Medicaid Waivers
HHS Approvals of Pharmacy Plus Demonstrations Continue to Raise Cost and Oversight Concerns Gao ID: GAO-04-480 June 30, 2004Under section 1115 of the Social Security Act, the Secretary of Health and Human Services may waive certain Medicaid requirements for states seeking to deliver services through demonstration projects. By policy, these demonstrations must not increase federal spending. GAO has previously reported concerns with HHS's approval process. GAO was asked to provide information on a new Medicaid section 1115 demonstration initiative called Pharmacy Plus, intended to allow states to cover prescription drugs for seniors not otherwise eligible for Medicaid. GAO reviewed the (1) approval status of state proposals, (2) extent to which HHS ensured that demonstrations are budget neutral, (3) basis for savings assumptions, and (4) federal and state steps to evaluate and monitor the demonstrations.
From January 2002 through May 2004, HHS reviewed Pharmacy Plus proposals from 15 states and approved four: Florida, Illinois, South Carolina, and Wisconsin. These demonstrations offer prescription drug coverage to low-income seniors not otherwise eligible for Medicaid. HHS denied proposals from Delaware and Hawaii as inconsistent with demonstration guidelines; most of the rest were not under active review because HHS had not determined how new Medicare prescription drug legislation will affect proposed or operating Pharmacy Plus demonstrations. Over 5 years, the four approved demonstrations will provide prescription drug coverage to half a million low-income people age 65 or older, at a projected cost of about $3.6 billion, of which the federal share would be about $2.1 billion. HHS has not adequately ensured that the four approved demonstrations will be budget neutral, that is, that the federal government will not spend more with the demonstrations than without them. HHS approved the demonstrations' 5-year spending limits using projections of cost and beneficiary enrollment growth that exceeded benchmarks that HHS said it considered in assessing budget neutrality, specifically, states' recent average growth rates and projections for Medicaid program growth nationwide. Neither HHS's negotiations with the states nor its rationale for approving higher growth rates is documented. Using the benchmark growth rates, GAO estimates that none of the four demonstrations will be budget neutral and federal spending may increase significantly, for example, by more than $1 billion in Illinois and $416 million in Wisconsin over 5 years. Unrealistic savings assumptions also contribute to demonstration spending limits that are not likely to be budget neutral. States assumed that keeping low-income seniors healthy--thus preventing them from spending down their financial resources on health services and "diverting" them from Medicaid eligibility--would generate sufficient savings to offset the increased costs of providing a new drug benefit. GAO found neither state experience nor other research to support such savings. Without state-specific evidence, HHS approved savings assumptions for the four states ranging from $480 million to $2 billion per state over 5 years. Had more conservative assumptions been used to estimate demonstration savings, the proposals likely could not have been approved as budget neutral. Efforts by the states and HHS to evaluate and monitor the Pharmacy Plus demonstrations are in their early stages. The four states have taken few steps to put their own required evaluation plans into practice, and an independent evaluation contracted by HHS and started in October 2002 is scheduled to report in September 2005. In the interim, HHS has not ensured that all states meet requirements for progress reporting on the demonstrations. The information that states have submitted is often insufficient for determining whether the demonstrations are operating as intended, and this shortcoming will limit HHS's oversight capability.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-04-480, Medicaid Waivers: HHS Approvals of Pharmacy Plus Demonstrations Continue to Raise Cost and Oversight Concerns
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Report to the Committee on Finance, U.S. Senate:
United States General Accounting Office:
GAO:
June 2004:
Medicaid Waivers:
HHS Approvals of Pharmacy Plus Demonstrations Continue to Raise Cost
and Oversight Concerns:
GAO-04-480:
GAO Highlights:
Highlights of GAO-04-480, a report to the Committee on Finance, U.S.
Senate:
Why GAO Did This Study:
Under section 1115 of the Social Security Act, the Secretary of Health
and Human Services may waive certain Medicaid requirements for states
seeking to deliver services through demonstration projects. By policy,
these demonstrations must not increase federal spending. GAO has
previously reported concerns with HHS‘s approval process.
GAO was asked to provide information on a new Medicaid section 1115
demonstration initiative called Pharmacy Plus, intended to allow states
to cover prescription drugs for seniors not otherwise eligible for
Medicaid. GAO reviewed the (1) approval status of state proposals, (2)
extent to which HHS ensured that demonstrations are budget neutral, (3)
basis for savings assumptions, and (4) federal and state steps to
evaluate and monitor the demonstrations.
What GAO Found:
From January 2002 through May 2004, HHS reviewed Pharmacy Plus
proposals from 15 states and approved four: Florida, Illinois, South
Carolina, and Wisconsin. These demonstrations offer prescription drug
coverage to low-income seniors not otherwise eligible for Medicaid. HHS
denied proposals from Delaware and Hawaii as inconsistent with
demonstration guidelines; most of the rest were not under active review
because HHS had not determined how new Medicare prescription drug
legislation will affect proposed or operating Pharmacy Plus
demonstrations. Over 5 years, the four approved demonstrations will
provide prescription drug coverage to half a million low-income people
age 65 or older, at a projected cost of about $3.6 billion, of which
the federal share would be about $2.1 billion.
HHS has not adequately ensured that the four approved demonstrations
will be budget neutral, that is, that the federal government will not
spend more with the demonstrations than without them. HHS approved the
demonstrations‘ 5-year spending limits using projections of cost and
beneficiary enrollment growth that exceeded benchmarks that HHS said it
considered in assessing budget neutrality, specifically, states‘ recent
average growth rates and projections for Medicaid program growth
nationwide. Neither HHS‘s negotiations with the states nor its
rationale for approving higher growth rates is documented. Using the
benchmark growth rates, GAO estimates that none of the four
demonstrations will be budget neutral and federal spending may increase
significantly, for example, by more than $1 billion in Illinois and
$416 million in Wisconsin over 5 years.
Unrealistic savings assumptions also contribute to demonstration
spending limits that are not likely to be budget neutral. States
assumed that keeping low-income seniors healthy”thus preventing them
from spending down their financial resources on health services and
’diverting“ them from Medicaid eligibility”would generate sufficient
savings to offset the increased costs of providing a new drug benefit.
GAO found neither state experience nor other research to support such
savings. Without state-specific evidence, HHS approved savings
assumptions for the four states ranging from $480 million to $2 billion
per state over 5 years. Had more conservative assumptions been used to
estimate demonstration savings, the proposals likely could not have
been approved as budget neutral.
Efforts by the states and HHS to evaluate and monitor the Pharmacy Plus
demonstrations are in their early stages. The four states have taken
few steps to put their own required evaluation plans into practice, and
an independent evaluation contracted by HHS and started in October 2002
is scheduled to report in September 2005. In the interim, HHS has not
ensured that all states meet requirements for progress reporting on the
demonstrations. The information that states have submitted is often
insufficient for determining whether the demonstrations are operating
as intended, and this shortcoming will limit HHS‘s oversight
capability.
What GAO Recommends:
GAO recommends that the Secretary of HHS strengthen the processes for
approving and overseeing Pharmacy Plus and other Medicaid section 1115
demonstrations. HHS concurred with several recommendations for
strengthening demonstration approval and oversight but disagreed that
review criteria should be clarified and applied to already-approved
demonstrations. GAO maintains that the criteria for HHS‘s approvals
should be clear and consistently applied.
www.gao.gov/cgi-bin/getrpt?GAO-04-480.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Kathryn G. Allen at (202)
512-7118.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
HHS Has Reviewed 15 Pharmacy Plus Proposals and Approved 4:
HHS Has Not Ensured That Approved Demonstrations' Spending Limits Will
Be Budget Neutral:
Pharmacy Plus Savings Assumptions Not Well Supported:
States Have Taken Few Steps to Evaluate Demonstrations, and HHS Has Not
Ensured Sufficient or Timely Progress Reporting:
Conclusions:
Recommendations for Executive Action:
Agency and State Comments and Our Evaluation:
Appendixes
Appendix I: Calculating a State's Pharmacy Plus Spending Limit for All
Medicaid Seniors:
Appendix II: Denied, Withdrawn, and Pending Pharmacy Plus Demonstration
Proposals as of May 2004:
Appendix III: Comments from the Department of Health and Human
Services:
GAO's Response to the Department of Health and Human Services' Specific
Comments on GAO's Findings:
Appendix IV: Comments from the State of Florida:
Appendix V: Comments from the State of Illinois:
Appendix VI: Comments from the State of Wisconsin:
GAO's Response to the State of Wisconsin's Specific Comments:
Appendix VII: GAO Contact and Staff Acknowledgments:
GAO Contact:
Acknowledgments:
Related GAO Products:
Tables:
Table 1: Highlights of Pharmacy Plus Demonstrations Approved as of May
2004:
Table 2: HHS-Approved, State Historical, and CMS Actuary Growth Rates:
Table 3: HHS-Approved and Benchmark 5-Year Spending Limits:
Table 4: States' Projections of Medicaid Senior Populations after 5
Years, with and without HHS-Approved Pharmacy Plus Demonstrations:
Figure:
Figure 1: Steps to Calculate Projected 5-Year Without-Demonstration
Costs:
Abbreviations:
CBO: Congressional Budget Office:
CMS: Centers for Medicare & Medicaid Services:
FPL: federal poverty level:
HHS: Department of Health and Human Services:
HIFA: Health Insurance Flexibility and Accountability:
MMA: Medicare Prescription Drug, Improvement, and Modernization Act of
2003:
OMB: Office of Management and Budget:
PACE: Pharmaceutical Assistance Contract for the Elderly:
PACENET: Pharmaceutical Assistance Contract for the Elderly Needs
Enhancement Tier:
SCHIP: State Children's Health Insurance Program:
SSA: Social Security Act:
United States General Accounting Office:
Washington, DC 20548:
June 30, 2004:
The Honorable Charles Grassley:
Chairman:
The Honorable Max Baucus:
Ranking Minority Member:
Committee on Finance:
United States Senate:
Under section 1115 of the Social Security Act (SSA), the Secretary of
Health and Human Services may waive certain statutory requirements for
Medicaid--the joint federal and state program financing health care for
low-income families, certain seniors, and disabled individuals--in
connection with experimental, pilot, or demonstration projects that are
likely to promote program objectives.[Footnote 1] Because of the
projects' experimental nature, the Department of Health and Human
Services (HHS) requires demonstrations authorized under section 1115 to
include measurable objectives and an evaluation component. In addition,
since the early 1980s, HHS has required states to show that their
proposals for section 1115 demonstrations are "budget neutral" for the
federal government: that is, a proposed demonstration cannot raise
federal expenditures beyond what they would be under a state's existing
program.
In January 2002, HHS announced the Medicaid Pharmacy Plus section 1115
demonstration initiative, offering states the opportunity to provide a
prescription drug benefit to two groups--seniors (people age 65 or
older) and disabled individuals--whose incomes, although low, exceed
levels that would qualify them for full Medicaid eligibility. Under
this initiative, HHS and the Centers for Medicare & Medicaid Services
(CMS), the agency within HHS that has primary responsibility for
reviewing the demonstration proposals, encourage states to test over 5
years whether extending a drug benefit to seniors who are not eligible
for Medicaid would maintain these seniors' health and hold down overall
Medicaid costs.[Footnote 2]
Over the past decade, Congress and others have raised concerns about
the extent to which HHS has ensured that approved section 1115
demonstration waivers promote the goals and fiscal integrity of both
Medicaid and the State Children's Health Insurance Program (SCHIP). In
particular, Congress has been concerned about HHS's waiver approval
process and the federal costs associated with some of the
demonstrations. Our past work has found, for example, that HHS's
process for approving demonstrations is not always clear or open to
public input and that the department has not always ensured the budget
neutrality of approved demonstrations, thereby raising federal
expenditures.[Footnote 3]
You asked us for information on the Pharmacy Plus initiative. We
focused our review on the following four questions:
1. How many states have applied for Pharmacy Plus demonstration
waivers, and what is the status of their proposals?
2. To what extent has HHS ensured that the approved demonstrations are
budget neutral to the federal government?
3. How well supported are states' assumptions about savings that may
accrue to Medicaid from the Pharmacy Plus demonstration waivers?
4. What steps are states and HHS taking to evaluate approved
demonstrations and to monitor if they are functioning as intended?
Our work is based on a review and analysis of Pharmacy Plus
demonstration waiver proposals considered and approved by HHS from
January 2002 through May 2004. Our analysis covers only demonstration
proposals submitted in response to HHS's Pharmacy Plus
initiative.[Footnote 4] To determine the status of demonstrations under
this initiative, we analyzed HHS data on all proposals it considered,
including their number, outcomes, and characteristics. For approved
demonstrations, we analyzed the applications as submitted by the
states; HHS decision memorandums and approval letters; the applications
as ultimately approved; HHS's terms and conditions for approved
demonstrations; and, when available, the states' plans (called
operational protocols) for how the demonstrations will operate. We also
discussed the process of review and approval with officials of the
reviewing agencies--HHS, CMS, and the Office of Management and Budget
(OMB)--and we obtained information from officials representing the
states with approved demonstrations. To assess budget neutrality, we
obtained available budget justifications and documentation from state
and federal officials and discussed with them the budget negotiations
associated with each approved demonstration.[Footnote 5] To examine the
assumptions behind the initiative and the likelihood of associated
savings, we reviewed published literature and interviewed officials
from the Kaiser Commission on Medicaid and the Uninsured and the
Congressional Budget Office (CBO). We discussed plans for evaluating
the approved demonstrations with HHS and state officials. During our
review, Congress passed the Medicare Prescription Drug, Improvement,
and Modernization Act of 2003, which adds a drug benefit to Medicare,
the federal program providing health insurance for the majority of
people age 65 or older regardless of income.[Footnote 6] We considered
the limited information available as of May 2004 about the relationship
between Pharmacy Plus and the act. We conducted our work from December
2002 through June 2004 in accordance with generally accepted government
auditing standards.
Results in Brief:
From January 2002 through May 2004, HHS reviewed Pharmacy Plus
demonstration waiver proposals from 15 states. It approved four
demonstrations (Florida, Illinois, South Carolina, and Wisconsin),
denied two (Delaware and Hawaii), and considered nine other proposals.
The four demonstrations, each approved for a 5-year period, cover most
prescription drugs and incorporate cost sharing by beneficiaries.
Together, the four demonstrations may enroll as many as half a million
people age 65 or older whose incomes are higher than states' limits for
Medicaid eligibility. Combined 5-year state and federal spending for
the four approved demonstrations' new drug benefit is projected to
total approximately $3.6 billion, the federal share of which is
estimated to be about $2.1 billion. The two proposals that HHS denied
were inconsistent with Pharmacy Plus guidelines. One state had an
existing program that covered the same population proposed for the
demonstration; the other wanted to expand coverage to people with
incomes above the initiative's limit of 200 percent of the federal
poverty level (FPL). As of May 2004, most of the remaining nine
demonstration proposals were not under active review by HHS, primarily
because the department had not determined how the new Medicare
legislation would affect the Pharmacy Plus initiative and whether HHS
would continue to review Pharmacy Plus demonstration proposals.
HHS has not adequately ensured that the four approved Pharmacy Plus
demonstrations will be budget neutral, that is, that the federal
government will spend no more with the demonstrations than without
them. HHS has approved 5-year demonstration spending limits based on
projections of cost and beneficiary enrollment growth that exceeded
benchmarks that department officials said they considered in assessing
states' proposals for budget neutrality. These cost and enrollment
growth benchmarks incorporate the states' recent historical average
growth rates and projections developed by CMS's Office of the Actuary
for Medicaid program growth nationwide. HHS has not established written
criteria for how it reviews or approves state-proposed cost or
enrollment growth rates against these benchmarks. HHS's basis for
approving state demonstrations' spending limits as budget neutral is
not clear, particularly for Illinois and Wisconsin, for neither the
department's negotiations with the states nor its rationale for
approving higher-than-benchmark rates of estimated growth is
documented. HHS's internal decision memorandums--which described the
factors that HHS, CMS, OMB, and others considered in reviewing the
demonstrations and which are not publicly available--did not provide
the rationale for the approved spending limits, and neither did the
publicly available demonstration approval letters. The approved 5-year
spending limit for Illinois is more than $2 billion higher than it
would have been had benchmark growth rates been applied; Wisconsin's
approved spending limit is $713 million more than it would have been
with benchmark rates. We estimate that over 5 years, with the approved
demonstrations, the federal government could spend over $1 billion more
in Illinois, $416 million more in Wisconsin, $55 million more in
Florida, and $42 million more in South Carolina than without the
demonstrations, thus not meeting the stated policy of budget
neutrality.
States' assumptions about savings that may accrue to Medicaid from the
Pharmacy Plus demonstrations are not well supported by state experience
or research. The four states with approved demonstrations assumed that
the cost of extending drug benefits to seniors now ineligible for
Medicaid would be offset by savings accrued because demonstration
beneficiaries would stay relatively healthy and therefore not deplete
their income or assets to Medicaid eligibility levels. HHS approved the
four states' savings assumptions--some projecting significant
reductions in overall Medicaid senior enrollment and ranging from $480
million to $2 billion per state in combined federal and state spending
over 5 years--without state-specific data supporting these assumptions.
One state's estimate of savings, for example, was derived by
determining how much the state needed to save in order to demonstrate
that its proposal would be budget neutral, rather than how much the
state could realistically expect to save. The limited research
available indicates that health care savings due to improved access to
prescription drugs are likely to be much less than what states assumed
and HHS approved. Had more conservative savings assumptions been used
to estimate the demonstrations' costs, the proposals likely could not
have been approved as budget neutral. Because federal liability is
capped by a 5-year spending limit for each demonstration, states will
be at risk if anticipated savings do not accrue and if their
demonstration spending reaches or exceeds the limits.
As of February 2004, efforts by the states and HHS to evaluate and
monitor the Pharmacy Plus demonstrations--and particularly states'
efforts to begin implementing their evaluation plans to address stated
evaluation objectives--were in their early stages. The four states with
approved demonstrations had taken few steps toward implementing the
evaluation plans required as a condition of demonstration approval:
Florida and South Carolina had not decided whether state officials or
an outside entity would conduct their evaluations. Illinois and
Wisconsin officials believed that participating in the independent
evaluation contracted by HHS and started in October 2002 would take the
place of their own evaluations. HHS officials, by contrast, told us
that state evaluations were still required. This independent evaluation
is scheduled to report by September 2005. But in the interim, HHS has
not ensured that each state submits in its progress reports enough
information for HHS to monitor that its demonstration is functioning as
intended, that the information is in a form enabling comparisons across
states, or that it is submitted in a timely manner. This lack of
information limits the department's oversight capability. For example,
Illinois did not submit required quarterly progress reports during the
demonstration's first year of operation, and its annual report did not
provide information that would allow HHS to assess whether the new drug
benefit was enabling seniors to avoid enrollment for full Medicaid
benefits.
HHS's process for approving Medicaid demonstrations under the Pharmacy
Plus initiative continues to raise some of the same cost and oversight
concerns raised by other Medicaid section 1115 waiver approvals over
the past decade, including a failure to adequately justify the basis
for states' spending limits. We are recommending that the Secretary of
HHS clarify criteria for reviewing and approving demonstration spending
limits, consider applying these criteria to the four approved Pharmacy
Plus demonstrations, and publicly document the basis for Medicaid
section 1115 demonstration approvals to better ensure that approved
demonstrations will not raise costs to the federal government. We are
also recommending that the Secretary ensure that approved Pharmacy Plus
and other Medicaid section 1115 demonstrations fulfill the objectives
stated in their evaluation plans and more actively monitor approved
Pharmacy Plus and other Medicaid section 1115 demonstrations.
In commenting on a draft of this report, HHS concurred with our
recommendations related to evaluating and monitoring the section 1115
demonstrations and documenting the basis for demonstration approvals.
HHS did not concur with our recommendations that it clarify criteria
for reviewing and approving states' proposed demonstration spending
limits and consider applying those criteria to its approval decisions
for the four Pharmacy Plus demonstrations. HHS indicated that while
review criteria are important, they cannot always be strictly applied
because of variations in state Medicaid programs and demonstration
proposals, and it also stated that the four approved demonstrations
were based on well-supported budget estimates of future state spending.
We have on several occasions raised concerns with HHS about the budget
neutrality of particular Medicaid section 1115 demonstrations, and the
Pharmacy Plus demonstrations are no exception. We acknowledge that
variations in state demonstration proposals justify some review
flexibility but believe that HHS has not clearly articulated or
documented the rationale for its decisions in approving Pharmacy Plus
demonstrations. Such lack of clarity raises questions about whether
these demonstrations, involving billions of federal dollars, have been
reviewed consistently.
We also provided a draft of this report to Florida, Illinois, South
Carolina, and Wisconsin. Illinois and Wisconsin officials commented
that we overstated the demonstrations' financial risk to the federal
government in light of data showing that to date, the demonstrations
were operating well within their spending limits. Both states asserted
that their pharmacy demonstrations were providing a valuable benefit to
seniors and would be budget neutral. Although we do not dispute the
health benefit to seniors of expanded access to prescription drugs,
demonstrating savings to the Medicaid program as a result of this
expanded access is a separate issue. Assumptions about such potential
savings are not well supported by research or by data from the states,
even though all the states except Wisconsin operated state-funded
pharmacy assistance programs before applying for their demonstrations.
Florida commented that the spending limit approved for its
demonstration was less than 1 percent above the benchmark spending
level. South Carolina and Wisconsin provided technical comments that
were incorporated in the report as appropriate.
Background:
Established in 1965 under title XIX of SSA, Medicaid is the nation's
health care financing program for low-income families and certain
people who are age 65 or older or disabled. The program accounted for
about $244 billion in federal and state expenditures in fiscal year
2002 and covered an estimated 53 million people.[Footnote 7] The states
and the federal government share Medicaid spending according to a
formula that provides a more generous federal match for states where
per capita income is lower.[Footnote 8]
Medicaid is an open-ended entitlement program, meaning that the federal
government is obligated to pay its share of expenditures for all people
and services covered under an HHS-approved state Medicaid plan. To
qualify for federal matching payments, state Medicaid programs are
required by law to cover certain categories of beneficiaries, including
pregnant women and children with family incomes below specific limits,
as well as individuals with limited income and assets who are age 65 or
older or disabled.[Footnote 9] State programs are also required to
cover certain services, including physician and hospital services and
nursing home care. As long as states meet federal requirements and
obtain HHS approval for their state Medicaid plans, they have
considerable flexibility in designing and operating their programs. For
example, states may choose to expand coverage to seniors whose incomes
are above statutory limits, and all states have opted to provide
prescription drug coverage. In addition, section 1115 of SSA permits
the Secretary of HHS to waive certain statutory requirements applicable
to Medicaid to allow states to provide services or cover individuals
not otherwise eligible for Medicaid and to provide federal funding for
services and populations not usually eligible for federal matching
payments.[Footnote 10]
The Pharmacy Plus initiative allows states to provide a prescription
drug benefit to certain Medicare beneficiaries, specifically seniors
and disabled people, with incomes at or below 200 percent of
FPL.[Footnote 11] Typically, Medicaid eligibility under an approved
state plan provides access to all state Medicaid-covered services, but
eligibility under a Pharmacy Plus demonstration covers only a
prescription drug benefit.[Footnote 12] The premise behind the
initiative is that expanded access to medically necessary drugs will
help keep low-income seniors healthy enough to avoid medical expenses
that could cause them to "spend down" their resources to the point of
Medicaid eligibility.[Footnote 13] The initiative assumes that budget
neutrality for pharmacy-only coverage can be achieved by savings to
Medicaid from fewer seniors' enrolling for full benefits, as well as
from improved access to prescription drugs, improved service delivery
or medication management, and better management of drug benefit costs.
Unlike some other section 1115 demonstration waivers, the Pharmacy Plus
initiative requires a participating state to accept a fixed spending
limit as part of its budget neutrality agreement with HHS. This
spending limit--sometimes called an aggregate spending limit or global
budget cap--applies not only to services and beneficiaries in the
state's demonstration drug program, but also to all services for all
Medicaid seniors in the state. The Pharmacy Plus budget neutrality
approach limits the amount the federal government will match for a
demonstration according to expected growth in both service costs and
enrollment (see app. I). Once a state has reached its Pharmacy Plus
spending limit, it cannot receive additional federal matching dollars
for any Medicaid services for seniors in the state, nor can the state
restrict enrollment of seniors who qualify for full Medicaid
benefits.[Footnote 14] Under the Pharmacy Plus scenario, a state
accepts the financial risks inherent in a fixed budget cap for
unanticipated changes in both cost and enrollment growth. For some
other section 1115 demonstrations, budget neutrality is based on a
projected per capita cost for each demonstration beneficiary. This
other scenario sets a limit on spending per person, but because federal
matching funds are available for all people who enroll, a state does
not have to accept financial risk for unexpected growth in enrollment.
HHS Has Reviewed 15 Pharmacy Plus Proposals and Approved 4:
As of May 2004, HHS had approved four states' Pharmacy Plus
demonstration proposals, denied two, and considered proposals from nine
other states. All four approved demonstrations--Florida, Illinois,
South Carolina, and Wisconsin--are to operate for 5 years, during which
time they might enroll a total of half a million low-income individuals
age 65 or older for the new prescription drug coverage. HHS denied two
demonstration proposals, from Delaware and Hawaii, because they were
not consistent with Pharmacy Plus guidelines. Of the remaining nine
proposals, one was withdrawn by the state and others have been on hold
since fall 2003, when Congress was considering Medicare prescription
drug legislation. At the time we completed our work, legislation
providing a new drug benefit through Medicare had been enacted, but HHS
had not determined how the new drug program would affect the Pharmacy
Plus initiative.
HHS Approved Four Pharmacy Plus Demonstrations:
HHS has approved Pharmacy Plus demonstrations for low-income seniors in
four states: Florida, Illinois, South Carolina, and Wisconsin.[Footnote
15] As of May 2004, all four demonstrations had been implemented and
under way for at least 17 months: Illinois', Florida's, and Wisconsin's
demonstrations were implemented in 2002, South Carolina's in 2003 (see
table 1). Together, the four approved demonstrations are projected to
enroll as many as 527,800 individuals for Medicaid prescription drug
benefits only; as of April 2004, they reported combined enrollment of
nearly 372,200 people. Illinois' demonstration is the largest, with
expected enrollment for the drug benefit of more than 250,000 seniors
over 5 years. As of April 2004, more than 192,600 people were enrolled
in Illinois' demonstration, the majority of them moved into the
Medicaid program from an existing state-funded pharmacy assistance
program.[Footnote 16]
Table 1: Highlights of Pharmacy Plus Demonstrations Approved as of May
2004:
State and demonstration status (in order of approval): Illinois,
Approved January 2002, Implemented June 2002, Request for amendment
submitted March 2003;
Description: Projected enrollment: As many as 256,500 seniors with
incomes at or below 200 percent of FPL; 192,600 participants enrolled
as of April 2004. Seniors with incomes at or below 200 percent of FPL
who were participating in Illinois' previous state-funded program were
automatically enrolled in the demonstration;
Description: Spending limit for all Medicaid seniors: $14.0 billion in
federal and state Medicaid funding over 5 years; prescription drug
benefit represents $1.4 billion;
Description: Benefits and cost sharing: Covers most prescription and
some over-the-counter drugs recommended by physicians. Seniors with
private insurance may choose to enroll for a $25 monthly rebate
program. No cost sharing for participants with incomes below 100
percent of FPL; participants at or above 100 percent of FPL pay $1 for
generic and $4 for brand-name drugs. All participants pay 20 percent
coinsurance after their annual drug benefits under the program exceed
$1,750;
Description: State program: Before the demonstration, Illinois' state-
funded pharmacy assistance program enrolled about 170,000
participants. The state continues to operate a state-funded program
covering prescription drugs for specified conditions for seniors with
incomes from 201 to 250 percent of FPL and for people with disabilities
and incomes up to 250 percent of FPL. Amendment sought to expand
coverage to eligible seniors with incomes at or below 250 percent of
FPL; amendment was pending as of March 2004.
State and demonstration status (in order of approval): Florida,
Approved July 2002, Implemented August 2002, Request for amendment
submitted September 2003;
Description: Projected enrollment: As many as 58,500 seniors with
incomes from 88 to 120 percent of FPL; 54,400 participants enrolled as
of April 2004;
Description: Spending limit for all Medicaid seniors: $16.7 billion in
federal and state Medicaid funding over 5 years; prescription drug
benefit represents $477 million;
Description: Benefits and cost sharing: Covers all prescription drugs
up to a monthly benefit limit of $160 per participant. Except for some
classes of drugs, such as mental health and HIV antiviral therapies,
brand-name drugs are limited to four per month, although physicians are
allowed to request exceptions. Participants pay $2 for generic drugs,
$5 for drugs on the state's preferred drug list, and $15 for other
brand-name drugs;
Description: State program: Before the demonstration, Florida's state-
funded pharmacy assistance program enrolled about 9,000 participants.
Replaced by the demonstration, the state-funded program had the same
income eligibility criteria as the demonstration but a lower benefit
limit: $80 per participant per month. Amendment sought to expand
eligibility to seniors with incomes at or below 200 percent of FPL and
to add a prescription drug discount program; amendment was pending as
of March 2004.
State and demonstration status (in order of approval): Wisconsin,
Approved July 2002, Implemented September 2002;
Description: Projected enrollment: As many as 146,800 seniors with
incomes at or below 200 percent of FPL; 70,300 participants enrolled
as of April 2004;
Description: Spending limit for all Medicaid seniors: $8.4 billion in
federal and state Medicaid funding over 5 years; prescription drug
benefit represents $919 million;
Description: Benefits and cost sharing: Covers prescription drugs,
including insulin. Participants pay an annual enrollment fee of $30 and
those with incomes above 160 percent of FPL pay an annual deductible of
$500. Participants pay $5 for generic and $15 for brand-name drugs
(those with incomes from 160 to 200 percent of FPL begin co-payments
after meeting the required deductible);
Description: State program: Wisconsin did not have a state-funded
pharmacy assistance program for seniors before this demonstration.
When the state implemented the demonstration, it also began offering
state-funded pharmacy benefits to seniors with incomes from 201 to 240
percent of FPL.
State and demonstration status (in order of approval): South Carolina,
Approved July 2002, Implemented January 2003;
Description: Projected enrollment: As many as 66,000 seniors with
incomes up to 200 percent of FPL; 54,900 enrolled as of April 2004;
Description: Spending limit for all Medicaid seniors: $5.0 billion in
federal and state Medicaid funding over 5 years; prescription drug
benefit represents $764.7 million;
Description: Benefits and cost sharing: Covers generic and, when no
generic is available, brand-name prescription drugs, over-the-counter
drugs prescribed by physicians, insulin and other self-injected drugs,
and syringes. Except for medications for specified conditions,
including behavioral health disorders, cardiac disease, cancer,
HIV/AIDS, and terminal or life- threatening diseases, coverage limited
to four prescriptions or refills per month. Participants pay an annual
deductible of $500, plus $10 for generic drugs; $15 for brand-name
drugs; and $21 for drugs requiring prior authorization;
Description: State program: Before the demonstration, South Carolina's
state-funded pharmacy assistance program enrolled about 41,000
participants. Demonstration replaces that program and expands
eligibility to seniors with incomes from 175 up to 200 percent of FPL.
Source: GAO analysis of state and HHS documents.
[End of table]
All the demonstrations except Florida's are approved to enroll seniors
with incomes at or below 200 percent of FPL, the maximum eligible
income established in HHS's Pharmacy Plus guidance.[Footnote 17] As
approved, Florida's demonstration covers seniors with incomes from 88
to 120 percent of FPL, but in September 2003, the state submitted an
amendment to expand income eligibility to 200 percent of FPL. Illinois
also applied in March 2003 to amend its approved demonstration to
expand eligibility, in its case to include seniors with incomes at or
below 250 percent of FPL. The terms of Illinois' demonstration approval
specifically permit the state to seek this amendment, as long as the
state submits data supporting its ability to cover this expansion
population at no additional cost to the federal government. As of March
2004, HHS was reviewing both amendments.
Projected 5-year costs vary among the four approved demonstrations. For
Florida, Illinois, South Carolina, and Wisconsin, total combined
federal and state Medicaid spending on the new drug benefit alone is
expected to be more than $3.6 billion over 5 years, of which the
federal share would be approximately $2.1 billion. The combined federal
and state Medicaid spending limits for the four demonstrations--for
services to all Medicaid seniors in the four states--would total $44
billion over 5 years, with a federal share of at least $25 billion. The
estimated 5-year costs solely for the drug benefit range from $477
million in Florida to $1.4 billion in Illinois, and combined 5-year
federal and state spending limits (based on projected costs for
services to all Medicaid seniors) range from $5.0 billion in South
Carolina to $16.7 billion in Florida.
When they applied, three of the four states with approved
demonstrations already operated state-funded pharmacy assistance
programs for seniors. Most beneficiaries eligible for these programs
are also eligible for Pharmacy Plus coverage. HHS allows the states to
subsume all or a portion of an existing program under a demonstration,
as long as the states' demonstrations propose to expand either the
number of beneficiaries or the scope of drug coverage.[Footnote 18] In
other words, the state may not simply secure federal matching dollars
for the costs of an existing state-funded drug program with no
expansion. To meet this condition, states with approved demonstrations
either raised income eligibility thresholds or expanded the scope of
drug coverage beyond that of their existing state programs. For
example, Florida doubled its maximum monthly benefit from $80 to $160
per person, and South Carolina expanded eligibility to include seniors
with incomes from 175 through 200 percent of FPL. Illinois'
demonstration offered a more comprehensive drug benefit than its state-
funded program did.[Footnote 19] Wisconsin did not previously have a
state-funded pharmacy assistance program for seniors.[Footnote 20]
HHS Denied Two Demonstration Proposals:
In 2003, HHS denied Pharmacy Plus demonstration proposals from two
states, Delaware and Hawaii. (See app. II for descriptions of denied,
withdrawn, and pending proposals.) Delaware's proposal was denied
primarily because HHS required that the state expand beyond the
existing state-funded program and limit coverage to seniors with
incomes at or below 200 percent of FPL. Delaware's state-funded
pharmacy assistance program already covered seniors and disabled adults
with incomes up to 200 percent of FPL or whose prescription drug costs
exceeded 40 percent of their annual incomes. For this reason, the state
could not expand either eligibility or coverage and stay within
Pharmacy Plus guidelines. Although Delaware proposed adding a pharmacy
benefit management component to monitor appropriate prescription use
and to control costs, HHS found this proposed change to the existing
program insufficient.[Footnote 21]
Hawaii proposed to make prescription drugs available at the discounted
Medicaid rate to state residents of all ages with family incomes at or
below 300 percent of FPL. This benefit was to be funded through
participant cost sharing, manufacturer rebates, and a fixed state
contribution of $1 per prescription. HHS's denial was based primarily
on the request to cover individuals with incomes up to 300 percent
instead of 200 percent of FPL. Other reasons for the denial included
the proposed coverage for all state residents, instead of targeting
seniors and people with disabilities, and the minimal state financial
participation of $1 per prescription in the first year of the
demonstration.[Footnote 22]
HHS Has Considered Nine Other Demonstration Proposals:
From January 2002 through May 2004, HHS considered Pharmacy Plus
demonstration proposals from nine other states: Arkansas, Connecticut,
Indiana, Maine, Massachusetts, Michigan, New Jersey, North Carolina,
and Rhode Island. As of May 2004, eight were still pending; one
proposal, from Massachusetts, had been withdrawn. Most proposals would
cover seniors with incomes at or below 200 percent of FPL; several
would also cover adults with disabilities. The drug benefits would
generally be comprehensive and require participant cost sharing, which
in some cases would include an annual enrollment fee and 20 percent co-
payment for each prescription. All but one of the states with pending
proposals have state-funded pharmacy assistance programs that they
propose to include in whole or in part in their demonstrations. (App.
II describes these demonstration proposals.)
As of May 2004, most of the pending proposals were not under active
review by HHS primarily because the department had not determined the
effect of the Medicare prescription drug legislation on the Pharmacy
Plus demonstration proposals. HHS officials told us in October 2003
that Arkansas, Rhode Island, and Indiana officials had asked that
review of their states' proposals be put on hold until after Congress
had completed consideration of the Medicare legislation. At that time
HHS was still reviewing a proposal from North Carolina but regarded
proposals from four other states as inactive because longtime
negotiations with those states had reached an impasse. Connecticut and
New Jersey, for example, already had broad state-funded drug coverage
for seniors with incomes up to 200 percent of FPL. In such cases, HHS
has been unwilling to approve federal financing for existing state-
funded programs.
Medicare Prescription Drug Legislation May Affect Pharmacy Plus
Initiative:
The Medicare Prescription Drug, Improvement, and Modernization Act of
2003 (MMA) will provide seniors access to a Medicare-covered
prescription drug benefit and will likely affect how HHS and the states
manage the Medicaid Pharmacy Plus initiative. This law gives Medicare
beneficiaries the opportunity to enroll for prescription drug coverage
to begin on January 1, 2006, and, as an interim measure, the
opportunity to enroll for Medicare-endorsed drug discount cards
beginning in June 2004. It also directs HHS to establish effective
coordination between Medicare plans and state Medicaid and pharmacy
assistance programs and to establish a commission to address these and
other transition issues.[Footnote 23] In 2006, the Medicare drug
benefit will replace Medicaid as the primary source of prescription
drug coverage for low-income seniors who would have been eligible for
both full benefits under Medicaid and drug benefits under Medicare
plans.[Footnote 24] Under MMA, individuals with limited assets and
incomes below 150 percent of FPL will be eligible for federal subsidies
to assist with the drug benefit's cost-sharing requirements.[Footnote
25] But because Pharmacy Plus demonstrations in Illinois, South
Carolina, and Wisconsin cover individuals with incomes above 150
percent and at or below 200 percent of FPL regardless of other assets,
some current demonstration beneficiaries may not qualify for these
subsidies. Pharmacy Plus beneficiaries are likewise ineligible for the
Medicare drug discount cards.[Footnote 26]
As of May 2004, HHS indicated it was considering how enactment of the
new law would affect Pharmacy Plus demonstrations and
proposals.[Footnote 27] Officials from the four states with approved
demonstrations told us in December 2003 that they were uncertain how
the law would affect their demonstrations, but they had no plans to end
the demonstrations early. After the Medicare prescription drug benefit
begins in 2006, some demonstrations could be discontinued or modified.
Early termination could have an impact on the demonstrations' budget
neutrality, which often depends on savings in later years to offset
higher start-up costs. Officials in Illinois and Florida indicated in
December 2003 that their pharmacy demonstrations might be converted to
state-funded programs in 2006.
HHS Has Not Ensured That Approved Demonstrations' Spending Limits Will
Be Budget Neutral:
HHS has not adequately ensured that the spending limits it has approved
for Pharmacy Plus demonstrations will be budget neutral--in other
words, that the federal government will spend no more under the
demonstrations than without them. For all four demonstrations, HHS
approved 5-year spending limits based on projections of cost and
beneficiary enrollment growth that exceeded benchmarks that department
officials told us they considered in assessing the reasonableness of
states' demonstration proposals. These cost and enrollment growth
benchmarks incorporate states' historical experience and expectations
for Medicaid program growth nationwide. The discrepancies between the
growth benchmarks and the approved growth rates were greatest for
Illinois and Wisconsin. Neither HHS's negotiations with the states nor
the department's rationale for approving higher-than-benchmark growth
rates is well documented. Had HHS based the 5-year demonstration
spending limits on the benchmark growth rates, the federal share of
approved spending would be considerably lower, particularly for
Illinois and Wisconsin: specifically, $1 billion lower in Illinois and
$416 million lower in Wisconsin.[Footnote 28] For Florida and South
Carolina, the federal share of approved spending would have been $55
million and $42 million lower, respectively.
HHS Approved Projected Growth Rates Exceeding Benchmarks:
HHS based the Pharmacy Plus demonstration spending limits it approved
on a range of estimated future growth rates for cost per beneficiary
and for enrollment, which in some cases exceeded benchmarks[Footnote
29] the department told us it considered in assessing the
reasonableness of states' proposals. A standard Pharmacy Plus
application form developed by HHS and a technical guidance document are
the chief sources of criteria and formal guidance to states for
developing demonstration proposals. But HHS has not established written
criteria for how it reviews and approves the growth rates that states
propose. These growth rates are key elements in the budget neutrality
negotiations between states and the federal government because higher
rates result in more generous spending limits, which represent the
federal government's agreed-on maximum spending for all the states'
Medicaid seniors during the demonstrations. An inappropriately high
spending level can represent a higher federal liability than warranted.
The process used by HHS and the states to determine whether states'
proposed Pharmacy Plus demonstrations will be budget neutral requires
comparing two cost estimates: (1) projected 5-year costs of a state's
existing Medicaid program for seniors ("without-demonstration costs")
and (2) projected 5-year costs of the state's existing program plus the
drug benefits and beneficiaries added by the demonstration ("with-
demonstration costs"). These calculations factor in projected growth in
costs and enrollment each year. As long as projected with-demonstration
costs do not exceed projected without-demonstration costs, the
demonstration can be approved as budget neutral. As a result, the
projected costs of a state's existing, without-waiver Medicaid program
for seniors effectively sets the spending limit for all services
provided to all Medicaid seniors in the state for the 5-year
demonstration term. Appendix I outlines the basic steps HHS follows in
setting Pharmacy Plus demonstration spending limits.
To determine budget neutral spending limits for the pharmacy
demonstrations, HHS officials told us they consider the following for
estimating growth in costs and enrollment through the course of the
demonstrations:
* For cost growth per beneficiary, similar to guidelines for other
types of section 1115 demonstrations,[Footnote 30] HHS seeks to approve
a growth rate equal to the lower of either the state's historical
average annual growth in per-beneficiary cost (that is, the average
annual rate for the 5 years before the demonstration proposal) or the
nationwide projected growth rate, developed by CMS's Office of the
Actuary, for Medicaid cost per beneficiary age 65 or older.[Footnote
31]
* For enrollment growth, HHS considers the state's historical average
annual growth in enrollment as a starting point and, to a lesser
extent, the CMS Actuary's nationwide rate, but it allows states to
present a rationale for a higher rate that anticipates rising future
enrollments.
HHS's approved growth rates in some cases exceeded these benchmarks
(see table 2). For per-beneficiary cost growth rates in Florida,
Illinois, and Wisconsin, HHS did not approve the lower of either the
state's historical average rate or the CMS Actuary's rate of 6.3
percent. Similarly, for beneficiary enrollment growth rates, HHS
approved rates for Illinois and Wisconsin that exceeded both the
states' historical experience and the CMS Actuary's 1.8 percent
projected annual growth rate. In Illinois' case, the approved rate for
beneficiary enrollment growth--5 percent per year over the 5-year
demonstration--was considerably higher than the state's 5-year
historical average enrollment growth of 1.6 percent per year.
Table 2: HHS-Approved, State Historical, and CMS Actuary Growth Rates:
Annual growth rates in percent:
State: Florida%;
Cost growth rates: HHS-approved: 6.5%;
Cost growth rates: State historical average: 6.5%;
Cost growth rates: CMS Actuary: 6.3%;
Enrollment growth rates: HHS- approved: 1.4%;
Enrollment growth rates: State historical average: 1.4%;
Enrollment growth rates: CMS Actuary: 1.8%.
State: Illinois[A]%;
Cost growth rates: HHS-approved: 5.5%;
Cost growth rates: State historical average: 4.5%;
Cost growth rates: CMS Actuary: 6.3%;
Enrollment growth rates: HHS- approved: 5.0%;
Enrollment growth rates: State historical average: 1.6%;
Enrollment growth rates: CMS Actuary: 1.8%.
State: South Carolina[B]%;
Cost growth rates: HHS-approved: 6.3%;
Cost growth rates: State historical average: 10.0%;
Cost growth rates: CMS Actuary: 6.3%;
Enrollment growth rates: HHS-approved: 1.0%;
Enrollment growth rates: State historical average: 0.7%;
Enrollment growth rates: CMS Actuary: 1.8%.
State: Wisconsin%;
Cost growth rates: HHS-approved: 6.3%;
Cost growth rates: State historical average: 5.4%;
Cost growth rates: CMS Actuary: 6.3%;
Enrollment growth rates: HHS- approved: 2.0%;
Enrollment growth rates: State historical average: 0.01% [C];
Enrollment growth rates: CMS Actuary: 1.8%.
Source: GAO analysis of HHS and state documents.
[A] The state historical average rates for Illinois (4.5 percent cost
growth and 1.6 percent enrollment growth) reflect updated information
provided by the state to HHS shortly before its approval decision on
January 28, 2002. This information does not appear in the demonstration
application that was submitted on July 31, 2001.
[B] For South Carolina, historical average rates reflect 3 years of
data, rather than the generally required 5 years, because cost and
enrollment data for Medicaid seniors were incomplete for 2 of the 5
years (data for certain long-term care waivers for seniors were not
included).
[C] This figure is lower than the 0.12 percent enrollment growth rate
Wisconsin proposed in its demonstration application. We included 5
years of data in calculating our average rate for the state, while the
state itself averaged 3 years of data, excluding 2 years when
enrollment declined slightly.
[End of table]
Basis for Approved Spending Limits Not Clear or Well Documented:
HHS's basis is unclear for approving growth rates higher than the
benchmarks in some cases, particularly for approving higher enrollment
growth rates for Illinois and Wisconsin. The department's negotiation
process with these two states, during which officials reached agreement
on allowed growth rates, was not documented, nor was its rationale for
approving rates that differed from the lower of state historical
experience or the CMS Actuary's projections. In particular, HHS's
internal decision memorandums--which described the factors that HHS,
CMS, OMB, and others considered in reviewing the demonstrations and
which are not publicly available--did not provide the rationale for the
approved spending limits, and neither did the publicly available
demonstration approval letters.
HHS and state officials told us that Illinois and Wisconsin used a
variety of arguments to convince the department that their situations
warranted higher enrollment growth rates. But the states provided
little specific documentation to HHS or to us to support these
arguments. For example:
* Illinois asserted that its projected annual enrollment growth rate
for the demonstration years from 2002 through 2007 should be
significantly higher than its 5-year average historical growth rate of
1.6 percent, because income eligibility levels for seniors in its
Medicaid program increased from 41 to 100 percent of FPL from July 2000
through July 2002. As support, the state provided HHS with updated
Medicaid enrollment data--which were more recent than those included in
the original demonstration application and showed increased growth
rates for seniors compared with earlier years--but these rates were
still lower than the 5 percent HHS approved and did not raise the
historical average to 5 percent.[Footnote 32] The state did not provide
documents with actuarial projections of the estimated number of people
expected to enroll in Medicaid because of the change in eligibility
criteria. Illinois justified applying the 5 percent annual growth rate
to all 5 years of the pharmacy demonstration by providing a chart
showing that enrollment in a different state program, SCHIP, had grown
more than 5 percent per year on average for 3 years after that
program's eligibility criteria were expanded. In our view, however,
Illinois' SCHIP enrollment experience with children does not provide a
reasonable basis for predicting enrollment by seniors in the Pharmacy
Plus demonstration.
* Wisconsin asserted that its projected annual enrollment growth rate
for the demonstration years should be significantly higher than either
its 5-year unadjusted historical growth rate of 0.01 percent or the
0.12 percent rate based on 3 years of historical data reported in its
application because of the anticipated effects of a nationwide Social
Security Administration mail outreach program to low-income Medicare
beneficiaries. This outreach program informed seniors enrolled in
Medicare about other benefits, including Medicaid assistance for
Medicare cost-sharing requirements, for which they might
qualify.[Footnote 33] Wisconsin officials told us they proposed a 4
percent future annual enrollment growth rate for seniors in the
expectation that this outreach program, along with factors including an
aging population and the economic downturn, would increase Medicaid
enrollment. According to HHS, Wisconsin did not document any
projections of how many newly eligible Medicaid individuals could be
prompted to enroll after the Social Security Administration outreach
mailing. Instead, it submitted information based on a review of a
similar outreach effort in Minnesota. According to Wisconsin state
officials, during negotiations HHS proposed 1 percent as a more
reasonable growth rate, and HHS and state officials agreed to an
approved enrollment growth rate of 2 percent per year. Our related work
suggests that Wisconsin may be justified in claiming some increase in
Medicaid enrollment as a result of the outreach program, but the effect
appears to be less than 1 percent. Notably, although the Social
Security Administration mail outreach program was nationwide, HHS did
not consider its effects when approving enrollment rates for other
states.[Footnote 34]
Demonstration Spending Limits Would Be Lower if Based on Benchmark
Rates:
Application of benchmark rates for projected per-beneficiary cost and
enrollment growth would have produced lower spending limits for all
four approved Pharmacy Plus demonstrations (see table 3). Benchmark-
based limits on combined federal and state spending would be
approximately $3 billion lower over 5 years than what HHS approved for
the four demonstrations, and the federal share alone would come to
about $1.6 billion less. The higher-than-benchmark growth rates HHS
approved for Illinois and Wisconsin accounted for most of these
differences. Had the spending limit for Illinois' demonstration, in
particular, been based strictly on the benchmark rates, combined
federal and state spending would have been almost $2.2 billion, or 15
percent, lower, and the federal government's liability under the
demonstration (at the state's 50 percent federal matching rate) lower
by more than $1 billion. The difference is less pronounced for
Wisconsin, where the approved federal and state spending limit exceeds
what it would have been had benchmark rates been applied by about $713
million, translating into about $416 million in additional federal
spending.
Table 3: HHS-Approved and Benchmark 5-Year Spending Limits:
State: Florida;
HHS- approved: $16,669;
Benchmark: $16,575;
Dollar difference (percentage difference)[A]: $94 (0.6%);
Federal share of difference[B]: $55.
State: Illinois;
HHS- approved: $14,047;
Benchmark: $11,880;
Dollar difference (percentage difference)[A]: $2,167 (15.4%);
Federal share of difference[B]: $1,083.
State: South Carolina;
HHS- approved: $4,962;
Benchmark: $4,902;
Dollar difference (percentage difference)[A]: $60 (1.2%);
Federal share of difference[B]: $42.
State: Wisconsin;
HHS- approved: $8,378;
Benchmark: $7,666;
Dollar difference (percentage difference)[A]: $713 (8.5%);
Federal share of difference[B]: $416.
Total[A];
HHS- approved: $44,056;
Benchmark: $41,023;
Dollar difference (percentage difference)[A]: $3,033 (6.9%);
Federal share of difference[B]: $1,596.
Source: GAO analysis of HHS and state documents.
Notes: Figures reflect total approved federal and state spending limits
for all Medicaid services for seniors over the 5 years of each
demonstration, including spending on new Pharmacy Plus prescription
drug benefits. We calculated benchmark spending limits using, for cost
growth per beneficiary, the lower of either the state's historical
average cost growth rate or the CMS Actuary's projected rate, and for
enrollment growth, the state's unadjusted 5-year historical average
enrollment growth rate, except for South Carolina, where we used the
average of 3 years' data.
[A] Dollar differences and totals are based on numbers before rounding.
[B] Federal share calculated by applying fiscal year 2003 federal
Medicaid matching rates for each state to the dollar difference for
that state: Florida, 58.8 percent; Illinois, 50 percent; South
Carolina, 69.8 percent; and Wisconsin, 58.4 percent.
[End of table]
The spending limits HHS approved for Illinois and Wisconsin exceed
estimates based on consistent application of the benchmark growth rates
by 15.4 percent and 8.5 percent, respectively.[Footnote 35] The limits
approved for Florida and South Carolina, while not budget neutral
compared with the benchmark spending estimates, reflect relatively
small differences. Florida's approved spending limit exceeds the
benchmark estimate by less than 1 percent--$94 million of a 5-year
approved federal and state spending limit of nearly $16.7 billion--and
South Carolina's approved spending limit exceeds the benchmark by 1.2
percent, or $60 million.
CBO has similarly reported that Pharmacy Plus demonstrations are likely
to increase federal Medicaid spending. Before passage of MMA, CBO
estimated that the Pharmacy Plus demonstrations would add about $18
billion to federal Medicaid spending over the 10 years from 2004
through 2013. According to CBO officials, the agency considered a range
of scenarios for how the initiative might grow with new demonstration
approvals and estimated the initiative's overall effect on Medicaid
spending.[Footnote 36] The officials told us that CBO did not include
any of the demonstrations' projected savings in its analysis because it
did not find the argument that savings would occur convincing.
Pharmacy Plus Savings Assumptions Not Well Supported:
Neither data from state experience nor other research supports the
savings assumptions necessary for budget neutrality in the Pharmacy
Plus demonstrations. In developing their demonstration proposals,
states assumed that keeping low-income seniors healthy--thus preventing
them from spending down their financial resources on health services
and "diverting" them from Medicaid eligibility--would generate savings
to help offset the increased costs of providing a new drug benefit.
Without state-specific evidence, HHS approved savings assumptions
negotiated with the states, including significant projected reductions
in Medicaid senior enrollment. But the limited research available
suggests that potential health care savings due to improved access to
prescription drugs are likely to be much less than the levels the
states assumed and HHS approved. Had more conservative savings
assumptions been used to estimate the demonstrations' costs, the
proposals likely could not have been approved as budget neutral.
Moreover, concerns have arisen about what actions states might take to
control spending on behalf of seniors if estimated savings do not
accrue and states reach or exceed their spending limits under the
demonstrations.
HHS-Approved Savings Assumptions Are Not Supported by State Experience:
The approved Pharmacy Plus demonstrations count on expected savings
based on reductions in the projected number of seniors who will enroll
in states' Medicaid programs--ranging from a 3 percent reduction in
Florida to a 25 percent reduction in South Carolina over the
demonstrations' 5 years. The dollar amounts of combined federal and
state savings projected under these assumptions in the demonstrations'
budget neutrality calculations range from $480 million in Florida to $2
billion in Illinois (see table 4).
Table 4: States' Projections of Medicaid Senior Populations after 5
Years, with and without HHS-Approved Pharmacy Plus Demonstrations:
Projections: Total projected Medicaid seniors, without demonstration,
by year 5;
Florida: 210,200;
Illinois: 186,683;
South Carolina: 90,006;
Wisconsin: 70,412.
Projections: Total projected Medicaid seniors, with demonstration, by
year 5;
Florida: 204,300;
Illinois: 145,240;
South Carolina: 67,946;
Wisconsin: 57,297.
Projections: Projected number of seniors diverted from Medicaid by
year 5;
Florida: 5,900;
Illinois: 41,442;
South Carolina: 22,060;
Wisconsin: 13,115.
Projections: Annual reduction in Medicaid seniors (percentage);
Florida: 3%;
Illinois: 5%;
South Carolina: 5%;
Wisconsin: 2.5-5%.
Projections: Cumulative 5-year reduction in Medicaid seniors
(percentage);
Florida: 3%;
Illinois: 22%;
South Carolina: 25%;
Wisconsin: 19%.
Projections: Projected dollar savings due to diversion of seniors from
Medicaid by year 5;
Florida: $480 million;
Illinois: $2 billion;
South Carolina: $769 million;
Wisconsin: $926 million.
Source: GAO analysis.
Note: Analysis of state and HHS documents and of Jocelyn Guyer, The
Financing of Pharmacy Plus Waivers: Trade-offs between Expanding Rx
Coverage and Global Caps in Medicaid (Washington, D.C.: Kaiser
Commission on Medicaid and the Uninsured, 2003).
[End of table]
To project the extent to which Pharmacy Plus would reduce its new
enrollment of Medicaid seniors, and thus its total senior enrollment,
Florida made the relatively conservative assumption that the drug
benefit would enable seniors to avoid Medicaid eligibility for 1 year;
after 5 years, the state's total projected number of Medicaid seniors
would be 5,900 (3 percent) lower with the demonstration than without
it. The other states, in contrast, assumed that everyone diverted in
each year of their demonstrations would remain out of Medicaid
throughout the full demonstration period and would not, for example,
enter a nursing home, which often results in Medicaid eligibility. As a
result, Illinois, South Carolina, and Wisconsin projected reductions of
nearly 20 percent or more in Medicaid senior enrollments at the end of
5 years. Had these states made more conservative assumptions--assuming,
for example, as Florida chose to, that providing access to prescription
drugs would delay seniors' entry into Medicaid by only 1 year instead
of 5--their projected with-demonstration costs would have exceeded
projected without-demonstration costs and would not have been budget
neutral.
Although states' demonstration proposals aim to achieve savings by
expanding seniors' access to prescription drugs and improving their
health, in practice it appears that some states' estimates of expected
savings may have been derived in part by determining how much in
savings was needed to demonstrate budget neutrality. In their
proposals, none of the three states that previously had state-funded
pharmacy assistance programs (Florida, Illinois, and South Carolina)
provided data from those programs that specifically supported such high
projected savings. Based on conversations with Wisconsin health care
financing officials and a review of documents, we found that the
state's demonstration savings estimates were a residual of the budget-
negotiating process, derived from determining how much was needed in
savings to demonstrate budget neutrality, rather than from research or
data about what was realistic.
Premise behind Approved Demonstrations Not Well Supported by Research:
The premise that Pharmacy Plus demonstrations will generate savings by
keeping low-income seniors from becoming Medicaid-eligible is not
supported by research. In a previous report, we reviewed the research
studies cited in Illinois' demonstration proposal and found that they
did not sufficiently support the state's theory that a full drug
benefit for low-income seniors would yield the projected level of
savings.[Footnote 37] Although these studies indicated that access to
prescription drugs benefited people in poor health, they all focused on
people who already had specific diagnosed conditions, such as diabetes,
heart disease, or HIV, rather than on a general population of seniors.
An extensive 2003 review of research examining drug coverage for low-
income seniors found relatively few studies about the effect on
Medicaid spending of expanded access to a broad prescription drug
benefit.[Footnote 38] The one study this review considered most
relevant, conducted in the mid-1980s, assessed Pennsylvania's state-
funded program, Pharmaceutical Assistance Contract for the Elderly
(PACE), and found that despite high enrollment, Medicaid entry among
PACE participants was neither prevented nor delayed enough to have a
discernible effect on the state's overall Medicaid budget.[Footnote 39]
Other studies of broad prescription drug benefits for low-income
seniors, including one of New York's program, found some reductions in
participants' health care costs but mainly for inpatient hospital care,
which, for people age 65 or older, is covered by Medicare rather than
Medicaid.[Footnote 40] Still other studies in this review examined the
more limited question of how access to appropriate drugs affects people
already suffering from specific illnesses. Such research sheds little
light on the cost-effectiveness of offering comprehensive drug benefits
to a broad population of low-income seniors.
Some states that have not submitted Pharmacy Plus proposals examined
the diversion and savings assumptions behind the demonstrations and
found that they would not likely be realized. For example, in
considering whether to apply for a demonstration, Minnesota found a
substantial risk that seniors receiving only a drug benefit would
eventually become Medicaid-eligible over a 5-year follow-up period. In
its optimal model, the study estimated that to generate enough savings
to offset the new drug costs, the risk of Medicaid entry would have to
be reduced by 50 percent for non-nursing-home enrollees and by 30
percent for those who become eligible after entering a nursing home.
Minnesota Medicaid officials concluded that this scenario was not
realistic and dropped the state's Pharmacy Plus demonstration
proposal.[Footnote 41]
Pennsylvania also conducted a Pharmacy Plus demonstration feasibility
study for PACE and the related Pharmaceutical Assistance Contract for
the Elderly Needs Enhancement Tier (PACENET) programs, which together
enrolled about 270,000 seniors in 2002.[Footnote 42] The study found
that to offset drug benefit costs, the programs would need aggressive
cost containment, through such approaches as increased co-payments,
reduced provider reimbursements, and a preferred drug list. In
addition, the study noted that in states with generous drug benefits,
savings from expansion to more seniors are particularly difficult to
realize because most beneficiaries who would have avoided expensive
nursing home care have already done so. As of March 2004, Pennsylvania
had not submitted a Pharmacy Plus demonstration proposal.
Concerns about Effects on States if Savings Do Not Accrue:
Although it is early in demonstration implementation, we and others
have raised concerns about how states may be affected if savings under
Pharmacy Plus do not accrue and the states' spending reaches or exceeds
HHS's approved spending limits. We noted in our July 2002 report that
the Illinois Pharmacy Plus demonstration, as approved, makes several
risky assumptions with regard to the extent of the expected
savings.[Footnote 43] In such cases the federal government would not be
at financial risk, but the states would be, because the spending limits
cover services for all the states' Medicaid seniors. Any expenditures
for Medicaid seniors beyond the demonstration's federally matched
spending limit would be entirely the state's responsibility. Officials
in Florida and Wisconsin expressed concerns that their demonstration
spending limits, based on fixed rates of growth projected over 5 years,
could not be adjusted to reflect unpredictable changes in costs and
enrollment growth. One study has raised concerns about the potential
effects on Medicaid seniors, noting that as state spending approaches
the limit of what the federal government will match, states may feel
pressed to reduce optional expansions of eligibility or optional
benefits.[Footnote 44] States could also try to control spending
without reducing eligibility or services by lowering provider
reimbursements--a step already taken in Illinois, although not in
response to pharmacy demonstration enrollment or spending--or by
implementing preferred drug lists.[Footnote 45]
States Have Taken Few Steps to Evaluate Demonstrations, and HHS Has Not
Ensured Sufficient or Timely Progress Reporting:
As of February 2004, efforts by the states and HHS to evaluate and
monitor the four approved demonstrations, and to address some of the
research questions the Pharmacy Plus initiative raises, were in their
early stages. The four states with approved demonstrations had taken
few steps toward implementing the evaluation plans required as a
condition of approval, and an independent evaluation of two of the
demonstrations, contracted by HHS and started in October 2002, was not
scheduled to report until September 2005. In the interim, HHS has not
ensured that the states' required progress reports contain sufficient
information for monitoring whether the demonstrations are functioning
as intended or that these reports are submitted in a timely manner.
States Have Taken Few Steps to Implement Evaluation Plans:
As a condition of Pharmacy Plus approval, HHS requires states to design
and carry out an evaluation and to report their results after the
demonstration ends.[Footnote 46] States are required to submit a plan
for this evaluation in their proposals and in the operational protocols
that HHS approves before states begin the demonstrations. Although the
four states with approved Pharmacy Plus demonstrations submitted the
required evaluation plans--containing research hypotheses, possible
outcome measures, and data needs--as of February 2004, they had taken
few steps to put their evaluation plans into practice.
As HHS requires, the four states' initial proposals and operational
protocols included plans for how they would evaluate whether their
demonstrations were working as intended. With some variations, all the
plans proposed to address the overall research question of how
providing a pharmacy benefit to non-Medicaid-covered seniors would
affect Medicaid costs, service use, and future eligibility trends,
including whether savings achieved by diverting individuals from
Medicaid eligibility would offset the benefit's cost. The first
demonstration proposal, from Illinois, initially contained an extensive
plan to assess demonstration outcomes; the plan later changed
significantly. The initial plan proposed that the state collect data
from sources such as Medicaid and Medicare claims systems, surveys of
participants or case-study interviews, and demonstration-specific
claims. In terms of outcome measures, Illinois' plan proposed comparing
seniors who do have the drug benefit with seniors who do not on such
measures as hospitalization rates, health care service costs, use of
emergency room services, and rates and length of nursing home stays. A
later version of Illinois' plan (as described in the state's
operational protocol), however, calls for using existing Medicaid
claims data for only one outcome measure, Medicaid spending for
seniors.
Both South Carolina and Wisconsin adopted Illinois' relatively
extensive initial evaluation plan in their demonstration proposals, and
as of February 2004, neither South Carolina nor Wisconsin had changed
its proposed plan. Florida, which did not submit an evaluation plan in
its demonstration proposal, provided a two-paragraph discussion in its
operational protocol. This discussion listed several hypotheses and
indicators to be monitored, noted that data would be collected using
the state's current Medicaid system, and gave no details about how or
when the plan would be implemented.
As of February 2004, the states had taken few steps to implement their
demonstration evaluation plans or to determine how they would collect
or analyze data to support their evaluations. States' evaluation
activities were generally limited to collecting and reporting to HHS
data from their existing Medicaid data systems. Although plans for
Illinois, South Carolina, and Wisconsin call for starting their
evaluations at the start of their demonstrations to draw on data about
services used before and throughout beneficiaries' enrollment, these
states and Florida indicated they were just beginning to collect and
report data to implement their evaluation plans:
* Florida and South Carolina officials told us that they had not
decided whether their evaluations would be designed and conducted by
the state Medicaid agency or by an outside entity such as a university.
Neither state had developed an evaluation implementation schedule.
* Illinois and Wisconsin reported providing extensive state data for
HHS's independent evaluation of their demonstrations but, at the time
of our review, had not begun their own evaluations. State officials
told us they understood that participating in the independent
evaluation would exempt them from conducting their own evaluations. But
HHS officials told us that state evaluations were still required.
HHS Has Contracted for an Independent Pharmacy Plus Evaluation:
HHS has contracted with independent university researchers for an
extensive evaluation of the Pharmacy Plus demonstrations in Illinois
and Wisconsin. The evaluation's goal is to document achievements and
difficulties in implementing a Pharmacy Plus demonstration, as well as
to identify impacts on entry into Medicaid and on costs to Medicare.
According to HHS, the evaluation aims to address whether providing
prescription drug benefits to non-Medicaid seniors will keep
individuals relatively healthy, divert them from full Medicaid
eligibility, and thus lower Medicaid and Medicare costs. To address
these issues, the evaluation contract calls for four components of
work, including (1) site visits to Illinois and Wisconsin to describe
the demonstrations and their implementation; (2) telephone surveys of
demonstration beneficiaries in those states about their health status,
access to health care, and prior drug coverage; (3) analysis of
Medicaid, Medicare, and demonstration claims data to assess patterns of
drug use and effects on Medicaid and Medicare costs; and (4) an
analysis of enrollment trends in each state's Medicaid program to
determine if diversion assumptions are met. In addition, the evaluation
aims to compare the experiences of demonstration beneficiaries with a
similar population in another state that does not offer a prescription
drug benefit.[Footnote 47]
Final results for all components of this planned 3-year evaluation,
which began in October 2002, are scheduled to be reported to HHS by
September 2005.[Footnote 48] Specifically, a final report to HHS on the
patterns of drug use is due in September 2004; final reports on the
demonstrations' cost effects on Medicaid and Medicare are due in
September 2005. The evaluation contract does not indicate when results
from the work may be available to other researchers or the public.
According to the HHS evaluation project officer, the independent
evaluators completed state site visits to Illinois and Wisconsin in
July 2003 for the descriptive work component and submitted draft
reports to HHS in December.[Footnote 49] These reports were in review
as of March 2004, and the project officer expected them to be approved
and posted on HHS's Web site, although he did not know when posting
would occur. A report containing results from the second evaluation
component, the telephone surveys of beneficiaries, was expected later
in 2004.[Footnote 50]
HHS Has Not Ensured That States Meet Progress-Reporting Requirements:
HHS's monitoring and reporting requirements, which the states agree to
carry out under HHS oversight, are set forth in the terms and
conditions attached to each demonstration's approval letter. Although
HHS and the states participated in required telephone conference calls
to monitor the demonstrations' start-up, HHS has not ensured that all
states submit the required quarterly and annual progress reports. The
lack of sufficient and timely information from progress reports may
impair the department's ability to monitor demonstration operations and
accomplishments.
Monitoring and reporting requirements are not as clearly established
for the Pharmacy Plus initiative as for the Health Insurance
Flexibility and Accountability (HIFA) initiative:
* The HIFA and Pharmacy Plus initiatives both require states to
participate with HHS in monthly telephone monitoring calls. For
pharmacy demonstrations, however, monthly calls are required for 6
months after implementation and only as needed thereafter; for most
approved HIFA demonstrations, monthly calls are unlimited.
* States with approved HIFA demonstrations are required to submit
quarterly progress reports in a format agreed upon with HHS, and
demonstration terms and conditions describe the required content of
these reports. The terms and conditions for Pharmacy Plus
demonstrations are less specific regarding progress report format and
content.
* HIFA demonstrations are expected to submit separate annual reports
that discuss progress in evaluating the demonstrations, including
results of data collection and analysis to test research hypotheses.
Pharmacy Plus annual reports, in contrast, may be combined with or
include the fourth quarterly progress report, may follow the same broad
content guidelines as quarterly reports, and are not required to report
progress in evaluation.
As of March 2004, HHS and the four Pharmacy Plus states had
participated in the initial monitoring phone calls and begun to gather
data on how their demonstrations were working. HHS and the states
confirmed participating in monthly telephone calls for the first 6
months and then agreeing to maintain contact as needed. An HHS official
told us the department did not set agendas or document these informal
contacts, which focused on demonstration operations as states tracked
enrollment and began to gather information about drug use and
expenditures for new beneficiaries. States reported taking some steps
to develop the capacity to report on their demonstrations. Florida,
Illinois, and Wisconsin, for example, reported having or developing
data management systems containing state Medicaid and other data that
are capable of generating demonstration-specific reports. South
Carolina expected to rely on existing Medicaid data systems. None of
the states, however, were tracking the number of demonstration
enrollees who had become eligible for Medicaid, although officials in
three states reported the ability to do so. Further, the states had not
provided information to HHS to assess whether diversion savings were
occurring.
The information that HHS requires states to report has been
insufficient for determining whether the demonstrations are operating
as intended. According to one HHS official, HHS has not prescribed a
standard format for, or specific information to be provided in, either
the quarterly or annual progress reports; rather, the department works
with the states to obtain needed information. The Pharmacy Plus terms
and conditions stipulate that written quarterly and annual progress
reports contain, at minimum, (1) a discussion of events during the
quarter, including "enrollment numbers, lessons learned, and a summary
of expenditures";[Footnote 51] (2) notable accomplishments; and (3)
problems and questions that arose and how they were resolved. The same
HHS official told us that in response to these general requirements,
states' progress reports did not always include all information
considered useful for monitoring purposes. For example, HHS reported
that officials were working with Illinois to obtain additional
information to complete its draft annual progress report. Illinois'
six-page annual report, submitted in September 2003, reported only on
new demonstration beneficiaries and did not include first-year starting
or ending enrollment or cost information for the state's Medicaid
senior program as a whole--the services and population affected by the
Pharmacy Plus spending limit. One HHS official told us that after
review of Illinois' report, these cost and enrollment data were
specifically requested to assess whether the new drug benefit was
keeping seniors from becoming eligible for full Medicaid benefits. As
of February 2004, Illinois had not provided this information.
Finally, HHS has not insisted on timely submission of the required
quarterly and annual reports. Although Pharmacy Plus terms and
conditions specify that quarterly reports are due 60 days after the end
of the quarter, and annual reports are due 60 days after the end of the
fourth quarter, HHS has not ensured that states submit the reports on
time. Again, the department's policy is to work with the states toward
compliance. As of January 2004, Florida and Wisconsin had submitted all
required written quarterly reports, mostly on time, while South
Carolina had submitted only one of three required progress
reports.[Footnote 52] Illinois, whose demonstration was the first to be
implemented, did not submit any of the three required quarterly reports
before submitting its combined fourth quarterly and first annual report
early in September 2003.
Conclusions:
HHS's approval and monitoring of state demonstrations under the
Pharmacy Plus initiative raise cost and oversight concerns and,
ultimately, program concerns. The department's approval of four states'
demonstrations raises questions about HHS's basis for its decisions.
Because HHS based the spending limits it approved on higher-than-
justified growth rates, these spending limits do not, in our view,
represent reasonable estimates of demonstration costs over the 5-year
trial periods and are not budget neutral. It was difficult to assess
the reasonableness of the spending limits themselves, given that they
were decided upon through an undocumented negotiation process, and
neither public nor HHS internal documents stated the rationale for
approving higher growth rates. We found that if HHS's benchmarks had
been used to establish the spending limits, the federal government's
liability for the four demonstrations could have been $1.6 billion
lower over 5 years. Moreover, the approved demonstrations rely on
highly questionable assumptions about the extent to which savings would
accrue to Medicaid from improved health of people receiving the new
pharmacy benefit, particularly since many of them already had pharmacy
benefits through existing state-funded programs.
In addition, the Pharmacy Plus initiative raises important evaluation
questions about how improved access to prescription drugs may affect
seniors' health and Medicaid and Medicare costs. Although some of these
questions will likely be addressed by the independent evaluation of two
states' demonstrations, in the interim HHS does not appear to be
ensuring that states provide sufficient, consistent, and timely
information for demonstration monitoring or that states begin
implementing their own evaluation plans. The limited available
information on how these demonstrations are operating makes it
difficult to assess whether they are operating as intended.
The concerns about HHS's approved Pharmacy Plus demonstrations parallel
those we have raised about other section 1115 waiver demonstration
approvals over the past decade. These include the extent to which the
department is protecting the Medicaid program's fiscal integrity and
the need for clear criteria and a public process when HHS reviews and
approves demonstrations. Along with the authority to waive Medicaid
requirements, and the flexibility given states to test new approaches
for delivering services more efficiently and effectively, comes the
responsibility for making decisions based on clear criteria and for
monitoring the demonstrations and learning from them. More can and
should be done to fulfill this responsibility.
Recommendations for Executive Action:
In light of our findings that the four HHS-approved Pharmacy Plus
demonstrations are likely to substantially increase federal Medicaid
spending, as previously approved Medicaid section 1115 demonstrations
have done; that HHS's review process and basis for these approvals have
not been clearly set forth; and that approved demonstrations are not
all meeting evaluation and monitoring requirements, we are making seven
recommendations to the Secretary of HHS related to the section 1115
demonstration process.
To improve HHS's process for reviewing and approving states' budget
neutrality proposals for Pharmacy Plus and other Medicaid section 1115
demonstrations, we recommend that the Secretary take three actions:
* For future demonstrations, clarify criteria for reviewing and
approving states' proposed spending limits.
* Consider applying these criteria to the four approved Pharmacy Plus
demonstrations and reconsider the approval decisions, as appropriate.
* Document and make public the basis for any section 1115 demonstration
approvals, including the basis for the cost and enrollment growth rates
used to arrive at the spending limits.
To ensure that approved Pharmacy Plus and other Medicaid section 1115
demonstrations fulfill the objectives stated in their evaluation plans,
we recommend that the Secretary take two actions:
* Ensure that states are taking appropriate steps to develop evaluation
designs and to implement them by collecting and reporting the specific
information needed for a full evaluation of the demonstration
objectives.
* On acceptance, make public the interim and final results of HHS's
independent Pharmacy Plus evaluation.
To ensure that the Secretary and other stakeholders have the
information needed to monitor approved Pharmacy Plus and other Medicaid
section 1115 demonstrations to determine if they are functioning as
intended, we recommend that the Secretary take two actions:
* Ensure that states provide sufficient information in their
demonstration progress reports, in a consistent format, to facilitate
the department's monitoring.
* Ensure that states submit required demonstration progress reports in
a timely manner.
Agency and State Comments and Our Evaluation:
We provided a draft of this report for comment to HHS and the states of
Florida, Illinois, South Carolina, and Wisconsin. HHS and Florida,
Illinois, and Wisconsin responded with written comments, which are
reproduced in appendixes III through VI, respectively. South Carolina
provided technical comments, which we incorporated in our report as
appropriate.
HHS's Comments and Our Evaluation:
HHS concurred with five of our recommendations to strengthen the
processes for approving and overseeing Pharmacy Plus and other Medicaid
section 1115 waivers and disagreed with two. It concurred with our
recommendations to make public the basis for section 1115 demonstration
approvals and to ensure that Pharmacy Plus and other Medicaid section
1115 demonstrations fulfill the objectives of their evaluation plans by
working with the states toward useful program evaluations and making
results of the independent Pharmacy Plus evaluation publicly available.
HHS also concurred with our recommendation to ensure that adequate
information is available to monitor the demonstrations to determine if
they are functioning as intended. In this regard, HHS stated that it
has provided each state that has implemented a Pharmacy Plus
demonstration with an example of an outline and content to be used as a
guide for progress reports and that it will make concerted efforts to
ensure that states submit the reports in a timely manner.
HHS did not concur with our recommendation that the Secretary of HHS
clarify criteria for reviewing and approving states' proposed
demonstration spending limits, indicating that although the department
recognizes the importance of using criteria for reviewing budget
neutrality, strict criteria cannot be determined in advance because
states' circumstances differ. HHS also strongly disagreed with our
recommendation that the Secretary consider applying clarified criteria
to the four approved Pharmacy Plus demonstrations and reconsider the
approval decisions as appropriate. HHS stated that it used criteria to
review each of the approved, disapproved, and pending demonstration
proposals; believes the four approved demonstrations were based on
well-supported budget estimates of future state spending; and does not
believe it appropriate to reconsider approved demonstrations before the
end of the approval periods.
We agree with HHS that some flexibility is appropriate in considering
the unique Medicaid section 1115 demonstrations proposed by different
states. Consistent with our analyses of other section 1115
demonstration waivers over the past decade, however, we believe HHS's
review process and decision criteria should be clear, and the results-
-particularly when approved spending limits deviate significantly from
limits developed using benchmarks that HHS said it uses as a starting
point--should be publicly explained and documented in the
demonstrations' approval letters and terms and conditions. Even though
HHS has developed a standard application form for Pharmacy Plus
demonstrations, that form and other guidance does not provide written
criteria for how HHS reviews and approves the growth rates that states
propose. HHS's rationale for significantly deviating from benchmarks
for projecting future program growth in establishing different states'
spending limits has not been documented or made clear to us or to
others, including other states that may be seeking approval of
demonstration proposals. Without such clarity, questions arise as to
how consistently states have been or will be treated in applying for
demonstrations. Further, in our view, Pharmacy Plus demonstration
approvals were based on questionable savings assumptions. We believe
that HHS should establish clear criteria on which to base the spending
limits and should reconsider its spending limit decisions for the
approved Pharmacy Plus demonstrations in light of such criteria.
HHS also commented that it was premature to evaluate the Pharmacy Plus
demonstrations given the limited experience from 12 to 18 months of
operation. HHS said that were the outcome predetermined, a
demonstration would serve no purpose. The agency believes the Pharmacy
Plus initiative provides states an opportunity to use a Medicaid
demonstration to test if providing drug coverage will prevent the aged
and disabled low-income population from becoming Medicaid eligible. HHS
noted that the four approved demonstrations together are providing drug
coverage to 346,000 seniors who would otherwise be without this
important benefit.
We agree that it is too early to evaluate the outcomes of the 5-year
demonstrations and that section 1115 demonstrations are intended to
test new propositions. More needs to be done, however, to ensure that
states' evaluations collect the information needed to determine whether
those new propositions are functioning as intended. Four states have
Pharmacy Plus demonstrations in place to test such propositions, and
substantial federal funding is involved, including costs that were
previously paid for by the states themselves. For these reasons, HHS
has a responsibility to (1) make fiscally prudent decisions in its
approvals, (2) ensure that savings hypotheses have some grounding in
experience or research, and (3) ensure that the evaluations are planned
and conducted in a way that will produce adequate information regarding
the demonstrations' research hypotheses.
We also agree that the demonstrations can provide a valuable benefit to
low-income seniors and disabled individuals who might otherwise be
without drug coverage. But three of the four states with approved
demonstrations had state-funded drug coverage programs in place before
implementing their Pharmacy Plus demonstrations, and these state-funded
programs became eligible for federal matching funds when the
demonstrations were approved. We therefore find HHS's statement that
the demonstrations are providing drug coverage to seniors who would
otherwise be without it to be an overstatement.
HHS also commented on how MMA may affect the operation of approved
Pharmacy Plus demonstrations and the review of pending and new
demonstration proposals. HHS stated that seniors covered by the four
Pharmacy Plus demonstrations will be able to begin receiving drug
coverage under the Medicare Part D program in January 2006, and states
will be able to use their own funds to "wrap around" the Medicare
benefit to assist other Medicare beneficiaries whose incomes exceed the
level for low-income subsidies. At that time, HHS believes there will
be less need for Pharmacy Plus demonstrations, given expanded Medicare
coverage for prescription drugs, and states operating the
demonstrations will need to decide if they want to continue doing so
and if their demonstrations can continue to be budget neutral. We have
reviewed and incorporated this new information as appropriate.
HHS's written comments appear in appendix III, along with our response
to additional comments that HHS provided on the findings in our draft
report. The department also provided technical comments, which we
considered and incorporated as appropriate.
Illinois' and Wisconsin's Comments and Our Evaluation:
Illinois and Wisconsin officials commented that our draft report
overstated the demonstrations' financial risk to the federal government
and was unnecessarily alarming in light of data showing that the
demonstrations are operating well within their spending limits. In its
comments, Illinois said that it stood by the growth rates it used to
develop the spending limit for its Pharmacy Plus demonstration; it
further argued for the soundness of its demonstration's premise--that
providing a drug benefit to seniors will keep them healthier than if
they had no drug coverage. In its comments, Wisconsin said that the
draft report failed to consider the significant benefits its
demonstration offers to the federal government and to seniors.
We agree that providing a drug benefit to seniors could keep them
healthier, and we do not dispute the benefit to seniors of the states'
drug programs started or expanded through Pharmacy Plus demonstrations.
The demonstrations were approved, however, on the presumption that the
cost of each state's prescription drug program would be paid for in
savings from keeping seniors with little or no previous drug coverage
healthy enough that they would not become eligible for full Medicaid
benefits. Illinois' demonstration was approved on this presumption even
though most of the beneficiaries were already receiving some
prescription drug coverage through the state's existing state-funded
program. We remain concerned that HHS is not maintaining its policy to
ensure demonstrations are budget neutral.
Illinois also commented that it had taken all necessary steps to
conduct its own evaluation and that it had cooperated fully with
federal evaluators and HHS officials. Illinois said that although it
officially filed its quarterly reports late, it submitted all the
detailed data contained in those reports to CMS monthly. We are
principally concerned with the extent to which the information that
Illinois provided could be used to monitor whether the demonstration
was operating as intended. Its one-to two-page quarterly reports, filed
late, tallied the number of beneficiaries enrolled in the demonstration
and drug expenditures to date and provided a narrative paragraph on
accomplishments, problems, or issues. The information itself, however,
furnishes little insight as to whether the demonstration is operating
as intended or whether the benefit is reducing Medicaid costs.
Wisconsin commented that the draft report failed to ascribe any value
to the government of Wisconsin's agreement to cap its federal Medicaid
funding for seniors as a condition of Pharmacy Plus demonstration
approval. We believe the draft report accurately captured HHS's
approach to limiting the federal liability for the Pharmacy Plus
demonstrations by establishing a "cap," or spending limit, as a
condition of approval. We remain neutral on the "value" of this cap for
several reasons. Requiring states to abide by a spending limit is a
departure from the open-ended entitlement nature of the Medicaid
program. We also recognize that under the Medicaid program, states have
considerable discretion to alter spending by increasing--or decreasing-
-coverage for certain populations and services. In addition, we
recognize that HHS's budget neutrality practices provide for
flexibility in approach and that HHS has established such a limit on
other section 1115 demonstrations before the Pharmacy Plus initiative.
Wisconsin also commented that the draft report failed to mention that
the demonstrations were reviewed, determined reasonable, and approved
by OMB. We recognize that OMB is involved in assessing budget
neutrality and other aspects of Pharmacy Plus and mentioned that
agency's role in our draft report. Nevertheless, as OMB officials told
us, the authority for section 1115 waiver approval rests with the
Secretary of HHS, and responsibility for final Pharmacy Plus approval
decisions rests with the Secretary and his designees.
Wisconsin further commented that in criticizing CMS for not obtaining
better evidence to support projected savings, our report fails to
consider that the reason for demonstration projects is precisely to
test such propositions. We maintain, however, that when HHS establishes
a new initiative to encourage states to apply for Pharmacy Plus
demonstrations, it is the agency's responsibility to ensure that each
demonstration's evaluation objectives are reasonable, each
demonstration's savings assumptions are realistic and grounded in some
evidence, and the evaluations are well planned and data monitoring is
established early enough to assure that the questions can be answered.
Other States' Comments and Our Evaluation:
Florida commented that its demonstration was predicated upon savings to
be achieved over the 5-year life of the program and that its proposed
spending limit was close to--less than 1 percent above--the
conservative benchmark spending level we calculated. We agree that
Florida's spending limit was relatively close to a limit based on the
benchmarks and included that information in the draft report.
South Carolina provided technical comments that we incorporated 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
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 & Medicaid Services, 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 http://
www.gao.gov.
If you or your staff have any questions, please contact me at (202)
512-7118. Another contact and other major contributors are listed in
appendix VII.
Signed by:
Kathryn G. Allen:
Director:
Health Care--Medicaid and Private Health Insurance Issues:
[End of section]
Appendix I: Calculating a State's Pharmacy Plus Spending Limit for All
Medicaid Seniors:
To achieve budget neutrality, a state's projected 5-year spending with
its Pharmacy Plus demonstration cannot exceed 5-year projected costs
without the demonstration. As a result, the projected costs of a
state's existing Medicaid program for seniors effectively sets the
spending limit while the demonstration is under way. Calculating this
without-demonstration limit (steps 1-5 in fig. 1) starts with a base
year, generally the most recent full year for which data are available;
calculations for each subsequent year are based on numbers from the
previous year. The result limits a state's Medicaid spending for all
services provided to all Medicaid seniors in the state.
Figure 1: Steps to Calculate Projected 5-Year Without-Demonstration
Costs:
[See PDF for image]
[End of figure]
Calculating projected 5-year with-demonstration costs follows the same
steps but, in addition, factors in the estimated number of new
beneficiaries receiving only the prescription drug benefit; the costs
of providing them the benefit; and the expected savings, mainly from
keeping these beneficiaries healthy enough to avoid eligibility for
full Medicaid.
[End of section]
Appendix II: Denied, Withdrawn, and Pending Pharmacy Plus Demonstration
Proposals as of May 2004:
State and status: Denied.
State and status: Hawaii Submitted January 2003 Denied April 2003;
Description: Projected enrollment: Individuals with incomes at or below
300 percent of the federal poverty level (FPL); Coverage and cost
sharing: Sought federal assistance only for administrative costs for a
demonstration to make prescription drugs available at the discounted
Medicaid rate plus a dispensing fee. State was to contribute $1 toward
the cost of each prescription in the first year, increasing to $8 by
the fifth year; Reasons for denial: Exceeded the Pharmacy Plus income
limit at or below 200 percent of FPL, provided for only minimal state
financial contributions to pharmacists, and did not include the
necessary budget neutrality analysis.
State and status: Delaware Submitted December 2002 Denied July 2003;
Description: Projected enrollment: Seniors and adults with disabilities
with incomes at or below 200 percent of FPL or, if income is above 200
percent of FPL, with prescription drug expenses exceeding 40 percent of
their incomes; Coverage and cost sharing: All prescriptions covered by
the Medicaid state plan, up to an annual benefit limit of $2,500.
Participants to pay co-payments of $5 or 25 percent of the cost per
prescription, whichever is greater; Reason for denial: State already
provided drug benefits to the people to be covered under the
demonstration.
State and status: Withdrawn; Description: [Empty].
State and status: Massachusetts[A[SUBMITTED JULY 2002] 002 Withdrawn
March 2003; Description: Projected enrollment: Seniors with incomes at
or below 188 percent of FPL; Coverage and cost sharing: Same broad
prescription drug coverage as state Medicaid plan. State proposed three
levels of co-payments (exact amounts not specified): generic drugs,
designated brand-name drugs, and all other brand-name drugs. Full cost
of prescriptions to be covered after participants reached annual out-
of-pocket spending limits: for example, a single person would pay the
lesser of $2,000 or 10 percent of gross annual income; Reason for
withdrawal: State's existing pharmacy assistance program for seniors
already covered the populations to be included in the demonstration,
and without an expansion the state and the Department of Health and
Human Services (HHS) could not reach agreement on budget neutrality.
State and status: Pending; Description: [Empty].
State and status: Connecticut Submitted December 2001; Description:
Projected enrollment: Seniors and adults with disabilities with incomes
up to 300 percent of FPL; Coverage and cost sharing: All prescription
drugs and insulin and syringes with specified exceptions, such as
cosmetics and antihistamines. Annual registration fee of $25 and co-
payments of $12 for those with incomes up to approximately 233 percent
of FPL and $20 for those above; State program: Covers low-income
seniors and people with disabilities with incomes up to approximately
233 percent of FPL. Demonstration would expand eligibility up to 300
percent of FPL.
State and status: New Jersey Submitted March 2002; Description:
Projected enrollment: Seniors and adults with disabilities with incomes
at or below 200 percent of FPL; Coverage and cost sharing: All
prescription drugs covered by state Medicaid plan, with $5 co-payment
for each prescription. For brand-name drug when generic is available,
$5 co-payment plus cost difference between the two; State program:
Covers seniors and adults with disabilities with incomes up to 222
percent of FPL if single and 202 percent if married. Demonstration
would cover individuals with incomes at or below 200 percent of FPL.
State and status: Arkansas Submitted September 2002; Description:
Projected enrollment: Qualified Medicare beneficiaries age 65 or older
with incomes at or below 85 percent of FPL; Coverage and cost sharing:
Would cover two prescriptions per beneficiary per month. Annual $25
enrollment fee and co-payments of $10 for each generic prescription and
$20 for each brand-name drug; State program: No state-funded pharmacy
assistance program for seniors at the time of demonstration proposal
submission.
State and status: Indiana Submitted June 2002 Revised proposal
submitted May 2003; Description: Projected enrollment: Seniors with
incomes at or below 135 percent of FPL; Coverage and cost sharing:
Same prescription drugs as the state's Medicaid program, plus insulin,
up to annual benefit caps set on a sliding scale: $1,000 for people
with incomes up to 100 percent of FPL; $750 for those with incomes up
to 120 percent of FPL; and $500 for those with incomes at or below 135
percent of FPL. Participants would pay 50 percent of the discounted
program price, which is the same as the Medicaid price, for each
prescription; State program: Existing state-funded pharmacy program
for low-income seniors to be covered under the demonstration with no
change in eligibility or drug coverage. State indicated that increased
enrollment was expected in the demonstration following a change from a
mail-in rebate system to a point-of-sale system using a discount card.
State and status: Maine Submitted August 2002; Description: Projected
enrollment: Seniors age 62 or older and adults with disabilities with
incomes at or below 185 percent of FPL; Coverage and cost sharing:
Prescription drugs for specified conditions with 20 percent co-payment
for each prescription, or 10 percent if from mail-order sources.
Broader range of drugs available for coverage with 20 percent co-
payment after $1,000 out-of-pocket expenses; State program:
Demonstration would cover state-funded pharmacy program, expand
conditions covered, and add voluntary mail-order purchase.
State and status: Rhode Island Submitted October 2002; Description:
Projected enrollment: Seniors and adults with disabilities or chronic
illness, including chronic mental illness, with incomes at or below 200
percent of FPL; Coverage and cost sharing: All prescription drugs
covered by state Medicaid plan. Annual $25 enrollment fee (waived for
first year of program) and co-payments that increase after participants
have incurred $1,800 of drug expenses per year under the program, from
$2 to $4 for generics and from $8 to $12 for brand-name drugs with no
generic equivalent; other brand-name drugs have a $25 co-payment;
State program: The demonstration would cover individuals with incomes
at or below 200 percent of FPL from three state-funded pharmacy
programs, while individuals in those programs with higher incomes would
continue to be state funded. The scope of drugs covered by state
programs would be expanded under the demonstration.
State and status: North Carolina Submitted January 2003; Description:
Projected enrollment: Seniors with incomes at or below 200 percent of
FPL; Coverage and cost sharing: All prescription drugs and insulin.
Co-payments of $5 for generic and $15 for brand-name drugs; annual
benefit limit of $1,000 per participant; State program: Demonstration
would cover and expand existing state-funded program by broadening
prescription drugs covered from drugs for three specific conditions to
those for all conditions, reducing cost sharing, and increasing annual
benefit limit from $600 to $1,000.
State and status: Michigan Submitted February 2003; Description:
Projected enrollment: Seniors with incomes at or below 200 percent of
FPL; Coverage and cost sharing: Most prescription drugs covered by
state Medicaid plan, plus insulin and syringes. Annual $25 enrollment
fee and coinsurance of 20 percent of cost of each prescription up to a
monthly cap on a sliding scale determined by household income. An
additional co-payment would be charged for brand-name drugs with
generic equivalents; State program: Demonstration would cover existing
state-funded pharmacy assistance program with the same eligibility and
coverage and expand enrollment.
Source: GAO analysis of state and HHS documents.
Notes: These descriptions of states' Pharmacy Plus demonstration
proposals are based on the proposals as submitted for HHS review.
Changes to proposals that may be made during the review process and
before approval are not available in documents.
[A] In March 2003, Massachusetts withdrew two separate section 1115
demonstration proposals from review: a Pharmacy Plus demonstration for
seniors (the proposal described in this appendix) and a prescription
drug benefit for individuals with disabilities as an amendment to the
state's section 1115 Medicaid managed care demonstration. At the same
time, Massachusetts submitted a new proposal--not a Pharmacy Plus
proposal--to add a drug benefit for certain seniors and disabled
individuals as an amendment to its existing managed care demonstration.
In August 2003, that proposal was also withdrawn.
[End of table]
[End of section]
Appendix III: Comments from the Department of Health and Human
Services:
DEPARTMENT OF HEALTH & HUMAN SERVICES:
office of Inspector General:
JUN 8 2004:
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 Waivers: HHS Approvals of Pharmacy Plus Demonstrations
Continue to Raise Cost and Oversight Concerns" (GAO-04-480). 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 provided several technical comments directly to your
staff.
The Department appreciates the opportunity to comment on this draft
report before its publication.
Signed by:
Dennis J. Duquette:
Deputy Inspector General of the Office of Management and Policy:
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. 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 (HHS) ON THE
GENERAL ACCOUNTING OFFICE'S DRAFT REPORT: "MEDICAID WAIVERS: HHS
APPROVALS OF PHARMACY PLUS DEMONSTRATIONS CONTINUE TO RAISE COST AND
OVERSIGHT CONCERNS" (GAO-04-480):
This report looks at the Administration's initiative to simplify and
encourage States to consider demonstrations under section 1115 of the
Social Security Act to expand coverage for prescription drugs under the
Medicaid program to seniors and individuals with disabilities who have
income exceeding that permitted for Medicaid eligibility but not
exceeding 200 percent of the Federal poverty level.
As the report notes, HHS' Centers for Medicare & Medicaid Services
(CMS) approved four States' applications for Pharmacy Plus waivers.
These programs together are providing drug coverage to 346,000 seniors
who would otherwise be without this important benefit. However,
beginning in January 2006, these individuals will be able to begin
receiving drug coverage under the Medicare Part D program. When
Pharmacy Plus began, enactment of a drug benefit under Medicare was far
from certain. With enactment of this historic legislation, Medicare
beneficiaries will receive substantial coverage for drugs. Low-income
beneficiaries will receive additional benefits, leaving them with
minimal out-of-pocket costs. And, States will be able to use their own
funds to wrap around the Medicare benefit to assist other Medicare
beneficiaries with incomes that exceed the level for low-income
subsidies.
When the Medicare Part D benefit is in place, we believe there will be
less need for Pharmacy Plus waivers. States with waivers in effect will
need to decide if they want to continue their waiver and if their
waiver can continue to be budget neutral. Furthermore, the overlap of
the Pharmacy Plus and Medicare Part D programs will make it difficult
to fully evaluate the cost-effectiveness of Pharmacy Plus waivers.
States generally projected that the break-even point for Pharmacy Plus
would not occur until the fourth or fifth year of the demonstrations.
In all of the Pharmacy Plus States, the Medicare drug benefit will
begin before the time projected by the State for the savings generated
by pharmacy coverage to exceed the cost of the benefit.
Based on the amount of time expected by the States and HHS for the
Pharmacy Plus investment to pay off, our overall comment to GAO's
findings and recommendations is that it is premature to evaluate the
Pharmacy Plus waivers based on the limited experience available to
date. It is important to note that the very nature of a demonstration
project is to test new concepts and approaches in the Medicaid program.
Were the outcome predetermined, a demonstration would serve no purpose.
Each of the approved demonstration programs is scheduled to run for 5
years. As noted in the report, when this review was conducted, the
four programs reviewed had been in operation from 12 to 18
months-hardly sufficient time to determine the demonstrations'
outcomes.
The premise underlying the Pharmacy Plus demonstration program is
straightforward. Prescription drugs are an increasingly important and a
costly part of medical care. Medicare beneficiaries-the aged and
disabled-who have income marginally in excess of that permitted for
Medicaid eligibility, are at high risk of not adhering to their drug
regimens if they lack insurance or other financial support to pay for
prescription drugs. This is why 20 States established State-funded
pharmacy assistance programs for their low-income citizens. Failure to
take prescribed medications results in poorer health and increased
health care costs. Pharmacy Plus provides the States an opportunity to
use a Medicaid demonstration to test if providing drug coverage will
prevent these populations from becoming Medicaid eligible and result in
lower Medicaid costs.
GAO Recommendation:
To improve HHS' process for reviewing and approving Slates' budget
neutrality proposals for Pharmacy Plus and other Medicaid section 1115
demonstrations, we recommend that the Secretary take three actions
first:
First, for future demonstrations, clarify criteria for reviewing and
approving States'proposed spending limits.
HHS Response:
We nonconcur. We recognize the importance of using criteria for
reviewing budget neutrality for Pharmacy Plus and other Medicaid
section 1115 demonstrations; however, because State circumstances
differ, strict criteria cannot be predetermined as our review is
dependent on the specific proposal at issue. CMS, together with the
Federal team of staff in other components of HHS and the Office of
Management and Budget (OMB), works with the submitting States to
understand the States' proposals and budget estimates. This review
process involves much back and forth conversation to clarify the
submission, note omissions or needed changes, and discuss budget
assumptions. It is unrealistic and impractical to document all of these
discussions. However, we note that for Pharmacy Plus we developed a
template for the State application. This provides guidance both on the
program elements that HHS expects to be included in the application and
State historical budget data that must be submitted. The program and
budget templates guide States through the program elements that must be
submitted in the application in order for HHS to review and approve the
proposal. We believe that the template brings a considerable degree of
standardization to the Pharmacy Plus application review process over
that which would exist were no template available. In fact, of all the
types of demonstrations, those with HHS-developed templates (such as
Pharmacy Plus, Health Insurance Flexibility and Accountability, and
Independence Plus) provide the most clarity in the development and
approval process.
GAO Recommendation:
Second, consider applying these criteria to the four approved Pharmacy
Plus waivers and reconsider the approval decisions, as appropriate.
HHS Response:
We strongly nonconcur. The Federal team has used the process and
criteria stated above to review each of the approved, disapproved, and
pending Pharmacy Plus demonstrations.
This process has resulted not only in the approval of four
demonstrations, but two denials of demonstration applications, and nine
pending demonstrations that have not been approved largely due to
concerns about budget neutrality. HHS believes that the four projects
approved were based on well-supported budget estimates of future State
spending. We do not believe it is appropriate to reopen approved
demonstrations before the end of the approval period.
GAO Recommendation:
Third, document and make publicly available the basis for any section
1115 demonstration approvals, including the basis, for the cost and
enrollment growth rates used to arrive at the spending limits.
HHS Response:
We concur. HHS makes available on our CMS web site the incoming
applications (including the budget neutrality spreadsheets, which
contain all growth trend rates and show the historical, without waiver,
and with waiver trend rates), the approval or disapproval letters,
terms and conditions, and final budget neutrality spreadsheets.
GAO Recommendation:
To ensure that approved Pharmacy Plus and other Medicaid section 1115
demonstrations fulfill the objectives stated in their evaluation plans,
we recommend that the Secretary take two actions:
First, ensure that States are taking appropriate steps to develop
evaluation designs and to implement them by collecting and reporting
the specific information needed for a full evaluation of the
objectives.
HHS Response:
We concur. HHS agrees that the evaluation component of demonstrations
is important, which is why it is a requirement of approval. The
application specifies that there must be an evaluation conducted by the
State. States are required to submit an evaluation plan for their
Pharmacy Plus demonstrations prior to implementation. We will continue
to work with States toward a useful evaluation of their programs.
GAO Recommendation:
Second make the interim and final evaluation results of HHS'
independent Pharmacy Plus evaluation public when approved by HHS.
HHS Response:
We concur. HHS agrees with this recommendation and plans to make the
results of this evaluation public by making it available on our CMS web
site.
GAO Recommendation:
To ensure that the Secretary and other stakeholders have information
needed to monitor approved Pharmacy Plus and other Medicaid section
1115 demonstrations to determine if they are functioning as intended,
we recommend that the Secretary take two actions:
First, ensure that States provide sufficient information in their
demonstration progress reports, in a consistent format, to facilitate
the Department's monitoring.
HHS Response:
We concur. During implementation and the initial years of the
demonstration, HHS' monitoring focus is to ensure that: a) individuals
are not adversely affected by the demonstration, b) individuals are
being served by the program, and c) that actual State and Federal
spending does not exceed the budget neutrality projections. We think
that receiving this information is sufficient to monitor the program as
it develops. For every State that has implemented a Pharmacy Plus
program, HHS has provided an example of an outline and content that is
to be used as a guide for the progress reports.
We think that a consistent format is more important for evaluative
purposes than it is for monitoring purposes. To evaluate the Pharmacy
Plus initiative as a whole, it is helpful to have standard data
collected to measure the effects of the program. As HHS continues to
work with the Pharmacy Plus States toward an evaluation of the program,
we will seek to have States collect consistent data to help us best
understand the effect of these demonstrations.
GAO Recommendation:
Second, ensure that States submit required demonstration progress
reports in a timely manner.
HHS Response:
We concur. HHS agrees that States should submit their reports timely
and will make concerted efforts to ensure that States do so.
The following are HHS' comments to the GAO Findings in the draft
report:
GAO Finding: Four HHS-Approved Pharmacy Plus Demonstrations are Likely
to Substantially Increase Federal Medicaid Spending.
GAO concludes that the four approved Pharmacy Plus demonstration
projects will not prove to be budget neutral to the Medicaid program,
resulting in increased costs to the program. HHS disagrees with this
conclusion. We find the GAO analysis faulty and lacking in substance.
We note that while we approved four applications, we disapproved two
others, and reviewed but did not approve another nine. The reason we
approved only four applications is that we take seriously our
responsibility to ensure budget neutrality and will not approve
applications until we are confident that the budget estimates are well
supported.
As noted in the report, HHS requires that Medicaid demonstrations be
budget neutral to the Medicaid program. Because the premise of Pharmacy
Plus is that a drug benefit will "divert" low-income individuals from
Medicaid, budget neutrality needs to encompass not only the
expenditures for those covered by the demonstration, but also the
entire affected population group. That is, we include expenditures for
the regular Medicaid population from which costs are to be diverted, as
well as the expansion benefit to Pharmacy Plus demonstration
participants. States seeking Pharmacy Plus waivers are required to
agree to a 5-year aggregate budget cap. This cap is an estimate of
total Medicaid expenditures for the population group included in the
waiver (e.g., aged), including the States' long-term care
expenditures--the most costly category of care in Medicaid. Clearly,
this cap puts the States at risk, making it critical that the cap be an
accurate estimate of future Medicaid costs without the waiver.
Likewise, it is important to HHS that the estimate be accurate because
the Federal Government commits to matching State expenditures up to the
cap. For each State, HITS worked closely with State and Federal staff
to develop and agree to the best estimate of each State's expenditures
over the 5-year life of the waiver. Clearly, there is no standard
formula that can be used for this calculation.
The GAO report spends much time discussing deviations from "benchmark"
numbers for expected program growth, going as far as to calculate the
difference between the States' agreed upon caps and what the caps would
have been based on the benchmarks, and equating these to $1.5 billion
in excess Medicaid payments. We take strong exception to this analysis
and its conclusions, and find the arguments made by GAO invalid. HHS
policy has never been to hold States to benchmark levels of growth.
Rather, we used two benchmarks as a starting point in our discussions
with States. The starting point for evaluating budget neutrality is the
lower of the State's historical rates of growth, based on the most
recent 5 years, for costs and enrollment, or the national growth rate
estimated by the Office of the Actuary in CMS and used in the
President's Budget.
We are concerned that GAO has missed the fundamental purpose of budget
neutrality. It is not to hold the State to a formula-driven cap.
Rather, the goal is to estimate the amount the State would have spent
in the absence of the demonstration. The estimation process is
necessarily an individualized one, and must take into account the
particular demographic, economic, and program characteristics of the
State at issue. For this reason, we regard the growth measure described
above not as a "benchmark" but as a "starting point" for the estimation
process.
This starting point is viewed as the low-end estimate for the State.
Both estimates have limitations that would make it unreasonable of us
to use either one as the sole standard in setting an aggregate budget
cap for future spending. We know that State historical growth rates may
not be predictive of future growth rates and that growth rarely occurs
at a steady pace. Regarding the President's budget estimates, these are
estimated on a national basis: clearly growth for individual States is
expected to vary both up and down from these estimates. Estimating
future expenditures for an individual State's Medicaid program is a
process that takes into account many different factors. State Medicaid
programs are dynamic. Change is routine, not the exception. We
acknowledge that this makes estimating future expenditures on an
aggregate basis very difficult. This is why budget neutrality for
section 1115 demonstration programs is generally constructed on a per
capita basis. But the nature of the hypothesis underlying Pharmacy Plus
requires an aggregate cap. We work closely with States to define that
cap because of the risk the States are accepting. We believe that each
State best knows its Medicaid program, population, cost drivers, and
effects of exogenous factors. HHS tries to balance State historical
growth, HHS' own national estimates, and the State's individual best
estimates. From there, budget neutrality estimates are negotiated and
agreed to by all parties. This is consistent with the approach taken
with other demonstrations. Demonstrations approved in the past, such as
State Health Reform demonstrations, have included future program growth
estimated by States, including increases due to planned program
expansions.
GAO focuses inappropriately on two "benchmarks" for growth in State
costs and enrollment. It argues that the aggregate budget caps are not
budget neutral because HHS approved caps based on higher growth
assumptions. As GAO acknowledges (pages 25 and 26), HHS allows States
to present a rationale for higher growth rates. GAO's conclusion that
we violated our own approval criteria in allowing higher growth rates
is wrong.
The report also gives the impression that we grossly exceeded the
benchmarks (the starting point for us); in fact only two (for Illinois
and Wisconsin) of the eight estimates (cost and enrollment growth for
each of the four States) did we approve a growth rate that exceeded
both the State average and the President's budget estimate.[ In these
cases we were convinced, by data presented by the State, that changed
circumstances in the State would result in higher enrollment growth. In
three instances, we used the lower of the State historical growth and
the President's budget estimate. In one instance the number agreed was
between the two benchmarks. In the remaining two instances, we used the
greater of the two benchmarks.
It is also worth taking a closer look at instances where the estimate
used exceeded the two benchmarks. For those instances that involve
enrollment growth, it is generally more volatile than cost growth, as a
variety of factors can result in abrupt and significant caseload
growth. Liberalizing program eligibility clearly causes enrollment to
grow. Other factors, such as program exposure, outreach, and the
creation of an easier enrollment process, have the same effect. It is
important to remember that enrollment growth by State varies more
widely from the national President's Budget estimates than does cost
growth.
Illinois' growth was largely the result of an expansion in eligibility
scheduled to take effect shortly after the start of the Pharmacy Plus
demonstration. The Federal team reviewed the estimates used by the
State in its budget. These estimates were not developed to support the
State's Pharmacy Plus application. They were used to request funds
needed to implement a legislated program expansion. We found these
numbers to be credible.
In Wisconsin, the State's estimates were based on several factors
including enrollment/education initiatives launched by the Social
Security Administration and several State initiatives designed to
increase enrollment by removing application and renewal barriers to
Medicaid eligibility. Wisconsin estimated annual enrollment increases
of 4 percent. The enrollment growth rate approved was 2 percent. HHS
neither violated its own benchmarks, as GAO describes them, nor
approved unreasonable, unfounded cost increases to the Medicaid
program.
We note an error in the GAO chart on page 26 of the report. Our
records show South Carolina's historical average for enrollment growth
to be 1.0, not 0.7 as indicated by GAO. Our records show Wisconsin's 3-
year growth rate to be 6.6 percent (5.4 percent if using 5 years as was
used by GAO). CMS used the 3-year estimate; therefore, the approved
percentage was the lower benchmark.
GAO Finding: HHS' Review Process and Basis for These Approvals Have Not
Been Clearly Set Forth.
The Federal review process for Pharmacy Plus demonstrations is similar
to that for other Medicaid Section 1115 demonstration applications and
does not differ greatly from other types of program requests that HHS
processes. HHS considers many other types of State program requests
that require us to evaluate future costs in order to avoid incurring
new expenditures in the Medicaid program. These programs with costs
tests, such as section 1915(6) waivers, section 1915(c) waivers, and
section 1115 demonstrations, are all reviewed similarly in HHS. CMS,
other HHS components, and, at times, OMB work with the State to reach
agreement on best estimates for future spending using historical costs
trends. The Federal team takes into consideration the information
provided by the State as well as its own estimates.
The process for all these program reviews, including Pharmacy Plus, is
very interactive. Numerous teleconferences take place within the
Federal team and between Federal and State staff. The HHS staff also
regularly report progress to senior management and receive guidance on
how to proceed. A prime focus of this interaction is to develop the
best estimate of future State spending to use in the budget neutrality
calculation. We see no reason to establish a different review process
for Pharmacy Plus demonstration applications.
GAO Finding: Approved Demonstrations Are Not All Meeting Evaluation and
Monitoring Requirements.
A standard Term and Condition of approvals of Medicaid 1115
demonstration projects is a requirement for the State to evaluate the
program. At times, HHS also undertakes its own evaluation. As noted in
the GAO report, HHS has a contract with Brandeis University to evaluate
the Illinois and Wisconsin Pharmacy Plus demonstrations. Ideally, a
State would develop its evaluation plan prior to program
implementation. In practice, HHS has found that, even when States
present an evaluation design prior to the start of the demonstration,
it frequently changes as States gain experience implementing the
program, gathering initial data, and discovering new questions to
address. HHS is also aware that States have limited resources to fund
independent evaluations and usually rely on in-house staff. States
frequently do not have staff with the skills needed to develop or carry
out a sophisticated evaluation design, nor the funds for a costly
evaluation. For these reasons, HHS works with State staff to assist
them in developing a reasonable evaluation plan that addresses the key
questions of benefit coverage and costs in the demonstration program.
In monitoring the demonstration programs, HHS is primarily concerned
with tracking Medicaid enrollment and expenditures. As we noted during
implementation and the initial years of the demonstration, HHS' focus
is to ensure that: a) individuals are not adversely affected by the
demonstration; b) individuals are being served by the program, and
c) that actual State and Federal spending does not exceed the budget
neutrality projections. The monthly calls held between HHS and the
State, and the quarterly progress reports are designed to help HHS
monitor program activity. HHS monitors actual spending by reviewing
financial reports submitted through the CMS 64 system. HHS is
monitoring the Pharmacy Plus demonstrations through these means.
HHS provided examples of progress reports to all States and specified
those items that HHS wanted to be reported on a quarterly basis. While
Illinois has not been timely on some of its quarterly progress reports
(but did provide them), the State has been sending HHS enrollment data,
utilization data, and data about program enrollees.
This information, together with the financial expenditure reports and
the monthly phone calls, provide us adequate information to monitor
their program. HHS also asked Illinois to revise its originally
submitted annual report to include more information. South Carolina,
likewise, has not been timely in submitting its formal progress
reports. However, the State and HHS continue to have monthly progress
calls that involve discussions about program enrollment and operation.
Florida and Wisconsin have been timely on their report submissions. As
noted above in our response to a GAO recommendation, HHS plans to make
concerted efforts to ensure timely submission of these reports in the
future.
GAO's Response to the Department of Health and Human Services' Specific
Comments on GAO's Findings:
In addition to indicating whether it concurred with our seven
recommendations, HHS commented on the report draft's findings in three
areas.
Effect of HHS-Approved Pharmacy Plus Demonstrations on Federal Medicaid
Spending:
HHS disagreed with our conclusion that the four approved Pharmacy Plus
demonstrations will not prove to be budget neutral to the Medicaid
program and will possibly result in increased federal Medicaid
spending. HHS stated that the department takes seriously its
responsibility to ensure budget neutrality in the Medicaid
demonstrations it approves, noting that it approved four Pharmacy Plus
demonstrations while denying two and reviewing but not approving nine
other proposals whose budget estimates were not well supported.
HHS was concerned that we missed the fundamental purpose of budget
neutrality, which HHS says is not to hold states to a formula-driven
cap but to estimate the amount of future Medicaid spending. HHS
believes that the four approved demonstrations' spending limits were
based on well-supported budget estimates of future state
spending,[Footnote 53] and said its policy has never been to hold
states to benchmark levels of growth. Those benchmarks are, in HHS's
view, a starting point in projecting how the program will grow, because
HHS typically permits states to present rationales for higher growth
rates.
We agree that there may be state-specific circumstances that justify
departures from benchmarks HHS considers as starting points.
Nevertheless, we believe that, given the potential impact on federal
Medicaid spending, HHS and states should justify and document any
significant departures from those starting points. In conducting our
assessment, we interviewed HHS officials and Illinois and Wisconsin
state officials and requested all documents that were considered in
their budget neutrality negotiations. Those interviews and documents,
which we discussed in the draft report, did not fully support the
higher growth rates that were approved. We note that enrollment growth
rates, in particular, can have a significant multiplier effect on
future spending estimates. Further, we note that HHS allowed at least
one state to argue for a higher growth rate using broad justifications-
-such as the effect of the Social Security Administration's nationwide
outreach program for low-income Medicare beneficiaries--that other
states could also have used but did not, raising questions of clarity
and consistency in both the process and the final decisions.
Documentation of HHS's approval decisions and the basis for approved
spending limits could provide a rationale for higher cost and
enrollment growth rates and offer guidance and assurance of consistent
treatment to other states applying for Pharmacy Plus demonstrations.
Absent such documentation, neither HHS nor the states have adequately
justified the departures from states' historical growth rates or the
CMS Actuary's growth projections in establishing states' spending
limits.
HHS's Review Process and Basis for Approvals:
In its comments, HHS stated that the federal review process for
Pharmacy Plus demonstration proposals is similar to the review process
for other Medicaid section 1115 demonstrations, indicating that the
process is necessarily interactive and involves numerous meetings
within the federal team and with states. We acknowledge that the review
process for Medicaid section 1115 demonstration proposals benefits from
being inclusive and interactive, and we are not suggesting that HHS
should establish a new or different review process specifically for the
Pharmacy Plus demonstrations. Our concern is that the basis for its
decisions and any agreed-upon spending limit be clear and justified,
not only for Pharmacy Plus demonstrations but for all section 1115
approvals. As noted in the draft report, the concerns raised by HHS's
approved Pharmacy Plus demonstrations parallel those we have raised
about other section 1115 waiver demonstration approvals over the past
decade, including concerns about the extent to which the department is
protecting the Medicaid program's fiscal integrity and the need for
clear criteria and a public process in reviewing and approving
demonstrations.
Approved Demonstrations' Evaluation and Monitoring Requirements:
HHS commented that the department plans to continue working with states
toward developing useful program evaluations based on consistent data
collection as well as sufficient, consistent, and timely monitoring
information. HHS also plans to make results of the independent Pharmacy
Plus evaluation available on the CMS Web site. With regard to states'
own evaluations, HHS emphasized practical limitations, such as
constraints on state financial and staff resources, indicating that
while states ideally would develop evaluation plans before implementing
demonstrations, in practice such plans often change. HHS commented that
it obtains sufficient information for monitoring the demonstrations
through telephone contacts and progress reports that respond to an
example outline the department provided to each demonstration state.
We recognize that state resources are limited, demonstration
implementation tends to be a higher priority than evaluation, and the
independent contractor evaluation of Pharmacy Plus will provide
substantial information. Nonetheless, the lack of action to monitor key
information--such as whether demonstration enrollees are being diverted
from Medicaid--to plan how their evaluations will be conducted, or to
collect data needed for such evaluations suggests a low priority for
ensuring that evaluations can and will be done. HHS needs to ensure
that states provide sufficient, consistent, and timely information for
both demonstration monitoring and for determining whether the
demonstrations are functioning as intended and to ensure that
evaluation plans are put into place.
[End of section]
Appendix IV: Comments from the State of Florida:
FLORIDA MEDICAID:
JEB BUSH:
GOVERNOR:
MARY PAT MOORE:
INTERIM SECRETARY:
May 14, 2004:
Katherine Iritani:
Assistant Director:
U.S. General Accounting Office:
Washington, D.C. 20548:
Dear Ms. Iritani:
This letter responds to your request for written comments concerning
draft report GAO-04-480 "Medicaid Waivers - HHS Approval of Pharmacy
Plus Demonstrations Continue to Raise Cost and Oversight Concerns". The
report raises concerns with both state and federal methodologies used
to substantiate budget neutrality for Medicaid Pharmacy Plus
demonstration waivers.
We would note that the Florida waiver application was based in part
upon assumptions provided to Florida Medicaid by CMS, and that
Florida's proposed limits were less than 1 % above the conservative
benchmark spending levels in the GAO reports.
Florida's Pharmacy Plus waiver was predicated upon savings to be
achieved over the five-year life of the program. Larger savings were
expected to accrue in the last two years of the program, based upon
avoiding nursing home admissions and hospital based care as a result of
improved prescription drug therapies available during the early years
of the program. While the program may be terminated early due to the
implementation of the Medicare prescription drug benefit, Florida's
calculations continue to reflect budget neutrality at a minimum, and
possible incremental savings.
Sincerely,
Signed by:
Steven A. Grigas:
Acting Deputy Secretary:
Florida Medicaid:
[End of section]
Appendix V: Comments from the State of Illinois:
Illinois Department of Public Aid:
201 South Grand Avenue East:
Springfield, Illinois 62763-0002:
Rod R. Blagojevich:
Governor:
Barry S. Maram:
Director:
Telephone: (217) 782-1200 TTY: (800) 526-5812:
May 14, 2004:
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 Waivers: HHS Approvals of
Pharmacy Plus Demonstrations Continue to Raise Cost and Oversight
Concerns (GAO-04-480)." These comments should be included in the final
report as Illinois' comments.
Illinois stands by the growth rates used to develop the cost neutrality
cap for its pharmacy plus waiver. They are supported by the data and
other information submitted with the state's waiver application.
Illinois also believes that the basic premise of the demonstration-that
providing a drug benefit to an aged population without comprehensive
drug coverage will keep that population healthier-is a sound premise.
In fact, it is self-evident. Some states may have determined that a
drug benefit for seniors would not produce sufficient diversion from
Medicaid to make a pharmacy plus waiver cost neutral. However, every
state's Medicaid program is different with respect to benefits and
population. Illinois is confident that due to its particular program
structure and population, particularly with respect to spend down and
long term care, there will be sufficient diversion to make the
demonstration budget neutral. In fact, preliminary data already shows a
drop in nursing facility admissions.
Concerns expressed about reduction in services to the aged population
are unfounded and unnecessarily alarming in light of the fact that cost
data shows Illinois' demonstration operating within the cost neutrality
cap.
Illinois has taken all necessary steps to conduct its own evaluation in
addition to supplying extensive data and participating in numerous
lengthy interviews for the federal evaluation. Every data element
necessary for the evaluation is being collected.
Although Illinois' first three quarterly reports were officially filed
late, all of the detailed data contained in those quarterly reports had
previously been submitted to CMS on a monthly basis. All issues
discussed in the narrative portion had been discussed with CMS during
the monitoring phone calls and on-site visit. Official reporting for
Demonstration Program purposes of the cost data for the Medicaid aged
population has not and will not occur until the data set is complete.
Medicaid law allows one year to submit a claim. Therefore, complete
data for the first year will not be available until after July 1, 2004.
Nevertheless, preliminary budget neutrality cost data is submitted
quarterly to CMS on the CMS-64.
Sincerely,
Signed by:
Acme Marie Murphy Ph.D.
Administrator:
Division of Medical Programs:
E-mail: dpawebmaster@mail.idpa.state.il.us:
Internet: http://www.state.il.us/dpa/:
[End of section]
Appendix VI: Comments from the State of Wisconsin:
DIVISION OF HEALTH CARE FINANCING:
1 WEST WILSON STREET:
P O BOX 309:
MADISON WI 53701-0309:
Jim Doyle Governor:
Telephone: 608-266-8922:
Helene Nelson:
Secretary:
State of Wisconsin:
Department of Health and Family Services
FAX: 608-266-1096:
TTY: 668-261-7798:
dhfs.wisconsin.gov:
May 14, 2004:
Kathryn G. Allen:
Director:
Health Care - Medicaid and Private Health Insurance Issues:
General Accounting Office:
Washington, DC 20548:
Dear Ms. Allen:
Thank you for the opportunity to provide comments to the draft report
"Medicaid Waivers: Health and Human Service Approvals of Pharmacy Plus
Demonstrations Continue to Raise Cost and Oversight Concerns" (GAO-04-
480). The attached addresses substantive comments, corrections,
clarifications and omissions that we believe should be incorporated in
the General Accounting Office (GAO) final report.
We believe the GAO audit vastly overstates the financial risk to the
federal government of Wisconsin's Pharmacy Plus waiver and fails to
consider the significant benefits to the federal government of the
terms and conditions of the SeniorCare waiver. Under the terms of the
approved Pharmacy Plus waiver, in the current state fiscal year
SeniorCare will reduce drug costs for 90,000 Wisconsin seniors by over
$112 million, of which the federal government will pay approximately
$39 million (34.8 percent).
Wisconsin data shows that our costs for SeniorCare are significantly
below the benchmark, and that the risk to the federal government of
higher federal spending is significantly less than anticipated. Even
prior to adjusting SeniorCare for savings derived from individuals
diverting from Medicaid and from reduced hospitalization and nursing
home expenditures, the cost to the federal government would total $250
million, not $416 million based on more recent, actual data. The
transmittal letter is not consistent with statements in the draft
report. While the transmittal letter states unequivocally that the
approved terms will cost the federal government an additional $416
million, the report indicates that it might cost up to that amount.
Since statements in the transmittal letter may unduly influence some,
it is important that this false impression be corrected in the
transmittal letter. The draft report also fails to note that the terms
and conditions of Pharmacy Plus waivers for Wisconsin and the other
states were independently reviewed, determined reasonable, and approved
by the federal Office of Management and Budget (OMB).
The Pharmacy Plus program is a unique and valuable demonstration of the
importance of providing a comprehensive drug benefit program to low-
income seniors with significant drug costs. Under the Pharmacy Plus
model, the Wisconsin SeniorCare program has proven to be an efficient
and cost-effective program, currently providing full prescription drug
benefits to 90,000 low-income Wisconsin seniors.
Moreover, the draft report fails to ascribe any value to the federal
government of Wisconsin's agreement to cap its federal Medicaid funding
for seniors as a condition of Pharmacy Plus waiver approval. Wisconsin
took considerable risk in agreeing to cap federal Medicaid matching
funds for the elderly, and the federal government unquestionably
realizes a benefit from capping its exposure. While reasonable people
may differ on the exact value of that benefit, it cannot be assigned
zero value. In addition, when criticizing CMS for not obtaining better
evidence to support projected savings, the GAO report fails to consider
that the reason for demonstration projects is precisely to test such
propositions. In order to encourage sufficient participation to test
questions in the real world, the risk parameters must be reasonable.
The Wisconsin SeniorCare waiver was approved prior to the recent
federal enactment of Medicare drug coverage as an effort to address
both state and federal interest in expanding assistance for low-income
senior drug costs. At the time it was approved, the Wisconsin program
provided the Centers for Medicare and Medicaid Services (CMS) a cost-
effective way to make progress towards that goal. As such, the
SeniorCare program has proven to be a bargain for taxpayers and
beneficiaries. In the first 18 months of operation, SeniorCare has
demonstrated successful and efficient delivery of a drug benefit that
justifies continued strong support from the Federal government. We
encourage Congress, CMS and GAO to carefully weigh the importance of
SeniorCare to 90,000 low-income seniors in Wisconsin as a cost-
effective model for prescription drug coverage.
In summary, Wisconsin's SeniorCare waiver will generate significant
cost savings to the federal government through reduced Medicaid and
Medicare payments for hospital and nursing home care. The waiver will
ensure that low-income seniors have continued access to an easy
application, to a simple, comprehensive prescription drug benefit, and
to uncomplicated, reasonable cost sharing requirements when the
Medicare Part D drug benefit is implemented.
Please find attached a list of complete comments and clarifications to
the report. Again, thank you for the opportunity to respond to the
draft. You may contact Russell Pederson, (608) 266-1720, with questions
regarding this matter.
In closing, I would like to thank you and the GAO staff responsible for
this report. The GAO has demonstrated a collaborative and collegial
approach to learning more about the Wisconsin SeniorCare program in
order to produce this report to Congress.
Sincerely,
Signed by:
Mark B. Moody:
Administrator:
Attachment:
Wisconsin Department of Health and Family Services Comments to GAO
Draft Report:
Medicaid Waivers: Health and Human Service (HHS) Approvals of Pharmacy
Plus Demonstrations Continue to Raise Cost and Oversight Concerns (GAO-
04-480):
Submitted May 14, 2004:
Comments:
1. The General Accounting Office (GAO) uses a figure of $416 million as
the potential liability for the federal government because of "too
liberal" benchmarks. However, the five-year costs of SeniorCare to the
federal government will be significantly less than this amount. GAO's
use of this figure without any mention of the actual cost of SeniorCare
exaggerates the federal fiscal effect. The current projection for the
five-year cost of SeniorCare is $250 million (FED). As such, even prior
to adjusting SeniorCare for savings derived from individuals diverting
from Medicaid, the cost to the federal government would total $250
million - not $416 million. Most importantly, the $250 million of
federal expenditures will provide Wisconsin seniors over $641 million
in prescription drug savings and will result in savings from reduced
hospitalizations and nursing home care.
2. The draft states that the Centers for Medicare and Medicaid Services
(CMS) should have applied a rule to use the lower of the state
experience or the CMS standard in setting the budget neutrality
parameters. We believe this is an unreasonable standard and rule to
apply to Pharmacy Plus waivers. If historical experience provides
sufficient justification to lower the accepted benchmark, it should
also be permitted to expand the benchmark. In addition, the GAO report
mentions several criteria that were discussed throughout the
negotiations on the waiver, including the potential impact of the SSA
outreach on Medicaid enrollment, the growth in the elderly population,
and the cost trends and enrollment projections for the elderly in the
President's budget. The report, however, does not incorporate these
factors into the benchmark factor analysis, and as noted earlier, the
failure to do so is not reasonable given the requirement to place an
aggregate cap on federal Medicaid matching funds for the elderly.
3. The report questions the savings from expanding drug coverage by
noting that some of the savings (such as hospital care) will accrue to
Medicare, rather than Medicaid. This argument is an unreasonably narrow
interpretation considering the federal government pays 100 percent of
Medicare and, in Wisconsin, about 60 percent of Medicaid.Although the
benefit to the Medicare program is not considered in the CMS test of
Medicaid savings, Medicare savings should be considered and are
relevant to the GAO review of the overall federal fiscal effect of the
waivers. In fact, the CMS independent evaluation of the Wisconsin
Pharmacy Plus waiver expressly requires a component that will review
the Medicare costs of SeniorCare participants. An estimate of savings
could be developed using these data.
4. The GAO criticizes the CMS approval of a Wisconsin standard
benchmark increase of 6.3 percent for the cost per eligible because
Wisconsin's historical experience was lower. However, the historical
trend was an increasing trend so that the five-year average may very
well underestimate what will happen in the five years of the SeniorCare
waiver. The higher cost per eligible figure (6.3 percent) is reasonable
given the upward trend that Wisconsin was experiencing at the time the
waiver was in negotiation. In particular, the historical trend in the
last three years was 7.3 percent.
5. The GAO references the Social Security Administration outreach
factor for the higher caseload growth factor. However, the draft does
not mention other important factors, such as the expansion of Wisconsin
FamilyCare and PACE/Partnership. Because FamilyCare and Pace/
Partnership expand access to home and community-based waiver services,
there is an expansion in the number of eligibles on Medicaid that will
be enrolled as waiting lists for community-based care are eliminated.
6. The GAO suggests there is not firm evidence that expansion of drug
coverage would produce savings in Medicaid by diverting or delaying
Medicaid enrollment. We strongly object to this characterization of the
Wisconsin waiver negotiation and intent of the Pharmacy Plus programs.
The GAO criticism ignores the central purpose of demonstration waivers.
In fact, Pharmacy Plus demonstrations are intended to determine if this
important health care benefit can be delivered cost-effectively. In
addition, research does suggest that coverage of prescription drugs is
beneficial to seniors.
7. The draft also suggests Congress and others have raised concerns
about whether 1115 demonstration waivers actually promote the goals of
Medicaid. We strongly dispute the implication that the Wisconsin
SeniorCare Pharmacy Plus waiver is not, in fact, providing critical
prescription drugs to a vulnerable elderly, low-income, uninsured
population. The report provides no information that is routinely
reported by Wisconsin to CMS under the terms of the approved waiver
(and shared with GAO) that demonstrates budget neutrality to date. It
should be noted that the waiver was obtained to serve more low-income
seniors under Medicaid and it did not limit benefits or services to
current Medicaid recipients.
Contrary to the GAO draft summary, there is no evidence to date that
the Wisconsin SeniorCare demonstration waiver will increase federal
spending. SeniorCare is lauded by virtually every local, state and
federal stakeholder, and participant audience as an exemplary, cost-
effective, uncomplicated program that provides critical prescription
drugs to low-income Wisconsin seniors.
8. The GAO mis-characterizes the benchmark standards for Wisconsin.
Wisconsin was not allowed significant "extra room" in the trend rates
given reasonable variation that is expected in any trend. In addition,
the benchmarks must also address the risk to the state of capping all
federal Medicaid matching funds for Medicaid benefits to the elderly.
The report states that a "lack of information" on how the
demonstrations are operating "compromises any attempt to assess whether
they are operating as intended." We strongly object to this statement.
The Wisconsin Division of Health Care Financing (DHCF) has developed
sophisticated fiscal and program utilization monitoring systems and
reports all of which are available and reported in aggregate on a
quarterly basis to CMS. DHCF has met all requirements under the Terms
and Conditions in providing timely, comprehensive program cost and
utilization reports.
10. DHCF administers a data reporting system that allows staff to
conduct ongoing reporting and monitoring of the state commitment to
budget neutrality through evaluative analysis. As such, we strongly
object to the draft statement, "the information states have submitted
is insufficient for determining whether the demonstrations are
operating as intended which will limit HHS oversight capability."
Wisconsin has submitted detailed quarterly and annual reports that
correspond directly to CMS operational protocols. The reports provide
CMS, state staff, and the public with quantitative measures and
analysis of the budget neutrality calculation, program costs,
participant utilization and an array of program data. As such, we are
confident the SeniorCare program is, in fact, functioning as intended
and reported.
11. In addition, Wisconsin has agreed to a rigorous independent
evaluation by a CMS contractor to ensure a complete and impartial
analysis of Wisconsin SeniorCare and Medicaid data, as well as
corresponding analysis of participant Medicare medical claims data. The
independent evaluation is a comprehensive review of the program
effectiveness, including state, federal and participant costs, drug
utilization, and overall impact on low-income Wisconsin seniors.
Wisconsin has provided the CMS contractor, Brandeis University, with
extensive program information and data over the course of the past
year, including direct program and participant cost information,
detailed fiscal analyses and any information requested for the purpose
of the evaluation.
The GAO draft omits any reference to the importance of the independent
evaluation as an effective approach to review CMS assumptions relating
to budget neutrality and program effectiveness. We believe Congress'
interest in the effectiveness of the approved Pharmacy Plus waivers is
best addressed through the unbiased and independent evaluation. We also
believe CMS has correctly exercised its authority under the SeniorCare
Terms and Conditions to allow the independent evaluation as meeting the
program evaluation requirement under the waiver.
GAO's Response to the State of Wisconsin's Specific Comments:
In addition to overall comments on our draft report contained in its
letter and discussed in the body of this report, Wisconsin provided 11
specific comments in an attachment to its letter, which is reproduced
on pages 67 through 69. Our responses to Wisconsin's specific comments
are numbered below to correspond with each of the state's numbered
comments.
5. Wisconsin commented that our $416 million figure (the estimated
federal share of the difference between HHS-approved and benchmark 5-
year spending limits in table 3) exaggerates the federal fiscal effect,
because the actual costs of the demonstration's first years have come
in under the projected costs. The state currently projects federal
costs for the new drug benefit under the demonstration totaling $250
million over 5 years instead of roughly $537 million, which is the
federal share of $919 million approved for the new benefit (see table
1). Although we recognize that the actual costs of Wisconsin's
demonstration to date are less than the costs projected at the time the
waiver was approved, our analysis examined the extent to which HHS
ensured that the demonstrations--in the form they were approved--
maintained spending limits that were budget neutral to the federal
government. Because Wisconsin's approved spending limit represents the
total amount the state is authorized to spend over the demonstration's
5-year life-span, the federal government could be liable for as much as
$416 million more than what it would have been liable for had HHS held
the state to a spending limit based on benchmark rates (see table 3).
6. Wisconsin commented that it is unreasonable to hold HHS to applying
the lower of two benchmark growth rates in calculating budget
neutrality: state experience or projections by the Centers for Medicare
& Medicaid Services' (CMS) Actuary for Medicaid costs. The state also
expressed concern that our analysis did not incorporate factors other
than the benchmarks that affect program growth. We believe that it is
reasonable to expect HHS to use objective benchmark growth rates in
projecting the Medicaid costs on which it bases spending limits and to
document its reasons for deviating from those benchmarks--even if the
department regards them as starting points. Otherwise, the department's
rationale for setting higher spending limits (based on higher growth
rates) for some states than for others is not apparent to other states
involved in waiver negotiations and reviews. As noted in the draft
report, HHS responded to Wisconsin's request for higher growth rates
but did not, in our view, adequately document the basis for approving
higher rates. In our own analysis of the spending limits, we did not
include the additional factors that Wisconsin asserted should raise its
spending limits because neither the state nor HHS provided adequate
support to justify doing so.
7. Wisconsin stated that our interpretation was unreasonably narrow in
not accounting for potential savings accruing to Medicare, as well as
to Medicaid, from expanding prescription drug coverage for seniors. We
considered savings to Medicaid alone because HHS allows states to
include savings only to Medicaid, not Medicare, in determining whether
their Medicaid demonstrations are budget neutral.
8. Wisconsin commented that because its historical cost growth rate has
been rising, it was appropriate for HHS to calculate the state's
spending limit using a rate higher than its historical 5-year average.
We believe that whenever HHS allows growth rate projections that exceed
its benchmarks, it should document the basis for this deviation.
9. Wisconsin mentioned two state programs that it believes will, like
the Social Security Administration's outreach program for low-income
Medicare beneficiaries, help increase senior enrollment in Wisconsin's
Medicaid program because they are likely to identify individuals who
qualify for full Medicaid benefits. But the state did not quantify or
provide any data or other evidence to show the potential effects of
these programs or of Social Security Administration outreach. We did
not include these effects in our benchmark analysis for the same reason
we did not include other factors that Wisconsin believed should raise
is spending limit (see our response to comment 2).
10. Wisconsin noted that we found no firm evidence to support the idea
that expanding drug coverage would produce significant savings in
Medicaid by diverting or delaying Medicaid enrollment. The state
asserts that this criticism ignores the central purpose of these
demonstrations: to determine if an important health care benefit can be
delivered cost effectively. We acknowledge the value of demonstrations
to test health care alternatives, but we believe that the case for
substantial savings to Medicaid due to expanded prescription drug
coverage is not well supported. We also believe that HHS has not done
enough to ensure that states develop and implement demonstration
evaluation designs. Although we do not dispute Wisconsin's comment that
research suggests coverage of prescription drugs benefits seniors, we
believe that demonstrating the effects of drug coverage on avoiding
Medicaid enrollment is a separate issue.
11. Wisconsin has interpreted our mention of congressional concern
about the extent to which HHS has ensured that section 1115
demonstration waivers promote the goals of Medicaid as implying that
the state's demonstration is not providing critical prescription drugs
to a vulnerable elderly, low-income, uninsured population. We did not
intend to suggest that Wisconsin's demonstration is not a valuable
benefit to these individuals. We were referring to our earlier work on
section 1115 Medicaid and State Children's Health Insurance Program
(SCHIP) demonstrations, which, in addition to raising concerns about
HHS's use of section 1115 waiver authority to approve demonstration
spending limits that were not budget neutral, also found that HHS was
allowing states to use unspent SCHIP funding to cover childless adults,
despite SCHIP's statutory objective of expanding health coverage to
low-income children.[Footnote 54]
12. Wisconsin commented that we mischaracterized the growth rates
approved by HHS for the state's demonstration as too high. See our
response to comment 2.
13. Wisconsin objected to our conclusion that the lack of available
information on how these demonstrations are operating compromises
attempts to assess whether they are operating as intended. This
statement does not apply to any one state alone but synthesizes our
findings for the four approved demonstrations taken together. We
acknowledge that Wisconsin has been responsive to HHS's requirements
for informative and timely progress reports and have revised our report
as appropriate.
14. Wisconsin stated that its data reporting system allows its staff to
monitor that the demonstration is operating as intended. In the draft
report, we noted that Wisconsin officials reported having the
capability for monitoring. We have not assessed Wisconsin's monitoring
system.
15. Wisconsin commented on the importance of, and Wisconsin's full
participation in, CMS's contracted independent evaluation as an
effective approach to reviewing the agency's assumptions relating to
budget neutrality and program effectiveness. We believe the draft
report captured the plans for this independent evaluation, as well as
the apparent confusion over each state's responsibility for conducting
its own evaluation. We have revised our report to reflect that
Wisconsin officials believe the state is not required to conduct an
evaluation, whereas HHS officials told us the state would be required
to do so.
[End of section]
Appendix VII: GAO Contact and Staff Acknowledgments:
GAO Contact:
Katherine Iritani, (206) 287-4820:
Acknowledgments:
In addition, Tim Bushfield, Ellen W. Chu, Helen Desaulniers, Behn
Kelly, Suzanne Rubins, Ellen M. Smith, and Stan Stenersen made key
contributions to this report.
[End of section]
Related GAO Products:
SCHIP: HHS Continues to Approve Waivers That Are Inconsistent with
Program Goals. GAO-04-166R. Washington, D.C.: January 5, 2004.
Medicaid and SCHIP: Recent HHS Approvals of Demonstration Waiver
Projects Raise Concerns. GAO-02-817. Washington, D.C.: July 12, 2002.
Medicare and Medicaid: Implementing State Demonstrations for Dual
Eligibles Has Proven Challenging. GAO/HEHS-00-94. Washington, D.C.:
August 18, 2000.
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.
FOOTNOTES
[1] Section 1115 allows waivers of requirements in Medicaid, the State
Children's Health Insurance Program (SCHIP), and several other programs
authorized under SSA. See section 1115 (codified at 42 U.S.C. § 1315
(2000)); see also section 2107(e) of SSA (codified at 42 U.S.C. §
1397gg(e)) (regarding the applicability of section 1115 to SCHIP).
[2] Although CMS is the agency within HHS that has primary
responsibility for reviewing section 1115 demonstration waiver
proposals, we refer to HHS throughout this report as the primary
program entity because the authority to grant waivers for the
demonstrations resides with the Secretary of HHS.
[3] A list of related GAO products appears at the end of this report.
[4] We do not include proposals to provide a prescription drug benefit
to low-income seniors under an amendment to an existing section 1115
Medicaid managed care waiver, like those approved for Vermont and
Maryland, because such proposals are reviewed under different
guidelines.
[5] To verify the accuracy of data included in state demonstration
applications, we discussed these data and their sources with state
officials.
[6] Pub. L. No. 108-173, 117 Stat. 2066.
[7] In fiscal year 2001, the latest year for which complete data are
available, beneficiaries who were aged, blind, or disabled represented
about 30 percent of those served by Medicaid but accounted for more
than 65 percent ($141 billion) of Medicaid's total $216 billion in
federal and state spending. Beneficiaries age 65 and older accounted
for 26.5 percent of total Medicaid spending, or $57 billion; blind or
disabled individuals accounted for nearly 39 percent, or $84 billion.
[8] In fiscal year 2003, the federal share of individual states'
Medicaid expenditures ranged from 50 to 77 percent. Federal Medicaid
matching rates were increased temporarily by 2.95 percentage points
from April 1, 2003, through June 30, 2004, pursuant to title IV of the
Jobs and Growth Tax Relief Reconciliation Act of 2003. See Pub. L. No.
108-27, § 401(a)(3), 117 Stat. 752, 764-765 (to be codified at 42
U.S.C. § 1396d note).
[9] Medicaid eligibility is determined by several factors, including
individual or family income, age, and eligibility for certain other
federal benefits. For example, although state Medicaid programs vary,
most people who are age 65 or older, or are disabled, qualify
automatically for Medicaid if their incomes and assets qualify them for
cash assistance under the federal Supplemental Security Income program.
[10] In fiscal year 2001, more than 20 percent of total federal Medicaid
spending was governed by the terms and conditions of section 1115
waivers rather than by standard Medicaid program requirements. See
Jeanne Lambrew, Section 1115 Waivers in Medicaid and the State
Children's Health Insurance Program: An Overview (Washington, D.C.:
Kaiser Commission on Medicaid and the Uninsured, 2001).
[11] In 2003, the annual income that represented 200 percent of FPL was
$17,960 for an individual, $24,240 for a family of two.
[12] States are also required to ensure that beneficiaries receiving
only the prescription drug benefit have access to primary care services
to assist with medical management related to pharmacy products,
although they are not required to pay for these services. Most Pharmacy
Plus beneficiaries are seniors covered by Medicare, which generally
covers hospital and physician services.
[13] To be eligible for Medicaid, seniors must meet income and asset
limits specified by each state, within federal requirements. Some
individuals with income and assets too high to be immediately eligible
may qualify for coverage on a monthly basis if they incur such high
medical costs that they "spend down" to a qualifying income and asset
level. Such spending down often happens when people enter nursing homes
and quickly deplete their resources.
[14] According to the terms of approval for Pharmacy Plus
demonstrations, to maintain budget neutrality, states may not alter
eligibility or benefits for seniors who qualify for full Medicaid.
States may pursue a variety of cost-control measures for the drug-only
expansion, including limiting enrollment and increasing cost sharing
for Pharmacy Plus beneficiaries.
[15] HHS approved a fifth demonstration proposal, from Indiana, in
April 2003, but the state declined to accept the terms of HHS's
approval, primarily because of the state's concerns about the spending
limit for all Medicaid seniors. Instead, Indiana proposed a different
budget approach that would not require the state to project and commit
to a spending limit covering all Medicaid seniors. Indiana's
alternative proposal, submitted May 2003, was one of the nine proposals
under consideration by HHS as of March 2004.
[16] Illinois' state-funded program covered seniors and people with
disabilities with incomes up to 250 percent of FPL. Participants who
were 65 or older with incomes at or below 200 percent of FPL were
automatically enrolled in the demonstration on June 1, 2002. Eligible
seniors with incomes from 201 to 250 percent of FPL and people with
disabilities continue to be covered by the state-funded program.
[17] Although HHS has identified the initiative's target population as
seniors and people with disabilities who have incomes at or below 200
percent of FPL, none of the states with approved pharmacy
demonstrations have chosen to include people with disabilities.
[18] The Pharmacy Plus application form and standard terms and
conditions for three of the four approved demonstrations do not include
a specific maintenance-of-effort requirement. Only Illinois, the first
Pharmacy Plus demonstration approved, has such a maintenance-of-effort
requirement. HHS officials told us that the department's policy
regarding state maintenance of effort has been evolving. Since the
Illinois approval, the officials told us that they have asked states to
demonstrate that they are expanding their programs.
[19] Illinois' state-funded program began in 1985 to cover
prescriptions for cardiovascular disease and has expanded over the
years to include drugs for several conditions, including arthritis,
diabetes, Alzheimer's disease, cancer, glaucoma, lung disease, and
Parkinson's disease.
[20] Wisconsin began offering state-funded drug benefits to seniors
with incomes from 200 up to and including 240 percent of FPL at the
same time that it implemented its demonstration.
[21] A Delaware Medicaid official expressed concern that HHS's denial
was inconsistent with its guidelines, which, as set forth in the
application form, indicate that states may be allowed to provide
enhanced pharmacy benefit management services as one option for
expanding state-funded programs under the demonstration. HHS officials
told us that the denial of Delaware's proposal would not be
reconsidered because the proposed expansion was not large enough, and
approving it would simply make the state-funded program eligible for
federal matching payments.
[22] A Hawaii Medicaid official reported that the agency was unable to
fundamentally change the nature of the proposal during HHS review
because the proposal had been outlined in state law.
[23] Specifically, the law establishes a State Pharmaceutical
Assistance Transition Commission to develop a proposal for addressing
the transitional issues facing state-funded pharmacy assistance
programs and their participants because of implementation of the new
Medicare prescription drug benefit. Members of the commission are to
include representatives of states operating pharmacy benefit programs,
interested organizations, private insurers, and others. The commission
is required to submit a detailed proposal, including specific
legislative or administrative recommendations, to Congress and the
President by January 1, 2005. See Pub. L. No. 108-173, § 101(a), 117
Stat. 2071, 2128-31 (adding sections 1860D-23 and 1860D-24 to SSA) (to
be codified at 42 U.S.C. §§ 1395w-133 and 1395w-134); see also section
106, 117 Stat. 2168-9.
[24] See Section 103(c), 117 Stat. 2158 (amending section 1935 of SSA)
(to be codified at 42 U.S.C. § 1396n-5).
[25] For example, individuals with incomes below 135 percent of FPL
generally will be entitled to a full premium subsidy; individuals with
incomes up to 150 percent of FPL will be entitled to an income-related
premium subsidy determined on a sliding scale. In addition, after
reaching an out-of-pocket threshold of $3,600, individuals with incomes
below 135 percent of FPL will have no co-payment for covered drugs,
while those with incomes below 150 percent of FPL will pay either $2 or
$5 for each drug. See Section 101(a), 117 Stat. 2107-9 (adding sections
1860D-14(a)(1) and (2) to SSA) (to be codified at 42 U.S.C. §§ 1395w-
114(a)(1) and (2)); see also section 101(a), 117 Stat. 2077-9 (adding
section 1860D-2(b)(4) to SSA) (to be codified at 42 U.S.C. § 1395w-
102(b)(4)).
[26] See Section 101(a), 117 Stat. 2132-3 (adding section 1860D-31(b)
to SSA) (to be codified at 42 U.S.C. § 1395w-141(b)).
[27] In commenting on a draft of this report, HHS said that it expected
less need for Pharmacy Plus demonstrations when Medicare coverage for
prescription drugs is expanded under MMA and that states would need to
decide if they want to continue their demonstrations.
[28] We have reported that by allowing Illinois to include
impermissible costs in its projected spending under the Medicaid
program without the demonstration, HHS approved a Pharmacy Plus
demonstration in the state that was not budget neutral, inappropriately
raising allowed costs for the project by $275 million. We recommended
to the Secretary of HHS that the agency ensure that valid methods are
used to demonstrate budget neutrality and that it apply such methods to
adjust the federal spending commitment under Illinois' demonstration.
See U.S. General Accounting Office, Medicaid and SCHIP: Recent HHS
Approvals of Demonstration Waiver Projects Raise Concerns, GAO-02-817
(Washington, D.C.: July 12, 2002). As of March 2004, HHS had not
adjusted the state's spending limit.
[29] We use the term "benchmark" throughout this report to describe the
cost and Medicaid enrollment growth rates HHS considered when making
its approval decisions for Pharmacy Plus demonstrations. We use
"benchmark" rather than "criterion" because, in contrast to its
practice in approving some other section 1115 demonstrations, HHS did
not have written cost or enrollment growth criteria for Pharmacy Plus.
[30] The Health Insurance Flexibility and Accountability (HIFA)
initiative, for example, another Medicaid section 1115 demonstration
waiver initiative, specifies a similar benchmark for cost growth per
beneficiary in its standard application form. The HIFA initiative
provides two options for projecting cost growth per beneficiary: the
Medical Care Consumer Price Index, developed by the Bureau of Labor
Statistics, or a state-specific projection of what the program would
have cost without the demonstration. For the second option, HHS policy
is to apply the lower of state-specific experience--using 5 years of
Medicaid data--or the CMS Actuary's Medicaid baseline for the eligible
groups covered by the demonstration.
[31] The CMS Actuary's growth projections in effect during budget
discussions for the four approved Pharmacy Plus demonstrations were a
6.3 percent annual increase in cost per beneficiary and a 1.8 percent
annual increase in enrollment.
[32] Illinois provided HHS with updated information on senior
enrollment in the state's Medicaid program, including growth of 1.3
percent between state fiscal years 1999 and 2000 and 4.2 percent
between state fiscal years 2000 and 2001. These updated figures are
incorporated in the 5-year historical average enrollment growth rate of
1.6 percent, covering state fiscal years 1997 through 2001.
[33] The Medicare, Medicaid, and SCHIP Benefits Improvement and
Protection Act of 2000 requires the Social Security Administration to
notify Medicare beneficiaries nationwide about other benefits,
including Medicaid, for which they could potentially be eligible. See
Pub. L. No. 106-554, App. F, § 911(a), 114 Stat. 2763, 2763A-583
(adding section 1144 to SSA) (to be codified at 42 U.S.C. § 1320b-14).
See U.S. General Accounting Office, Medicare Savings Programs: Results
of Social Security Administration's 2002 Outreach to Low-Income
Beneficiaries, GAO-04-363 (Washington, D.C.: Mar. 26, 2004).
[34] See GAO-04-363. In 2002, the Social Security Administration
outreach program sent letters to about 16.4 million low-income Medicare
beneficiaries nationwide, yielding an estimated 74,000 additional
individuals--a further increase in enrollment of 0.5 percent--enrolling
in Medicaid programs that help low-income Medicare beneficiaries pay
their Medicare premiums and, in some cases, their deductibles and
coinsurance. On the basis of a sample, we estimated that Wisconsin
experienced a statistically significant increase in additional Medicaid
enrollment after the Social Security Administration mailing, although
at 0.4 percent, the response was slightly less than the U.S. average.
The Social Security Administration outreach program continued on a
smaller scale in 2003 and thereafter.
[35] We calculated Wisconsin's benchmark spending limit based on the
0.01 percent average annual enrollment growth rate for 5 years of
historical data, which included 2 years when enrollment declined
slightly. Had the 0.12 percent average annual enrollment growth rate
been used, based on 3 years of historical data as the state proposed in
its demonstration application, Wisconsin's combined federal and state
spending limit would have been $7.9 billion, about 5.7 percent, or $477
million, below what HHS approved.
[36] According to CBO officials, the agency did not analyze the cost
impact of individual Pharmacy Plus demonstrations but estimated
potential impact on Medicaid spending overall under various growth
scenarios. CBO estimated that roughly 1.2 million people would join the
Medicaid rolls for the prescription drug benefit only. See U.S.
Congressional Budget Office, An Analysis of the President's Budgetary
Proposals for Fiscal Year 2004: An Interim Report (Washington, D.C.:
March 2003).
[37] GAO-02-817.
[38] Ellen O'Brien, "Will Prescription Drug Coverage for the Low-income
Elderly Pay for Itself? A Review of the Literature," Georgetown
University Health Policy Institute working paper, prepared for the
Kaiser Commission on Medicaid and the Uninsured, May 2003, cited with
permission. See www.hpi.georgetown.edu/pdfs/obrienrxcostoff.pdf,
downloaded March 16, 2004. The author identified sources through a
Medline search of the research literature and a manual search of
citations in published papers. The analysis covered research literature
on the effects of prescription drug coverage on low-income seniors,
access limits in Medicaid and other insurance plans, studies of
specific drugs or drug classes, and studies of the cost-effectiveness
of recent prescription drugs.
[39] Bruce Stuart and Daniel Lago, "Prescription Drug Coverage and
Medical Indigence among the Elderly," Journal of Aging and Health, vol.
1, no. 4 (1989), 452-469.
[40] In 2002 we reported that in assessing the cost of a Medicare
prescription drug benefit at that time, CBO, OMB, and CMS's Actuary did
not accept the premise that providing a prescription drug benefit to
low-income seniors would pay for itself (GAO-02-817). CBO raised
several reasons for caution, including that greater use of drugs among
seniors could increase the risk of side effects and adverse drug
reactions, which could in turn increase use of hospitals, emergency
rooms, and other health care services. CBO concluded that Medicare
beneficiaries without any drug coverage already consumed a large number
of prescription drugs, and therefore any savings due to increased
access would likely be small.
[41] The results of this study by JEN Associates of Cambridge,
Massachusetts, were reported in a memorandum to the Minnesota
Department of Human Services, "Feasibility Analysis of PDP Expansion,"
dated March 7, 2002.
[42] Pennsylvania's PACE program has operated since 1984 and PACENET
has provided an expanded benefit to additional low-income seniors since
1996. See Mercer Government Human Services Consulting, Pharmacy Plus
1115 Waiver Feasibility Study, Commonwealth of Pennsylvania (Phoenix:
October 2002).
[43] See GAO-02-817, 23-24.
[44] Jocelyn Guyer, The Financing of Pharmacy Plus Waivers: Trade-offs
between Expanding Rx Coverage and Global Caps in Medicaid (Washington,
D.C.: Kaiser Commission on Medicaid and the Uninsured, May 2003).
[45] According to an Illinois official, the reimbursement rate for all
providers, including pharmacists, was cut by 6 percent in state fiscal
year 2003, and that step helped the pharmacy demonstration operate well
below its targeted first-year spending limit.
[46] States are required to provide HHS with drafts of their final
evaluation reports within 180 days of the end of the 5-year
demonstrations; Pharmacy Plus terms and conditions do not require
interim evaluation reports from the states. HHS also requires the
states to cooperate with federal evaluators and contractors in the
independent evaluation.
[47] The evaluators chose Ohio because of its proximity to both
Illinois and Wisconsin; the characteristics of its senior population;
and likely similarities in the attitudes of that state's policymakers,
physicians, and public about the use of long-term care services.
[48] HHS selected Illinois and Wisconsin, the first two demonstrations
to be implemented (in June and July 2002), for the independent
evaluation. In March 2004, HHS's evaluation project officer indicated
that the new Medicare prescription drug program and its potential
effects on Pharmacy Plus demonstrations may lead the department to
reassess plans and schedules for the independent evaluation.
[49] The descriptions include such information as how each
demonstration was established, demonstration features, each state's
economic and political environment, obstacles encountered during
program implementation, and the state's progress toward implementation
and ensuring beneficiary access to prescription drugs.
[50] The evaluators have also developed a database, including data
provided from Illinois' and Wisconsin's Medicaid data systems, allowing
them to track and analyze demonstration enrollment, costs, drug use,
and demographics, along with HHS Medicare claims data for Pharmacy Plus
beneficiaries from 1 year before enrollment in the demonstration
through their first year.
[51] Centers for Medicare & Medicaid Services, Pharmacy Plus: A
Demonstration Program under Section 1115: Model Special Terms and
Conditions of Approval (Washington, D.C.: U.S. Department of Health and
Human Services, n.d.), 4, www.cms.hhs.gov/medicaid/1115/
pharmplustemptc.pdf (downloaded Apr. 6, 2004).
[52] According to an HHS official, quarterly reports for South
Carolina's demonstration were delayed because the state had difficulty
generating data on demonstration expenses, requiring department
officials to work with the state on the problem.
[53] HHS also stated that the 0.7 percent per year state historical
average enrollment growth rate we cite for South Carolina (table 2) is
in error, because its records showed that South Carolina's historical
average for enrollment growth was 1.0 percent. In verifying the state's
historical enrollment rate, we noted that the rate had been "rounded
up" to the next full percentage from the 0.7 percent actual historical
rate. For consistency with other rates in the table, we did not round
it.
[54] See GAO-02-817 and U.S. General Accounting Office, SCHIP: HHS
Continues to Approve Waivers That Are Inconsistent with Program Goals,
GAO-04-166R (Washington, D.C.: Jan. 5, 2004).
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