Medicaid Financing
Federal Oversight Initiative Is Consistent with Medicaid Payment Principles but Needs Greater Transparency Gao ID: GAO-07-214 March 30, 2007The costs of Medicaid--the federal-state program financing health care for about 60 million low-income people--totaled about $317 billion in fiscal year 2005. Increasing budgetary pressures have created tension between the states and the federal government, in part because some states have used inappropriate financing arrangements to collect federal matching funds when payments were not retained by the providers. In August 2003, the federal Centers for Medicare & Medicaid Services (CMS) began an initiative to end inappropriate arrangements. GAO was asked to examine the (1) number, and fiscal effects, of states ending particular financing arrangements; (2) extent to which CMS's initiative represents a change in agency approach or policy; and (3) transparency and consistency of the initiative. For states ending arrangements, GAO surveyed state officials, reviewed CMS documents, and interviewed CMS and state officials.
From August 2003 through August 2006, 29 states ended certain financing arrangements as a result of CMS's oversight initiative. The ended arrangements involved supplemental payments--those separate from and in addition to the states' standard Medicaid payments--made to government health care providers, most often government nursing homes and hospitals. According to CMS, the arrangements had to be ended because the providers did not retain all the payments made to them but returned all or a portion to the states. The fiscal effects on the states and on the federal government of ending specific arrangements were uncertain, as nearly two-thirds of states ending arrangements were seeking to continue obtaining federal reimbursements for the related supplemental payments by using different financing arrangements from those they were required to end. CMS's initiative departs from the agency's past approach and is consistent with Medicaid payment principles--for example, that payment for services must be consistent with efficiency, economy, and quality of care. In the past, CMS limited states' inappropriate financing arrangements through means other than examining whether providers were retaining supplemental payments. Twenty-four of 29 states reported the view that CMS had changed its policy. One state has challenged CMS's disapproval of its state plan amendment, in part on the grounds that CMS changed its policy and should have gone through rule making beforehand. In another case, unrelated to the initiative, in which a state challenged a CMS disapproval, a 2005 federal court ruling upheld CMS's determination that the state's arrangement, in which providers did not fully retain payments, was inconsistent with Medicaid payment principles. CMS has not implemented its initiative transparently, contributing to concerns about the consistency of its reviews of state financing arrangements. CMS's initiative has lacked transparency in two ways. First, in implementing its initiative, CMS did not issue written guidance about the specific approval standards for state financing arrangements, although a proposed regulation published in the Federal Register on January 18, 2007, when finalized, could provide such guidance. Second, CMS has not always provided states with clear, written explanations of its determinations. GAO's review of CMS documentation related to the financing arrangements ended in 29 states found that for only one-fourth of the financing arrangements did CMS explain to the affected states in writing the specific basis for determining that their financing arrangements were inconsistent with one or more Medicaid payment principles. This lack of transparency has raised questions for some states about the consistency with which states have been treated and precluded GAO from determining whether CMS has treated states consistently.
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Director: Team: Phone:GAO-07-214, Medicaid Financing: Federal Oversight Initiative Is Consistent with Medicaid Payment Principles but Needs Greater Transparency
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Consistent with Medicaid Payment Principles but Needs Greater
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Report to the Committee on Finance, U.S. Senate:
United States Government Accountability Office:
GAO:
March 2007:
Medicaid Financing:
Federal Oversight Initiative Is Consistent with Medicaid Payment
Principles but Needs Greater Transparency:
GAO-07-214:
GAO Highlights:
Highlights of GAO-07-214, a report to the Committee on Finance, U.S.
Senate
Why GAO Did This Study:
The costs of Medicaid”the federal-state program financing health care
for about 60 million low-income people”totaled about $317 billion in
fiscal year 2005. Increasing budgetary pressures have created tension
between the states and the federal government, in part because some
states have used inappropriate financing arrangements to collect
federal matching funds when payments were not retained by the
providers. In August 2003, the federal Centers for Medicare & Medicaid
Services (CMS) began an initiative to end inappropriate arrangements.
GAO was asked to examine the
(1) number, and fiscal effects, of states ending particular financing
arrangements; (2) extent to which CMS‘s initiative represents a change
in agency approach or policy; and (3) transparency and consistency of
the initiative. For states ending arrangements, GAO surveyed state
officials, reviewed CMS documents, and interviewed CMS and state
officials.
What GAO Found:
From August 2003 through August 2006, 29 states ended certain financing
arrangements as a result of CMS‘s oversight initiative. The ended
arrangements involved supplemental payments”those separate from and in
addition to the states‘ standard Medicaid payments”made to government
health care providers, most often government nursing homes and
hospitals. According to CMS, the arrangements had to be ended because
the providers did not retain all the payments made to them but returned
all or a portion to the states. The fiscal effects on the states and on
the federal government of ending specific arrangements were uncertain,
as nearly two-thirds of states ending arrangements were seeking to
continue obtaining federal reimbursements for the related supplemental
payments by using different financing arrangements from those they were
required to end.
CMS‘s initiative departs from the agency‘s past approach and is
consistent with Medicaid payment principles”for example, that payment
for services must be consistent with efficiency, economy, and quality
of care. In the past, CMS limited states‘ inappropriate financing
arrangements through means other than examining whether providers were
retaining supplemental payments. Twenty-four of 29 states reported the
view that CMS had changed its policy. One state has challenged CMS‘s
disapproval of its state plan amendment, in part on the grounds that
CMS changed its policy and should have gone through rule making
beforehand. In another case, unrelated to the initiative, in which a
state challenged a CMS disapproval, a 2005 federal court ruling upheld
CMS‘s determination that the state‘s arrangement, in which providers
did not fully retain payments, was inconsistent with Medicaid payment
principles.
CMS has not implemented its initiative transparently, contributing to
concerns about the consistency of its reviews of state financing
arrangements. CMS‘s initiative has lacked transparency in two ways.
First, in implementing its initiative, CMS did not issue written
guidance about the specific approval standards for state financing
arrangements, although a proposed regulation published in the Federal
Register on January 18, 2007, when finalized, could provide such
guidance. Second, CMS has not always provided states with clear,
written explanations of its determinations. GAO‘s review of CMS
documentation related to the financing arrangements ended in 29 states
found that for only one-fourth of the financing arrangements did CMS
explain to the affected states in writing the specific basis for
determining that their financing arrangements were inconsistent with
one or more Medicaid payment principles. This lack of transparency has
raised questions for some states about the consistency with which
states have been treated and precluded GAO from determining whether CMS
has treated states consistently.
What GAO Recommends:
GAO recommends that the Administrator of CMS (1) issue guidance to
clarify allowable financing arrangements and (2) explain its
determinations in writing to states and interested parties. CMS said
recent actions would respond to the first recommendation. Although CMS
disagreed with the second recommendation, GAO believes it remains
valid.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-214].
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 or allenk@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Twenty-nine States Ended Financing Arrangements, with Uncertain Fiscal
Effects:
CMS's Initiative Departs from Past Approach and Is Consistent with
Medicaid Payment Principles:
CMS's Initiative Lacks Transparency, Raising Concerns about Consistent
Review of State Financing Arrangements:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Methodology for Determining the Number of States Ending
Financing Arrangements:
Appendix II: Methodology for Analyzing CMS Case Files:
Appendix III: Comments from the Centers for Medicare & Medicaid
Services:
Appendix IV: GAO Contact and Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: Financing Arrangements Ended, by State and Type of
Supplemental Provider Payment Involved, from August 2003 through August
2006:
Table 2: Number of States Planning or Implementing Certain Alternative
Arrangements for Financing the Nonfederal Share of Payments, as of
October 2006:
Figure:
Figure 1: Inappropriate State Financing Arrangement in Which Provider
Did Not Retain the Full Supplemental Payment:
Abbreviations:
CMS: Centers for Medicare & Medicaid Services:
CPE: certified public expenditure:
DSH: disproportionate share hospital:
HCFA: Health Care Financing Administration:
IGT: intergovernmental transfer:
UPL: upper payment limit:
United States Government Accountability Office:
Washington, DC 20548:
March 30, 2007:
The Honorable Max Baucus:
Chairman:
The Honorable Charles Grassley:
Ranking Minority Member:
Committee on Finance:
United States Senate:
Growing pressures on federal and state budgets have increased tensions
between the federal government and the states regarding Medicaid, the
joint federal-state health care financing program for about 60 million
individuals, including low-income children, families, and aged or
disabled individuals. The federal government and the states share in
the cost of the program, which in fiscal year 2005 totaled about $317
billion.[Footnote 1] The Centers for Medicare & Medicaid Services
(CMS)--the federal agency responsible for overseeing states' programs-
-has an important role in ensuring that states comply with certain
statutory Medicaid payment principles when claiming federal
reimbursements for payments made to institutional and other providers
that serve Medicaid beneficiaries. For example, Medicaid payments must
be "consistent with efficiency, economy, and quality of care,"[Footnote
2] and states must share in any reported Medicaid costs in proportions
established according to a statutory formula.[Footnote 3] In recent
years, tensions have arisen between the federal government and states
with regard to CMS's actions to oversee the appropriateness of Medicaid
provider payments for which states have sought federal matching
reimbursement, including concerns over whether states were
appropriately financing their share, that is, the nonfederal share of
the payments.
We and others have reported that some states have inappropriately
established financing arrangements creating the appearance of payments
to government-owned or government-operated providers, such as nursing
homes, in order to obtain additional federal matching funds.[Footnote
4] These arrangements involved supplemental payments--payments that
states made to providers that were 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,
because states required the government providers to return part or all
of them to the states. States could then use the money to fund the
nonfederal share of other Medicaid expenditures. Such arrangements
effectively increased the federal share of the states' total Medicaid
expenditures because federal funding increased without a commensurate
increase in nonfederal funding. Financing arrangements involving
illusory payments to Medicaid providers have had significant fiscal
implications for the federal government and states. In 2003, we
designated Medicaid as a program at high risk of mismanagement, waste,
and abuse, in part because of concerns about inappropriate financing
arrangements.[Footnote 5] As states' arrangements involving illusory
payments have come to light, Congress and CMS have taken steps to limit
them, including establishing a regulation estimated to have saved the
federal government approximately $17 billion from fiscal year 2002
through fiscal year 2006.
In August 2003, CMS launched an oversight initiative to review and
evaluate the appropriateness of states' Medicaid payments for which
federal matching reimbursement was sought, by assessing whether states
had financing arrangements that required providers to return payments
to the states. Under this initiative, a state's submission of a
proposal to change provider payments in its state Medicaid plan--the
plan approved by CMS that defines how each state will operate its
Medicaid program, including which populations and services are covered
and the rates at which providers will be paid for serving Medicaid
beneficiaries--triggers CMS scrutiny of the appropriateness of any
related financing arrangement. CMS withholds approval of a proposed
state plan amendment until obtaining satisfactory assurances that a
state is ending financing arrangements the agency finds to be
inappropriate. As CMS has carried out this initiative, concerns have
been raised that CMS's policies have not been transparent, that is,
clearly explained and available to interested parties; represent a
change in policy that should have undergone a rule-making process
during which a proposed regulation would have been published for public
comment; and have not been implemented consistently from state to
state.
You asked us to review CMS's efforts under its oversight initiative
begun in August 2003, including the process the agency has used and the
outcomes of that process, focusing on states that were required to end
Medicaid financing arrangements that CMS found to be inappropriate.
This report addresses the following questions:
1. How many states have ended Medicaid financing arrangements as a
result of CMS's initiative, and what have been the fiscal effects?
2. To what extent does CMS's initiative reflect a change in approach or
policy for overseeing states' Medicaid financing arrangements?
3. To what extent has CMS implemented its initiative in a transparent
manner and consistently across states?
To determine the number of states among the 50 states and the District
of Columbia that ended financing arrangements and the fiscal effects of
ending the arrangements under CMS's oversight initiative, we obtained
information from CMS on the financing arrangements that were ended from
August 2003 through August 2006, reviewed CMS's files containing agency
and state documents regarding the ended arrangements, and discussed
with CMS officials the characteristics of and the basis for the
agency's determinations concerning states' arrangements and the
potential federal fiscal effects from states' ending arrangements. To
ensure that we had an accurate count of states that had ended one or
more financing arrangements, we verified this information with each
state that, according to CMS, had ended an arrangement. In addition, we
contacted all states not identified by CMS as having ended an
arrangement and asked them whether they had ended certain financing
arrangements as a result of CMS's initiative. We determined that the
information provided by CMS about which states ended financing
arrangements, coupled with confirmation provided by states, was
sufficiently reliable for the purposes of our review. To learn more
about the ended financing arrangements, we sent a questionnaire to, and
obtained responses from 100 percent of, the subset of states that we
determined had ended an arrangement from August 2003 through August
2006. Our questions sought information and associated documentation to
verify the characteristics of the financing arrangements that the
states had ended; the actions the states had taken or planned to take
as a result of CMS's initiative, including states' proposals to
implement different financing arrangements as an alternative to the
arrangements they had ended; and the potential fiscal effects on state
budgets of ending financing arrangements. We updated our information on
the status of states' plans to implement alternative arrangements in
October 2006. We also obtained additional information about CMS's
initiative by interviewing officials from nearly two-thirds of the
states receiving our questionnaire, including officials from states
whose questionnaire responses required clarification or who requested
an interview. We did not independently validate the information the
states provided to us about fiscal effects. (See app. I for a more
detailed description of our methodology for determining the number of
states that ended financing arrangements.)
To examine the extent to which CMS's initiative reflects a change in
approach or policy for overseeing states' Medicaid financing
arrangements, we reviewed the legal and programmatic bases for CMS's
initiative; reviewed relevant legal opinions and related materials;
interviewed CMS officials concerning CMS's oversight in the past and
under the initiative; reviewed agency and congressional actions to
address states' inappropriate financing arrangements from 1994, when we
first reported on these issues, through November 2006; and reviewed
public statements by CMS officials and CMS documents that discussed the
agency's actions under its initiative. In our questionnaire to the
states that ended financing arrangements under the initiative, we asked
whether each state viewed CMS's actions as a change from the agency's
prior approach.
To assess the extent to which CMS's initiative has been implemented in
a transparent manner, we performed a structured review of documentation
contained in CMS's files for the subset of states that had ended
financing arrangements, including examining correspondence and other
information related to each state review under the initiative. We
assessed how CMS communicated to the states that ended financing
arrangements its determinations about financing arrangements and the
basis for its determinations, including assessing the extent to which
CMS provided states with written information on the statutory basis for
its determinations under the initiative. We did not assess the validity
of CMS's determinations that states must end certain financing
arrangements, nor did we compare the basis for these determinations
with CMS's approvals of other financing arrangements it reviewed. (See
app. II for further information on our methodology for analyzing CMS's
files.) Through our questionnaire to the states that ended financing
arrangements, we sought information on their views of CMS's review
process, including information on whether, in the opinion of state
officials, CMS explained why the state should end its financing
arrangement, on what basis CMS concluded that the state should end its
financing arrangement, and what guidance--such as letters to state
Medicaid directors or technical guidance manuals--CMS provided the
state on financing arrangements. To assess the consistency of CMS's
reviews under the initiative, we examined information in CMS's files
for evidence of any differences in CMS's reviews of states that ended
financing arrangements, including differences in the concerns that CMS
identified. Because of limitations in the file documents, however, we
were unable to determine whether CMS had treated states that ended
financing arrangements consistently. For example, CMS's files did not
contain records of oral discussions or explanations of relevant
differences in the states' Medicaid programs. Through our
questionnaire, we sought the views of state officials on whether the
states that ended financing arrangements believed CMS had been
consistent across states in its reviews. In part to better understand
how CMS's reviews had affected states that ended financing
arrangements, we interviewed officials in nearly two-thirds of the
states that received our questionnaire and who had, for example,
requested an interview or whose responses to the questionnaire needed
clarification. Finally, we interviewed CMS officials about the agency's
review process under the initiative and the basis for its
determinations regarding states' financing arrangements. Our findings,
conclusions, and recommendations are based on the evidence we obtained
in reviewing states that ended financing arrangements as a result of
CMS's oversight initiative. We conducted our review from July 2005
through March 2007 in accordance with generally accepted government
auditing standards.
Results in Brief:
From August 2003 through August 2006, 29 states ended Medicaid
financing arrangements that CMS determined to be inappropriate as a
result of its oversight initiative; the fiscal effects of ending such
arrangements were uncertain at the time of our review. The ended
financing arrangements involved supplemental payments made to
government-owned or government-operated health care providers, most
often government nursing homes and hospitals. CMS officials informed us
that in all the cases, they required states to end the financing
arrangements because under the arrangements, government providers did
not retain all of the supplemental payments made to them but instead
returned part or all of the payments to the states. In more than half
the cases, we identified documents in CMS's files confirming that under
the arrangements, providers retained less than the full amounts of the
supplemental payments they received. The fiscal effects on the states
and on the federal government of ending such arrangements remained
uncertain at the time of our analysis because nearly two-thirds of
states (19 of 29) that ended financing arrangements were either
planning or implementing different arrangements for financing the
nonfederal share of the related supplemental payments. For example, 10
states were adopting arrangements under which the supplemental payments
would be based on funds expended by government providers and certified
as allowable expenditures for providing Medicaid services to Medicaid
beneficiaries. As of October 2006, only 12 of the 19 states planning or
implementing alternative arrangements had begun seeking federal
reimbursements, and those states faced further CMS review before
obtaining reimbursements.
CMS's initiative reflects a departure from the agency's past oversight
approach and is consistent with Medicaid payment principles requiring,
for example, that payment for services be consistent with efficiency,
economy, and quality of care. In the past, CMS limited states'
inappropriate financing arrangements through means other than
determining whether the individual providers involved were retaining
the supplemental payments made to them. Consequently, CMS previously
approved states' financing arrangements even in some cases where it was
aware that the providers did not retain the full payments. Most states
that ended financing arrangements view CMS's initiative as a change in
CMS policy. In response to our questionnaire, officials in 24 of 29
states that ended financing arrangements reported that CMS had changed
its policy on allowable state financing; in additional written
comments, officials of 6 of these states expressed concern that CMS
objected to provisions it had previously approved and did so without
first notifying states through rule making of its policy changes.
Whether CMS's initiative represents a change in policy that would
require rule making was, as of February 2007, under review in federal
court. In July 2004, Minnesota challenged CMS's disapproval of its
state plan amendment in part on the grounds that CMS should have gone
through rule making before disapproving the state's plan amendment
under the initiative. CMS's disapproval was affirmed by the
Administrator in July 2006. Minnesota officials in September 2006 filed
an appeal of the Administrator's decision in federal court; the appeal
was pending as of February 2007. In another case, unrelated to the
initiative, in which a state challenged CMS's disapproval of a state
plan amendment involving an inappropriate financing arrangement, a 2005
federal court ruling upheld CMS's determination that the state's
financing arrangement, in which the providers did not retain Medicaid
payments, was inconsistent with Medicaid payment principles.
CMS's initiative has not been implemented in a transparent manner,
contributing to concerns about the consistency of its reviews of
financing arrangements across states. CMS's initiative has lacked
transparency in two ways. First, under the initiative, CMS did not
issue written guidance about the specific approval standards related to
allowable financing methods that it was applying in reviewing states'
financing arrangements. In January 2007, after receiving a draft of
this report for review and comment, CMS published a proposed regulation
that could, when finalized, provide guidance clarifying allowable
arrangements for states to finance the nonfederal share of their
Medicaid payments. Second, CMS has not always provided states that
ended financing arrangements with clear, written explanations for its
determinations, which could inform the directly affected states, as
well as other states and interested parties, about allowable financing
arrangements. In only one-fourth of the financing arrangements that
states ended did CMS provide written explanations to the affected
states of the specific bases for determining that their financing
arrangements were inconsistent with one or more Medicaid payment
principles. Although CMS officials said that their reviews of states'
financing arrangements under the initiative have been consistent, the
lack of transparency has contributed to some states' concerns about
consistent treatment and precluded us from determining whether CMS
treated states that ended financing arrangements consistently.
To improve the transparency of CMS's oversight of states' Medicaid
financing arrangements, we are recommending that the Administrator of
CMS issue guidance to clarify allowable arrangements for financing the
nonfederal share of Medicaid payments. Such clarification could be
accomplished through one of the many different avenues CMS has for
providing states with guidance, including finalizing the regulation
proposed on January 18, 2007. We also recommend that the Administrator
provide to each state it reviews, and make available to all states and
other interested parties, written explanations of agency determinations
on the allowability of various arrangements for financing the
nonfederal share of Medicaid payments.
In commenting on a draft of this report, CMS indicated that the agency
was in the process of implementing our first recommendation and not in
agreement with the second.
* CMS stated that the proposed regulation published on January 18,
2007, would respond to our first recommendation that the agency issue
guidance to clarify allowable financing arrangements. We agree, and
updated our report to recognize the publication of the proposed
regulation after CMS had received a draft of our report for review and
comment. We note, however, that CMS's regulation is not final, and we
therefore maintain our recommendation.
* In disagreeing with our recommendation that it provide states with
written explanations of the agency's determinations under the
initiative, CMS raised concerns about providing details on the
allowability of arrangements that states have since corrected or
terminated and indicated that the proposed regulation would satisfy the
recommendation on a nationwide scale. Our recommendation was not
intended to be applied retroactively but, rather, to be used in ongoing
and future determinations. We have clarified this intent in our report.
Although we agree that the proposed regulation, when finalized, could
address some concerns about the transparency of CMS's efforts, we
continue to believe that specific written explanations of the agency's
future determinations are also needed because they would further
delineate for states and others how CMS is applying its guidance in
reviewing specific arrangements. We therefore maintain our
recommendation.
CMS also commented that the report overemphasized the need for
transparency and overlooked the fairness of CMS's review activities. We
maintain that CMS's changed oversight approach, states' concerns about
the lack of guidance and consistent treatment, and the significant
potential fiscal effects of CMS's determinations on states' budgets
show the need for more transparency in the agency's guidance and
determinations.
Background:
Title XIX of the Social Security Act establishes Medicaid as a joint
federal-state program to finance health care for certain low-income,
aged, or disabled individuals.[Footnote 6] 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 7] CMS provides information to states about
Medicaid program requirements through federal regulations; a published
State Medicaid Manual; standard letters issued to all state Medicaid
directors (known as state Medicaid directors letters), which are also
available on CMS's Web site; and technical guidance manuals on
particular topics.
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 and nursing home and inpatient hospital care), and
the rates of and methods for calculating payments to providers. Any
changes a state wishes to make in its Medicaid program must be
submitted to CMS for review and approval in the form of a proposed
state plan amendment. A state plan amendment is valid indefinitely,
barring any changes to federal law or policy or the state's decision to
further amend that part of its state plan. Changes may range from
editorial changes, such as updates for agency name changes, to
substantive program changes, such as establishing new methods for
developing provider payment rates, adding certain types of payments, or
modifying eligibility for program services. State plan amendments may
be needed to reflect developments in federal law, regulation, or case
law or changes in state law, organization, policy, or operation of the
Medicaid program. States are not required to submit state plan
amendments on a regular basis but, rather, as needed when the states
seek to change some aspect of their programs. Nor are states limited in
the number of state plan amendments they may submit. In fiscal year
2005, for example, 722 state plan amendments were submitted for CMS
review, with the number per state ranging from a low of 5 in three
states to a high of 41 in two states.
Under a statutory formula, the federal government may pay from 50 to 83
percent of a state's Medicaid expenditures.[Footnote 8] Certain
inappropriate financing arrangements, however, have allowed some states
to effectively increase the federal share of their Medicaid
expenditures. 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 this nonfederal share from local governments, as
long as the state itself contributes at least 40 percent.[Footnote 9]
In the past, we and others have reported that some states were using
inappropriate financing arrangements to boost the federal share of
program expenditures, most recently through misuse of Medicaid upper
payment limit (UPL) provisions. UPLs are the federal government's way
of placing ceilings on the federal share of a state's Medicaid program;
they are the upper bound on the amounts the federal government will
reimburse a state for the federal share of state spending on certain
services. Some states have paid certain providers supplemental payments
up to the UPL, and the federal government has shared in those
payments.[Footnote 10] These supplemental payments were separate from
and in addition to those made at the states' standard Medicaid payment
rates, and some states required providers to return most or all of
these supplemental payments to the state, thus increasing federal
funding without a commensurate increase in nonfederal funding.
When government entities were involved, states were able to increase
federal funding inappropriately because supplemental payments could be
returned to the state through a mechanism known as an intergovernmental
transfer, or IGT. An IGT is a legitimate feature in state finance that
enables state and local governments to carry out their shared
governmental functions, for example, through the transfer of revenues
between governmental entities. Some state supplemental payments
involving IGTs, however, have been part of inappropriate financing
arrangements in which states received federal Medicaid reimbursements
based on payment amounts that were greater than the amounts actually
retained by the providers for Medicaid purposes--effectively shifting
Medicaid program costs to the federal government. Figure 1 illustrates
one such example. 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 $2 million. Essentially, the state created the illusion of a
$41 million supplemental hospital payment when only $2 million was
actually retained by the provider. This illusory payment netted the
state tens of millions of dollars in excess federal funds.
Figure 1: Inappropriate State Financing Arrangement in Which Provider
Did Not Retain the Full Supplemental Payment:
[See PDF for image]
Source: GAO analysis of one state's financing arrangement for state
fiscal year 2004.
[End of figure]
This type of financing arrangement is inappropriate for at least two
reasons. First, it enables states to obtain additional federal
reimbursements, effectively without contributing a nonfederal share; in
this case, the state actually netted $28.5 million as a result of the
arrangement. Second, it makes federal Medicaid reimbursements available
for other purposes. In some cases, states have used the returned funds
as the nonfederal share of additional Medicaid payments to providers to
seek still more federal reimbursements, thus recycling federal funds to
produce additional federal funds.
CMS's initiative was undertaken as part of the agency's efforts to
strengthen financial oversight and ensure payment accuracy and the
fiscal integrity of the Medicaid program. Under this initiative,
whenever a state submitted to CMS for review and approval a proposed
state plan amendment revising a section of the state plan related to
payments to providers, CMS officials asked the state five standard
funding questions intended to gauge the appropriateness of the state's
financing arrangement. Specifically, CMS asked states to describe:
* whether Medicaid providers would retain all Medicaid payments made to
them, including the federal and nonfederal shares, or whether any
portion would be returned to the state, local-government entity, or
other organization;
* sources of state funds used to make the Medicaid payments, for
example, whether the nonfederal share came from appropriations from the
legislature or from IGT arrangements or other sources;
* the total amount of any supplemental payments made to each Medicaid
provider;
* the methods used by the state to estimate the UPL for different types
of providers; and:
* whether total Medicaid payments to government providers exceeded the
providers' costs of providing services to Medicaid beneficiaries.
Under the initiative, a state typically responds to CMS's questions,
which starts a series of communications between state and CMS officials
via e-mail, telephone, or formal letters and culminates in a decision
by CMS as to the appropriateness of the state's financing arrangements
related to the Medicaid payments. If CMS determines that providers are
not fully retaining payments they received from the state, CMS
withholds approval of state plan amendments until the state provides
assurances that it will end inappropriate financing arrangements. After
ending the arrangement, the state may, with CMS approval, continue
making the related supplemental payments under a different financing
arrangement.
Twenty-nine States Ended Financing Arrangements, with Uncertain Fiscal
Effects:
As a result of CMS's oversight initiative, 29 states ended arrangements
for financing Medicaid supplemental payments to government providers,
most often nursing homes and hospitals, from August 2003 through August
2006. According to CMS, under each of the ended arrangements,
government providers retained less than the full payment amounts. At
the time of our review, 19 of the 29 states that ended financing
arrangements were planning or implementing alternative ways to finance
the nonfederal share of the supplemental payments, but they had not
begun receiving federal reimbursements under those alternatives. Hence,
the fiscal effects of the ended financing arrangements remained
uncertain.
Ended Arrangements Involved Supplemental Payments Not Fully Retained by
Government Providers:
From August 2003 through August 2006, 29 states ended one or more
financing arrangements, each of which involved supplemental payments to
health care providers--most often nursing homes and hospitals--that
were owned or operated by government entities, such as states and
counties. According to CMS, all of these arrangements were inconsistent
with Medicaid payment principles because the related payments were not
retained in full by these government providers. CMS completed many
reviews that did not result in a state's ending a financing
arrangement. Specifically, according to CMS data, 19 of the 29 states
that ended an arrangement had other arrangements that had been reviewed
with no objections from CMS. In addition, 18 states other than the 29
that ended arrangements underwent reviews of one or more financing
arrangements that met with CMS's approval and therefore did not have to
be ended.[Footnote 11]
In total, the 29 states ended 55 financing arrangements involving
supplemental payments made to government providers for various Medicaid
services identified in states' Medicaid plans. States most frequently
ended arrangements to finance supplemental payments made to government-
operated nursing homes (for example, county nursing homes) and
hospitals (such as county, municipal, and state university hospitals).
For example, one state supplemented its standard Medicaid payments with
quarterly payments to county nursing homes. The state noted in a letter
to CMS that in state fiscal year 2003, two eligible county nursing
homes received supplemental payments totaling $18 million, of which the
nursing homes retained $509,000. Combined, arrangements for financing
nursing home payments and hospital payments for inpatient services (42
percent and 24 percent, respectively) represented about two-thirds of
all 55 ended arrangements in the 29 states. The remaining one-third of
ended financing arrangements most often involved disproportionate share
hospital, or DSH, payments[Footnote 12] (20 percent) and hospital
payments for outpatient hospital services (11 percent). See table 1 for
a summary of the financing arrangements ended by states from August
2003 through August 2006.
Table 1: Financing Arrangements Ended, by State and Type of
Supplemental Provider Payment Involved, from August 2003 through August
2006:
State: Alabama;
Type of supplemental payment involved in ended arrangement: Nursing
home: Check;
Type of supplemental payment involved in ended arrangement: Inpatient
hospital: Check;
Type of supplemental payment involved in ended arrangement:
Disproportionate share hospital: Check;
Type of supplemental payment involved in ended arrangement: Outpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Home
health: Check;
Type of supplemental payment involved in ended arrangement: Physician:
[Empty].
State: Alaska;
Type of supplemental payment involved in ended arrangement: Nursing
home: [Empty];
Type of supplemental payment involved in ended arrangement: Inpatient
hospital: Check;
Type of supplemental payment involved in ended arrangement:
Disproportionate share hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Outpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Home
health: [Empty];
Type of supplemental payment involved in ended arrangement: Physician:
[Empty].
State: Arkansas;
Type of supplemental payment involved in ended arrangement: Nursing
home: Check;
Type of supplemental payment involved in ended arrangement: Inpatient
hospital: Check;
Type of supplemental payment involved in ended arrangement:
Disproportionate share hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Outpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Home
health: [Empty];
Type of supplemental payment involved in ended arrangement: Physician:
[Empty].
State: California;
Type of supplemental payment involved in ended arrangement: Nursing
home: [Empty];
Type of supplemental payment involved in ended arrangement: Inpatient
hospital: Check;
Type of supplemental payment involved in ended arrangement:
Disproportionate share hospital: Check;
Type of supplemental payment involved in ended arrangement: Outpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Home
health: [Empty];
Type of supplemental payment involved in ended arrangement: Physician:
[Empty].
State: Georgia;
Type of supplemental payment involved in ended arrangement: Nursing
home: Check;
Type of supplemental payment involved in ended arrangement: Inpatient
hospital: Check;
Type of supplemental payment involved in ended arrangement:
Disproportionate share hospital: Check;
Type of supplemental payment involved in ended arrangement: Outpatient
hospital: Check;
Type of supplemental payment involved in ended arrangement: Home
health: [Empty];
Type of supplemental payment involved in ended arrangement: Physician:
[Empty].
State: Iowa;
Type of supplemental payment involved in ended arrangement: Nursing
home: Check;
Type of supplemental payment involved in ended arrangement: Inpatient
hospital: Check;
Type of supplemental payment involved in ended arrangement:
Disproportionate share hospital: Check;
Type of supplemental payment involved in ended arrangement: Outpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Home
health: [Empty];
Type of supplemental payment involved in ended arrangement: Physician:
[Empty].
State: Kansas;
Type of supplemental payment involved in ended arrangement: Nursing
home: Check;
Type of supplemental payment involved in ended arrangement: Inpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement:
Disproportionate share hospital: Check;
Type of supplemental payment involved in ended arrangement: Outpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Home
health: [Empty];
Type of supplemental payment involved in ended arrangement: Physician:
[Empty].
State: Kentucky;
Type of supplemental payment involved in ended arrangement: Nursing
home: Check;
Type of supplemental payment involved in ended arrangement: Inpatient
hospital: Check;
Type of supplemental payment involved in ended arrangement:
Disproportionate share hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Outpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Home
health: [Empty];
Type of supplemental payment involved in ended arrangement: Physician:
Check.
State: Louisiana;
Type of supplemental payment involved in ended arrangement: Nursing
home: Check;
Type of supplemental payment involved in ended arrangement: Inpatient
hospital: Check;
Type of supplemental payment involved in ended arrangement:
Disproportionate share hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Outpatient
hospital: Check;
Type of supplemental payment involved in ended arrangement: Home
health: [Empty];
Type of supplemental payment involved in ended arrangement: Physician:
[Empty].
State: Massachusetts;
Type of supplemental payment involved in ended arrangement: Nursing
home: Check;
Type of supplemental payment involved in ended arrangement: Inpatient
hospital: Check;
Type of supplemental payment involved in ended arrangement:
Disproportionate share hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Outpatient
hospital: Check;
Type of supplemental payment involved in ended arrangement: Home
health: [Empty];
Type of supplemental payment involved in ended arrangement: Physician:
[Empty].
State: Michigan;
Type of supplemental payment involved in ended arrangement: Nursing
home: Check;
Type of supplemental payment involved in ended arrangement: Inpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement:
Disproportionate share hospital: Check;
Type of supplemental payment involved in ended arrangement: Outpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Home
health: [Empty];
Type of supplemental payment involved in ended arrangement: Physician:
[Empty].
State: Minnesota;
Type of supplemental payment involved in ended arrangement: Nursing
home: [Empty];
Type of supplemental payment involved in ended arrangement: Inpatient
hospital: Check;
Type of supplemental payment involved in ended arrangement:
Disproportionate share hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Outpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Home
health: [Empty];
Type of supplemental payment involved in ended arrangement: Physician:
[Empty].
State: Mississippi;
Type of supplemental payment involved in ended arrangement: Nursing
home: [Empty];
Type of supplemental payment involved in ended arrangement: Inpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement:
Disproportionate share hospital: Check;
Type of supplemental payment involved in ended arrangement: Outpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Home
health: [Empty];
Type of supplemental payment involved in ended arrangement: Physician:
[Empty].
State: Missouri;
Type of supplemental payment involved in ended arrangement: Nursing
home: Check;
Type of supplemental payment involved in ended arrangement: Inpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement:
Disproportionate share hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Outpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Home
health: [Empty];
Type of supplemental payment involved in ended arrangement: Physician:
[Empty].
State: Montana;
Type of supplemental payment involved in ended arrangement: Nursing
home: Check;
Type of supplemental payment involved in ended arrangement: Inpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement:
Disproportionate share hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Outpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Home
health: [Empty];
Type of supplemental payment involved in ended arrangement: Physician:
[Empty].
State: Nebraska;
Type of supplemental payment involved in ended arrangement: Nursing
home: Check;
Type of supplemental payment involved in ended arrangement: Inpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement:
Disproportionate share hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Outpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Home
health: [Empty];
Type of supplemental payment involved in ended arrangement: Physician:
[Empty].
State: New Hampshire;
Type of supplemental payment involved in ended arrangement: Nursing
home: Check;
Type of supplemental payment involved in ended arrangement: Inpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement:
Disproportionate share hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Outpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Home
health: [Empty];
Type of supplemental payment involved in ended arrangement: Physician:
[Empty].
State: New Jersey;
Type of supplemental payment involved in ended arrangement: Nursing
home: Check;
Type of supplemental payment involved in ended arrangement: Inpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement:
Disproportionate share hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Outpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Home
health: [Empty];
Type of supplemental payment involved in ended arrangement: Physician:
[Empty].
State: New York;
Type of supplemental payment involved in ended arrangement: Nursing
home: Check;
Type of supplemental payment involved in ended arrangement: Inpatient
hospital: Check;
Type of supplemental payment involved in ended arrangement:
Disproportionate share hospital: Check;
Type of supplemental payment involved in ended arrangement: Outpatient
hospital: Check;
Type of supplemental payment involved in ended arrangement: Home
health: [Empty];
Type of supplemental payment involved in ended arrangement: Physician:
[Empty].
State: North Carolina;
Type of supplemental payment involved in ended arrangement: Nursing
home: [Empty];
Type of supplemental payment involved in ended arrangement: Inpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement:
Disproportionate share hospital: Check;
Type of supplemental payment involved in ended arrangement: Outpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Home
health: [Empty];
Type of supplemental payment involved in ended arrangement: Physician:
[Empty].
State: Oklahoma;
Type of supplemental payment involved in ended arrangement: Nursing
home: [Empty];
Type of supplemental payment involved in ended arrangement: Inpatient
hospital: Check;
Type of supplemental payment involved in ended arrangement:
Disproportionate share hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Outpatient
hospital: Check;
Type of supplemental payment involved in ended arrangement: Home
health: [Empty];
Type of supplemental payment involved in ended arrangement: Physician:
[Empty].
State: Oregon;
Type of supplemental payment involved in ended arrangement: Nursing
home: Check;
Type of supplemental payment involved in ended arrangement: Inpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement:
Disproportionate share hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Outpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Home
health: [Empty];
Type of supplemental payment involved in ended arrangement: Physician:
[Empty].
State: Pennsylvania;
Type of supplemental payment involved in ended arrangement: Nursing
home: Check;
Type of supplemental payment involved in ended arrangement: Inpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement:
Disproportionate share hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Outpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Home
health: [Empty];
Type of supplemental payment involved in ended arrangement: Physician:
[Empty].
State: South Carolina;
Type of supplemental payment involved in ended arrangement: Nursing
home: Check;
Type of supplemental payment involved in ended arrangement: Inpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement:
Disproportionate share hospital: Check;
Type of supplemental payment involved in ended arrangement: Outpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Home
health: [Empty];
Type of supplemental payment involved in ended arrangement: Physician:
[Empty].
State: South Dakota;
Type of supplemental payment involved in ended arrangement: Nursing
home: Check;
Type of supplemental payment involved in ended arrangement: Inpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement:
Disproportionate share hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Outpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Home
health: [Empty];
Type of supplemental payment involved in ended arrangement: Physician:
[Empty].
State: Tennessee;
Type of supplemental payment involved in ended arrangement: Nursing
home: Check;
Type of supplemental payment involved in ended arrangement: Inpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement:
Disproportionate share hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Outpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Home
health: [Empty];
Type of supplemental payment involved in ended arrangement: Physician:
[Empty].
State: Virginia;
Type of supplemental payment involved in ended arrangement: Nursing
home: Check;
Type of supplemental payment involved in ended arrangement: Inpatient
hospital: Check;
Type of supplemental payment involved in ended arrangement:
Disproportionate share hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Outpatient
hospital: Check;
Type of supplemental payment involved in ended arrangement: Home
health: [Empty];
Type of supplemental payment involved in ended arrangement: Physician:
[Empty].
State: Washington;
Type of supplemental payment involved in ended arrangement: Nursing
home: Check;
Type of supplemental payment involved in ended arrangement: Inpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement:
Disproportionate share hospital: Check;
Type of supplemental payment involved in ended arrangement: Outpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Home
health: [Empty];
Type of supplemental payment involved in ended arrangement: Physician:
[Empty].
State: Wisconsin;
Type of supplemental payment involved in ended arrangement: Nursing
home: Check;
Type of supplemental payment involved in ended arrangement: Inpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement:
Disproportionate share hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Outpatient
hospital: [Empty];
Type of supplemental payment involved in ended arrangement: Home
health: [Empty];
Type of supplemental payment involved in ended arrangement: Physician:
[Empty].
State: Total (29);
Type of supplemental payment involved in ended arrangement: Nursing
home: 23;
Type of supplemental payment involved in ended arrangement: Inpatient
hospital: 13;
Type of supplemental payment involved in ended arrangement:
Disproportionate share hospital: 11;
Type of supplemental payment involved in ended arrangement: Outpatient
hospital: 6;
Type of supplemental payment involved in ended arrangement: Home
health: 1;
Type of supplemental payment involved in ended arrangement: Physician:
1.
Source: CMS and states.
Note: Data from GAO analysis of CMS documents and state responses to
GAO's questionnaire.
[End of table]
Although the specific details of the ended financing arrangements
differed from state to state, in more than half of all cases (31 of
55), we identified documents in CMS's files confirming that under the
arrangements, providers retained less than the full amount of the
supplemental payments they received. For example:
* One state explained in its responses to CMS's standard funding
questions that a portion of the supplemental payments to non-state-
government-owned hospitals for inpatient services was returned to the
state. Payments were made to the hospitals, which retained an amount
equal to 3 percent of the payments plus 50 percent of the federal share
of the payment. The remaining funds were transferred by the hospitals
to their county governments. The counties transferred these funds back
to the state via an IGT. The transferred funds were allocated to the
state's Medicaid program to fund additional Medicaid services.
* An official from another state noted in an e-mail to CMS that
facilities participating in the state's UPL program transferred an
amount that exceeded the nonfederal share of certain payments. For
example, as explained in a response from a CMS official to the state,
under the state's arrangement for supplemental nursing home payments,
providers were required to transfer to the state the nonfederal share
of the supplemental payments plus approximately an additional 43
percent, which the state used to fund other Medicaid expenditures. CMS
concluded that under such an arrangement, the nursing homes netted only
57 percent of the total supplemental payment reported by the state.
In the remaining cases, we could not conclusively determine from
reviewing CMS's documentation whether the involved providers retained
less than the full amount of the supplemental payment. CMS reported to
us, however, that in all of the arrangements states ended, providers
retained less than the full amount of the supplemental payments they
received because the states required providers to either (1) return a
portion of the payment to the state through an IGT or (2) transfer to
the state more than the nonfederal share of the payment before the
state made the payment to providers and sought federal reimbursement.
In about two-thirds of cases, states ended financing arrangements by
removing or revising the pertinent supplemental payment provisions in
their state plans. Specifically, states added provisions to their state
plan amendments that would, as of a given date (most often, it was the
end of the states' fiscal year 2005), end the type of supplemental
payments under CMS review. As CMS explained to one state, providing
such an end date in writing assured CMS that the state would not
continue the payments in question (in this case, supplemental payments
to local-government hospitals) under the inappropriate financing
arrangement; moreover, if the state did not agree to end the
arrangement, CMS would not approve the state's proposed state plan
amendment. In response, the state resubmitted its amendment, adding a
provision ending its supplemental payments to local-government
hospitals as of June 30, 2005, and in its cover letter to CMS noted
that the state would resume making such payments only under an
arrangement acceptable to CMS. In another case, CMS required a state to
end its arrangements for certain supplemental payments as a condition
for approving the state's section 1115 waiver proposal.[Footnote 13]
Under the waiver agreement, CMS required the state to end, by amending
its state plan, the supplemental inpatient hospital payments, nursing
home payments, and DSH payments for which providers did not retain the
full amounts. This process--in which CMS required states to remove from
their state plans provisions governing certain supplemental payments,
thereby ending the inappropriate financing arrangements--was the
typical approach that CMS took with states under the initiative. In
some cases (5 of 55), however, CMS accepted from states written
assurance that the state would end an inappropriate financing
arrangement. For example, one state wrote to CMS that it would in the
future revise its arrangement to comply with CMS's current policy.
Fiscal Effects Are Uncertain Because Most States Were Seeking Continued
Federal Reimbursements under Alternative Arrangements:
The state and federal fiscal effects of states' ending their financing
arrangements were unclear because most of the states (19 of 29 states)
were planning or implementing alternative arrangements to continue
obtaining federal reimbursements for the related supplemental payments.
As of October 2006, only 12 of the 19 states that were planning or
implementing different financing arrangements had resumed seeking
federal matching funds. Until states begin to obtain federal matching
funds under the alternative arrangements, the fiscal effects of the
initiative will remain unclear.
The 29 states we contacted provided us estimates of potential annual
reductions in federal reimbursement related to ended arrangements--most
frequently based on the amount of federal reimbursement under the ended
arrangements in their fiscal year 2005--that totaled nearly $1.9
billion and ranged from $0 to approximately $382 million among the
states. Of the 29 states, 14 states chose not to continue making the
supplemental payments related to one or more ended
arrangements.[Footnote 14] For example, one state discontinued its
supplemental payments to public nursing homes at the end of its fiscal
year 2005 and, as a result, would no longer receive federal
reimbursement for such payments--reimbursement totaling nearly $5
million in state fiscal year 2004. The 14 states that were not taking
steps to continue obtaining comparable federal reimbursement estimated
that they would each annually receive from $0 to $69 million less in
federal matching funds.[Footnote 15]
Most states' estimates were preliminary as of October 2006, because 19
states were planning or implementing different arrangements for
financing the related supplemental payments from those that CMS had
required them to end. Doing so would allow the states to continue to
seek federal reimbursement for those payments. To obtain such federal
reimbursement, however, states were subject to CMS review of their
alternative arrangements for financing the nonfederal share of their
payments. Several states were continuing to use an IGT to fund the
nonfederal share, but with changes that they expected to meet with CMS
approval; specifically, under a revised IGT, providers would retain in
full the supplemental payments made to them. Other states were planning
or implementing other arrangements, such as increasing appropriations
or generating new revenues by imposing taxes on certain providers, to
continue making supplemental payments. The alternative chosen by the
largest number of states--10 of the 19 states adopting alternative
arrangements--was an approach based on government providers' certifying
their Medicaid expenditures to the state. Such certified public
expenditures, or CPEs, do not involve an actual transfer of funds by
government providers to the state.[Footnote 16] Table 2 describes these
alternatives and the number of states planning or implementing each
one.
Table 2: Number of States Planning or Implementing Certain Alternative
Arrangements for Financing the Nonfederal Share of Payments, as of
October 2006:
Alternative arrangement: Medicaid certified public expenditure (CPE);
Number of states: 10;
Description: Government provider, such as a county hospital, certifies
to a state the amount of expenditures for a Medicaid-covered service
provided to a Medicaid beneficiary. The state obtains federal Medicaid
matching funds based on the amount of the expenditure;
Example: Under one state proposal, 22 government hospitals would be
paid in advance for the full cost of providing services to indigent
individuals, including Medicaid beneficiaries. The hospitals would
certify the total amount of Medicaid expenditures to the state, and the
state would then seek federal reimbursement on the basis of the
certified amount.[A].
Alternative arrangement: Revised intergovernmental transfer (IGT);
Number of states: 8;
Description: Continued use of IGTs with revisions agreed to by CMS.
Specifically, CMS is requiring that (1) IGTs from providers to a state
occur before supplemental payments are made and (2) the amount of an
IGT not exceed the nonfederal share of the Medicaid costs. This
approach provides some assurance that government providers are
contributing only toward the nonfederal share of a state's Medicaid
costs, as prescribed by federal statute;
Example: During state fiscal year 2006, one state will continue using
IGTs for inpatient hospital services. Transfers will be limited to the
nonfederal share of the Medicaid supplemental payment. The state will
obtain assurances from entities making IGTs that all payments will
remain with the hospitals.
Alternative arrangement: Provider tax;
Number of states: 4;
Description: A tax, fee, assessment, or other mandatory payment,
imposed on health care services or providers. States may use resulting
revenue to pay their nonfederal share of Medicaid costs under
statutorily specified circumstances.[B];
Example: One state legislature passed an act authorizing the state to
implement a provider tax on public, non-state-government hospitals to
fund the nonfederal share of Medicaid payments for inpatient and
outpatient services, effective July 2007.
Alternative arrangement: State appropriation;
Number of states: 3;
Description: State revenue set aside to pay for the nonfederal share of
Medicaid spending;
Example: One state partially replaced the portion of the nonfederal
share previously funded by an IGT with state appropriations.
Source: CMS and states.
Notes: Data from GAO analysis of CMS and state documents, state
responses to GAO questionnaire, and information reported by state
officials. Numbers do not sum to 19--the number of states reporting
that they were planning or implementing alternative arrangements for
financing the nonfederal share--because some states were using a
combination of alternatives.
[A] This state received CMS approval to use CPEs to finance the
nonfederal share of supplemental inpatient and DSH payments and to
restructure Medicaid payments for all inpatient hospital services under
a waiver of Medicaid requirements granted under section 1115 of the
Social Security Act, 42 U.S.C. § 1315 (2000).
[B] 42 U.S.C. § 1396b(w)(6) (2000). States may receive federal matching
funds for provider taxes only if such taxes are broad-based (i.e.,
imposed on all items or services in the class of services or providers
thereof); uniformly imposed (i.e., all items or services in the class
or providers thereof pay the same rate of tax); and do not result in
any taxpayers being held harmless (i.e., receiving state funds to
reduce the net payment to the state to below the amount of the tax). 42
U.S.C. § 1396b(w)(3) (2000). When the tax rate is higher than 6
percent, CMS will consider the hold-harmless requirement violated if 75
percent or more of the taxpayers receive 75 percent or more of the
taxes paid back from the state in enhanced Medicaid or other state
payments. 42 C.F.R. § 433.68(f)(3) (2006).
[End of table]
States had differing views about the potential fiscal effects of
adopting alternative arrangements for financing the nonfederal share of
supplemental payments. Half of the states using CPEs (5 of 10) expected
CPEs to result in federal reimbursement comparable to what they had
received under their ended financing arrangements. For example,
officials from one state explained that under its previous arrangement,
DSH payments had been limited to costs, and under the state's CPE
arrangement (approved by CMS in December 2005), the state would
continue obtaining the same amount of federal reimbursement. In
contrast, officials from the remaining 5 states using CPEs expressed
concern that CPEs could yield less in federal funds than the
arrangements they replaced, in part because CPEs must be based on the
documented facility-specific costs of providing Medicaid services to
Medicaid beneficiaries. An official from 1 of the 5 states explained
that, under a prior financing arrangement, the state sought federal
reimbursement on amounts up to the UPL, regardless of the facilities'
actual costs for providing services. In using CPEs, however, the state
will seek federal reimbursement for the lower of either a facility's
UPL or its actual Medicaid expenditures, and some facilities'
expenditures were less than the UPL.
The fiscal effects of states' replacing their ended financing
arrangements with alternative arrangements, such as CPEs, were
uncertain as of October 2006 because several states had not fully
implemented the alternatives and others faced further CMS review before
receiving federal matching funds. Specifically, 1 of the 19 states was
still planning its approaches; 6 states reported having implemented
alternative arrangements but had not begun seeking federal
reimbursements; and the remaining states (12 of 19 states) had made
payments under their alternative arrangements and had begun seeking
federal reimbursements. Those 12 states, however, faced further CMS
review before receiving reimbursements. CMS officials informed us that
CMS had efforts under way to monitor states' use of alternative
arrangements as the states resumed seeking federal reimbursement. CMS's
efforts may affect the amount of federal reimbursements the states
receive. For example, CMS deferred paying close to $2 million in
federal matching funds to a state that resumed seeking reimbursement
for supplemental hospital payments under a revised IGT arrangement. As
of October 2006, the state and CMS were still working to resolve CMS's
concerns with the state's alternative arrangement. CMS also plans to
review other types of alternative arrangements. For example, in its
approvals granted from December 2005 through April 2006 of 3 states'
plans to use CPEs, CMS informed the states that it planned to conduct
financial reviews to ensure that the states' reported expenditures were
accurate and that all supplemental payments to certifying facilities
had appropriate nonfederal funding.[Footnote 17]
CMS's Initiative Departs from Past Approach and Is Consistent with
Medicaid Payment Principles:
CMS's initiative is a departure from the agency's past oversight
approach and is consistent with Medicaid payment principles. In the
past, CMS's approach to inappropriate state financing arrangements did
not involve any assessment of whether individual providers were
retaining the supplemental payments they received from states. As a
result, before the initiative, CMS authorized some states to make
supplemental payments even when the agency was aware that providers
were not retaining the full payment amount. States that ended financing
arrangements view CMS's initiative as a change in policy. One state,
Minnesota, challenged CMS's disapproval of its state plan amendment in
July 2004. Minnesota argued, in part, that CMS had departed from its
past interpretation of Medicaid requirements and should have gone
through the process of proposing and receiving comments on a regulation
(known as "notice-and-comment rule making") before disapproving the
amendment.[Footnote 18] In July 2006, this argument was rejected, and
the disapproval was upheld by the CMS Administrator.[Footnote 19] The
state filed an appeal in federal court in September 2006, and as of
February 2007, this appeal was pending. In another case, unrelated to
CMS's initiative, in which a state challenged CMS's disapproval of a
state plan amendment involving an inappropriate financing arrangement,
a 2005 federal court ruling upheld CMS's determination that the state's
financing arrangement, in which the providers did not retain Medicaid
payments, was inconsistent with Medicaid payment principles.[Footnote
20]
CMS's Initiative Departs from Past Oversight Approach:
CMS's requirement that states end financing arrangements in which
providers do not retain the full payment represents a departure from
the agency's past oversight approach to ensuring that states adhere to
Medicaid payment principles. Before 2003, CMS's most recent approach
for addressing inappropriate state financing arrangements curtailed
such arrangements by restricting states' ability to combine, or
"aggregate," the amount of payments they could make under the UPL to
different types of providers. CMS placed this restriction by revising
Medicaid's UPL regulation in 2001.[Footnote 21] The revision took place
after some states were found taking advantage of the UPL by making
supplemental payments to government facilities at rates much higher
than established Medicaid rates and then requiring the facilities to
return most or all of the supplemental payments to the state.[Footnote
22] CMS determined that these financing arrangements were not
consistent with Medicaid's principle of efficiency and economy and
restricted states' ability to aggregate payments across different types
of providers. The revised regulation did not address the use of IGTs--
the transfer of funds between states and local-government providers--or
whether providers were retaining the Medicaid payments made under the
new limits. At the time it issued the regulation, CMS determined that
the best option for reducing excessive federal reimbursements was to
revise the UPL regulation to limit the extent to which aggregated
supplemental payments could be made. CMS recognized the possibility
that excessive federal funds could still be obtained under the new
regulation. In the preamble to its 2001 regulation, CMS reported that
it was concerned about how some states used fund transfers between
states and local governments and noted that, if problems continued in
the future, further actions could be needed to ensure that federal
funds were used to match bona fide expenditures.
In the months after CMS issued its 2001 regulation and before its
initiative, CMS approved some states' financing arrangements that
entailed the transfer of Medicaid supplemental payments from government
providers back to the state. CMS's efforts after issuing the 2001 UPL
regulation focused on ensuring that states were not seeking excessive
federal reimbursements based on aggregated local-government and private-
facility UPLs, as states had done before the regulation. Otherwise, CMS
did not curtail financing arrangements, even when they involved
providers' not retaining all of the payments made to them.[Footnote 23]
After the 2001 UPL regulation went into effect and before the
initiative began, CMS approved states' Medicaid plan amendments
establishing supplemental payments to government providers even when
the agency was aware that providers were not retaining the supplemental
payments. Subsequently, however, CMS determined that these approved
arrangements were inappropriate because the providers were not
retaining the payments. For example:
* On March 13, 2002, CMS approved one state's proposal to establish a
supplemental payment for inpatient hospital services provided by local-
government hospitals. During CMS's review of this proposal, the state
informed CMS via letter that it was likely that the majority of the
payments would be returned by the providers to the state. In state
fiscal year 2002, the state's estimated supplemental payments to local-
government providers totaled about $22 million. On October 23, 2003,
however, after submitting a state plan amendment to adjust its standard
Medicaid payment rates for hospitals, the state received CMS's standard
funding questions under the initiative. CMS's subsequent review
resulted in the state's ending the previously approved supplemental
payment involving local-government hospitals.
* On May 19, 2003, CMS approved another state's supplemental payment
for inpatient hospital services provided in government hospitals.
During the agency's review of the state plan amendment for these
payments, the state informed CMS in writing that this proposal would
use state plan language similar to the state's supplemental county
nursing home payment. CMS had approved this nursing home payment in
2001, even though the agency had been informed when the payment was
proposed that the underlying financing arrangement involved bank loans
and wire transfers among counties. Less than 2 months before the state
submitted its state plan amendment for the supplemental payment to
government hospitals, CMS was informed that the county nursing homes
would retain little of the supplemental payments made to them.[Footnote
24] Nevertheless, CMS approved the similar request involving
supplemental payments for inpatient hospital services in local-
government hospitals. On August 21, 2003, the state received CMS's
standard questions under the initiative after it had submitted a
nonsupplemental inpatient hospital state plan amendment to CMS for
review. CMS's subsequent review led to the state's ending its
supplemental payments to the local-government hospitals.
States Report That CMS Has Changed Certain of Its Policies on State
Financing Arrangements:
Twenty-four of the 29 states that ended financing arrangements and that
we contacted reported that under its initiative, CMS has changed its
policies on what is an appropriate state financing arrangement. Four
states reported that they had no basis to judge whether CMS has changed
its policy, 1 state responded that CMS's actions do not represent a
change in policy, and 1 state did not respond to this
question.[Footnote 25] Officials of 6 states expressed concerns that
before objecting to state plan provisions comparable to what it had
approved in the past, CMS should have used a rule-making process to
enable states to comment on any proposed changes.[Footnote 26]
According to CMS, however, the agency did not adopt a new policy but is
scrutinizing states' payments and their underlying financing
arrangements more closely to ensure that they comport with existing
laws and regulations and that federal reimbursement is justified.
One state, Minnesota, challenged CMS's disapproval under the initiative
of a state plan amendment[Footnote 27] by formally requesting that the
CMS Administrator reconsider the disapproval.[Footnote 28] In its July
2004 reconsideration request, the state argued, among other points,
that the disapproval of its state plan amendment to increase
supplemental payments to county-operated nursing homes was based on a
new policy that constituted a major departure from past CMS
policy.[Footnote 29] The state noted that CMS reviewed and approved the
county nursing home payment on two previous occasions without asking
any questions about whether the nursing homes retained the funds they
were paid.[Footnote 30] According to the state, CMS changed its policy
without going through notice-and-comment rule making, and thus the
agency's post-August 2003 policy could not be used to disapprove the
state's plan amendment. The Administrator upheld CMS's disapproval on
July 12, 2006, finding the state's argument that CMS was required to
use notice-and-comment rule making unsupported. The Administrator's
decision stated that CMS is required to administer the Medicaid program
in a manner consistent with statute, and applying the law correctly
does not require notice-and-comment rule making. In September 2006, the
state appealed the decision to a federal circuit court; the appeal was
pending as of February 2007.
A Federal Court Found a Similar Action to Be Within CMS's Authority and
Consistent with Medicaid Payment Principles:
A 2005 court case found that CMS acted appropriately in disapproving
one state's proposed plan amendment in which providers would retain
only 10 percent of the payments they received. While this disapproval
did not result from CMS's initiative, the basis for CMS's actions in
the case shared key characteristics with CMS's basis for ending states'
financing arrangements under its initiative.[Footnote 31] In a
September 12, 2005, ruling, the United States Court of Appeals for the
Ninth Circuit upheld CMS's disapproval of a state plan amendment that
was estimated to increase federal reimbursements by $50 million a year
even though providers would retain only $5 million of the payments that
had been made to them.[Footnote 32] CMS disapproved the state's
proposal, finding that it would result in payments that were not
consistent with Medicaid's principle of efficiency, economy, and
quality of care because the providers would return the bulk of the
payment to the state. The court found that CMS had an obligation to
ensure that the Medicaid statute was satisfied before approving a state
plan amendment and that CMS correctly applied the Medicaid statute in
disapproving the plan amendment. Specifically, the court upheld CMS's
determination that the state's proposed payment was not consistent with
the principle that provider payments be efficient and economical.
CMS's Initiative Lacks Transparency, Raising Concerns about Consistent
Review of State Financing Arrangements:
As implemented, CMS's oversight initiative has lacked transparency and
raised concerns about consistency in CMS's reviews of states that ended
financing arrangements. The initiative has not been transparent in that
CMS did not issue written guidance about its specific approval
standards related to allowable financing methods under the initiative-
-that is, the conditions upon which the agency would or would not
approve a state's financing arrangement. CMS published a proposed
regulation in the Federal Register on January 18, 2007, that could,
when finalized, provide guidance clarifying allowable arrangements for
financing the nonfederal share of Medicaid payments. In addition, CMS
has not always clearly communicated in writing its review
determinations to individual states that ended financing arrangements
or provided to all states a record of its determinations under the
initiative. Although CMS officials said that their reviews have been
consistent because the same funding questions have been asked
consistently of all states, the lack of transparency has prompted
states to raise questions about the consistency of CMS's reviews and
precluded us from determining whether CMS treated states that ended
financing arrangements consistently.
CMS's Initiative Has Lacked Transparency:
CMS's initiative has lacked transparency in two ways. First, the agency
did not issue written guidance explaining the specific standards it
used for reviewing and approving states' financing arrangements.
Consequently, officials in several of the 29 states that ended
financing arrangements told us that it was unclear exactly what
financing arrangements CMS would and would not allow and why
arrangements approved in the past were no longer allowed. Second, CMS
did not always explain in writing to the states that ended financing
arrangements the specific bases for its determinations, nor did it make
available for the benefit of other states and interested parties any
record of its determinations that certain arrangements were
unallowable.
CMS Did Not Provide Guidance about Its Specific Approval Standards
under the Initiative:
CMS did not, before or under the initiative, provide guidance to the
states about its specific approval standards, something it had done for
some previous oversight actions. For example, before the agency took
actions in 2001 and 2002 to further limit states' UPL-related financing
arrangements, CMS issued a letter to state Medicaid directors. In each
case, the letters communicated the problems the agency had identified
with existing UPL regulations and associated financing arrangements,
the problems' effect on the Medicaid program and why action was needed,
and the type of action the agency proposed to take. In contrast, for
the 2003 oversight initiative, CMS did not issue a state Medicaid
directors letter or other written guidance that would explain the
nature of the agency's intent to address the problem or its specific
standards for allowable financing methods, such as allowable use of
IGTs. Rather, CMS began asking states submitting state plan amendments
for review to answer the five standard questions about how they
financed the nonfederal share of their payments.
The lack of CMS guidance to explain the specific standards used under
the initiative has resulted in confusion among states about allowable
financing arrangements. When states did receive guidance, it was more
likely to be oral than written. Only 8 of the 29 states (28 percent) we
contacted that had ended financing arrangements reported they had
received written guidance or clarification from CMS, before or during
the review process, regarding appropriate and inappropriate financing
arrangements. States 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. Officials in several states that ended
financing arrangements told us that CMS did not provide the guidance
they needed about such topics, including appropriate and inappropriate
use of IGTs and CPEs. For example, officials from one state commented
that they did not understand why CMS would no longer approve the
financing arrangement involving transfer payments with local-
government providers that the state had used for more than a decade.
Officials from another state remarked that the distinction between IGTs
and CPEs, and the reasons CMS appeared to approve of CPEs over IGTs,
were not always clear. According to CMS officials, the agency has
provided guidance on CPEs by working with states individually as the
states have developed their proposed financing arrangements.
During our review, a senior CMS official informed us that the agency
was considering providing guidance to all states on proper methods for
financing the nonfederal share of Medicaid payments, including
clarification on issues such as IGTs and CPEs. On January 18, 2007,
after it received a draft of this report for review and comment, CMS
published a notice of proposed rule making to expressly limit Medicaid
payments to government providers to the providers' actual Medicaid
costs.[Footnote 33] The proposed regulation also includes additional
guidance related to state financing arrangements and, when finalized,
could provide states with needed clarifications.
CMS Did Not Always Document Its Determinations or Make Them Available
to States:
CMS did not communicate with states in clear, specific terms in writing
that the states' financing arrangements were inconsistent with Medicaid
payment principles or why they were inconsistent and should be ended.
We reviewed case files obtained from CMS to assess how the agency
communicated its determinations to the 29 states that ended 55
arrangements under the initiative. In more than half the cases (30 of
55 arrangements, or 52 percent), we found no documentation that CMS
communicated to the states in writing the reasons that a state's
arrangement was inconsistent, and in another 10 cases (17 percent), we
found only general explanations of CMS's concerns with the financing
arrangement in question.[Footnote 34]
In only one-fourth of the cases did CMS communicate in writing to a
state the specific basis for its concerns with that state's financing
arrangement. Specifically, for 14 of the 55 arrangements (25 percent)
the states ended, CMS informed the state in writing that its
arrangement was inconsistent with particular Medicaid payment
principles and explained why it was inconsistent. The following example
illustrates one of the cases where CMS communicated its determinations
in writing to the state, including the basis for its determination:
* First, CMS clearly identified in writing the statutory provisions
with which it found the state's financing arrangement to be
inconsistent: "the State is claiming Federal matching funds for
payments to non-state public hospitals for which a significant portion
of the payments are returned to the State. CMS considers this funding
arrangement to be inconsistent with Sections 1902(a)(2), 1902(a)(30),
and 1903(a) of the Social Security Act."
* Second, CMS discussed each statutory provision cited above to explain
why the state's financing arrangement was not consistent with a given
principle. For example, CMS wrote about section 1902(a)(30)(A): "The
supplemental payments are not consistent with the requirement under
section 1902(a)(30)(A) of the Act that payment rates must be consistent
with 'efficiency, economy and quality of care.' In light of the State's
admission that the facilities are refunding a significant portion of
the supplemental payments, the proposed payment rate is not consistent
with either efficiency or economy. The refund requirement indicates
that the State itself has determined that the full payment amount is
not required by the facilities to ensure Medicaid beneficiaries' access
to services. Moreover, the proposed payment rate is not consistent with
either economy or quality of care because it exceeds the funding
actually made available to support the provision of services to
Medicaid beneficiaries."
In most cases, CMS did not provide states with similar written
explanations of the basis for its determinations. For 30 of the 55
financing arrangements that we reviewed and that CMS determined were
unallowable under the initiative, we found no evidence that CMS
communicated in writing to the states, even in general terms, that the
states' arrangements were inconsistent with Medicaid payment principles
or why. For 10 arrangements, either CMS provided a general written
explanation that the state's arrangement was inconsistent with a
payment principle and why, or CMS's written communications were
incomplete or difficult to interpret. For example, CMS wrote in a
letter to one state that its financing arrangement for nursing home
payments appeared to be inconsistent with portions of the Social
Security Act, but the agency did not further explain why.
CMS has not made its determinations about any particular state's
financing arrangement known or available to other states, as has been
done in other contexts. The Department of Health and Human Services'
Food and Drug Administration, for example, maintains on its Web site
various directories of guidance documents it has issued, including an
annual comprehensive list with links to the documents themselves, and a
searchable docket management system that provides access to the
agency's official repository for administrative proceedings and other
materials. In another example, the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003[Footnote 35] requires the
Department of Health and Human Services to make publicly available the
factors it considers in making national Medicare coverage
determinations--that is, whether an item or service is reasonable and
necessary and thus eligible for Medicare coverage. These determinations
are posted on CMS's Web site, where they are available for public
comment. CMS has noted that such coverage guidance documents represent
the agency's current thinking on a particular topic but do not create
or confer any rights for any individual and do not bind CMS or the
public. In contrast, under CMS's initiative--involving substantial
state and federal Medicaid dollars--CMS does not have any similar
procedure in place for publicizing its case-by-case determinations on
financing arrangements.
Lack of Transparency Has Raised Concerns among States about Consistent
Review of State Financing Arrangements:
The lack of information to states on the basis for CMS's determinations
under the initiative has raised concerns among the states we contacted
about whether CMS has treated them consistently; from CMS's point of
view, however, the agency has taken several steps to ensure consistent
application of the review process. The lack of written guidance appears
to have resulted in differences in states' understanding of what CMS
would approve. For example, several states understood that they were
required to end the use of IGTs, while other states understood that
they would be able to continue using IGTs with revisions that met with
CMS approval. Determining whether such differences of understanding
resulted from inconsistent treatment by CMS is difficult without a
complete and clear written record of CMS's discussions with states
about appropriate and inappropriate financing arrangements. Some of the
states that responded to our questionnaire, or that we interviewed,
expressed concerns about perceived differences in how CMS had reviewed
state financing arrangements and allowed states to deal with
arrangements that the agency found to be inconsistent with Medicaid
payment principles. Officials of one state observed, "Because the
decisions and reasoning are not written and issued to all states, we
have no way of ensuring that CMS decisions are made consistently across
all states."
Six of the 29 states that ended financing arrangements and responded to
our questionnaire expressed the opinion that CMS's case-by-case review
process was not implemented consistently across states; another 17
states responded that they had no basis for judging whether CMS treated
states consistently; and only 3 states responded that CMS had been
consistent.[Footnote 36] Officials of one state added that while CMS
had attempted to apply a consistent review technique by asking the same
standard funding questions about each plan amendment that each state
submitted, the results of the reviews seemed to vary across states:
some states were required to return funds, while others were required
to end their financing arrangements. The Medicaid director of another
state remarked that asking the standard funding questions every time a
state submits a plan amendment was a waste of time and duplicative,
and, moreover, the CMS review process had not been applied consistently
because states had been able to negotiate different deals with CMS to
replace their IGTs with other financing arrangements.
A September 2006 report prepared for the Department of Health and Human
Services' Office of Inspector General, which reviewed CMS's financial
management oversight of the Medicaid program, raised concerns about the
need for transparency and clear guidelines in CMS's process for
reviewing and approving state plan amendments. The report recommended,
among other things, that CMS "to the extent possible, provide
visibility into the program administration activities, including
judgments regarding individual state operations, which can help ensure
that decisions are made transparently and consistently across
jurisdictions recognizing the unique nature of each local Medicaid
program. Because routine judgments or interpretations may have long-
term funding consequences, a process to assess which decisions merit
further visibility should be developed and implemented."[Footnote 37]
CMS officials told us that the agency had several controls in place to
ensure that its review of state financing arrangements was implemented
consistently. Officials told us that they followed CMS's established
state plan amendment review procedures and asked the same standard
funding questions about each plan amendment submitted by each state. In
addition, in early 2005, after the initiative was under way, CMS
created a unit to centralize responsibility for reviewing and approving
state plan amendments related to reimbursement. This central office
unit, the Division of Reimbursement and State Financing, also directs
about 90 funding specialists hired from late 2004 through April 2006 to
help CMS (1) gain a better understanding of how states budget for and
finance their portion of Medicaid expenditures and (2) actively
identify state financing arrangements that could result in
inappropriate claims for federal reimbursement or increased federal
costs. A major activity of the funding specialists during their first
year was to complete state Medicaid program profiles, which describe
the sources of each state's nonfederal share of Medicaid funds, state
payment methodologies, and financing-related concerns that may need to
be addressed. CMS officials told us that routine review of states'
quarterly Medicaid expenditure reports and focused financial management
reviews help ensure that high-risk financing arrangements that have not
been reviewed under the initiative's state plan amendment process also
receive scrutiny.
Conclusions:
We have long been concerned about states' financing arrangements that
inappropriately boost the federal share of Medicaid program costs
without providing corresponding state dollars, thus undermining the
fiscal integrity of the federal-state partnership. CMS's initiative is
a direct attempt to address these long-standing problems and to better
ensure that states' financing arrangements are consistent with Medicaid
payment principles.
The basis for CMS's determinations under this high-profile initiative,
however--with substantial state and federal dollars at stake--has not
been transparent to states. CMS did not provide written guidance to
states; did not always explain to each state in writing the basis for
its determinations; and did not make its determinations available to
other states and interested parties as a means of communicating its
standards for allowable arrangements, as it has done for other
programs. A case-by-case review of financing arrangements used in
states' Medicaid programs is not only appropriate but warranted in a
program as complex and diverse across states as Medicaid. Nevertheless,
determinations that can affect a state's Medicaid budget by tens of
millions, or even billions, of dollars over a number of years demand a
clear basis and an open process. The lack of transparency under CMS's
initiative has contributed to concerns about whether states have been
treated consistently; such concerns are likely to continue unless CMS
alters its oversight approach. Further, many states have been seeking
to resume supplemental payments to government providers by seeking to
make changes that respond to CMS's objections, yet they have had little
written guidance from CMS on what changes are needed or few
explanations for determinations that CMS has made. In this federal-
state Medicaid partnership, it is appropriate that the federal
government review and act upon concerns affecting the program's fiscal
integrity--and equally appropriate for states to expect and receive a
clear explanation of what federal policy allows.
Recommendations for Executive Action:
To enhance the transparency of CMS oversight and clarify and
communicate the types of allowable state financing arrangements, we
recommend that the Administrator of CMS take the following two actions:
1. Issue guidance to clarify allowable financing arrangements,
consistent with Medicaid payment principles.
2. Provide each state CMS reviews under its initiative with specific
and written explanations regarding agency determinations on the
allowability of various arrangements for financing the nonfederal share
of Medicaid payments and make these determinations available to all
states and interested parties.
Agency Comments and Our Evaluation:
We provided a draft of this report to CMS for comment on January 3,
2007, and received a written response from the agency (reproduced in
app. III). In commenting on the report, CMS indicated that ongoing
actions would respond to our first recommendation that the agency issue
guidance to states. CMS disagreed with our second recommendation to
provide states with explanations regarding the agency's determinations.
CMS reported that the regulation proposed on January 18, 2007, would
respond to our first recommendation, that the agency issue guidance to
clarify allowable state financing arrangements. CMS said that when
finalized, the regulation will provide states with guidance to clarify
appropriate sources of nonfederal Medicaid funds, including the use of
IGTs and CPEs, and reaffirm agency policy that health providers must
retain in full the Medicaid payments they receive. We agree that the
regulation, when finalized, could help clarify for states the
allowability of certain financing arrangements and respond to our
recommendation. We updated our report to recognize publication of the
proposed regulation after CMS received a draft of our report for review
and comment. Nevertheless, because the regulation has been proposed but
not finalized, we have maintained our recommendation in the report.
CMS did not agree with our second recommendation to enhance the
transparency of its oversight initiative by providing states with
specific, written explanations of agency determinations on the
allowability of financing arrangements and by making these
determinations available to all states and interested parties. CMS
disagreed with the conclusion that the agency had not implemented its
initiative transparently, stating that the agency communicated its
concerns to each involved state and that its process was as transparent
as possible given variation among states' financing arrangements. CMS
cited several specific reservations about the report's findings
regarding the lack of transparency and concerns of inconsistency and
about this associated recommendation.
* CMS commented that the report confused the regulatory state plan
review process with a lack of transparency in its reviews and
determinations. CMS stated it followed the appropriate parameters of
the review process and held conference calls to understand states'
financing arrangements and discuss remaining issues. CMS also stated
that it is not standard practice to document each communication during
these processes. CMS questioned the benefit of documenting all
discussions between CMS and states and of making them publicly
available, particularly for states that have already ended
arrangements.
* CMS commented that the reported concerns about the consistency of
CMS's review are misleading and generally unfair. Highlighting the
report draft's finding that CMS's initiative was consistent with
Medicaid payment principles, CMS assumed that this conclusion meant
that states were treated in the same manner.
* CMS commented that the statistics in the report based on states'
"opinions" have little merit without supporting evidence. CMS also said
that GAO overlooked a "strong indication" that most states do not
believe they were treated unfairly or inequitably, since only one state
has appealed a determination made under the initiative.
We do not agree with CMS's view that the report confuses the state plan
review process with a lack of transparency or that the report suggests
that CMS should maintain and make publicly available detailed records
of all its discussions and communications with state officials. The
report clearly relates concerns about transparency to the lack of
information to states about the specific bases for CMS's determinations
that particular arrangements were unallowable. We provide specific
examples in which CMS clearly communicated this information to some but
not all states and also report that such clear written communication
occurred in only one-fourth of the cases. We did not intend to suggest,
as CMS understood, that CMS communicate the basis for its
determinations retroactively, and we have clarified this point in our
report's recommendation.
We also do not agree with CMS's view that our conclusion that the
agency's initiative was consistent with Medicaid payment principles
suggests that all states were treated consistently. This finding was
related to the broader initiative and based on what CMS officials
reported as the overall basis for their determinations. As we stated in
the draft report, however, we were unable to determine to what extent
the initiative was implemented consistently for individual states
because, in most cases, a written record of the basis for CMS's
determinations did not exist.
With regard to CMS's concerns about the reporting of states' opinions
without supporting evidence, we point to the evidence provided in the
draft report of CMS's changed approach. For example, the draft report
cited instances in which CMS had, before its initiative, reviewed and
approved states' plan amendments even though the amendments clearly
showed that the financing methods involved were the same as those CMS
later questioned under its initiative. Finally, with regard to CMS's
view that states believe they were treated fairly because only one
state appealed its determination, we note that states could choose not
to appeal a determination for many reasons, including the time and
costs involved in doing so, and point to the states' many reported
concerns about the initiative's transparency. We found that states'
reported concerns were remarkably consistent, and we maintain that our
reporting on matters such as states' receipt of explanations and
guidance from CMS is valid.
As arranged with your offices, unless you publicly announce the
contents of this report earlier, we plan no further distribution of
this report until 30 days after its issue date. At that time, we will
send copies of the report to the Secretary of Health and Human
Services, the Administrator of the Centers for Medicare & Medicaid
Services, and other interested parties. 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 members have any questions, please contact me at
(202) 512-7118. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
report. GAO staff who made major contributions to this report are
listed in appendix IV.
Signed by:
Kathryn G. Allen:
Director, Health Care:
[End of section]
Appendix I: Methodology for Determining the Number of States Ending
Financing Arrangements:
Our process for determining the number of states that ended Medicaid
financing arrangements, and for determining the number of arrangements
each of the states ended as a result of the Centers for Medicare &
Medicaid Services' (CMS) oversight initiative, involved three phases.
First, we obtained from CMS its list of the states that had ended
financing arrangements; second, we contacted all 50 states and the
District of Columbia to verify CMS's data; and, finally, we took
several steps to resolve discrepancies, identified in our review,
between CMS data and information provided by states. We limited the
scope of our review to those states we determined to have ended a
financing arrangement during the period August 2003 through August
2006.
We obtained from CMS a one-page summary spreadsheet that identified the
states that as of July 2005 had ended financing arrangements and the
particular arrangements ended. For example, the spreadsheet indicated
that several states ended arrangements for both nursing home and
hospital payments. As noted by a CMS official, the summary spreadsheet
was an internal document used for tracking the results of the
initiative and was updated periodically. During our review, we obtained
periodic updates of this list from CMS. From July 2005 through August
2006, CMS added two states to its list of those that had ended a
financing arrangement, and we included those states in the scope of our
review.
To assess the accuracy of the summary list provided by CMS, we sent a
standard questionnaire via e-mail to those states that CMS identified
as having ended a financing arrangement and, as part of the
questionnaire, asked the states to confirm the data provided by
CMS.[Footnote 38] Specifically, we asked whether the state had ended
the particular arrangement or arrangements reported by CMS and whether
the state had ended any other arrangements not identified in CMS's
list. In addition, we interviewed officials from two groups of states:
five states that CMS suspected were using one or more inappropriate
financing arrangements that had not been ended and three states that,
according to CMS, had not submitted a proposal to amend their state
Medicaid plans and thus had not undergone a CMS review.[Footnote 39]
In analyzing the data provided by CMS, states' responses to our
questionnaire, and interviews with state officials, we found one
discrepancy that could potentially have affected our findings.
Specifically, in our interviews with states, officials from one state
reported that their state had ended an arrangement, although CMS's list
indicated that it had not. According to data provided by CMS, the state
has not claimed federal reimbursement for the arrangement in the last 4
years. A CMS official told us, however, that the agency did not
consider the state's arrangement ended because the state had not
revised its state plan. For the purposes of our review, we concluded
that the state had ended the arrangement and included the state in our
count.
Because of the differences we found between CMS's original data
provided to us and what we learned from some of the states, we
contacted all states, including those that received our questionnaire
or participated in interviews, to further test the reliability of the
information in CMS's summary list. In spring 2006, we sent a short set
of questions by e-mail to all 50 states and the District of Columbia,
asking them to confirm whether CMS had reviewed certain financing
arrangements and to indicate the outcomes of any reviews conducted. The
states' responses did not identify additional financing arrangements
ended by states. We determined that the information provided by CMS
about the states--coupled with information provided by the states
through our questionnaire, confirmation e-mail, and interviews--was
sufficiently reliable for the purposes of our review.
[End of section]
Appendix II: Methodology for Analyzing CMS Case Files:
To evaluate how CMS implemented its initiative and, in particular, the
extent to which the initiative was implemented in a transparent manner,
we examined copies of CMS case files, provided by the agency, for each
review under the initiative that resulted in a state's ending a
financing arrangement. The files included CMS and state documents, such
as official letters between CMS and states and records of e-mail
correspondence, relevant to CMS's review of the ended arrangements. We
carried out a structured content analysis of each case file to identify
how and to what extent CMS communicated in writing to the state the
basis for its determination that a state's financing arrangement was
not appropriate.
The objectives of our content analysis of CMS's files for each state
were to determine the extent to which CMS communicated in writing to
the state (1) that it found the state's financing arrangement
inconsistent with statutory or regulatory Medicaid payment principles
and (2) the reasons for CMS's determination. For each of these two
objectives, we assessed whether CMS's written communications to the
states, contained in the case files, could be classified as specific or
general.
* In regard to finding that a state's financing arrangement was
inconsistent with Medicaid payment principles, we classified CMS's
communication as specific if the agency wrote to state officials in a
letter or e-mail to inform them that the state's financing arrangement
was inconsistent with Medicaid payment principles, and the agency
specified the particular Medicaid statute, regulation, or policy with
which it was not consistent. If, on the other hand, CMS informed the
state in writing that its arrangement was inconsistent with Medicaid
payment principles but did not specify which principle or principles,
we classified the communication as general.
* In regard to explaining the reason for its determination, we
classified CMS's communication as specific if the agency communicated
in writing to the state the reasons the state's financing arrangement
was or appeared to be inconsistent with Medicaid payment principles. If
a CMS file contained documents that (1) described CMS's concern about a
state financing arrangement but did not clearly indicate that the
arrangement was inconsistent with Medicaid payment principles or (2)
identified or alluded to concerns with a state's financing arrangement
but did not link the concerns with any agency determination, we
classified CMS's communication as general.
If we found no evidence that CMS communicated in writing its
determination or the reasons for its determination, we classified such
cases as ones in which CMS did not communicate to the state in writing
in either general or specific terms.
Our content analysis approach was validated by GAO's research methods
staff, and a random sample of our assessments was reviewed by GAO's
general counsel staff.
[End of section]
Appendix III: Comments from the Centers for Medicare & Medicaid
Services:
Department Of Health & Human Services:
Centers for Medicare & Medicaid Services:
Administrator:
Washington, DC 20201:
To: Kathryn G. Allen:
Director, Health Care:
Government Accountability:
From: Leslie V. Norwalk, Esq.
Acting Administrator:
Subject: Government Accountability Office's (GAO) Draft Report:
Medicaid Financing: Federal Oversight Initiative is consistent with
Medicaid Payment Principles but Needs Greater Transparency (GAO-07-
214).
We appreciate the opportunity to respond to the above referenced draft
report dated January 3, 2007. The draft report is in response to your
review of the Centers for Medicare & Medicaid Services' (CMS) oversight
of Medicaid State financing. As noted in your report, since August
2003, CMS has been ensuring that States finance their share of the
Medicaid program with permissible funding sources and that health care
providers are allowed to retain the payments made to them for providing
services to Medicaid individuals. We are pleased that GAO has found
that our exercise of our oversight responsibilities is consistent with
Medicaid payment principles. As GAO notes, GAO has urged action since
at least 1994 to end financing arrangements it has labeled "illusory."
Our actions are consistent with long standing GAO recommendations.
We disagree with the conclusion that CMS did not implement its
initiative transparently. After determining that greater scrutiny of
State payment provisions was necessary, CMS informed each State that
submitted an institutional payment provision of its concerns through
standard questions designed to elicit relevant information. These
questions were submitted as part of requests for additional information
that are authorized by statute, and did not reflect any change in the
overall State plan review procedure. Furthermore, the overall standards
for approval of State payment provisions were also unchanged; these are
set by statute. The quality, extent and content of the information
received from States varied widely. Upon receiving information from
each State, CMS then had to determine the appropriate response to that
State's individual circumstances. In other words, CMS' process was as
transparent as possible given the variation among States.
We are also concerned that the report appears to place greater emphasis
on "transparency" and process rather than outcome. We are not certain
to whom the process of State plan amendment review should be more
transparent. The States themselves have sought to protect their
financing methodologies from scrutiny, have not been forthcoming with
information, and have kept these matters from the public eye. Many of
the discussions between States and the Federal Government have been
extremely delicate. We strongly doubt that a process that would have
opened States to greater public criticism would have yielded a more
positive result than what has been achieved.
The GAO has also overlooked a strong indication of the fairness of CMS
review activities. Only one State has appealed a determination made in
this CMS initiative, which is an indication that States generally do
not believe they were treated unfairly or inequitably in CMS State plan
review processes. We also note that the process includes State appeals
to Federal court. The GAO does not offer any recommendations that
suggest that we could have achieved more positive results than we have.
Under the subject review, which spanned an l 8-month period, GAO
examined the following: (1) the number and fiscal impacts of States
ending particular financing arrangements; (2) the extent to which CMS'
initiative represents a change in Agency approach of policy; and, (3)
the transparency and consistency of CMS' initiative.
The draft report concludes that:
* Twenty-nine States ended financing arrangements but the fiscal impact
is uncertain at the time the draft report was released;
* CMS' initiative departs from the Agency's past approach and is
consistent with Medicaid payment principles; and,
* CMS has not implemented its initiative transparently, contributing to
concerns about consistency of its reviews of State financing
arrangements.
We agree with the GAO finding that, at the time this draft report was
released, 29 States ended at least one financing arrangement under CMS'
oversight initiative.
We further agree that the fiscal impacts of these arrangements were
uncertain because States were seeking to continue obtaining Federal
matching funds under alternative financing arrangements. Specifically,
for the Medicaid State plan payments that were financed in a manner
inconsistent with the Federal Medicaid statute, CMS' oversight
initiative applied a nationally consistent end date for the financing
arrangements in question, which was the end of each affected State's
fiscal year (FY) 2005. Based on that nationally consistent application,
all affected States that sought to continue obtaining Federal funds
through alternative financing arrangements had not yet completed their
final claiming applicable to their State FY 2006. This is critically
important to note, in that the majority of the affected States sought
to utilize certified public expenditures as the alternative financing
arrangement, which requires cost identification, as well as interim and
final reconciliation of such costs.
We agree with the GAO finding that CMS' initiative added an additional
level of scrutiny to the review of Medicaid reimbursement State plan
amendments, within the statutory procedural framework. As highlighted
in the draft report, in August of 2003, CMS began asking States five
questions related to the State's share (non-Federal) of Medicaid
payment obligations under CMS' review of Medicaid reimbursement State
plan amendments. This additional layer to the review of Medicaid
reimbursement State plan amendments ensures that States finance their
share of the Medicaid program in a manner consistent with the Federal
Medicaid statute, including the confirmation that providers that serve
the Medicaid population are able to fully retain the Medicaid payments
made to them for such services.
We also agree with the GAO finding that CMS' initiative is consistent
with Medicaid payment principles. CMS' approach of requiring the
termination of payment arrangements whereby providers of Medicaid
services were not able to fully retain the Medicaid payments made to
them was based on the information provided to CMS by the affected
States in response to the five funding questions. In no instance did
CMS allow for the approval of a Medicaid State plan amendment whereby,
under the CMS oversight initiative, it was discovered that a State
utilized a financing arrangement that was inconsistent with the
Medicaid statute until such time that the affected State agreed to
terminate such financing arrangement by the end of its State FY 2005.
However, we are concerned that, as currently drafted, the report
confuses the Federal regulatory State plan review process by which CMS
reviewed Medicaid State financing with a lack of transparency to such
review and determination. The parameters of the State plan review
process are defined in Federal regulation and allow CMS one opportunity
to formally request additional information from States prior to
rendering a decision on the Medicaid State plan amendment proposal.
Under our oversight initiative, CMS included a standard set of five
questions related to Medicaid financing through formal request(s) for
additional information from the States. As highlighted in the draft
report, these five questions were an additional level of scrutiny. But
these questions were not inconsistent with CMS' oversight
responsibilities, and were made in accordance with the regulatory
review process.
Only when CMS received a State's response to the formal request for
additional information under the Federal regulatory State plan
amendment review process, did evidence exist in the affected States
that certain State financing arrangements appeared inconsistent with
the Medicaid statute. In some instances, the responses provided by the
State to the standard funding questions were incomplete.
In an effort to expedite the State plan review process, CMS often held
conference calls with States to understand the State's financing and to
discuss remaining issues. Independent of even the oversight initiative,
it is not a standard practice for CMS to document each communication
with a State during the State plan amendment review process.
Under this oversight initiative, CMS properly documented the results of
such communications through the revisions made by an affected State to
its Medicaid State plan and to the related financing in question. This
is further documented through the ultimate approval by CMS of such
State plan amendment, which included all relevant statutory sections
under which the Medicaid State plan review was conducted. The Medicaid
State plan process does not lend itself to CMS providing detailed
written explanation to States on approvals of State plan amendments nor
does Federal law or regulations require such detailed explanation.
Despite this process, in instances where States asked for written
guidance on certain financing arrangements, CMS obliged.
Moreover, GAO performed a massive review of all relevant Medicaid State
plan files provided by CMS, information of which clearly supports the
nationally consistent application of CMS policy regarding proper
Medicaid State financing. The information CMS provided to GAO
represents substantial evidence that all States were treated
consistently through approach/review process and policy application.
Consistent with the review of that evidence, the draft report
recognizes that the application of CMS policy was consistent with
Medicaid payment principles. Moreover, the draft report does not
indicate that CMS actually applied policy inconsistently; it only
concludes that because each State did not receive formal written
explanations as to why requiring providers to retain less than the
total Medicaid payment claimed was inconsistent with the statute,
concerns exist about consistent policy application.
We believe the conclusion or "potential" inconsistency reference is
misleading and generally unfair. Specifically, we believe the GAO
should reconsider the position of potential inconsistency for the
following reasons:
1. The GAO reviewed all relevant CMS State plan amendment files;
2. The GAO questioned the affected States;
3. The GAO reports that CMS application of CMS policy was consistent
with Medicaid payment principles.
Based on the review of all relevant information from both CMS and the
affected States and in consideration of the conclusion in this draft
report that CMS application of policy was consistent with Medicaid
payment principles, any question of inconsistent application in a
particular State or State plan amendment review becomes illogical. The
draft report highlights that 25 percent of the affected States received
clear written explanations of CMS' determination. For the remaining
States that did not receive written explanations, we would assume GAO's
conclusion that the application of CMS policy was consistent with
Medicaid payment principles means that these States were treated in the
same manner as the States that received detailed explanations.
Finally, while the GAO performed a thorough examination of the evidence
provided by CMS to support a nationally consistent application, the GAO
apparently only asked affected States for their "opinion" on the CMS
oversight initiative. The statistics provided in the report based on
State "opinion" have little merit absent supporting evidence. Moreover,
to suggest that States made changes to certain Medicaid financing
arrangements without a clear understanding as to why the financing in
question was not consistent with Federal law falls short. The GAO has
many clear indications that States were often not forthcoming about
financial arrangements initially and made changes when the facts were
established. States often requested meetings with CMS to discuss the
financing issues and questions. The majority of those States did not
request that CMS provide them with written detailed explanations
surrounding those financing arrangements. Moreover, CMS has spent
countless hours with affected Slates trying to assist in developing
alternative financing arrangements that meet the requirements of the
Medicaid statute.
GAO Recommendation:
Issue guidance to clarify allowable financing arrangements, consistent
with Medicaid payment principles.
CMS Response:
On January 18, 2007, CMS issued a notice of proposed rulemaking, which,
in part. would clarify the appropriate Medicaid State financing
sources, including the use of intergovernmental transfer and certified
public expenditures. The proposed regulation also would reaffirm the
retention of payment requirements, consistent with the CMS oversight
initiative. Once the final rule is issued, this recommendation will be
met.
GAO Recommendation:
Provide each state review under its initiative with .specific and
written explanations regarding agency determinations on the
allowability of various arrangements for financing the nonfederal share
of Medicaid payments. and make these determinations available to all
states and interested parties.
CMS Response:
We disagree. Under CMS' oversight initiative, all States were treated
in a consistent manner with respect to the review process and the
policy application. The GAO concludes in this report that the treatment
of States was consistent with Medicaid payment principles. The affected
States have subsequently moved to alternative methods of financing or
have terminated certain payment arrangement altogether. We have no
evidence to support going back to States now and providing detailed
articulation on arrangements that the States themselves may not desire
to be made public. Moreover, while the GAO's draft report identifies
numerous details about certain financing arrangements and certain
opinions in States regarding CMS' oversight initiative, the anonymity
of the specific State(s) in the draft report is remarkably noticeable.
In sum, the proposed regulation discussed in response to recommendation
number one appears to satisfy this recommendation on a national scale
for all States and interested parties.
We also believe that the results bear witness to the professional
manner in which difficult situations, that if subject to making all
information "available to all states and interested parties" could have
fractured Federal-State relationships and State-State relationships as
well, were resolved. We believe the process itself, which is criticized
by GAO for lack of transparency, in fact, contributed to successful
resolution.
Once again, we thank you for the opportunity to review this report.
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
Kathryn G. Allen, (202) 512-7118 or allenk@gao.gov.
Staff Acknowledgments:
In addition to the contact named above, Katherine Iritani, Assistant
Director; Susan Barnidge; Tim S. Bushfield; Ellen W. Chu; Helen
Desaulniers; Ellen M. Smith; and Craig Winslow made key contributions
to this report.
[End of section]
Related GAO Products:
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.
FOOTNOTES
[1] This figure represents estimated combined federal and state
Medicaid expenditures for provider services and administration in
fiscal year 2005, the last year for which data were available.
[2] 42 U.S.C § 1396a(a)(30)(A) (2000).
[3] 42 U.S.C § 1396d(b) (2000).
[4] A list of related GAO products appears at the end of this report.
[5] GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.:
January 2005).
[6] 42 U.S.C. §§ 1396 et seq. (2000).
[7] Throughout this report, 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."
[8] Under Medicaid law, states with lower per capita incomes receive
higher federal matching rates. 42 U.S.C § 1396d(b) (2000).
[9] 42 U.S.C § 1396a(a)(2) (2000).
[10] UPLs are based on the amounts that Medicare, the federal health
care program that covers seniors aged 65 and older and some disabled
persons, pays for comparable services. Because states' standard
Medicaid payment rates are often lower than Medicare rates for the same
services, some states calculated the difference between what they
actually paid providers using standard Medicaid rates and the UPL, and
then made a supplemental payment for the difference to a few government
providers.
[11] On the basis of information from CMS and our contacts with the
states, we determined that the three remaining states and the District
of Columbia had not ended a financing arrangement as a result of CMS's
initiative.
[12] DSH payments are separate Medicaid payments states make to
hospitals. 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. States have some
discretion in designating which hospitals, including hospitals owned or
operated by local governments, qualify for DSH payments. In response to
inappropriate state financing arrangements involving DSH payments in
the early 1990s, Congress passed provisions capping the amount of DSH
payments a hospital may receive and limiting the total amount of DSH
payments a state may make to all hospitals. 42 U.S.C. § 1396r-4(f)-(g)
(2000).
[13] Section 1115 of the Social Security Act allows the Secretary of
Health and Human Services, in connection with experimental, pilot, or
demonstration projects likely to promote program objectives, to waive
certain statutory Medicaid requirements and provide federal matching
funds for expenditures for which federal matching funds would not
otherwise be available. 42 U.S.C. § 1315 (2000).
[14] Four states that ended more than one financing arrangement chose
to discontinue supplemental payments related to one of the ended
arrangements. However, these states were also planning to use an
alternative financing arrangement to continue making payments related
to another of the ended arrangements. As a result, we counted the four
states in the total number of states discontinuing payments related to
an ended financing arrangement and in the total number of states
continuing payments under an alternative arrangement.
[15] The state that estimated a potential reduction of $69 million in
federal matching funds also reported that approximately $58 million
would be offset by new federal funding made available under a section
1115 demonstration project that included federal funding for health
care expenditures previously paid with state and local funds.
[16] Under a CPE arrangement, government providers certify their
Medicaid expenditures to the state, and the state then obtains federal
reimbursement on the basis of the certified expenditures. Medicaid law
allows states to finance the nonfederal share of payments with CPEs as
long as the funds are (1) derived from state or local tax revenue and
(2) certified by units of local or state government as eligible for
federal reimbursement. 42 U.S.C. § 1396b(w)(6) (2000). States are
responsible for ensuring that expenditures are eligible for federal
reimbursement by reviewing standard cost reports filed annually by each
government provider.
[17] In addition to these efforts, CMS identified CPEs as an issue for
focused financial reviews in the last 3 fiscal years, 2004 through
2006. See GAO, 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).
[18] Notice-and-comment rule making (also referred to as informal rule
making) is a process in which an agency publishes a proposed rule in
the Federal Register for public comment. After considering the comments
received, the agency issues a final rule.
[19] In re The Disapproval of the Minnesota State Plan Amendment 03-
006, No. 2004-04 at 15, note 36 (CMS Administrator, July 12, 2006).
[20] Alaska Dep't of Health & Soc. Servs. v. Ctr. for Medicare &
Medicaid Servs., 424 F.3d 931, 939-40 (9th Cir. 2005).
[21] Before the 2001 regulation, separate UPLs existed for different
classes of Medicaid services, such as inpatient hospital services,
outpatient hospital services, and nursing facility services. 42 C.F.R.
§ 447.272 (2000). Within the different provider types--state-
government-operated facilities, local-government-operated facilities,
and private facilities--only state-operated facilities had separate
UPLs for each class of service, with the exception of outpatient
hospital services, which did not have a separate UPL for state-
government facilities. As a result, within each service class, some
states sought federal reimbursement for large supplemental payments by
combining--or aggregating--the payment amount allowed under their UPLs
for the entire group of local-government and private facilities, even
if the actual payment was made to only a handful of selected government
facilities. In December 2000, Congress directed the Health Care
Financing Administration (HCFA, the former name for CMS) to issue a
final regulation to revise the UPL regulation and limit states' ability
to obtain excessive federal reimbursements. Medicare, Medicaid, and
SCHIP Benefits Improvement and Protection Act of 2000, Pub. L. No. 106-
554, app. F, § 705(a), 114 Stat. 2763, 2763A-575-2763A-576. In January
2001, HCFA issued the final UPL regulation, which established separate
UPLs for private facilities and for local-government facilities for
different classes of services, including inpatient hospital services,
outpatient hospital and clinic services, and nursing facility services.
66 Fed. Reg. 3,148 (Jan. 12, 2001). The final rule also contained
provisions that set the UPL for hospitals operated by local governments
at 150 percent of what Medicare would pay, rather than 100 percent,
which allowed states to make larger supplemental payments to such
hospitals. In January 2002, CMS issued another final UPL regulation
that replaced the 150 percent UPL for local-government hospitals with a
100 percent UPL. 67 Fed. Reg. 2,602 (Jan. 28, 2002).
[22] For additional information, see GAO, Medicaid: Improved Federal
Oversight of State Financing Schemes Is Needed, GAO-04-228 (Washington,
D.C.: Feb. 13, 2004).
[23] On numerous occasions, we have reported concerns related to CMS's
oversight of states' UPL arrangements, including concerns that CMS was
approving new state financing arrangements that were inappropriate and
allowing states to continue claiming excessive federal reimbursements
that were not consistent with the purpose of CMS's UPL regulations.
See, for example, GAO, Medicaid: HCFA Reversed Its Position and
Approved Additional State Financing Schemes, GAO-02-147 (Washington,
D.C.: Oct. 30, 2001), and GAO-04-228.
[24] In October 2001, we reported that the state's financing
arrangements for supplemental county nursing home payments
inappropriately generated hundreds of millions of dollars in federal
matching funds without a corresponding nonfederal share or an actual
payment for services. See GAO-02-147.
[25] The number of states totals 30 in this instance because 1 state
provided a different response for each of the two financing
arrangements it ended.
[26] The questions we sent to the states did not ask about rule making;
some states, however, volunteered this information in narrative
comments on CMS's initiative.
[27] On June 1, 2004, CMS sent the Minnesota Medicaid agency a letter
disapproving Minnesota's state plan amendment to increase supplemental
payments to county nursing homes. Before this disapproval, the state
and CMS had had numerous exchanges orally and in writing about details
of the state's existing supplemental payments to county nursing homes.
These exchanges were triggered by CMS's August 5, 2003, letter to the
state requesting responses to CMS's standard funding questions. In its
June disapproval letter, CMS explained that the state had not provided
assurances to CMS that county nursing homes would retain the increased
payments and had also failed to demonstrate that the proposed amendment
would be consistent with Medicaid principles, including providing a
nonfederal share for the payments and ensuring that payments would be
economical and efficient.
[28] Under Medicaid law and regulation, states can request the
Administrator of CMS to reconsider disapprovals of state plan
amendments. 42 U.S.C § 1316 (2000) and 42 C.F.R. § 430.18 (2006). These
appeals typically result in a hearing before a CMS hearing officer, who
reviews the evidence and arguments presented by the appealing state and
CMS and then makes a recommendation to the CMS Administrator. The
Administrator makes the final administrative decision on whether to
uphold the agency's disapproval. If the CMS Administrator upholds a
disapproval, the state may then appeal in federal circuit court.
[29] The state also argued in its appeal that the state plan amendment
met all the statutory and regulatory requirements for approval. For
example, the state argued, the amendment would result in efficient and
economical payments because the payments did not exceed the UPL for
local-government nursing homes. The state also argued that CMS violated
the Social Security Act by insisting that the state eliminate the
intergovernmental transfers of funds from the counties that owned and
operated the nursing homes receiving the payments.
[30] The supplemental payment to county nursing homes was established
by a state plan amendment approved in 1994, and a state plan amendment
was submitted and approved in 2002 to increase the payment.
[31] While the case involved Medicaid payments to tribal facilities and
not facilities owned and operated by state or local-government
entities, CMS's disapproval was based on the same standard that the
agency applied under its initiative, specifically, that providers did
not retain the full payment amount.
[32] Alaska Dep't of Health & Soc. Servs., 424 F.3d 931, 939-40.
[33] See 72 Fed. Reg. 2,236 (Jan. 18, 2007). In budget proposals for
fiscal years 2005 and 2006, the administration proposed that Congress
pass legislation to specifically prohibit federal reimbursement for
state payments to government providers that exceeded the providers'
actual costs of providing Medicaid services, but Congress did not pass
such legislation. CMS's January proposed rule sought to implement this
limitation administratively. According to CMS officials, the
administration has authority to implement such limits administratively
but proposed the legislation to ensure the program's fiscal integrity
over time. CMS's proposal is consistent with an earlier recommendation
we made to Congress: to pass legislation to specifically prohibit
Medicaid payments to any government facility that exceed costs. See
GAO, Medicaid: States Use Illusory Approaches to Shift Program Costs to
Federal Government, GAO/HEHS-94-133 (Washington, D.C.: Aug. 1, 1994).
[34] In the case of 1 of the 55 ended financing arrangements, CMS
communicated to the state in writing--but only in general terms--that
the state's financing arrangement was or appeared to be inconsistent
with Medicaid payment principles. CMS also provided the state a written
explanation specifying why the arrangement was inconsistent with
Medicaid payment principles in general, without specifying which
principle or principles.
[35] Pub. L. No. 108-173, § 731(a), 117 Stat. 2066, 2349-51.
[36] Two of the three remaining states responded "other" without
providing an explanation, and the last state did not answer the
question.
[37] See Department of Health and Human Services, Office of Inspector
General, Ernst & Young Final Report, Review of the Centers for Medicare
& Medicaid Services' Medicaid Financial Management Oversight
(Washington, D.C.: Sept. 25, 2006).
[38] We later also sent our standard questionnaire to the two states
CMS added to its list from July 2005 through August 2006.
[39] When we contacted the states CMS identified as not having
submitted any proposals to change their state Medicaid plans, officials
from the three states told us that their states had submitted proposals
and undergone several CMS reviews. These differences did not affect our
findings, however, because the state officials confirmed that their
states had not ended a payment arrangement as a result of review under
CMS's initiative.
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U.S. Government Accountability Office, 441 G Street NW, Room 7149
Washington, D.C. 20548:
