Medicaid Financing
Long-Standing Concerns about Inappropriate State Arrangements Support Need for Improved Federal Oversight Gao ID: GAO-08-255T November 1, 2007Medicaid, a joint federal-state program, financed the health care for about 60 million low-income people in fiscal year 2005. States have considerable flexibility in deciding what medical services and individuals to cover and the amount to pay providers, and the federal government reimburses a proportion of states' expenditures according to a formula established by law. The Centers for Medicare & Medicaid Services (CMS) is the federal agency responsible for overseeing Medicaid. Growing pressures on federal and state budgets have increased tensions between the federal government and states regarding this program, including concerns about whether states were appropriately financing their share of the program. GAO's testimony describes findings from prior work conducted from 1994 through March 2007 on (1) certain inappropriate state Medicaid financing arrangements and their implications for Medicaid's fiscal integrity, and (2) outcomes and transparency of a CMS oversight initiative begun in 2003 to end such inappropriate arrangements.
GAO has reported for more than a decade on varied financing arrangements that inappropriately increase federal Medicaid matching payments. In reports issued from 1994 through 2005, GAO found that some states had received federal matching funds by paying certain government providers, such as county operated nursing homes, amounts that greatly exceeded established Medicaid rates. States would then bill CMS for the federal share of the payment. However, these large payments were often temporary, since some states required the providers to return most or all of the amount. States used the federal matching funds obtained in making these payments as they wished. Such financing arrangements had significant fiscal implications for the federal government and states. The exact amount of additional federal Medicaid funds generated through these arrangements is unknown, but was in the billions of dollars. Because such financing arrangements effectively increase the federal Medicaid share above what is established by law, they threaten the fiscal integrity of Medicaid's federal and state partnership. They shift costs inappropriately from the states to the federal government, and take funding intended for covered Medicaid costs from providers, who do not under these arrangements retain the full payments. In 2003, CMS began an oversight initiative that by August 2006 resulted in 29 states ending inappropriate financing arrangements. Under the initiative, CMS sought satisfactory assurances that a state was ending financing arrangements that the agency found to be inappropriate. According to CMS, the arrangements had to be ended because the providers did not retain all payments made to them but returned all or a portion to the states. GAO reported in 2007 that, although CMS's initiative was consistent with Medicaid payment principles, it was not transparent in implementation. CMS had not used any of the means by which it normally provides states with information about Medicaid program requirements, such as the published state Medicaid manual, standard letters issued to all state Medicaid directors, or technical guidance manuals. Such guidance could be helpful to inform states about the specific standards it used for reviewing and approving states' financing arrangements. In May 2007, CMS issued a final rule that would limit Medicaid payments to government providers' costs. GAO has not reported on CMS's rule.
GAO-08-255T, Medicaid Financing: Long-Standing Concerns about Inappropriate State Arrangements Support Need for Improved Federal Oversight
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United States Government Accountability Office:
GAO:
Testimony:
Before the Committee on Oversight and Government Reform, House of
Representatives:
For Release on Delivery:
Expected at 10:00 a.m. EDT:
Thursday, November 1, 2007:
Medicaid Financing:
Long-Standing Concerns about Inappropriate State Arrangements Support
Need for Improved Federal Oversight:
Statement of Dr. Marjorie Kanof:
Managing Director:
Health Care:
GAO-08-255T:
GAO Highlights:
Highlights of GAO-08-255T, a testimony before the Committee on
Oversight and Government Reform, House of Representatives.
Why GAO Did This Study:
Medicaid, a joint federal-state program, financed the health care for
about 60 million low-income people in fiscal year 2005. States have
considerable flexibility in deciding what medical services and
individuals to cover and the amount to pay providers, and the federal
government reimburses a proportion of states‘ expenditures according to
a formula established by law. The Centers for Medicare & Medicaid
Services (CMS) is the federal agency responsible for overseeing
Medicaid.
Growing pressures on federal and state budgets have increased tensions
between the federal government and states regarding this program,
including concerns about whether states were appropriately financing
their share of the program. GAO‘s testimony describes findings from
prior work conducted from 1994 through March 2007 on (1) certain
inappropriate state Medicaid financing arrangements and their
implications for Medicaid‘s fiscal integrity, and (2) outcomes and
transparency of a CMS oversight initiative begun in 2003 to end such
inappropriate arrangements.
What GAO Found:
GAO has reported for more than a decade on varied financing
arrangements that inappropriately increase federal Medicaid matching
payments. In reports issued from 1994 through 2005, GAO found that some
states had received federal matching funds by paying certain government
providers, such as county operated nursing homes, amounts that greatly
exceeded established Medicaid rates. States would then bill CMS for the
federal share of the payment. However, these large payments were often
temporary, since some states required the providers to return most or
all of the amount. States used the federal matching funds obtained in
making these payments as they wished. Such financing arrangements had
significant fiscal implications for the federal government and states.
The exact amount of additional federal Medicaid funds generated through
these arrangements is unknown, but was in the billions of dollars.
Because such financing arrangements effectively increase the federal
Medicaid share above what is established by law, they threaten the
fiscal integrity of Medicaid‘s federal and state partnership. They
shift costs inappropriately from the states to the federal government,
and take funding intended for covered Medicaid costs from providers,
who do not under these arrangements retain the full payments.
In 2003, CMS began an oversight initiative that by August 2006 resulted
in 29 states ending inappropriate financing arrangements. Under the
initiative, CMS sought satisfactory assurances that a state was ending
financing arrangements that the agency found to be inappropriate.
According to CMS, the arrangements had to be ended because the
providers did not retain all payments made to them but returned all or
a portion to the states. GAO reported in 2007 that, although CMS‘s
initiative was consistent with Medicaid payment principles, it was not
transparent in implementation. CMS had not used any of the means by
which it normally provides states with information about Medicaid
program requirements, such as the published state Medicaid manual,
standard letters issued to all state Medicaid directors, or technical
guidance manuals. Such guidance could be helpful to inform states about
the specific standards it used for reviewing and approving states‘
financing arrangements. In May 2007, CMS issued a final rule that would
limit Medicaid payments to government providers‘ costs. GAO has not
reported on CMS‘s rule.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.GAO-08-255T]. For more information, contact
Marjorie Kanof at (202) 512-7114 or kanofm@gao.gov.
[End of section]
Mr. Chairman and Members of the Committee:
I am pleased to be here today as you explore recent regulatory actions
of the administration related to the Medicaid program and the potential
effects of these actions on patients, providers, and states. Medicaid,
a joint federal and state program that covered about 60 million people
in fiscal year 2005, fulfills a crucial role in providing health
coverage for a variety of vulnerable populations, including certain low-
income children, families, and individuals who are aged or disabled.
Ensuring the program's long-term sustainability is therefore very
important.
The federal government and the states share responsibilities for
financing and administering Medicaid. Within broad federal
requirements, states have considerable flexibility in deciding what
medical services and individuals to cover and the amount to pay
providers, and the federal government reimburses a proportion of
states' expenditures according to a formula established by
law.[Footnote 1] The Centers for Medicare & Medicaid Services (CMS) is
the federal agency responsible for overseeing states' Medicaid programs
and ensuring the propriety of expenditures for which states seek
federal reimbursement. Total Medicaid expenditures are significant and
growing, totaling an estimated $317 billion in fiscal year 2005, and
are expected to continue to grow.[Footnote 2]
Growing pressures on federal and state budgets have increased tensions
between the federal government and the states regarding Medicaid. In
recent years, tensions have arisen regarding CMS's actions in
overseeing the appropriateness of provider payments for which states
have sought federal reimbursement, including whether states were
appropriately financing their share, that is, the nonfederal share of
these payments. Starting in the early 1990's and as recently as 2005,
we and others have reviewed aspects of inappropriate Medicaid financing
arrangements in some states, often involving supplemental payments made
to government providers that were above and beyond states' typical
Medicaid payment rates. We have also reviewed CMS's oversight of such
arrangements, most recently reporting in March 2007 on an initiative
started in 2003 to end inappropriate arrangements. In May 2007 CMS
issued a final rule that would affect state Medicaid financing
arrangements. In my testimony today I will summarize and describe our
findings (1) on past inappropriate state Medicaid financing
arrangements, including their implications for the fiscal integrity of
the Medicaid program; and (2) on the outcomes and transparency of CMS's
2003 initiative, which provides context for considering the effect of
the May rule on various stakeholders. My testimony is based on our
previous work assessing various Medicaid financing arrangements and
federal oversight of these arrangements. We conducted this body of work
from June 1993 through March 2007. We have not reported on CMS's May
2007 rule. We conducted our work in accordance with generally accepted
government auditing standards.
In summary, we have reported for more than a decade on varied financing
arrangements that inappropriately increase federal Medicaid matching
payments. In reports issued from 1994 through 2005, we reported on
various arrangements whereby states received federal matching funds by
paying certain government providers, such as county owned or operated
nursing homes, amounts that greatly exceeded established Medicaid
rates.[Footnote 3] The large payments were often temporary since some
states required the government providers to return all or most of the
money to the states. States used the federal matching funds received
for these payments--which essentially made a round-trip from the states
to providers and back to the states--at their own discretion. Such
financing arrangements had significant fiscal implications for the
federal government and states. The exact amount of additional federal
Medicaid funds generated through these arrangements is not known, but
was in the billions of dollars. Despite congressional and CMS action
taken during those years to limit such arrangements, we found in recent
years that improved federal oversight of such arrangements was needed.
Because such financing arrangements effectively increase the federal
Medicaid share above what is established by law, they threaten the
fiscal integrity of Medicaid's federal and state partnership. They
shift costs inappropriately from the states to the federal government,
and take funding intended for Medicaid providers, who do not under
these arrangements retain the full payments.
CMS's oversight initiative, started in 2003 to end inappropriate state
financing arrangements, by August 2006 had resulted in 29 states ending
financing arrangements in which providers did not retain the
supplemental payments they received. Although we found that CMS's
initiative was consistent with Medicaid payment principles, we also
found that more transparency was needed regarding the way in which CMS
was implementing its initiative and the review standards it was using
to end certain financing arrangements. For example, to inform states
about the specific standards it used for reviewing and approving
states' financing arrangements under its new initiative, CMS had not
used any of the means by which it typically provides information to
states about the Medicaid program, such as its published state Medicaid
manual, standard letters issued to all state Medicaid directors, or
technical guidance manuals. Consequently, states were concerned about
standards that were applied in CMS's review of their arrangements and
the consistency with which states were treated. These observations
provide some context for the controversy surrounding CMS's May 2007
rule. We have not reported on CMS's May 2007 rule or other rules
related to Medicaid financing issued this year. The extent to which the
rule will address concerns about the transparency of CMS's initiative
and review standards will depend on how CMS implements it.
Background:
Title XIX of the Social Security Act establishes Medicaid as a joint
federal-state program to finance health care for certain low-income
children, families, and individuals who are aged or disabled.[Footnote
4] Medicaid is an open-ended entitlement program, under which the
federal government is obligated to pay its share of expenditures for
covered services provided to eligible individuals under each state's
federally approved Medicaid plan. States operate their Medicaid
programs by paying qualified health care providers for a range of
covered services provided to eligible beneficiaries and then seeking
reimbursement for the federal share of those payments.[Footnote 5]
CMS has an important role in ensuring that states comply with statutory
Medicaid payment principles when claiming federal reimbursements for
payments made to institutional and other providers who serve Medicaid
beneficiaries. For example, Medicaid payments must be "consistent with
efficiency, economy, and quality of care,"[Footnote 6] and states must
share in Medicaid costs in proportions established according to a
statutory formula.[Footnote 7]
Within broad federal requirements, each state administers and operates
its Medicaid program in accordance with a state Medicaid plan, which
must be approved by CMS. A state Medicaid plan details the populations
a state's program serves, the services the program covers (such as
physicians' services, nursing home care, and inpatient hospital care),
and the rates of and methods for calculating payments to providers.
State Medicaid plans generally do not detail the specific arrangements
a state uses to finance the nonfederal share of program spending. Title
XIX of the Social Security Act allows states to derive up to 60 percent
of the nonfederal share from local sources, as long as the state itself
contributes at least 40 percent.[Footnote 8]
Over the last several years, CMS has taken a number of steps to help
ensure the fiscal integrity of the Medicaid program. These include
making internal organizational changes that centralize the review of
states' Medicaid financing arrangements and hiring additional staff to
review each state's Medicaid financing. The agency also published in
May 2007 a final rule related to Medicaid payment and
financing.[Footnote 9] This rule would, among other things, limit
payments to government providers to their cost of providing Medicaid
services. The Secretary is prohibited by law from implementing the rule
until May 25, 2008.[Footnote 10]
Concerns about Certain Medicaid Financing Arrangements that Undermine
Medicaid's Fiscal Integrity Are Long-Standing:
From 1994 to 2005, we have reported numerous times on a number of
financing arrangements that create the illusion of a valid state
Medicaid expenditure to a health care provider. Payments under these
arrangements have enabled states to claim federal matching funds
regardless of whether the program services paid for had actually been
provided. As various schemes have come to light, Congress and CMS took
several actions from 1987 through 2002, through law and regulation, to
curtail them (see table 1).
Table 1: Medicaid Financing Schemes Used to Inappropriately Generate
Federal Payments and Federal Actions to Address Them, 1987-2002:
Financing arrangement: Excessive payments to state health facilities;
Description: States made excessive Medicaid payments to state-owned
health facilities, which subsequently returned these funds to the state
treasuries;
Action taken: In 1987, the Health Care Financing Administration (HCFA)
issued regulations that established payment limits specifically for
inpatient and institutional facilities operated by states.
Financing arrangement: Provider taxes and donations;
Description: Revenues from provider-specific taxes on hospitals and
other providers and from provider "donations" were matched with federal
funds and paid to the providers. These providers could then return most
of the federal payment to the states;
Action taken: The Medicaid Voluntary Contribution and Provider-Specific
Tax Amendments of 1991 essentially barred certain provider donations,
placed a series of restrictions on provider taxes, and set other
restrictions for state contributions.
Financing arrangement: Excessive disproportionate share hospital (DSH)
payments;
Description: DSH payments are meant to compensate those hospitals that
care for a disproportionate number of low-income patients. Unusually
large DSH payments were made to certain hospitals, which then returned
the bulk of the state and federal funds to the state;
Action taken: The Omnibus Budget Reconciliation Act of 1993 placed
limits on which hospitals could receive DSH payments and capped both
the amount of DSH payments states could make and the amount individual
hospitals could receive.
Financing arrangement: Excessive DSH payments to state mental
hospitals;
Description: A large share of DSH payments were paid to state-operated
psychiatric hospitals, where they were used to pay for services not
covered by Medicaid or were returned to the state treasuries;
Action taken: The Balanced Budget Act of 1997 limited the proportion of
a state's DSH payments that can be paid to state psychiatric hospitals.
Financing arrangement: Upper payment limit (UPL) for local government
health facilities;
Description: In an effort to ensure that Medicaid payments are
reasonable, federal regulations prohibit Medicaid from paying more than
a reasonable estimate of the amount that would be paid under Medicare
payment principles for comparable services. This UPL applies to
payments aggregated across a class of facilities and not for individual
facilities. As a result of the aggregate upper limit, states were able
to make large supplemental payments to a few local public health
facilities, such as hospitals and nursing homes. The local government
health facilities then returned the bulk of the state and federal
payments to the states;
Action taken: The Medicare, Medicaid, and SCHIP Benefits Improvement
and Protection Act of 2000 required HCFA to issue a final regulation
that established a separate payment limit for each of several classes
of local government health facilities. In 2002, CMS issued a regulation
that further lowered the payment limit for local public hospitals.
Source: GAO, Medicaid: Intergovernmental Transfers Have Facilitated
State Financing Schemes, GAO-04-547T (Washington, D.C.; Mar. 18, 2004).
Note: Before June 2001, CMS was known as the Health Care Financing
Administration (HCFA).
[End of table]
Many of these arrangements involve payment arrangements between the
state and government-owned or government-operated providers, such as
local-government-operated nursing homes. They also involved
supplemental payments--payments states made to these providers separate
from and in addition to those made at a state's standard Medicaid
payment rate. The supplemental payments connected with these
arrangements were illusory, however, because states required these
government providers to return part or all of the payments to the
states.[Footnote 11] Because government entities were involved, all or
a portion of the supplemental payments could be returned to the state
through an intergovernmental transfer, or IGT. Financing arrangements
involving illusory payments to Medicaid providers have significant
fiscal implications for the federal government and states. The exact
amount of additional federal Medicaid funds generated through these
arrangements is not known, but was in the billions of dollars. For
example, a 2001 regulation to curtail misuse of the UPL regulation was
estimated to have saved the federal government approximately $17
billion from fiscal year 2002 through fiscal year 2006. In 2003, we
designated Medicaid to be a program at high risk of mismanagement,
waste, and abuse, in part due to concerns about states' use of
inappropriate financing arrangements.[Footnote 12]
Inappropriate Medicaid Financing Arrangements Undermine Medicaid's
Fiscal Integrity:
States' use of these creative financing mechanisms undermined the
federal-state Medicaid partnership as well as the program's fiscal
integrity in three ways. First, inappropriate state financing
arrangements effectively increased the federal matching rate
established under federal law by increasing federal expenditures while
state contributions remained unchanged or even decreased. Figure 1
illustrates a state's arrangement in place in 2004 in which the state
increased federal expenditures without a commensurate increase in state
spending. In this case, the state made a $41 million supplemental
payment to a local-government hospital. Under its Medicaid matching
formula, the state paid $10.5 million and CMS paid $30.5 million as the
federal share of the supplemental payment. After receiving the
supplemental payment, however, the hospital transferred back to the
state approximately $39 million of the $41 million payment, retaining
just $2 million. Creating the illusion of a $41 million hospital
payment when only $2 million was actually retained by the provider
enabled the state to obtain additional federal reimbursements without
effectively contributing a nonfederal share--in this case, the state
actually netted $28.5 million as a result of the arrangement.
Figure 1: Example of How One State Increased Federal Medicaid Matching
Funds without Increasing State Spending:
[See PDF for image]
This figure is an illustration of funding flow, as follows:
1. State Medicaid agency made a $41 million supplemental payment to
local-government hospital, consisting of $10.5 million in state funds
and $30.5 million provided by CMS as the federal share.
2. Local-government hospital transferred $39 million back to state via
an IGT.
CMS paid $30.5 million;
Local-government hospital retained $2 million;
State netted $28.5 million.
Source: GAO analysis of one state's financing arrangement for state
fiscal year 2004.
[End of figure]
Second, CMS had no assurance that these increased federal matching
payments were retained by the providers and used to pay for Medicaid
services. Federal Medicaid matching funds are intended for Medicaid-
covered services for the Medicaid-eligible individuals on whose behalf
payments are made. Under these arrangements, however, payments for such
Medicaid-covered services were returned to the states which could then
use the returned funds at their own discretion. In 2004, we examined
how six states with large supplemental payment financing arrangements
involving nursing homes used the federal funds they generated. As in
the past, some states deposited excessive funds from financing
arrangements into their general funds, which may or may not be used for
Medicaid purposes. Table 2 provides further information on how states
used their funds from supplemental payment arrangements, as reported by
the six states we reviewed in 2004.
Table 2: Selected States' Use of Funds Generated through UPL
Arrangements, as of January 2004:
State: Michigan;
Use: Funds generated by the state's UPL arrangement were deposited in
the state's general fund but were tracked separately as a local fund
source. These local funds were earmarked for future Medicaid expenses
and used as the state match, effectively recycling federal UPL matching
funds to generate additional federal Medicaid matching funds.
State: New York;
Use: Funds generated by the state's UPL arrangement were deposited into
its Medical Assistance Account. Proceeds from this account were used to
pay for the state share of the cost of Medicaid payments, effectively
recycling federal funds to generate additional federal Medicaid
matching funds.
State: Oregon;
Use: Funds generated by the state's UPL arrangement were used to
finance education programs and other non-Medicaid health programs. UPL
matching funds recouped from providers were deposited into a special
UPL fund. Facing a large budget deficit, a February 2002 special
session of the Oregon legislature allocated the fund balance, about
$131 million, to finance kindergarten to 12th grade education programs.
According to state budget documents, the UPL funds were used to replace
financing from the state's general fund.
State: Pennsylvania;
Use: Funds generated by the state's UPL arrangement were used for a
number of Medicaid and non-Medicaid purposes, including long-term care
and behavioral health services. In state fiscal years 2001-2003 the
state generated $2.4 billion in excess federal matching funds, of which
43 percent was used for Medicaid expenses (recycled to generate
additional federal matching funds), 6 percent was used for non-Medicaid
purposes, and 52 percent was unspent and available for non-Medicaid
uses (does not total 100 percent because of rounding).
State: Washington;
Use: Funds generated by the state's UPL arrangement were commingled
with a number of other revenue sources in a state fund. The fund was
used for various state health programs, including a state- funded basic
health plan, public health programs, and health benefits for home care
workers. A portion of the fund was also transferred to the state's
general fund. The fund was also used for selected Medicaid services and
the State Children's Health Insurance Program (SCHIP), which
effectively recycled the federal funds to generate additional federal
Medicaid matching funds.
State: Wisconsin;
Use: Funds generated by the state's UPL arrangement were deposited in a
state fund, which was used to pay for Medicaid- covered services in
both public and private nursing homes. Because the state used these
payments as the state share, the federal funds were effectively
recycled to generate additional federal Medicaid matching funds.
Source: CMS and states.
Note: Information is based on work ending in January 2004. See GAO,
Medicaid: Improved Federal Oversight of State Financing Schemes Is
Needed, GAO-04-228 (Washington, D.C.: Feb. 13, 2004).
[End of table]
Third, these state financing arrangements undermined the fiscal
integrity of the Medicaid program because they enabled states to make
payments to government providers that significantly exceeded their
costs. In our view, this practice was inconsistent with the statutory
requirement that states adopt methods to ensure that Medicaid payments
are consistent with economy and efficiency.
CMS Oversight Initiative to End State Financing Arrangements Lacked
Transparency:
Our March 2007 report[Footnote 13] on a recent CMS oversight initiative
to end certain financing arrangements where providers did not retain
the payments provides context for CMS's May rule. Responding to
concerns about states' continuing use of creative financing
arrangements to shift costs to the federal government, CMS has taken
steps starting in August 2003 to end inappropriate state financing
arrangements by closely reviewing state plan amendments on a state-by-
state basis. As a result of CMS initiative, from August 2003 through
August 2006, 29 states ended one or more arrangements for financing
supplemental payments, because providers were not retaining the
Medicaid payments for which states had received federal matching funds.
We found CMS's actions under its oversight initiative to be consistent
with Medicaid payment principles--for example, that payment for
services be consistent with efficiency and economy. We also found,
however, that CMS's initiative to end inappropriate financing
arrangements lacked transparency, in that CMS had not issued written
guidance about the specific approval standards for state financing
arrangements. CMS's initiative was a departure from the agency's past
oversight approach, which did not focus on whether individual providers
were retaining the supplemental payments they received. In contacting
the 29 states that ended a financing arrangement from August 2003
through August 2006 under the initiative, only 8 states reported they
had received any written guidance or clarification from CMS regarding
appropriate and inappropriate financing arrangements. CMS had not used
any of the means by which it typically provides information to states
about the Medicaid program, such as its published state Medicaid
manual, standard letters issued to all state Medicaid directors, or
technical guidance manuals, to inform states about the specific
standards it used for reviewing and approving states' financing
arrangements. State officials told us it was not always clear what
financing arrangements CMS would allow and why arrangements approved in
the past would no longer be approved. Twenty-four of 29 states reported
that CMS had changed its policy regarding financing arrangements, and 1
state challenged CMS's disapproval of its state plan amendment, in part
on the grounds that CMS changed its policy regarding payment
arrangements without rule making.[Footnote 14] The lack of transparency
in CMS's review standards raised questions about the consistency with
which states had been treated in ending their financing arrangements.
We consequently recommended that CMS issue guidance to clarify
allowable financing arrangements.
Our recommendation for CMS to issue guidance for allowable financing
arrangements paralleled a recommendation we had made in earlier work
reviewing states' use of consultants on a contingency-fee basis to
maximize federal Medicaid revenues.[Footnote 15] Our work found
problematic projects where claims for federal matching funds appeared
to be inconsistent with CMS's policy or with federal law, or that--as
with inappropriate supplemental payment arrangements--undermined
Medicaid's fiscal integrity. Several factors contributed to the risk of
state projects. Many were in areas where federal requirements had been
inconsistently applied, evolving, or not specific. We recommended that
CMS establish or clarify and communicate its policies in these areas,
including supplemental payment arrangements.[Footnote 16] CMS responded
that clarifying guidance was under development for targeted case
management, rehabilitation services, and supplemental payment
arrangements.
We have recently initiated work to examine CMS's current oversight of
certain types of state financing arrangements. We have not reported on
CMS's May 2007 rule or other rules related to Medicaid financing issued
this year. The extent to which the rule will address concerns about the
transparency of CMS's initiative and review standards will depend on
how CMS implements it.
Concluding Observations:
As the nation's health care safety net, the Medicaid program is of
critical importance to beneficiaries and the providers that serve them.
The federal government and states have a responsibility to administer
the program in a manner that assures expenditures benefit those low-
income people for whom benefits were intended. With annual expenditures
totaling more than $300 billion per year and growing, accountability
for the significant program expenditures is critical to providing those
assurances. The program's long-term fiscal sustainability is important
for beneficiaries, providers, states, and the federal government.
For more than a decade, we have reported on various methods that states
have used to inappropriately maximize federal Medicaid reimbursement,
and we have made recommendations to end these inappropriate financing
arrangements. Supplemental payments involving government providers have
resulted in billions of excess federal dollars for states, yet
accountability for these payments--assurances that they are retained by
providers of Medicaid services to Medicaid beneficiaries--has been
lacking. CMS has taken important steps in recent years to improve its
financial management of Medicaid. Yet more can be done to enhance the
transparency of CMS oversight. Consequently, we believe our
recommendations regarding the clarification and communication of
allowable financing arrangements remain valid.
Mr. Chairman, this concludes my prepared statement. I will be happy to
answer any questions that you or Members of the Committee may have.
Contact and Acknowledgments:
For future contacts regarding this testimony, please contact Marjorie
Kanof at (202) 512-7114 or Kanofm@gao.gov. Katherine Iritani, Assistant
Director; Ted Burik; Tim Bushfield; Tom Moscovitch; and Terry Saiki
made key contributions to this statement.
[End of section]
Related GAO Products:
Medicaid Financing: Federal Oversight Initiative Is Consistent with
Medicaid Payment Principles but Needs Greater Transparency. GAO-07-214.
Washington, D.C.: March 30, 2007.
Medicaid Financial Management: Steps Taken to Improve Federal Oversight
but Other Actions Needed to Sustain Efforts. GAO-06-705. Washington,
D.C.: June 22, 2006.
Medicaid: States' Efforts to Maximize Federal Reimbursements Highlight
Need for Improved Federal Oversight. GAO-05-836T. Washington, D.C.:
June 28, 2005.
Medicaid Financing: States' Use of Contingency-Fee Consultants to
Maximize Federal Reimbursements Highlights Need for Improved Federal
Oversight. GAO-05-748. Washington, D.C.: June 28, 2005.
High-Risk Series: An Update. GAO-05-207. Washington, D.C.: January
2005.
Medicaid: Intergovernmental Transfers Have Facilitated State Financing
Schemes. GAO-04-574T. Washington, D.C.: March 18, 2004.
Medicaid: Improved Federal Oversight of State Financing Schemes Is
Needed. GAO-04-228. Washington, D.C.: February 13, 2004.
Major Management Challenges and Program Risks: Department of Health and
Human Services. GAO-03-101. Washington, D.C.: January 2003.
Medicaid: HCFA Reversed Its Position and Approved Additional State
Financing Schemes. GAO-02-147. Washington, D.C.: October 30, 2001.
Medicaid: State Financing Schemes Again Drive Up Federal Payments. GAO/
T-HEHS-00-193. Washington, D.C.: September 6, 2000.
Medicaid: States Use Illusory Approaches to Shift Program Costs to
Federal Government. GAO/HEHS-94-133. Washington, D.C.: August 1, 1994.
[End of section]
Footnotes:
[1] States and the federal government share in Medicaid expenditures.
The federal share can range from 50 to 83 percent.
[2] This figure represents estimated federal and state Medicaid program
expenditures for provider services and administration in fiscal year
2005.
[3] See related GAO products at the end of this statement.
[4] 42 U.S.C. §§ 1396 et seq. (2000).
[5] Throughout this statement, we refer to funds used by state Medicaid
programs to pay providers for rendering Medicaid services as
"payments." We refer to federal funds received by states from CMS for
the federal share of states' Medicaid payments as "reimbursements."
[6] See 42 U.S.C. § 1396a(a)(30)(A) (2000).
[7] Under the formula, the federal government may pay from 50 to 83
percent of a state's Medicaid expenditures. States with lower per
capita incomes receive higher federal matching rates. 42 U.S.C. §
1396d(b) (2000).
[8] See 42 U.S.C. § 1396a(a)(2) (2000). Local governments and local
government providers can contribute to the nonfederal share of Medicaid
payments through mechanisms known as intergovernmental transfers, or
IGTs. IGTs are a legitimate feature in state finance that enable state
and local governments to carry out their shared governmental functions,
for example through the transfer of revenues between governmental
entities.
[9] See 72 Fed. Reg. 29,748 (May 29, 2007).
[10] See Pub. L. No. 110-28, § 7002, 121 Stat. 112, 187 (2007).
[11] The two most common supplemental payments that involved illusory
payments to government providers are upper payment limit, or UPL,
payments and disproportionate share hospital, or DSH, payments.
Illusory UPL payments are based on the misuse of Medicaid UPL
provisions. UPLs are the federal government's way of placing a ceiling
on the federal share of a state Medicaid program; they are the upper
bound on the amounts the federal government will pay a state for the
federal share of state spending on certain services. Some states made
supplemental payments up to the UPL but then required the providers to
return all or a portion of the payment. Under Medicaid law, states are
required to make special hospital payments to supplement standard
Medicaid payment rates and help offset costs for hospitals that serve a
disproportionate share of low-income or uninsured patients; these
payments came to be known as disproportionate share hospital, or DSH,
payments.
[12] GAO, Major Management Challenges and Program Risks: Department of
Health and Human Services, GAO-03-101 (Washington, D.C.: January 2003).
[13] GAO, Medicaid Financing: Federal Oversight Initiative is
Consistent with Medicaid with Medicaid Payment Principles but Needs
Greater Transparency, GAO-07-214 (Washington, D.C.: Mar. 30, 2007).
[14] This state formally requested that the CMS Administrator
reconsider the disapproval of the state plan amendment. The
Administrator upheld the disapproval, finding the state's argument that
CMS was required to use notice-and-comment rule making unsupported. The
United States Court of Appeals for the Eighth Circuit denied the
state's appeal of this decision. Minnesota v. Ctrs. for Medicare and
Medicaid Servs., 495 F.3d 991 (8th Cir. 2007).
[15] See GAO, Medicaid Financing: States' Use of Contingency-Fee
Consultants to Maximize Federal Reimbursements Highlights Need for
Improved Federal Oversight, GAO-05-748 (Washington, D.C.: June 28,
2005).
[16] Other areas where we found federal law and policies had been
inconsistently applied, evolving, or not specific included targeted
case management services, rehabilitation services, and Medicaid
administrative costs. We found that states' claims in some of these
categories had grown substantially in dollar amounts. For example,
during fiscal years 1999 through 2003, combined state and federal
spending for targeted case management services increased by 76 percent,
from $1.7 billion to $3.0 billion, across all states.
[End of section]
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