Medicaid Financing
Long-standing Concerns about Inappropriate State Arrangements Support Need for Improved Federal Oversight
Gao ID: GAO-08-650T April 3, 2008
Medicaid, a joint federal-state program, financed the health care for about 59 million low-income people in fiscal year 2006. States have considerable flexibility in deciding what medical services and individuals to cover and the amount to pay providers, and the federal government reimburses a portion of states' expenditures according to a formula established by law. The Centers for Medicare & Medicaid Services (CMS) is the federal agency responsible for overseeing Medicaid. Growing pressures on federal and state budgets have increased tensions between the federal government and states regarding this program, including concerns about whether states were appropriately financing their share of the program. GAO's testimony describes findings from prior work conducted from 1994 through March 2007 on (1) certain inappropriate state Medicaid financing arrangements and their implications for Medicaid's fiscal integrity and (2) outcomes and transparency of a CMS oversight initiative begun in 2003 to end such inappropriate arrangements.
GAO has reported for more than a decade on varied financing arrangements that inappropriately increase federal Medicaid matching payments. In reports issued from 1994 through 2005, GAO found that some states had received federal matching funds by paying certain government providers, such as county-operated nursing homes, amounts that greatly exceeded established Medicaid rates. States would then bill CMS for the federal share of the payment. However, these large payments were often temporary, since some states required the providers to return most or all of the amount. States used the federal matching funds obtained in making these payments as they wished. Such financing arrangements had significant fiscal implications for the federal government and states. The exact amount of additional federal Medicaid funds generated through these arrangements is unknown, but was in the billions of dollars. Because such financing arrangements effectively increase the federal Medicaid share above what is established by law, they threaten the fiscal integrity of Medicaid's federal and state partnership. They shift costs inappropriately from the states to the federal government, and take funding intended for covered Medicaid costs from providers, who do not under these arrangements retain the full payments. In 2003, CMS began an oversight initiative that by August 2006 resulted in 29 states ending one or more inappropriate financing arrangements. Under the initiative, CMS sought satisfactory assurances that a state was ending financing arrangements that the agency found to be inappropriate. According to CMS, the arrangements had to be ended because the providers did not retain all payments made to them but returned all or a portion to the states. GAO reported in 2007 that although CMS's initiative was consistent with Medicaid payment principles, it was not transparent in implementation. CMS had not used any of the means by which it normally provides states with information about Medicaid program requirements, such as the published state Medicaid manual, standard letters issued to all state Medicaid directors, or technical guidance manuals. Such guidance could be helpful by informing states about the specific standards used for reviewing and approving states' financing arrangements. In May 2007, CMS issued a final rule that, if implemented, would, among other things, limit Medicaid payments to government providers' costs. We have not reviewed the substance of the May 2007 rule. The extent to which the May 2007 rule would respond to GAO's concerns about the transparency of CMS's initiative and review standards will depend on how CMS implements it.
GAO-08-650T, Medicaid Financing: Long-standing Concerns about Inappropriate State Arrangements Support Need for Improved Federal Oversight
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Testimony:
Before the Subcommittee on Health, Committee on Energy and Commerce,
House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 10:00 a.m. EDT:
Thursday, April 3, 2008:
Medicaid Financing:
Long-standing Concerns about Inappropriate State Arrangements Support
Need for Improved Federal Oversight:
Statement of James Cosgrove, Acting Director:
Health Care:
GAO-08-650T:
GAO Highlights:
Highlights of GAO-08-650T, a testimony before the Subcommittee on
Health, Committee on Energy and Commerce, House of Representatives.
Why GAO Did This Study:
Medicaid, a joint federal-state program, financed the health care for
about 59 million low-income people in fiscal year 2006. States have
considerable flexibility in deciding what medical services and
individuals to cover and the amount to pay providers, and the federal
government reimburses a portion of states‘ expenditures according to a
formula established by law. The Centers for Medicare & Medicaid
Services (CMS) is the federal agency responsible for overseeing
Medicaid.
Growing pressures on federal and state budgets have increased tensions
between the federal government and states regarding this program,
including concerns about whether states were appropriately financing
their share of the program. GAO‘s testimony describes findings from
prior work conducted from 1994 through March 2007 on (1) certain
inappropriate state Medicaid financing arrangements and their
implications for Medicaid‘s fiscal integrity and (2) outcomes and
transparency of a CMS oversight initiative begun in 2003 to end such
inappropriate arrangements.
What GAO Found:
GAO has reported for more than a decade on varied financing
arrangements that inappropriately increase federal Medicaid matching
payments. In reports issued from 1994 through 2005, GAO found that some
states had received federal matching funds by paying certain government
providers, such as county-operated nursing homes, amounts that greatly
exceeded established Medicaid rates. States would then bill CMS for the
federal share of the payment. However, these large payments were often
temporary, since some states required the providers to return most or
all of the amount. States used the federal matching funds obtained in
making these payments as they wished. Such financing arrangements had
significant fiscal implications for the federal government and states.
The exact amount of additional federal Medicaid funds generated through
these arrangements is unknown, but was in the billions of dollars.
Because such financing arrangements effectively increase the federal
Medicaid share above what is established by law, they threaten the
fiscal integrity of Medicaid‘s federal and state partnership. They
shift costs inappropriately from the states to the federal government,
and take funding intended for covered Medicaid costs from providers,
who do not under these arrangements retain the full payments.
In 2003, CMS began an oversight initiative that by August 2006 resulted
in 29 states ending one or more inappropriate financing arrangements.
Under the initiative, CMS sought satisfactory assurances that a state
was ending financing arrangements that the agency found to be
inappropriate. According to CMS, the arrangements had to be ended
because the providers did not retain all payments made to them but
returned all or a portion to the states. GAO reported in 2007 that
although CMS‘s initiative was consistent with Medicaid payment
principles, it was not transparent in implementation. CMS had not used
any of the means by which it normally provides states with information
about Medicaid program requirements, such as the published state
Medicaid manual, standard letters issued to all state Medicaid
directors, or technical guidance manuals. Such guidance could be
helpful by informing states about the specific standards used for
reviewing and approving states‘ financing arrangements. In May 2007,
CMS issued a final rule that, if implemented, would, among other
things, limit Medicaid payments to government providers‘ costs. We have
not reviewed the substance of the May 2007 rule. The extent to which
the May 2007 rule would respond to GAO‘s concerns about the
transparency of CMS‘s initiative and review standards will depend on
how CMS implements it.
To view the full product, including the scope and methodology, click on
[hyperlink,http://www.gao.gov/cgi-bin/getrpt?GAO-08-613T]. For more
information, contact Robert A. Robinson at (202) 512-3841 or
robinsonr@gao.gov.
[End of section]
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today as you explore recent regulatory actions
of the administration related to the Medicaid program and the potential
impacts of these actions on beneficiaries, providers, and states.
Medicaid, a joint federal and state program that covered over 59
million people in fiscal year 2006, fulfills a crucial role in
providing health coverage for a variety of vulnerable populations,
including certain low-income children, families, and individuals who
are aged or disabled. Ensuring the program's long-term sustainability
is therefore very important.
The federal government and the states share responsibilities for
financing and administering Medicaid. Within broad federal
requirements, states have considerable flexibility in deciding what
medical services and individuals to cover and the amount to pay
providers, and the federal government reimburses a portion of states'
expenditures according to a formula established by law.[Footnote 1] The
Centers for Medicare & Medicaid Services (CMS) is the federal agency
responsible for overseeing states' Medicaid programs and ensuring the
propriety of expenditures for which states seek federal reimbursement.
Total Medicaid expenditures are significant, totaling an estimated $317
billion in fiscal year 2006.[Footnote 2]
Growing pressures on federal and state budgets have increased tensions
between the federal government and the states regarding Medicaid. In
recent years, tensions have arisen regarding CMS's actions in
overseeing the appropriateness of provider payments for which states
have sought federal reimbursement, including whether states were
appropriately financing their share, that is, the nonfederal share of
these payments. Starting in the early 1990s and as recently as 2004, we
and others have reviewed aspects of inappropriate Medicaid financing
arrangements in some states, often involving supplemental payments made
to government providers that were beyond states' typical Medicaid
payment rates. We have also reviewed CMS's oversight of such
arrangements, most recently reporting in March 2007 on an initiative
started in 2003 to end inappropriate arrangements. Since 2007, CMS has
issued a series of proposed or final rules related to payments for
certain Medicaid services. These rules are the subject of H.R.
5613[Footnote 3]--which would place a moratorium on the rules--and of
today's hearing. One of those rules, issued as a final rule in May
2007,[Footnote 4] relates to a body of work GAO has conducted since the
early 1990s on state Medicaid financing arrangements. In my testimony
today, I will summarize and describe our findings on (1) past
inappropriate state Medicaid financing arrangements, including their
implications for the fiscal integrity of the Medicaid program, and (2)
the outcomes and transparency of CMS's 2003 initiative, which provides
context for considering the effect of the May rule on various
stakeholders. My testimony is based on our previous work assessing
various Medicaid financing arrangements and federal oversight of these
arrangements. We conducted this body of work from June 1993 through
March 2007. We have not reported on the proposed and final rules that
are addressed in H.R. 5613, with respect to the operation of the
Medicaid program. We conducted our work in accordance with generally
accepted government auditing standards.
In summary, we have reported for more than a decade on varied financing
arrangements that inappropriately increase federal Medicaid matching
payments. In reports issued from 1994 through 2005, we reported on
various arrangements whereby states received federal matching funds by
paying certain government providers, such as county-owned or county-
operated nursing homes, amounts that greatly exceeded standard Medicaid
rates.[Footnote 5] The large payments were often temporary, since some
states could require the government providers to return all or most of
the money to the states. States used the federal matching funds
received for these payments--which essentially made a round-trip from
the states to providers and back to the states--at their own
discretion. Such financing arrangements had significant fiscal
implications for the federal government and states. The exact amount of
additional federal Medicaid funds generated through these arrangements
is not known, but was in the billions of dollars. Despite congressional
and CMS action taken during those years to limit such arrangements, we
found even in recent years that improved federal oversight of such
arrangements was still needed.[Footnote 6] Because such financing
arrangements effectively increase the federal Medicaid share above what
is established by law, they threaten the fiscal integrity of Medicaid's
federal and state partnership. They shift costs inappropriately from
the states to the federal government, and take funding intended for
Medicaid beneficiaries and covered Medicaid costs from providers, who
do not under these arrangements retain the full payments.
CMS's oversight initiative, started in 2003 to end inappropriate state
financing arrangements, by August 2006 had resulted in 29 states ending
one or more financing arrangements in which providers did not retain
the supplemental payments they received. Although we found that CMS's
initiative was consistent with Medicaid payment principles, we also
found that more transparency was needed regarding the way in which CMS
was implementing its initiative and the review standards it was using
to end certain financing arrangements. For example, to inform states
about the specific standards it used for reviewing and approving
states' financing arrangements under its new initiative, CMS had not
used any of the means by which it typically provides information to
states about new or revised Medicaid program requirements, such as
proposed rule making, its published state Medicaid manual, standard
letters issued to all state Medicaid directors, and technical guidance
manuals. Consequently, states were concerned about standards that were
applied in CMS's review of their arrangements and the consistency with
which states were treated. These observations provide some context for
the controversy surrounding CMS's May 2007 rule. We have not assessed
this rule, or others addressed by H.R. 5613, with respect to the
operation of the Medicaid program. . The extent to which the May 2007
rule would respond to concerns about the transparency of CMS's
initiative and review standards will depend on how CMS implements it.
Background:
Title XIX of the Social Security Act establishes Medicaid as a joint
federal-state program to finance health care for certain low-income,
aged, or disabled individuals.[Footnote 7] 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 8]
CMS 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
who serve Medicaid beneficiaries. For example, Medicaid payments by law
must be "consistent with efficiency, economy, and quality
care,"[Footnote 9] and states must share in Medicaid costs in
proportions established according to a statutory formula.[Footnote 10]
Within broad federal requirements, each state administers and operates
its Medicaid program in accordance with a state Medicaid plan, which
must be approved by CMS. A state Medicaid plan details the populations
a state's program serves, the services the program covers (such as
physicians' services, nursing home care, and inpatient hospital care),
and the rates of and methods for calculating payments to providers.
State Medicaid plans generally do not detail the specific arrangements
a state uses to finance the nonfederal share of program spending. Title
XIX of the Social Security Act allows states to derive up to 60 percent
of the nonfederal share from local governments, as long as the state
itself contributes at least 40 percent.[Footnote 11]
Over the last several years, CMS has taken a number of steps to help
ensure the fiscal integrity of the Medicaid program. These include
making internal organizational changes that centralize the review of
states' Medicaid financing arrangements and hiring additional staff to
review each state's Medicaid financing. The agency also published in
May 2007 a final rule related to Medicaid payment and
financing.[Footnote 12] This rule would, among other things, limit
payments to government providers to their cost of providing Medicaid
services. Congress has imposed a moratorium on this rule until May 25,
2008.[Footnote 13]
Concerns about Certain Medicaid Financing Arrangements That Undermine
Medicaid's Fiscal Integrity Are Long-standing:
From 1994 through 2005, we have reported numerous times on a number of
financing arrangements that create the illusion of a valid state
Medicaid expenditure to a health care provider. Payments under these
arrangements have enabled states to claim federal matching funds
regardless of whether the program services paid for had actually been
provided. As various schemes have come to light, the Congress and CMS
took several actions from 1987 through 2002, through law and
regulation, to curtail them (see table 1).
Table 1: Medicaid Financing Schemes Used to Inappropriately Generate
Federal Payments and Federal Actions to Address Them, 1987-2002:
Financing arrangement: Excessive payments to state health facilities;
Description: States made excessive Medicaid payments to state-owned
health facilities, which subsequently returned these funds to the state
treasuries;
Action taken: In 1987, the Health Care Financing Administration (HCFA,
now called the Centers for Medicare & Medicaid Services or CMS) issued
regulations that established payment limits specifically for inpatient
and institutional facilities operated by states.
Financing arrangement: Provider taxes and donations;
Description: Revenues from provider-specific taxes on hospitals and
other providers and from provider "donations" were matched with federal
funds and paid to the providers. These providers could then return most
of the federal payment to the states;
Action taken: The Medicaid Voluntary Contribution and Provider-Specific
Tax Amendments of 1991 imposed restrictions on provider donations and
provider taxes.
Financing arrangement: Excessive disproportionate share hospital (DSH)
payments;
Description: DSH payments are meant to compensate those hospitals that
care for a disproportionate number of low-income patients. Unusually
large DSH payments were made to certain hospitals, which then returned
the bulk of the state and federal funds to the state;
Action taken: The Omnibus Budget Reconciliation Act of 1993 placed
limits on which hospitals could receive DSH payments and capped the
amount of DSH payments individual hospitals could receive.
Financing arrangement: Excessive DSH payments to state mental
hospitals;
Description: A large share of DSH payments were paid to state-operated
psychiatric hospitals, where they were used to pay for services not
covered by Medicaid or were returned to the state treasuries;
Action taken: The Balanced Budget Act of 1997 limited the proportion of
a state's DSH payments that can be paid to institutions for mental
disease and other mental health facilities.
Financing arrangement: Upper payment limit (UPL) for local government
health facilities;
Description: In an effort to ensure that Medicaid payments are
reasonable, federal regulations prohibit Medicaid from paying more than
a reasonable estimate of the amount that would be paid under Medicare
payment principles for comparable services. This UPL applies to
payments aggregated across a class of facilities and not for individual
facilities. As a result of the aggregate upper limit, states were able
to make large supplemental payments to a few local public health
facilities, such as hospitals and nursing homes. The local government
health facilities then returned the bulk of the state and federal
payments to the states;
Action taken: The Medicare, Medicaid, and SCHIP Benefits Improvement
and Protection Act of 2000 required HCFA to issue a final regulation
that established a separate aggregate payment limit for local
government health facilities. HCFA issued its final regulation on
January 12, 2001. In 2002, CMS issued a regulation that further lowered
the payment limit for local public hospitals.
Source: GAO.
Notes: See GAO, Medicaid: Intergovernmental Transfers Have Facilitated
State Financing Schemes, GAO-04-574T (Washington, D.C.: Mar. 18, 2004).
Before June 2001, CMS was known as HCFA.
[End of table]
Many of these arrangements involve payment arrangements between the
state and government-owned or government-operated providers, such as
local government-operated nursing homes. They also involved
supplemental payments--payments states made to these providers separate
from and in addition to those made at a state's standard Medicaid
payment rate. The supplemental payments connected with these
arrangements were illusory, however, because states required these
government providers to return part or all of the payments to the
states.[Footnote 14] Because government entities were involved, all or
a portion of the supplemental payments could be returned to the state
through an IGT.[Footnote 15] Financing arrangements involving illusory
payments to Medicaid providers have significant fiscal implications for
the federal government and states. The exact amount of additional
federal Medicaid funds generated through these arrangements is not
known, but was in the billions of dollars. For example, a 2001
regulation to curtail states' misuse of the UPL for certain provider
payments was estimated to have saved the federal government
approximately $17 billion from fiscal year 2002 through fiscal year
2006. In 2003, we designated Medicaid to be a program at high risk of
mismanagement, waste, and abuse, in part because of concerns about
states' use of inappropriate financing arrangements.[Footnote 16]
Inappropriate Medicaid Financing Arrangements Undermine Medicaid's
Fiscal Integrity:
States' use of these creative financing mechanisms undermined the
federal-state Medicaid partnership as well as the program's fiscal
integrity in at least three ways.
First, inappropriate state financing arrangements effectively increased
the federal matching rate established under federal law by increasing
federal expenditures while state contributions remain unchanged or even
decrease. Figure 1 illustrates a state's arrangement in place in 2004
in which the state increased federal expenditures without a
commensurate increase in state spending. In this case, the state made a
$41 million supplemental payment to a local government hospital. Under
its Medicaid matching formula, the state paid $10.5 million and CMS
paid $30.5 million as the federal share of the supplemental payment.
However, after receiving the supplemental payment the hospital
transferred back to the state approximately $39 million of the $41
million payment, retaining just $2 million. Creating the illusion of a
$41 million hospital payment when only $2 million was actually retained
by the provider enabled the state to obtain additional federal
reimbursements without effectively contributing a nonfederal share--in
this case, the state actually netted $28.5 million as a result of the
arrangement.
Figure 1: Example of How One State Increased Federal Medicaid Matching
Funds without Increasing State Spending:
This figure is a flowchart showing an example of how one state
increased federal medicaid matching funds without increased state
spending.
[See PDF for image]
Source: GAO analysis of one state's financing arrangement for state
fiscal year 2004.
[End of figure]
Second, CMS had no assurance that these increased federal matching
payments were retained by the providers and used to pay for Medicaid
services. Federal Medicaid matching funds are intended for Medicaid-
covered services for the Medicaid-eligible individuals on whose behalf
payments are made. However, under these arrangements payments for such
Medicaid-covered services were returned to the states, which could then
use the returned funds at their own discretion. In 2004, we examined
how six states with large supplemental payment financing arrangements
involving nursing homes used the federal funds they generated. As in
the past, some states deposited excessive funds from financing
arrangements into their general funds, which may or may not be used for
Medicaid purposes. Table 2 provides further information on how states
used their funds from supplemental payment arrangements, as reported by
the six states we reviewed in 2004.
Table 2: Selected States' Use of Funds Generated through UPL
Arrangements, as of January 2004:
State: Michigan;
Use: Funds generated by the state's UPL arrangement were deposited in
the state's general fund but were tracked separately as a local fund
source. These local funds were earmarked for future Medicaid expenses
and used as the state match, effectively recycling federal UPL matching
funds to generate additional federal Medicaid matching funds.
State: New York;
Use: Funds generated by the state's UPL arrangement were deposited into
its Medical Assistance Account. Proceeds from this account were used to
pay for the state share of the cost of Medicaid payments, effectively
recycling federal funds to generate additional federal Medicaid
matching funds.
State: Oregon;
Use: Funds generated by the state's UPL arrangement were used to
finance education programs and other non-Medicaid health programs. UPL
matching funds recouped from providers were deposited into a special
UPL fund. Facing a large budget deficit, a February 2002 special
session of the Oregon legislature allocated the fund balance, about
$131 million, to finance kindergarten to 12th grade education programs.
According to state budget documents, the UPL funds were used to replace
financing from the state's general fund.
State: Pennsylvania;
Use: Funds generated by the state's UPL arrangement were used for a
number of Medicaid and non-Medicaid purposes, including long-term care
and behavioral health services. In state fiscal years 2001 through 2003
the state generated $2.4 billion in excess federal matching funds, of
which 43 percent was used for Medicaid expenses (recycled to generate
additional federal matching funds), 6 percent was used for non-Medicaid
purposes, and 52 percent was unspent and available for non-Medicaid
uses (does not total 100 percent because of rounding).
State: Washington;
Use: Funds generated by the state's UPL arrangement were commingled
with a number of other revenue sources in a state fund. The fund was
used for various state health programs, including a state- funded basic
health plan, public health programs, and health benefits for home care
workers. A portion of the fund was also transferred to the state's
general fund. The fund was also used for selected Medicaid services and
the State Children's Health Insurance Program (SCHIP), which
effectively recycled the federal funds to generate additional federal
Medicaid matching funds.
State: Wisconsin;
Use: Funds generated by the state's UPL arrangement were deposited in a
state fund, which was used to pay for Medicaid- covered services in
both public and private nursing homes. Because the state used these
payments as the state share, the federal funds were effectively
recycled to generate additional federal Medicaid matching funds.
Sources: CMS and states, based on work ending in January 2004.
Note: See GAO, Medicaid: Improved Federal Oversight of State Financing
Schemes Is Needed, GAO-04-228 (Washington, D.C.: Feb. 13, 2004).
[End of table]
Third, these state financing arrangements undermined the fiscal
integrity of the Medicaid program because they enabled states to make
payments to government providers that could significantly exceed their
costs. In our view, this practice was inconsistent with the statutory
requirement that states ensure that Medicaid payments are economical
and efficient.
CMS Oversight Initiative to End State Financing Arrangements Lacked
Transparency:
Our March 2007 report[Footnote 17] on a recent CMS oversight initiative
to end certain financing arrangements where providers did not retain
the payments provides context for CMS's May rule. Responding to
concerns about states' continuing use of creative financing
arrangements to shift costs to the federal government, CMS has taken
steps starting in August 2003 to end inappropriate state financing
arrangements by closely reviewing state plan amendments on a state-by-
state basis. As a result of the CMS initiative, from August 2003
through August 2006, 29 states ended one or more arrangements for
financing supplemental payments, because providers were not retaining
the Medicaid payments for which states had received federal matching
funds.
We found CMS's actions under its oversight initiative to be consistent
with Medicaid payment principles--for example, that payment for
services be consistent with efficiency, economy, and quality of care.
We also found, however, that CMS's initiative to end inappropriate
financing arrangements lacked transparency, in that CMS had not issued
written guidance about the specific approval standards for state
financing arrangements. CMS's initiative was a departure from the
agency's past oversight approach, which did not focus on whether
individual providers were retaining the supplemental payments they
received. In contacting the 29 states that ended a financing
arrangement from August 2003 through August 2006 under the initiative,
only 8 states reported that they had received any written guidance or
clarification from CMS regarding appropriate and inappropriate
financing arrangements. CMS had not used any of the means by which it
typically provides information to states about the Medicaid program,
such as its published state Medicaid manual, standard letters issued to
all state Medicaid directors, or technical guidance manuals, to inform
states about the specific standards it used for reviewing and approving
states' financing arrangements. State officials told us that it was not
always clear what financing arrangements CMS would allow and why
arrangements approved in the past would no longer be approved. Twenty-
four of 29 states reported that CMS had changed its policy regarding
financing arrangements, and 1 state challenged CMS's disapproval of its
state plan amendment, in part on the grounds that CMS changed its
policy regarding payment arrangements and should have done so through
rule making.[Footnote 18] The lack of transparency in CMS's review
standards raised questions about the consistency with which states had
been treated in ending their financing arrangements. We consequently
recommended that CMS issue guidance to clarify allowable financing
arrangements.
Our recommendation for CMS to issue guidance for allowable financing
arrangements paralleled a recommendation we had made in earlier work
reviewing states' use of consultants on a contingency-fee basis to
maximize federal Medicaid revenues.[Footnote 19] Problematic projects
where claims for federal matching funds appeared to be inconsistent
with CMS's policy or with federal law, or that--as with inappropriate
supplemental payment arrangements--undermined Medicaid's fiscal
integrity, involved Medicaid payments to government entities and
categories of claims where federal requirements had been inconsistently
applied, were evolving, or were not specific. We recommended that CMS
establish or clarify and communicate its policies in these areas,
including supplemental payment arrangements.[Footnote 20] CMS's
responded that clarifying guidance was under development for targeted
case management, rehabilitation services, and supplemental payment
arrangements.
We have ongoing work to examine the amount and distribution of states'
Medicaid supplemental payments, but have not reported on the May 2007
rule or other rules related to Medicaid financing issued this year.
Certain elements of the May 2007 rule relate to the concerns our past
work has raised. Some aspects of the final rule appear to be responsive
to recommendations from our past work, to the extent that its
implementation could help ensure that Medicaid providers, on whose
behalf states' receive federal matching funds, retain the payments made
by the state. The extent to which the rule would address concerns about
the transparency of CMS's initiative and review standards will depend
on how CMS implements it.
Concluding Observations:
As the nation's health care safety net, the Medicaid program is of
critical importance to beneficiaries and the providers that serve them.
The federal government and states have a responsibility to administer
the program in a manner that ensures that expenditures benefit those
low-income people for whom benefits were intended. With annual
expenditures totaling more than $300 billion per year accountability
for the significant program expenditures is critical to providing those
assurances. Ensuring the program's long-term fiscal sustainability is
important for beneficiaries, providers, states, and the federal
government.
For more than a decade, we have reported on various methods that states
have used to inappropriately maximize federal Medicaid reimbursement,
and we have made recommendations to end these inappropriate financing
arrangements. Supplemental payments involving government providers have
resulted in billions of excess federal dollars for states, yet
accountability for these payments--assurances that they are retained by
providers of Medicaid services to Medicaid beneficiaries--has been
lacking. CMS has taken important steps in recent years to improve its
financial management of Medicaid, yet more can be done.
Mr. Chairman, this concludes my prepared statement. I will be happy to
answer any questions that you or members of the subcommittee may have.
Contact and Acknowledgments:
For information regarding this testimony, please contact James Cosgrove
at (202) 512-7114 or cosgrovej@gao.gov. Contact points for our Offices
of Congressional Relations and Public Affairs may be found on the last
page of this testimony. Katherine Iritani, Assistant Director; Carolyn
Yocom, Assistant Director; Ted Burik; Tim Bushfield; Tom Moscovitch;
and Terry Saiki also made key contributions to this testimony.
[End of section]
Related GAO Products:
Medicaid Financing: Long-Standing Concerns about Inappropriate State
Arrangements Support Need for Improved Federal Oversight. GAO-08-255T.
Washington, D.C.: November 1, 2007.
Medicaid Financing: Federal Oversight Initiative Is Consistent with
Medicaid Payment Principles but Needs Greater Transparency. GAO-07-214.
Washington, D.C.: March 30, 2007.
High-Risk Series: An Update. GAO-07-310. Washington, D.C.: January
2007.
Medicaid Financial Management: Steps Taken to Improve Federal Oversight
but Other Actions Needed to Sustain Efforts. GAO-06-705. Washington,
D.C.: June 22, 2006.
Medicaid: States' Efforts to Maximize Federal Reimbursements Highlight
Need for Improved Federal Oversight. GAO-05-836T. Washington, D.C.:
June 28, 2005.
Medicaid Financing: States' Use of Contingency-Fee Consultants to
Maximize Federal Reimbursements Highlights Need for Improved Federal
Oversight. GAO-05-748. Washington, D.C.: June 28, 2005.
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 in Schools: Improper Payments Demand Improvements in HCFA
Oversight. GAO/HEHS/OSI-00-69. Washington, D.C.: April 5, 2000.
Medicaid in Schools: Poor Oversight and Improper Payments Compromise
Potential Benefit. GAO/T-HEHS/OSI-00-87. Washington, D.C.: April 5,
2000.
Medicaid: States Use Illusory Approaches to Shift Program Costs to
Federal Government. GAO/HEHS-94-133. Washington, D.C.: August 1, 1994.
[End of section]
Footnotes:
[1] States and the federal government share in Medicaid expenditures.
The federal share of expenditures for Medicaid services can range from
50 to 83 percent.
[2] This figure includes estimated federal and state Medicaid program
expenditures for provider services and administration in fiscal year
2006.
[3] Protecting the Medicaid Safety Net Act of 2008, H.R. 5613, 110th
Cong. (2008). This legislation would place a moratorium until April 1,
2009 on seven Medicaid regulations issued by CMS in 2007.
[4] See 72 Fed. Reg. 29748 (May 29, 2007).
[5] See related GAO products at the end of this statement.
[6] Since identifying problems with inappropriate financing
arrangements involving certain government providers in 1994, we have
suggested that the Congress consider limiting payments to government
providers to their costs of providing Medicaid services to Medicaid
beneficiaries. See GAO, Medicaid: States Use Illusory Approaches to
Shift Program Costs to Federal Government, GAO/HEHS-94-133 (Washington,
D.C.: Aug. 1, 1994).
[7] 42 U.S.C. §§ 1396 et seq. (2000).
[8] Throughout this statement, we refer to funds used by state Medicaid
programs to pay providers for rendering Medicaid services as payments.
We refer to federal funds received by states from CMS for the federal
share of states' Medicaid payments as reimbursements.
[9] See 42 U.S.C § 1396a(a)(30)(A) (2000).
[10] Under the formula, the federal government may pay from 50 to 83
percent of a state's Medicaid expenditures for services. States with
lower per capita incomes receive higher federal matching rates. 42
U.S.C § 1396d(b) (2000).
[11] See 42 U.S.C § 1396a(a)(2) (2000). Local governments and local
government providers can contribute to the nonfederal share of Medicaid
payments through mechanisms known as intergovernmental transfers, or
IGTs. IGTs are a legitimate feature in state finance that enable state
and local governments to carry out their shared governmental functions,
for example through the transfer of revenues between governmental
entities.
[12] See 72 Fed. Reg. 29,748 (May 29, 2007).
[13] See Pub. L. No. 110-28, § 7002, 121 Stat. 112, 187 (2007).
[14] The two most common supplemental payments that involved illusory
payments to government providers are UPL payments and DSH payments.
Illusory UPL payments are based on the misuse of Medicaid UPL
provisions. UPLs are the federal government's way of placing a ceiling
on the federal share of a state Medicaid program; they are the upper
bound on the amounts the federal government will pay a state for the
federal share of state spending on certain services. Some states made
supplemental payments up to the UPL but then required the providers to
return all or a portion of the payment. Under Medicaid law, states are
required to make special hospital payments to supplement standard
Medicaid payment rates and help offset costs for hospitals that serve a
disproportionate share of low-income or uninsured patients; these
payments came to be known as DSH payments.
[15] State and local governments use IGTs to carry out their shared
governmental functions, such as collecting and redistributing revenues
to provide essential government services.
[16] GAO, High Risk Series: An Update, Major Management Challenges and
Program Risks: Department of Health and Human Services, GAO-07-310
(Washington, D.C.: Jan. 2007).
[17] GAO, Medicaid Financing: Federal Oversight Initiative Is
Consistent with Medicaid Payment Principles but Needs Greater
Transparency, GAO-07-214 (Washington, D.C.: Mar. 30, 2007).
[18] This state formally requested that the CMS Administrator
reconsider the disapproval of the state plan amendment. The
Administrator upheld the disapproval, finding the state's argument that
CMS was required to use notice-and-comment rule making unsupported. The
United State Court of Appeals for the Eighth Circuit denied the state's
appeal of this decision. Minnesota v. Ctrs. for Medicare and Medicaid
Servs., 495 F.3d 991 (8th Cir. 2007).
[19] See GAO, Medicaid Financing: States' Use of Contingency-Fee
Consultants to Maximize Federal Reimbursements Highlights Need for
Improved Federal Oversight, GAO-05-748 (Washington, D.C.: June 28,
2005).
[20] Other areas where our 2005 report identified that federal law and
policies had been inconsistently applied, were evolving, or were not
specific included targeted case management services and rehabilitation
services. We found that states' claims in some of these categories had
grown substantially in dollar amounts. For example, during fiscal years
1999 through 2003, combined state and federal spending for targeted
case management services increased by 76 percent, from $1.7 billion to
$3 billion, across all states.
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