
June 3.
* Populations served: The waiver would expand Medicaid coverage to one
population group: childless adults. In the first year, 11,480
individuals with incomes under 100 percent of FPL would be covered, and
in later years the income limit could rise to 125 percent of FPL. New
enrollees would receive the same benefits as other Medicaid
beneficiaries with the same nominal cost-sharing.
* Cost: Maine would finance the waiver, estimated to cost $236 million
over 5 years, with federal and state Medicaid funds by relinquishing
part of its Disproportionate Share Hospital allocation.
State and waiver: Michigan MIFamily Medicaid Expansion HIFA Waiver;
Highlights:
* Waiver submission: March 1, 2002; under review for 95 days as of June
3.
* Populations served: Michigan would expand coverage to an estimated
210,500 individuals in several groups that would receive different
benefits. (1) About 70,000 parents of children in Medicaid with family
incomes between 51 and 100 percent of FPL would receive a benefit plan
including physician, lab, X-ray, inpatient hospital (coverage limited
to a defined case rate payment per authorized admission), and many
outpatient services. Copayments for this group would include $10 for
each physician visit; $10 to $20 per prescription; and $25 for a
nonemergency visit to the emergency room (based on the prudent
layperson standard). (2) An estimated 62,000 childless adults with
incomes up to 35 percent of FPL would receive a specified outpatient
benefit plan, excluding any inpatient coverage. They would pay $3 for
physician visits, up to $5 per prescription, and $25 for a nonemergency
visit to the emergency room. (3) Up to 1,500 pregnant women with
incomes between 186 and 200 percent of FPL would receive full existing
Medicaid benefits. (4) Up to 75,000 childless adults with incomes
between 35 and 100 percent of FPL could receive a specified outpatient
benefit through county health plan programs supported by a federal,
state, and county partnership that would be phased in across the state
over 5 years. In addition, approximately 2,000 disabled Medicaid
beneficiaries would be allowed to earn up to 350 percent of FPL and
still receive Medicaid benefits. Waiver beneficiaries could receive
premium assistance vouchers to purchase private employer-sponsored
health insurance as an alternative to state programs.
* Cost: Michigan proposes to fund its expansions, estimated to be $2.4
billion over 5 years, with unspent SCHIP funds, Medicaid savings from
redefined benefits for the optional and expansion groups, redirecting a
portion of the state‘s Disproportionate Share Hospital allocation, and
new local funds from participating counties.
State and waiver: New Jersey Pharmaceutical Assistance to the Aged and
Disabled (PAAD) Program Waiver;
Highlights:
* Waiver submission: April 3, 2002; under review for 62 days as of June
3.
* Populations served: The waiver would refinance the existing state-
funded PAAD program for seniors age 65 and older and the disabled age
18 and older with incomes at or below 200 percent of FPL. State would
continue funding its state-only Senior Gold pharmacy assistance program
for eligible individuals with incomes up to 300 percent of FPL. These
two programs currently serve about 199,000 and 26,000 individuals,
respectively, and in 5 years would together serve an estimated 250,000
people. Both programs currently and under the waiver would provide the
same drugs approved for the Medicaid formulary. There would be pharmacy
benefit management, no enrollment fee, and $5 per prescription cost
sharing.
* Cost: Federal spending over 5 years is estimated at nearly $5
billion, half of the estimated total cost of $9.9 billion. The PAAD
waiver program would be funded by federal and state Medicaid payments,
while the Senior Gold program for higher income individuals would
continue to be state-funded.
State and waiver: New Mexico State Coverage Initiative HIFA Waiver;
Highlights:
* Waiver submission: April 3, 2002; under review for 62 days as of June
3.
* Populations served: The waiver would expand coverage to up to 40,000
uninsured adults ages 19 to 64 with incomes at or below 200 percent of
FPL in phase I. The expansion would be targeted to employed adults and
parents of Medicaid and SCHIP children. No children are included in
phase I. Benefits would be similar to basic commercial managed care
packages in the state (including inpatient, physician, lab and X-ray,
pharmacy, and mental health and substance abuse services), with sliding
scale cost sharing, for example, ranging from $5 per physician visit
for individuals with incomes up to and including 100 percent of FPL, to
$20 for those with incomes 151 through 200 percent of FPL. Similarly,
hospital inpatient copayments would range from $25 to $150 per day, and
nonemergency visits to the emergency room from $25 to $125. Coverage
would be offered primarily through an employer-based system. The
application states that an amendment to the demonstration would be
submitted later for a phase II, which could reallocate existing
Medicaid program resources to shift certain enrollees from Medicaid to
the phase I benefits package, with the savings allowing coverage of an
additional 40,000 uninsured adults. This proposal is not currently
under review.
* Cost: Federal spending over 5 years for the phase I program is
estimated at $228 million from the state‘s SCHIP allotment, which is 82
percent of total program costs estimated at over $277 million. There
would also be state and local funding and premium cost sharing by
participants.
State and waiver: South Carolina Prescription Drug Benefit for Low-
Income Seniors Program Waiver;
Highlights:
* Waiver submission: January 8, 2002; under review for 147 days as of
June 3.
* Populations served: This waiver would provide comprehensive pharmacy
benefits (the same as provided under the state‘s Medicaid plan) and
medical case management for up to 50,000 seniors age 65 and older with
incomes at or below 200 percent of FPL and no private drug coverage. An
existing state-funded pharmacy program serving about 33,500 seniors
with incomes at or below 175 percent of FPL would be folded into the
waiver. Participants would pay a deductible of $500, then $10 to $21
per prescription with no ceiling or cost limit.
* Cost: The program, estimated to cost $2.8 billion over 5 years
(including expenditures for the Medicaid-aged population as well as the
pharmacy benefit program itself), would be funded by federal and state
Medicaid payments, savings from diverting people from Medicaid
eligibility and reducing the rate of increase in use of Medicaid
services, a drug rebate program, and participant copayments.
State and waiver: Washington Medicaid and SCHIP Reform Waiver;
Highlights:
* Waiver submission: November 7, 2001; under review for 209 days as of
June 3. On January 25, 2002, HHS requested the state to submit a more
specific proposal outlining exactly what changes would be made to
benefits and cost sharing, which eligibility groups would be affected,
and what the timeframe would be. As of June 3 the original waiver was
being revised and may be resubmitted as a HIFA.
* Populations served: The Washington waiver as proposed in November of
2001 would cover about 32,000 parents of Medicaid and SCHIP children
currently enrolled in the state-only Basic Health Plan, who would be
transferred to the waiver, plus an estimated 20,000 additional parents
(a figure that could include an unspecified number of childless
adults). To do so, the November 2001 waiver proposal sought flexibility
to adopt cost sharing, change benefits, or limit enrollment as needed
in administering the state Medicaid program. For example, the
application requested flexibility to design different benefit packages,
with a benefit floor that would apply to both mandatory and optional
eligibility groups. This benefit floor would be based on the state-
funded Basic Health Plan”which offers inpatient and outpatient hospital
services, ambulance, emergency room, physician services, maternity and
well-baby care, and pharmacy”plus outpatient rehabilitation therapies.
Cost sharing would be limited to 5 percent of family income, on
average, from premiums paid by those with incomes above the FPL and
from copayments on all nonpreventive services.
* Cost: The state‘s November 2001 waiver proposal planned to use
unspent SCHIP funds estimated at $486 million for the 5 years 2002-2006
to finance the expansion populations.
State and waiver: Wisconsin SeniorCare Pharmacy Program Waiver;
Highlights:
* Waiver submission: April 1, 2002; under review for 64 days as of June
3.[A]
* Populations served: As proposed, the waiver would provide
comprehensive Medicaid prescription drug coverage for an estimated
177,000 seniors age 65 and older with incomes below 240 percent of FPL
who were not eligible for Medicaid. Participants would pay an annual
enrollment fee of $20, $5 to $15 per prescription, and individuals with
incomes between 160 and 240 percent of FPL would pay the first $500 as a
deductible. State legislation in 2001 established a new state-funded
pharmacy assistance program, SeniorCare, to be implemented September 1,
2002, and to be folded into this pharmacy waiver program once approved.
* Cost: The program, with an estimated total cost of about $1 billion
over 5 years, would be financed by federal and state Medicaid payments,
including Medicaid savings from delaying or diverting seniors from
spending down to eligibility.
[A] HHS announced approval of the Wisconsin pharmacy waiver application
on July 1, 2002. Because it was approved after we completed our work,
we did not assess the final approved waiver (which could potentially
differ in scope from the initial proposal). Our assessment in this
table references the initial plans included in the state‘s waiver
proposal.
Sources: State section 1115 waiver applications.
[End of table]
[End of section]
Appendix III: HHS Office of the General Counsel Response to GAO
Inquiry:
Department Of Health & Human Services:
Office of the General Counsel Centers for Medicare and Medicaid
Services Division:
330 Independence Ave., SW:
Room 5309 Wilbur J. Cohen Building:
Washington, D.C. 20201:
May 14, 2002:
Dayna K. Shah:
Associate General Counsel:
General Accounting Office:
441 G Street, N.W.
Washington, D.C. 20548:
Dear Ms. Shah:
I am responding on behalf of General Counsel Alex M. Azar II to your
inquiry concerning the approval of a demonstration project under
section 1115 of the Social Security Act (Act) for the State of Arizona
(approved pursuant to the Health Insurance Flexibility and
Accountability (HIFA), process). Specifically, you asked about the
"legal and policy justification" for allowing Arizona to use funds
appropriated under title XXI of the Act for the State Children's Health
Insurance Program (SCHIP) to provide insurance coverage to childless
adults.
While the Office of the General Counsel advises on legal issues, we do
not have ultimate responsibility for determining the justification for
approving a demonstration project under section 1115 of the Act.
Section 1115 accords the Secretary broad discretionary authority to
approve any demonstration project "which, in the judgment of the
Secretary, is likely to assist in promoting the objectives" of various
titles of the Act (including title XIX and, by virtue of the reference
in section 2107(e)(2)(A), title XXI). As I am certain you can
appreciate, this standard involves a degree of policy discretion that
only program officials can appropriately exercise.
The statutory language of section 1115 quoted above provides
considerable legal flexibility to authorize the use of program funds
for items, services or activities that would not normally be paid under
the program. Section 1115 by its terms provides for federal
participation in expenditures that are not "otherwise matchable."
Furthermore, the language of section 1115 permits approval of
demonstration projects based on the overall purposes of all of the
listed Social Security Act programs (rather than segregating each
program). In other words, in approving a Medicaid or SCHIP
demonstration, the Secretary may consider the likelihood of promoting
the objectives of the programs authorized under any of the titles of
the Social Security Act listed in section 1115.
I hope that this response has been helpful.
Signed by:
Sheree R. Kanner:
Associate General Counsel:
[End of section]
Appendix IV: Comments from the Department of Health and Human Services:
Department Of Health & Human Services:
Office of Inspector General:
Washington, D.C. 20201:
June 27, 2002:
Ms. Kathryn G. Allen:
Director, Health Care - Medicaid and Private Health Insurance Issues:
United States General Accounting Office:
Washington, D.C. 20548:
Dear Ms. Allen:
Enclosed are the Department's comments on your draft report entitled,
"Medicaid and SCHIP: Recent HHS Approvals of Demonstration Waiver
Projects Raise Concerns." The comments represent the tentative position
of the Department and are subject to reevaluation when the final
version of this report is received.
The Department appreciates the opportunity to comment on this draft
report prior to its publication.
Sincerely,
Signed by:
Janet Rehnquist:
Inspector General:
Enclosure:
[The Office of Inspector General (OIG) is transmitting the Department's
response to this draft report in our capacity as the Department's
designated focal point and coordinator for General Accounting Office
reports. The OIG has not conducted an independent assessment of these
comments and therefore expresses no opinion on them.]
Comments of the Department of Health and Human Services on the General
Accounting Office's Draft Report, "Medicaid and SCHIP: Recent HHS
Approvals of Demonstration Waiver Projects Raise Concerns" (GAO-02-
817):
General Comments:
The Department of Health and Human Services (HHS) appreciates the
opportunity to comment on this draft report on recent approvals of
Medicaid and the State Children's Health Insurance Program (SCHIP)
demonstrations. Since January 2001, Secretary Thompson has approved
nearly l,800 Medicaid and SCHIP state plan amendments (SPAs), managed
care waivers, home and community-based care waivers, and 1115 waivers
and amendments. As a result, over l.8 million more low-income Americans
have become eligible for Medicaid or SCHIP and 4.9 million individuals
have become eligible for expanded benefits or services.
Staff from the Centers for Medicare & Medicaid Services (CMS) began
meeting in November 2001 with your staff on the request from Senator
Baucus and Senator Grassley to review the actions we have taken in
Medicaid and SCHIP. Since then, the Department has provided GAO with
access to all staff and materials you have requested. We understand
that, because of the time constraints set by the requestors, the GAO
study has a limited focus. We would like to note that GAO's conclusions
and recommendations reflect an analysis of only 4 of the 1,800 SPAs,
waivers, and amendments approved since January 2001.
Increasing access to health insurance and providing prescription drugs
to senior citizens are among our top priorities Given the current state
of the economy, we believe our actions to increase coverage through
waivers are appropriate, if not imperative. We have responded at a time
when this issue is so crucial to the health and well-being of so many
low-income Americans, many of whom work - and pay taxes - but are still
below the poverty level and do not have health insurance.
Under section 1115 of the Social Security Act, Congress authorized the
Secretary the power to waive provisions of the Social Security Act and
authorized the Secretary to use federal program funds to share in
demonstration project costs that would otherwise not qualify for
federal funding. Because of Medicaid's complex eligibility rules, an
individual may be below the poverty level but still not eligible for
Medicaid. We have used 1115 waivers in the Medicaid program to expand
health insurance coverage for individuals who would not otherwise be
eligible for the program. In 1997, Congress extended the power to grant
1115 waivers of provisions of Title XXI, SCHIP. We would note that many
members of Congress have often indicated their support for a wide
variety of 1115 waivers. Some of these waivers have been comprehensive
such as those granted to California, Massachusetts. New York, Oregon,
and Tennessee among others. Some 1115 waivers have been targeted to
specific geographic areas such as Los Angeles County. Others are
targeted to specific services or specific individuals.
In general, non-disabled adults aged 21 to 64 are more likely to be
uninsured than children or senior citizens. Approximately 40 percent of
uninsured adults have no regular source of health care. The vast
majority of uninsured low-income adults are in the work force and
paying taxes. In the Medicaid program, of the four distinct population
groups (aged, blind/disabled, children, and adults), adults have the
shortest duration on Medicaid. For example, in Arizona, 77 percent of
blind and disabled individuals were enrolled for the full 12 months in
FY 2000. However, only 29 percent of non-disabled adults were covered
by Medicaid for the full 12 months. In Utah, only 16 percent of non-
disabled adults were covered by Medicaid for the full 12 months. Thus
it is likely that the Arizona and Utah waivers will provide health
insurance coverage for individuals who were formerly on Medicaid, but
have lost eligibility.
The SCHIP enrollment is higher than ever. The number of children ever
enrolled in SCHIP increased from 3.3 million in FY 2000 to 4.6 million
in FY 2001, an increase of 38 percent. Arizona started its SCHIP
program in 1998 and has set eligibility at 200 percent of the federal
poverty level. Its increase in SCHIP enrollment between FY 20(10 and FY
2001 was 43 percent, which is above the national average. Yet Arizona
still had an allotment balance of approximately $373 million when it
applied for a waiver to cover certain adults who have annual income of
less than $8,860.
The Health Insurance Flexibility and Accountability (HIFA) initiative,
announced in August of 2001, establishes new flexibility for States to
cover the uninsured by pursuing coordinated waivers of Medicaid and
SCHIP provisions. One important provision of this initiative is
coordination between public and private health insurance coverage. We
believe that it is appropriate to provide, wherever feasible,
opportunities for low-income Americans to be covered through employer-
sponsored plans. Because this is a cost-effective approach, it does
enable States to increase coverage to additional uninsured individuals.
The following are our specific comments on the recommendations and
findings of the report. We have divided our comments into two
sections -- responses to specific recommendations, and additional
comments.
GAO Recommendations for Executive Action:
To ensure that SCHIP funds are spent only for authorized purposes, we
recommend that the Secretary of HITS:
* Amend the approval of Arizona's HIFA waiver to prevent future use of
SCHIP funds on childless adults, and;
* Deny any pending or future state proposals to spend SCHIP funds for
this purpose.
HHS Response:
We want to be very clear that the coverage of uninsured low-income
children remains the priority of SCHIP. States that have received Title
XXI section 1115 demonstrations are required through Special Terms and
Conditions to prioritize spending Title XXI funds for children. States
are not permitted to limit or cap children's enrollment and must ensure
the availability of funding children over funding for adult expansion
populations.
We strongly disagree with GAO's recommendation. The GAO's analysis of
the objectives of SCHIP is extremely narrow and fails to recognize that
the approval of Arizona's HIFA waiver does promote the objectives of
the SCHIP program. The objectives of the Arizona HIFA waiver must be
viewed as a comprehensive approach in providing health insurance
coverage to those who were previously uninsured, including parents and
childless adults, some of whom may indeed be former Medicaid
recipients. The objectives of the Arizona HIFA waiver must be viewed as
a comprehensive approach in providing health insurance coverage to
those who were previously uninsured, including parents and childless
adults. The waiver cannot be adequately viewed by its individual
components. Overall we anticipate the demonstration will decrease the
number of uninsured children by an additional 2 percent. In addition,
demonstration waivers historically have been granted to provide health
insurance coverage to individuals not otherwise eligible for a program.
In the Arizona demonstration, as GAO noted, this includes childless
adults. These adults could become parents or caretaker relatives in the
future, and some of them may indeed be former Medicaid recipients.
Moreover, extending coverage to these adults strengthens the health
status and awareness of the low-income community in general, supports
the development of "medical homes" to encourage preventive care, and
widens the health delivery network available to the low-income
community. Congress specifically extended the section 1115 waiver
authority to the SCHIP program in 1997. Members of Congress have
previously indicated their support for SCHIP waivers that include
adults and Congress has long been aware of the Secretary's view that he
possesses broad authority to authorize waivers.
Funds spent on adult populations through demonstrations have not
impeded the ability of other states to provide SCHIP coverage to
children in contrast to statements made in the report (pages 4 and 15).
As GAO notes, in 2002, CMS redistributed unspent SCHIP funding to 18
states and territories in a manner that complied with the formula set
forth by Congress in the Title XXI statute as modified by the Medicare,
Medicaid, and SCHIP Benefit Improvement and Protection Act of 2000. In
other words, there were no states that were entitled to redistributed
funds that did not receive such funds, or received fewer funds than
they were entitled to, as a result of expenditures on section 1115
demonstrations.
GAO Recommendation:
To meet the fiduciary responsibility of ensuring that section 1115
waivers are budget neutral, we recommend that the Secretary of HHS:
* Better ensure that valid methods are used to demonstrate budget
neutrality, by developing and implementing consistent criteria for
consideration of section 1115 demonstration proposals, and;
* Reconsider Utah's and Illinois's budget neutrality justifications, in
light of our findings on the inappropriateness of certain costs and, to
the extent appropriate, adjust the limit on the federal government's
financial obligation for these waivers.
HHS Response:
We strongly disagree with both elements of this recommendation. Our
methods of assuring budget neutrality are valid.
Additionally, we note that the scope of the GAO's report ” four
approved demonstrations - is too narrow to gain an accurate view of the
section 1115 waiver review process and the methods used to determine
budget neutrality and allotment neutrality. A review of all of the
waivers approved over the past decade involving eligibility expansions
would show that the methods used to determine budget neutrality were
consistent with waivers approved by previous administrations. The
unique feature in the Utah approval was the actual scope of the benefit
package, not the fact that the expansion population is receiving a
different benefit package compared to the state plan population. Our
methodology of allowing Utah to include the projected costs of the
proposed benefit package is consistent with other approvals where the
benefit package differs from that offered to the state plan population.
The HIFA waiver guidance published in August 2001 is the first time
that HHS has detailed precisely how budget neutrality is determined. We
have been explicit in explaining its methodology and policies
concerning the approval of waivers and have shed light on a process
that previously was largely unclear to States. This guidance will only
serve to reinforce our consistent application of budget neutrality
principles.
We disagree with GAO's assertion that the Utah demonstration is not
budget neutral because we include the costs of certain new eligibles in
establishing a baseline for the purpose of assessing future budget
neutrality. The GAO drew the same conclusion in a 1995 report that did
not contain any recommendations; the GAO is now recommending that we re-
consider the use of this methodology. As we did in 1995, we disagree
with GAO's analysis. Additional comments appear at the end of this
document.
We also disagree with GAO's conclusions regarding the Illinois Pharmacy
Plus demonstration. GAO contends that the Illinois Pharmacy Plus waiver
will not be budget neutral, and questions the Illinois budget
neutrality premise that low-income elderly who are provided
prescription drug coverage will be less likely to become eligible for
the Medicaid program. As supportive evidence, the GAO points out that
neither the Congressional Budget Office (CBO), the Office of Management
and Budget (OMB), nor the CMS actuary scored savings for the Medicare
program in estimating the costs and savings of a Medicare prescription
drug benefit.
Estimating the costs of legislative proposals is a substantially
different exercise than estimating the costs of a proposed
demonstration. The purpose of section 1115 is to permit the Secretary
to approve state proposals to demonstrate program changes that further
the purposes of enumerated programs of the Social Security Act. The
state hypothesizes that savings will accrue from providing a drug
benefit to low-income seniors and has set out to demonstrate this in a
real-world setting. The state believes that by extending a pharmacy
benefit to a low-income, elderly population it can maintain the health
and economic welfare of the newly eligible group, which will result in
savings that will offset the cost of the benefits. We find this an
exciting and promising demonstration that is consistent with the intent
of the statutory waiver authority. Findings from this demonstration
will provide evidence to support future legislative cost estimates.
Indeed, the CBO states in its August 10, 2001, letter to Chairman
Bilirakis that state pharmacy programs such as these will provide
additional evidence on which to base future estimates.
The GAO further notes that the without-waiver estimates provided by the
state include impermissible costs related to payments to facilities in
excess of the upper payment limits (UPL). It estimates that more than
$356 million in inappropriate UPL expenses are included in the without
waiver estimate. We disagree that any costs were inappropriately
included in the without-waiver estimate. Additional comments on this
matter appear at the end of this response.
GAO Recommendation:
To improve the opportunity for public input into HHS consideration of
state Medicaid and SCHIP program proposals that waive statutory
requirements, we recommend that the Secretary of HHS provide for a
federal public input process that includes, at a minimum, notice in the
Federal Register and a 30-day comment period.
HHS Response:
We disagree on the need for this recommendation because opportunity for
public comment is more than adequate. CMS and the States have ensured
that there is ample opportunity for public comment at both the State
and Federal levels. The May 3, 2002 State Medicaid Director letter re-
affirms the guidance in the September 27, 1994 Federal Register notice.
In addition, information about demonstrations is currently posted on
the Internet, including fact sheets and information about key dates in
the review process. The CMS currently posts some proposals on the CMS
Website, such as HIFA proposals, and is working to post all pending and
approved proposals on the Internet in the future.
Although CMS has not published notice of waiver proposals in the
Federal Register since 1998, and does not have a formalized comment
period on proposals, CMS accepts and responds to written comments on
all demonstration proposals.
The CMS is proactively seeking public input through the addition of a
Low Income Health Access Open Door group to its existing 11 Open Door
Groups. This group will start in late June and will permit
beneficiaries, providers and other stakeholders to discuss many issues
relating to access to care for low-income populations, including
waivers.
We disagree with GAO's implication that public notice requirements were
not met in Arizona and Utah. While provider groups and committees in
Utah indicated to GAO that they had little or no opportunity to
formally comment on and influence the proposal, the State has indicated
that there was a great deal of discussion with these groups. The public
notice process is intended to allow states to receive and consider
input from stakeholders in the community, not necessarily to modify the
proposal in a way that would satisfy each commenter's concerns.
Additional Points:
1. We continue to disagree with the GAO about the Utah demonstration
because including the cost of new eligibles in the base does not
violate the principle of budget neutrality. The GAO's assertion is
based on the assumption that budget neutrality is only assured when the
costs under the waiver are less than or equal to the costs without the
waiver, assuming the State makes no changes to its program. This
methodology does not take into account the flexibility States have, to
increase eligibility in their programs. Budget neutrality is, and has
been since the Federal Register guidance was published in 1994, based
upon a comparison of with-waiver costs to without-waiver costs assuming
current-law flexibility. That is, once a State decides to expand
eligibility, we assume the State would have used current law to the
extent possible to cover the new populations in the absence of the
demonstration. The GAO's argument in support of its position that
States' interest in cost containment would preclude expansions under
current law is not persuasive; if States did not want to increase costs
they would not fund expansions, whether under current law or under a
demonstration.
2. Although it is mentioned, we believe that the report does not
adequately distinguish the difference between the budget neutrality
requirements of Title XIX section 1115 demonstrations and the allotment
neutrality requirements of Title XXI section 1115 demonstrations. We
first note this on page 3 [now on page 2] in the first partial
sentence, and later on page 14 in the first paragraph under fiscal
integrity, in which only the term "budget neutrality" is used. We would
recommend that GAO refer to "budget and allotment neutrality
justifications" – as these are separate and distinct measures of fiscal
integrity applicable to Medicaid and SCHIP, respectively. More
significantly, we believe it is important that the distinction is made
in the body of the document. Page 14 in the last paragraph, discusses
SCHIP followed by the statement, "Similarly, HHS did not consistently
ensure that the waivers will be budget neutral". Although the report
goes on to reference the Utah and Illinois demonstrations, it reads as
though the Title XXI California and Arizona demonstrations are subject
to budget neutrality and is confusing to the reader. It also suggests
that the California and Arizona demonstrations are not allotment
neutral, when the case is that they are allotment neutral. We would
suggest that the information in footnote 15 be elaborated upon and
highlighted more prominently in the document because it is an important
distinction. Budget neutrality means that Medicaid costs under the
waiver cannot exceed what would be allowable in the State's Medicaid
plan under current law, taking into consideration the populations,
including expansion populations, included in the waiver. Allotment
neutrality means that combined spending in the State's SCHIP program
and any SCHIP demonstration spending cannot exceed the available
allotment, including currently available redistributed funds. All
waivers are required to meet one or both of these requirements,
depending upon their funding source(s).
3. At the time that the Illinois waiver was approved, the final set of
regulations on upper payment limits were not yet effective, which
affects the amount of payments the state must phase out to come into
compliance with Medicaid UPL regulations. As referenced in the report,
we included a Term and Condition to the waiver approval that provides
for the budget limit to be modified to reflect changes in laws,
regulations, and policy statements that would have affected state
spending in the absence of the demonstration. We are in the process of
reviewing the budget neutrality cap in light of the new rules.
4. The CBO memorandum referenced in the report appears to address only
Medicare savings. (Clearly, substantial Medicaid savings would accrue
from a Medicare drug benefit by substituting Medicare as the payer of
prescriptions for dually-eligible Medicare and Medicaid beneficiaries.)
We believe that the impact of a prescription drug benefit for low-
income seniors may be greater than that of the general population on
Medicare. First, the demographic and health characteristics of the aged
Medicaid population may differ in important ways from the group
considered by CBO. They may be poorer, sicker, and less able to obtain
prescription drugs. Therefore, the impact of a prescription drug
benefit may be greater, resulting in more savings. Second, it is
unclear if CBO considered the impact of reductions in long-term
admissions to nursing homes. This is a substantial part of Medicaid
costs, and diversions from or delays in nursing home admissions may
yield substantial savings to Medicaid.
5. On page 3, under Results in Brief, and on page 10 in the second
paragraph, in the description of the Arizona and California approvals,
we recommend that GAO clarify that the coverage of adult populations is
for those that meet the articulated eligibility criteria and are
ineligible for Medicaid. These states cannot enroll or claim Title XXI
funds for adults that could be enrolled in Medicaid.
6. On page 35,[now on pp. 40-41] in the appendices, for the Arizona and
California waivers ” the chart describes it as having no enrollment
cap. It is important to note that while there is no explicit enrollment
cap, i.e., 25,000 people ” enrollment in both states is limited based
upon the availability of Title XXI funding and based upon the
assumption that Title XXI funding goes first to pay for state plan
children. As written, it makes it sound as if our liability is
unlimited and that is not the case.
7. On page 3 under Results in Brief, in the description of the Arizona
proposal, we recommend that GAO refer to these individuals as just
"uninsured low-income..." and delete the word "previously".
8. On page 8, middle paragraph, second sentence, we recommend that it
be rewritten to indicate: "To be considered, proposals must be
statewide and seek to coordinate coverage with private health insurance
options for low-income uninsured." The reference to employer-sponsored
insurance options is too limiting and refers to only one type of
coordination with private health insurance that we would find
acceptable.
9. On page 8 there is a statement that in 1995 the GAO "reported" that
demonstrations are not budget neutral. The term "reported" suggests
that the GAO was reporting a fact; rather, the GAO asserted based on
its own methodology (which openly differs from our methodology) that
demonstrations were not budget neutral. The text should be changed
accordingly.
10. On page 12, under Arizona populations served, the word "estimated"
should be inserted for the numbers of both populations to be enrolled
in the demonstration. Otherwise, it appears that this is a set number
for enrollment, which is not the case.
11. The chart on page 13 shows an enrollment fee for the Illinois
SeniorCare program. The state is not charging an enrollment fee.
12. On pages 16-17, [now on pp. 15-17] the discussion of the scope of
the Secretary's 1115 authority is unnecessary and overbroad in light of
CMS' position that the Arizona HIFA demonstration project will promote
the objectives of Title XXI of the Social Security Act.
13. On page 23[now on pp. 23-24] the statement is made that many people
in Illinois are already receiving some drug coverage under an existing
state funded program. While this is correct, we note that the
implication is that the benefit expansion is not extensive. In fact,
the demonstration covers three times as many drugs as the state-only
program and opens eligibility to many additional seniors.
14. Also on page 23, [now on p. 24] the statement is made that Illinois
is assuming diversion of "7,500 of the estimated 20,000 elderly
individuals who would normally enter Medicaid...." Not all of the
diversions will be from new enrollees – Illinois also assumes that some
current medically needy Medicaid enrollees will no longer be eligible
for Medicaid once they begin receiving a comprehensive drug benefit.
15. On page 36, [now on p. 40] cost-sharing requirements for Phases I
and II are respectively identical to the state's (or Arizona's)
Medicaid and SCHIP programs, not merely "comparable."
16. On page 36, [now on p. 42] Arizona's goal is to reduce the overall
rate of uninsurance by 1 percent, not 2 percent.
17. On page 37 [now on p. 42] in footnotes "b" and "c", we recommend
GAO use the term "separate child health program" instead of "separate
from Medicaid child health program" and "separate program".
18. On page 38, [now on p. 44] the description of the Michigan HIFA,
the state would use SCHIP and Medicaid funds, rather than just SCHIP
funds as the report indicates.
[End of section]
Appendix V: Comments from the State of Arizona:
Arizona Health Care Cost Containment System:
Committed to excellence in health care
Jane Dee Hull, Governor:
Phyllis Biedess, Director:
801 East Jefferson:
Phoenix, AZ 85034:
P.O. Box 25520:
Phoenix, AZ 85002:
(602) 417-4000
Internet: [hyperlink, http://www.ahcccs.state.az.us]:
June 20, 2002:
Kathryn G. Allen:
Director, Health Care-Medicaid and Private Insurance Issues:
United States General Accounting Office:
Washington DC 20548:
Dear Ms. Allen:
Thank you for the opportunity to comment on the draft report entitled
Medicaid and SCHIP: Recent HHS Approvals of Demonstration Waiver
Projects Raise Concerns (GAO-02-817).
Arizona notes that the General Accounting Office (GAO) is concerned
that "...HHS has allowed the state to use unspent SCHIP funding to
cover adults, including those without children, despite SCHIP's
fundamental goal of expanding health care coverage to low-income
children." It is accurate that CMS did grant approval to use SCHIP
funding for SCHIP parents and childless adults but not at the expense
of curtailing coverage to SCHIP eligible children. Under the Terms and
Conditions, the state agreed that it would not close enrollment,
institute waiting lists or decrease eligibility for SCHIP children
while the HIFA amendment is in place.
Children remain the state's first priority for Title XXI funds as
documented in the approval letter from HHS. Not only have we added over
49,000 through our SCHIP program, the state has added another 99,000
children to Medicaid due to an SCHIP application.
Arizona is requesting that GAO add into the final report a discussion
of the funding priorities that the state agreed to as a condition of
the waiver. Any available SCHIP funds will first be used for SCHIP
eligible children between 100 and 200% of FPL. The second priority for
SCHIP funding will be parents of children between 100% and 200% of FPL.
One of the compelling reasons to expand coverage for the parents was to
use the lure of family coverage as an incentive to keep children
enrolled in the SCHIP program. Only after the state pays for these
children and parents will SCHIP funds be used for childless adults. In
fact, the state fully expects that SCHIP funding for childless adults
will only be used for two years based on the priorities we have set.
Arizona is very concerned that the draft report may leave an impression
that Arizona is diverting SCHIP funding for children to fund parents
and childless adults. This is not accurate. Arizona has more than
sufficient SCHIP funding to cover the current population of 49,0(10
SCHIP children and the expected growth in this population at an income
level of up to 200% of FPL. We responded to a HHS HIFA initiative and
maintained coverage for SCHIP children at the maximum income level
while adding over 21,250 parents in the midst of a budget-cutting year.
As discussed above, we will only use SCHIP funding for the childless
adults after children and parents are covered.
Thank you for the opportunity to comment on the Arizona specific
contents of the draft report. The GAO had several other recommendations
and observations in the draft report that impact Arizona but the state
believes that it is more appropriate for HHS to respond to these issues
that include: the ability of HHS to use the 1115 waiver authority
contained in the SCHIP legislation; adequate review and oversight of
waiver proposals by HI-IS; and a recommendation for a federal notice
and comment period.
If you have any questions, please call Lynn Dunton at (602) 417-4447.
Sincerely,
Signed by:
Branch McNeal:
Deputy Director:
c: Katherine Iritani, Assistant Director:
[End of section]
Appendix VI: Comments from the State of Illinois:
Illinois Department of Public Aid:
George H. Ryan, Governor:
Jackie Garner, Director:
201 South Grand Avenue:
East Springfield, Illinois 62763-0001:
Telephone: (217) 782-1200 TTY: (800) 526-5812:
June 26, 2002:
Ms. Kathryn G. Allen, Director:
Health Care ” Medicaid and Private Health Insurance Issues:
United States General Accounting Office:
Washington, D.C. 20548:
Dear Ms. Allen:
Illinois provides the following comments on the GAO draft Report to the
Committee on Finance, U.S. Senate, "Medicaid and SCHIP: Recent HHS
Approvals of Demonstration Waiver Projects Raise Concerns." These
comments should be included in the final report as Illinois' comments.
Waiver Process:
Although not explicit, the report contains an implicit criticism of the
speed with which HHS approved the Illinois and other waivers covered,
implying that this speed led to the lack of cost neutrality. Illinois
would point out that there is nothing in the report that links the
speed of the review to the concerns raised about the approved waivers.
In fact, the GAO report states that the GAO raised the exact same
concerns about cost neutrality in 1995, prior to the expedited review
process.
Illinois believes that the revised waiver parameters promote good
management by clearly recognizing the importance that timely decisions
are critical to the federal and state partnership, the states'
abilities to meet established obligations, and the removal of months of
indecision by expediting health care to beneficiaries.
Budget Neutrality:
Illinois strongly disputes that its projected costs are inflated by
impermissible costs included in its projection. The GAO asserts that
Illinois' costs were inflated because its projection failed to account
for certain reductions in UPL expenses required by section 705b of the
Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act
(BIPA). The GAO reaches its conclusion by focusing on the requirements
of only one section of the act and ignoring the effect of two relevant
sections of the same law. Sections 70lc and 70ld of the act mitigate
the effect of section 705b and allow Illinois to increase total
spending at the institutions involved in the UPL arrangements discussed
in the GAO report, not reduce them. When the law as a whole is read and
applied, the GAO is incorrect in asserting that Illinois' budget
neutrality cap is inflated.
Even accepting the GAO's position that it is acceptable to issue its
report asserting inflated costs by considering only one section of
BIPA, Illinois notes that the $356 million estimate in the draft report
Illinois was allowed to review is miscalculated due to several mistakes
by the GAO auditors. The mistakes brought to GAO's attention include:
* Misapplying spending not paid to non-state government owned hospitals
as going to such hospitals, thereby inflating the GAO baseline costs
and more than doubling the number identified as excess spending by the
GAO;
* Transposing a number in the calculation of the UPL;
* Using population figures higher than those used by CMS in setting the
actual waiver cap.
Without considering GAO's not applying two relevant sections of federal
law, correcting for these mistakes would reduce GAO's estimate of
inflated costs to $I65 million, approximately 1% of the budget
neutrality cap.
Fiscal Integrity:
Cost neutrality in the Illinois demonstration program is based on the
premise that providing a drug benefit to low-income seniors will keep
them healthy and therefore divert them from costly hospitalizations and
institutionalization in nursing homes that allow them to spend down to
Medicaid eligibility. The section of the Report headed "Illinois Waiver
Approval Raises Questions About The Extent that HHS is Ensuring Waivers
Are Fiscally Sound" questions the validity of this premise. Illinois
believes that this section is totally unsupported by research, study,
references or any citation to authority and therefore is misleading and
unfair. Illinois would like to make three points with respect to this
section.
First, the GAO report actually makes no attempt to refute this premise
or make reference to any study or data that contradicts it. The only
source cited by the report to buttress its conclusion that HHHS failed
to insure fiscal integrity by approving a waiver based on this premise
is a one-page letter from the Director of the CBO expressing caution as
to how much savings to the Medicare program a prescription drug benefit
would generate. The report fails to cite any of the many studies that
show drug coverage can reduce other medical costs, including those
sources cited in Illinois' waiver application. "There are many other
studies in addition to those cited in Illinois' waiver application. Of
particular relevance is the report of the New York state-funded Epic
Program for pharmaceutical assistance to the low-income elderly.
[Footnote 53] Allowing states to test credible premises that, if
successful, are of tremendous benefit to the fiscal resources of states
and the federal government and to the health of low-income citizens is
the reason Congress gave waiver authority to the Secretary of HHS in
Section 1115.
Second, the fact that a prescription drug benefit for all Medicare
recipients is not cost neutral to the Medicare program does not mean
that such a benefit given to the target low-income population of the
Illinois demonstration program is not cost neutral to the Illinois
Medicaid program. The arguments set forth in the report against a
Medicare drug benefit being cost neutral are not directly applicable to
the Illinois waiver. Medicare is not a means-tested program. Therefore,
many moderate- and high-income Medicare beneficiaries may have access
to prescription drugs. Many studies indicate that low-income seniors do
not have the same access. Therefore, the improved health outcomes and
reduced medical costs associated with a prescription drug benefit will
be most dramatic for the low-income population served by the waiver.
Further, even within the context of Medicaid, the unique
characteristics of the Illinois Medicaid program and the health care
system in Illinois will result in a low-income elderly drug benefit
generating more Medicaid savings and diversion than would be the case
in other states. It should be noted that Illinois has 42% more nursing
home beds per l,000 people than the national average.
Finally, the report also fails to mention cost containment measures
available to Illinois in the demonstration program (e.g., cost sharing
latitude and enrollment caps) to maintain cost neutrality. These
options allow the state to avoid loss of FFP for its base Medicaid
population should combined costs of the program with the waiver exceed
projections.
Sincerely,
Signed by:
Jackie Garner:
Director:
cc: The Honorable Max Baucus, Chairman, Committee on Finance:
The Honorable Charles Grassley, Ranking Minority Member, Committee on
Finance:
Bill Koetzle, Office of Congressman Hastert:
[End of section]
Appendix VII: Comments from the State of Utah:
State of Utah:
Utah Department of Health:
Division Of Health Care Financing:
Michael O. Leavitt, Governor:
Rod L. Betit, Executive Director:
Michael J. Deily, Division Director:
288 North 1460 West:
PO Box 143101:
Salt Lake City, Utah 84114-3101:
Telephone: (801) 538-6406:
Fax: (801) 538-6099:
June 20, 2002:
Kathryn Allen, Director:
Health Care:
Medicaid and Private Health Insurance Issues:
U.S. General Accounting Office:
441 G St NW Room 5A14:
Washington DC 20548:
Dear Ms. Allen:
Thank you for the opportunity to review your draft report to the
Committee on Finance, U.S. Senate, entitled "Recent HHS Approvals of
Demonstration Waiver Projects Raise Concerns." We have a number of
concerns with the conclusions reached as outlined below.
First, the report implies that the HI IS approval of the Utah waiver in
a 60-day time period was too fast to provide adequate review. However,
GAO does not take into account the interactions between HHS and the
State of Utah that began in early 2001 and continued up until the
waiver was approved on February 9, 2002. Nearly a year of discussion
and negotiation took place before the waiver was approved.
Following the recommendation of HHS, Utah started working closely with
CMS staff approximately eight months prior to formally submitting its
waiver application. There was frequent communication between the State
and CMS during this eight-month period that provided the opportunity to
outline the basic concepts of the waiver and address many of the issues
and concerns surfaced by CMS prior to the formal application submittal.
These pre-application communications saved a significant amount of time
in the approval processes and differed substantially from our earlier
1995 experience in which negotiations with HCFA (now CMS) dragged on
for well over a year after the waiver request was submitted, resulting
in Utah losing the opportunity to implement an innovative demonstration
proposal, which would have provided coverage to 56,000 uninsured
people. GAO should encourage HHS to continue the practice of intensive
pre-approval communication rather than intimate the approval process
moves too fast.
Another area of concern with the draft report is the analysis of cost
neutrality. In addressing its opposition to the inclusion of
populations that could he covered under a State plan amendment, GAO
returns to its 1995 hypothesis that "it was questionable that these
states would have added optional eligibility groups to their Medicaid
programs without the waiver." This hypothesis is based on the argument
that "state officials indicated cost containment was a primary
consideration in seeking section 1115 waiver..." Cost containment is
not what the Utah waiver is trying to achieve in the sense GAO is
suggesting. Utah has a solid history of trying to address the challenge
of providing access to insurance coverage for the uninsured. There has
been debate about the best approach to accomplish this for low income
persons, some favoring a full blown Section 1931 expansion with a full
benefit package, as noted in this same GAO report where it addresses
public notice issues. While some in the community favor a 1931
expansion, others have serious concerns with crowd out related to this
type of expansion (which would increase the cost to the federal
government even more) and in our ability to capture the current private
and public dollars covering the costs of uncompensated care for the
target waiver population. While we hold that the more limited approach
is fiscally responsible, it is not clear on what basis the GAO can
conclude what action the State would take in the absence of the 1115
application. The fact is that the expenditures will be significantly
less than what the federal government would be legally obligated to pay
if the State covered the same group through its State Plan option.
Finally, in its Utah example, the report appears to confuse notice
requirements with whether there is consensus from all sectors of the
community on the design of the demonstration. Rather than addressing
the notice process, the bulk of the notice requirements section
regarding Utah addresses some areas of concern with specific components
of the Utah waiver. This is a demonstration program. Lack of consensus
on different aspects of the demonstration should be expected, and
criticism targeting different aspects of the program's design is no
surprise. These areas of controversy, while important, do not
demonstrate a problem with the structure of the public notice process.
One point of notice requirements is to give those with differing
opinions a chance to be heard. The GAO draft report does not
demonstrate or suggest that adequate notice did not occur in Utah; it
simply indicates that "some of the participants in these meetings
indicated they had little or no opportunity to formally comment on or
influence the waiver proposal." In fact, Utah put this proposal in
front of a variety of public forums for comment and public inclusion in
program development. There is also a formal rule making process which
has been followed. This is not being questioned in the GAO report.
While there is clearly on-going debate about several aspects of this
demonstration, we believe that the purpose of a demonstration is to
sort through some of the questions that have surfaced as a result of
putting forward this proposal. The fact that there is on-going debate
is solid evidence that there has been notice and open discussion about
Utah's demonstration proposal, and we have certainly received comment.
We suggest that the paragraph on page 27 of the draft report describing
the Utah process be removed or that it more accurately address the
notice and comment process rather than focus on areas of disagreement
with specific components of the demonstration.
Again, thank you for the opportunity to comment. I have enclosed a
background paper on the Utah demonstration project for your information
and with the hope that you will better understand what we are trying to
accomplish. I look forward to seeing your final report.
Sincerely,
Signed by:
Michael Deily, Director:
Division of Health Care Financing:
Enclosure:
[End of section]
Appendix VIII: GAO Contact and Staff Acknowledgments:
GAO Contact:
Katherine Iritani, Assistant Director (206) 287-4820:
Staff Acknowledgments:
In addition to those named above, Tim Bushfield, Helen Desaulniers, Behn
Miller, Amy Murphy, Suzanne Rubins, Ellen M. Smith, and Stan Stenersen
made key contributions to this report.
[End of section]
Related GAO Products:
Medicaid: HCFA Reversed Its Position and Approved Additional State
Financing Schemes. GAO-02-147. Washington, D.C.: October 30, 2001.
Medicaid: State Financing Schemes Again Drive Up Federal Payments.
GAO/T-HEHS-00-193. Washington, D.C.: September 6, 2000.
Medicare and Medicaid: Implementing State Demonstrations for Dual
Eligibles Has Proven Challenging. GAO/HEHS-00-94. Washington, D.C.:
August 18, 2000.
Children‘s Health Insurance Program: State Implementation Approaches
are Evolving. GAO/HEHS-99-65. Washington, D.C.: May 14, 1999.
State Medicaid Financing Practices. GAO/HEHS-96-76R. Washington,
D.C.: January 23, 1996.
Medicaid: Spending Pressures Spur States Toward Program Restructuring.
GAO/T-HEHS-96-75. Washington, D.C.: January 18, 1996.
Medicaid Section 1115 Waivers: Flexible Approach to Approving
Demonstrations Could Increase Federal Costs. GAO/HEHS-96-44.
Washington, D.C.: November 8, 1995.
Medicaid: State Flexibility in Implementing Managed Care Programs
Requires Appropriate Oversight. GAO/T-HEHS-95-206. Washington, D.C.:
July 12, 1995.
Medicaid: Statewide Section 1115 Demonstrations‘ Impact on Eligibility,
Service Delivery, and Program Cost. GAO/T-HEHS-95-182. Washington,
D.C.: June 21, 1995.
Medicaid: Spending Pressures Drive States Toward Program Reinvention.
GAO/T-HEHS-95-129. Washington, D.C.: April 4, 1995.
Medicaid: Spending Pressures Drive States Toward Program Reinvention.
GAO/HEHS-95-122. Washington, D.C.: April 4, 1995.
Medicaid: Experience With State Waivers to Promote Cost Control and
Access to Care. GAO/T-HEHS-95-115. Washington, D.C.: March 23, 1995.
Medicaid: States Use Illusory Approaches to Shift Program Costs to
Federal Government. GAO/HEHS-94-133. Washington, D.C.: August 1, 1994.
[End of section]
Footnotes:
[1] Although CMS has lead responsibility for administering Medicaid and
SCHIP, throughout this report we refer to HHS as the primary program
entity, because the section 1115 waiver authority resides with the
Secretary and other HHS entities are also involved in the review and
approval process. The CMS Administrator signed the approval letter on
behalf of the Secretary for the four waivers we reviewed.
[2] See related GAO products at the end of this report.
[3] The federal share of a state‘s payments for Medicaid services is
known as the federal medical assistance percentage (FMAP). FMAPs for
each state are calculated annually based on a formula designed to
provider a higher federal matching rate to states with lower per capita
incomes. No state may have a Medicaid FMAP lower than 50 percent or
higher than 83 percent.
[4] EPSDT services are required for all children up to age 18 with
family incomes at or below 100 percent of the FPL and for other
categorically needy children up to age 21. A state may also offer EPSDT
services to children between the ages of 19 to 21 as an ’optional“
service; once it does, the service must be made available to all
members of that group.
[5] Although SCHIP is generally targeted to families with incomes at or
below 200 percent of the FPL, each state may set its own income
eligibility limits, within certain guidelines. As of September 2001,
states‘ upper income eligibility for SCHIP ranged from 100 to 350
percent of FPL.
[6] The SCHIP statute provides for an ’enhanced“ federal matching rate,
based upon the state‘s Medicaid rate. Each state‘s SCHIP enhanced match
is the lower of 70 percent of its Medicaid matching rate plus 30
percentage points, or 85 percent.
[7] States have three options in designing SCHIP: they may expand their
Medicaid programs, develop a separate child health program that
functions independently of the Medicaid program, or do a combination of
both. A state‘s SCHIP Medicaid-expansion program must cover the same
services as its Medicaid program, including any covered optional
benefits, whereas a state‘s SCHIP separate child health program is not
required to do so.
[8] While SCHIP programs created through a Medicaid expansion must
continue to provide services to eligible children using Medicaid funds,
states with separate SCHIP programs can establish waiting lists or stop
enrollment when funds are exhausted.
[9] The Congressional Research Service reported that 19 states had
spent less than 25 percent of their available allotments through
September 2001. Of these 19 states, 5 had spent less than 10 percent of
these funds. Another 22 states had used between one-fourth and one-half
of their allotments. Only 10 states had expended more than 50 percent
of their available funds. See Elicia J. Herz and Peter Kraut, State
Children‘s Health Insurance Program: A Brief Overview, Congressional
Research Service (Washington, D.C.: Jan. 9, 2002).
[10] See Jeanne Lambrew, Kaiser Commission on Medicaid and the
Uninsured, Section 1115 Waivers in Medicaid and the State Children‘s
Health Insurance Program: An Overview (Washington, D.C.: July 20,
2001).
[11] See U.S. General Accounting Office, Medicaid Section 1115 Waivers:
Flexible Approach to Approving Demonstrations Could Increase Federal
Costs, GAO/HEHS-96-44 (Washington, D.C.: Nov. 8, 1995).
[12] Although the Illinois pharmacy proposal was received July 31,
2001, we include it in this group because it was one of the four
demonstrations approved under HHS‘s flexibility initiatives. We do not
include the Tennessee TennCare II Medicaid waiver, submitted February
12, 2002, and approved May 30, 2002, because it was initially reported
to be under review as a 1-year extension to the existing TennCare
demonstration before being approved, according to HHS, as a new 5-year
demonstration program. Similarly, we did not include the Wisconsin
pharmacy waiver in our analysis of approved waivers. HHS announced this
approval on July 1, 2002. This approval came too late for us to include
it in our analysis. Likewise, HIFA applications submitted in mid-May or
later, including those from Colorado, Delaware, Minnesota, and Oregon,
were not included in our analysis of pending proposals.
[13] The California waiver, once it was submitted in the HIFA template,
was approved in only 10 days; however, that application was based on a
section 1115 waiver proposal that had been under review since December
2000.
[14] Specifically, HHS‘s letter approving the Arizona HIFA waiver and
the attached terms and conditions establish priorities for the use of
SCHIP funds, as follows: ’Title XXI [SCHIP] funding will be used to
provide coverage in the following priority order: first to individuals
eligible under the title XXI State plan [i.e., children], then to
parents of Medicaid and SCHIP children between 100 and 200 percent of
the FPL, and finally to single adults and childless couples up to 100
percent of the FPL. For this last group, title XIX [Medicaid] Federal
matching funds will be used if title XXI funding is exhausted. Subject
to legislative approval and the Governor‘s signature, the expansion to
parents of Medicaid and SCHIP children will be implemented on or before
October 1, 2002. If this expansion is not implemented, Arizona will no
longer receive title XXI funding for childless adults.“ In addition,
the terms and conditions require that ’The State will not close
enrollment, institute waiting lists, or decrease eligibility standards
with respect to the children covered under its title XXI State plan
while the HIFA amendment is in effect.“ Arizona expects that SCHIP
funding for childless adults will only be used for 2 years.
[15] The limits on optional services that apply to some adults with
mandatory eligibility, as well as medically needy adults with optional
eligibility, do not affect children, pregnant women, or aged, blind, or
disabled Medicaid beneficiaries. However, because the demonstration
defines adults as age 19 and older, HHS granted Utah a waiver of the
EPSDT requirement for those individuals aged 19 and 20 who are
currently eligible for EPSDT. As adults, they will be affected by the
limits on optional services.
[16] HHS responded to Washington‘s proposal by asking for more specific
information regarding the planned approach and suggesting that the
proposal could be more responsive to HIFA guidelines. The initial
proposal asked for broad authority to reduce benefits, impose cost
sharing, and cap enrollment.
[17] Connecticut, New Jersey, and South Carolina have existing state-
funded pharmacy assistance programs for seniors that will be folded in
or coordinated with their proposed pharmacy waiver programs. The
Wisconsin legislature authorized such a program to be implemented by
September 1, 2002, with funding through June 30, 2003, and the
requirement that the state seek a Medicaid waiver to continue the
program. HHS announced approval of the Wisconsin pharmacy waiver
application on July 1, 2002, too late to be included in our review.
[18] We reviewed the cost-neutrality justifications for the four
waivers approved since August 2001. In Utah and Illinois, the
applicable test for these Medicaid waivers was budget neutrality. In
California and Arizona, the analysis or test of cost neutrality took
the form of SCHIP allotment neutrality, which requires that combined
spending in the state‘s SCHIP program and any waiver spending not
exceed the state‘s available SCHIP allotment. These two states met the
SCHIP allotment-neutrality test.
[19] See 67 Fed. Reg. 20794 (2002).
[20] Section 1115 lists title I (Old-Age Assistance), title X (Aid to
the Blind), title XIV (Aid to the Permanently and Totally Disabled),
title XVI (Supplemental Security Income for the Aged, Blind and
Disabled), or title XIX (Medicaid), or part A (Temporary Assistance for
Needy Families) or D (Child Support and Enforcement of Paternity) of
title IV.
[21] Section 1115 of the Social Security Act provides in pertinent part:
(a) In the case of any experimental, pilot, or demonstration project
which, in the judgment of the Secretary, is likely to assist in
promoting the objectives of title I, X, XIV, XVI, XIX, or part A or D
of title IV, in a State or States--
(1) the Secretary may waive compliance with any of the requirements of
section 2, 402, 454, 1002, 1402, 1602, or 1902, as the case may be, to
the extent and for such period he finds necessary to enable such State
or States to carry out such project, and;
(2)(A) costs of such project which would not otherwise be included as
expenditures under section 3, 455, 1003, 1403, 1603, or 1903, as the
case may be, and which are not included as part of the cost of projects
under section 1110, shall, to the extent and for the period prescribed
by the Secretary, be regarded as expenditures under the State plan or
plans approved under such title, or for administration of such State
plan or plans, as may be appropriate ...“ (emphasis added).
[22] In the section 1115 waiver provision, the phrase ’as the case may
be“ establishes a link between the titles of the Social Security Act
for which demonstration projects may be authorized and the statutory
provisions containing the requirements or limitations that may be
waived. We note that the Congress used a similar structure and the
phrase ’as the case may be“ to suggest a program-by-program application
of a provision in title XI of the Social Security Act concerning
penalties for false and misleading statements. Prior to amendment in
2000, section 1129A(e) contained a reference to only one title of the
Social Security Act and only one source of supplementary payments under
the act. When the Congress added a second title of the Social Security
Act and a corresponding source for such payments, it used the phrase
’as the case may be“ to distinguish payments made under one title from
payments made under the other.
[23] While not directly addressing the issue, the court, in Crane v.
Mathews, 417 F. Supp. 532 (N.D. Ga. 1976), suggested that section 1115
authorizes waivers on a program-by-program basis. Considering a
Medicaid waiver, the court stated that ’[t] he only limitation upon the
Secretary‘s authority under section 1115 is that he must judge the
project to be one which is likely to assist in promoting the applicable
title of the act“ (emphasis added). Id. at 539.
[24] These percentages represent an average of each of the federal
Medicaid and SCHIP matching rates for 2002 and 2003.
[25] The waiver allows the state in future years to cover more
childless adults than initially planned, if the state does not through
its SCHIP program cover as many children as anticipated and the state
has unanticipated unspent SCHIP funds.
[26] See U.S. General Accounting Office, Children‘s Health Insurance
Program: State Implementation Approaches are Evolving, GAO/HEHS-99-65
(Washington, D.C.: May 14, 1999).
[27] GAO/HEHS-99-65.
[28] Minnesota, New Jersey, Rhode Island, and Wisconsin have received
SCHIP section 1115 waiver approvals to cover parents of children
eligible for SCHIP or Medicaid.
[29] Estimating without-waiver costs involves several key steps. First,
a recent 12-month period prior to waiver approval is identified as a
base year. Second, Medicaid costs and the number of Medicaid
individuals covered are estimated for the base year. Third, trend rates
are developed to estimate the changes in costs and people served over
the life of the waiver.
[30] HHS and OMB disagreed with our conclusions that certain states‘
approved waivers were not budget neutral, including our position that
the hypothetical population method unduly inflates baseline estimates.
HHS and we continue to disagree on this point. OMB declined to comment
on our current report. See GAO/HEHS-96-44.
[31] To control federal expenditures, HHS established a set of UPLs on
the amount it would agree to pay states for certain categories of
services. The limits establish an aggregate ceiling for payments in
service categories, including inpatient hospital services, outpatient
hospital services, nursing facility services, and intermediate care
services for the mentally retarded, at both the state and the local
government levels.
[32] We found that states used intergovernmental transfers that
exploited UPL and other arrangements to inappropriately maximize
federal Medicaid funds, which ultimately are not used to pay for
Medicaid services for Medicaid-eligible individuals. See U.S. General
Accounting Office, Medicaid: State Financing Schemes Again Drive Up
Federal Payments, GAO/T-HEHS-00-193 (Washington, D.C.: Sept. 6, 2000);
U.S. General Accounting Office, Medicaid: HCFA Reversed Its Position
and Approved Additional State Financing Schemes, GAO-02-147
(Washington, D.C.: Oct. 30, 2001); and U.S. General Accounting Office,
Medicaid: States Use Illusory Approaches to Shift Program Costs to
Federal Government, GAO/HEHS-94-133 (Washington, D.C.: Aug. 1, 1994).
In a 2001 review of Illinois‘s UPL arrangements, the HHS Inspector
General found that from 1992 through 2000, Illinois generated at least
$1.6 billion in excessive federal matching funds that were not used for
services for the Medicaid individuals on whose behalf they were
claimed. The report found that in 1999 total payments to the county
involved in the UPL arrangement exceeded the total operating expenses
of the facilities involved in the funding arrangement by $244 million.
See Office of Inspector General, Department of Health and Human
Services, Review of Illinois‘ Use of Intergovernmental Transfers to
Finance Enhanced Medicaid Payments to Cook County for Hospital
Services, A-05-00-00056 (Washington, D.C.: Mar. 22, 2001).
[33] The final UPL rule that we are referencing was published January
12, 2001, and became effective March 13, 2001. The rule gives states a
transition period to gradually reduce their excessive payments and
comply with the new limits. It also increased the UPL for nonstate-
government-owned hospitals from 100 percent of what Medicare would pay
for comparable services to 150 percent of what Medicare would pay. On
January 18, 2002, HHS published another final rule that lowered the UPL
for nonstate-government-owned hospitals to 100 percent of what Medicare
would pay. The 2002 UPL went into effect May 14, 2002, but it did not
change the transition period or the rate of reduction in excess UPL
payments required by the 2001 UPL rule that went into effect March 13,
2001.
[34] Under the UPL transition rules, states are required to identify
excess UPL payments and reduce their claims for payment by a specified
amount in accordance with a transition schedule set forth in the
regulation. Illinois estimated that in 2000, $906 million, which was
78 percent of its total Medicaid payments to certain hospitals, would
be over the new limit. Under the phase-out methodology the $906 million
over the new limit is frozen and can be claimed until 2003, but from
2004 through the end of 2009, it is gradually eliminated. During this
time, the total reduction is $2.9 billion of which $1.4 billion will
occur over the 5-year course of the waiver.
[35] Under the new limits, Illinois will still be allowed some UPL-
related expenses, which can increase over the life of the waiver.
Combining the reduction in the excessive UPL expenses with the increase
in the allowed UPL expenses results in a 39-percent net decrease in the
amount of total payments allowed during the waiver.
[36] We believe that our estimate is conservative because the UPL-
related expenses that are in excess of the new limits are reduced at a
lower rate than they will be under the actual transition methodology
required by regulations. This methodology separates the excess UPL
expenses and the allowed UPL expenses to estimate total allowed
payments during the UPL transition.
[37] This increase stemmed from attributing a certain percentage of the
total UPL payments to the aged waiver population for a year prior to
the waiver, and then applying the expected increases based on
projections of how program costs would grow over the life of the
waiver. In commenting on a draft of this report, Illinois officials
stated that any impermissible UPL funds would likely be offset by
additional spending authority provided under the Medicare, Medicaid and
SCHIP Benefits Improvement and Protection Act (BIPA). We did not
consider this additional spending authority because the state and HHS
did not include it in Illinois‘s submitted or approved budget
neutrality justifications, and because it is unclear whether HHS will
allow such spending authority for estimating without-waiver costs.
[38] See GAO/HEHS-96-44.
[39] See Dan Crippen, Director, CBO Letter to the Honorable Michael
Bilirakis, Chairman, Subcommittee on Health, Committee on Energy and
Commerce (Washington, D.C.: Aug. 10, 2001). [hyperlink,
http://www.cbo.gov/showdoc.cfm?index=2989&sequence=0&from=1], downloaded
March 5, 2002.
[40] See Jocelyn Guyer, Kaiser Commission on Medicaid and the
Uninsured, The Financing of Illinois‘ Prescription Drug Demonstration
Project (Washington, D.C.: April 2002).
[41] See 59 Fed. Reg. 49249, September 27, 1994.
[42] This notice was HHS‘s response to concerns raised in the early
1990s about the rapid approval of some controversial statewide section
1115 waivers. For example, concerns were raised about the rapid
approval and implementation of a waiver submitted by Tennessee and that
state‘s acknowledged failure to consult with all affected stakeholders.
See GAO/T-HEHS-95-115.
[43] FOIA, 5 U.S.C. §552 (2002), provides for public access to agency
records that do not fall within specified exceptions.
[44] Specifically, the notice states that a process that results from
enactment of a proposal by the state legislature prior to submission of
the demonstration proposal, where the outline of the proposal is
contained in the legislative enactment, can satisfy the 1994 policy.
[45] HHS has also established a policy to ensure that there are
effective, ongoing consultations between states and federally-
recognized tribal governments during the decision-making process for
Medicaid and SCHIP matters.
[46] Section 12693.755 of the California Insurance Code provided for
expanded eligibility for SCHIP coverage for uninsured parents of
children enrolled in SCHIP and Medi-Cal (California‘s Medicaid program)
whose income does not exceed 250 percent of the FPL if authorized by a
waiver approved by CMS.
[47] 305 ILCS 5/5-5. 12a authorized the Illinois Department of Public
Aid to seek a Medicaid waiver to claim federal financial participation
for a pharmacy assistance program for persons age 65 and over with
income levels at or less than 250 percent of the federal poverty level.
[48] HHS‘s terms and conditions for the Utah waiver required, among
other things, that the state comply with the 1994 public notice policy
and submit documentation of its consultation with tribal
representatives prior to implementing the waiver. This condition was
applied after the waiver was approved.
[49] The Utah approval includes a waiver of the requirement that states
reimburse federally qualified health centers through a prospective
payment system. This only applies to the expansion population. State
officials estimate that this will result in payments about 10 percent
lower than they would be under the prospective payment system.
[50] Illinois in its comments also cited a report not included in its
initial waiver application addressing the New York Elderly
Pharmaceutical Insurance Coverage (EPIC) Program for pharmaceutical
assistance to the low-income elderly. We reviewed a copy of the report
(EPIC Evaluation Report to the Governor and Legislature, ’Maintaining
Health, Dignity and Independence”1987-1995“), which found that improved
access to drugs for this population had a positive impact on their
health. The state estimated $48 million in savings associated with
lower hospital and institutional care for participants, as compared to
the $41 million cost of the drug benefit program in 1993. However, the
bulk of these savings, $42 million, were for reduced hospital costs.
Illinois cannot claim such savings for its waiver program since
Medicare, not Medicaid, pays for these costs for the elderly
population. Only $6 million of the $48 million in estimated savings was
from the expected reduction in the rate of nursing home
admissions”comparing 17.4 admissions per thousand for the state‘s
senior population, with 16 admissions per thousand for the EPIC
participants. New York also has reported major changes in average
prescription price, utilization, participation, and overall spending
for EPIC since the early 1990s, the time period covered by its analysis
of the cost savings from the benefit. New York has not conducted a more
recent study of the hospital and nursing home admission rates for EPIC
participants.
[51] As noted elsewhere, HHS approved the Tennessee TennCare II waiver
on May 31, 2002, and the Wisconsin pharmacy waiver on July 1, 2002, too
late to be included in our analysis.
[52] We do not include the TennCare II Medicaid waiver in this group
because it was initially reported to be under review as an extension of
the existing TennCare demonstration waiver. HIFA applications submitted
in mid-May or later, including those from Colorado, Delaware,
Minnesota, and Oregon, were not included in our analysis because they
were submitted too late to be included. Note that this table is largely
based on the states‘ waiver applications as submitted to HHS, and
elements of the proposals may change during the review process.
[53] Epic Evaluation Report to the Governor and Legislature,
"Maintaining Health, Dignity & Independence-I987-1995.
[End of section]
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