[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



INTER-GOVERNMENTAL TRANSFERS: VIOLATIONS OF THE FEDERAL-STATE MEDICAID 
              PARTNERSHIP OR LEGITIMATE STATE BUDGET TOOL?

=======================================================================

                                HEARINGS

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                       MARCH 18 and APRIL 1, 2004

                               __________

                           Serial No. 108-76

                               __________

       Printed for the use of the Committee on Energy and Commerce


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house


                               __________

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                            WASHINGTON : 2003
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                    COMMITTEE ON ENERGY AND COMMERCE

                      JOE BARTON, Texas, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
RALPH M. HALL, Texas                   Ranking Member
MICHAEL BILIRAKIS, Florida           HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RICK BOUCHER, Virginia
PAUL E. GILLMOR, Ohio                EDOLPHUS TOWNS, New York
JAMES C. GREENWOOD, Pennsylvania     FRANK PALLONE, Jr., New Jersey
CHRISTOPHER COX, California          SHERROD BROWN, Ohio
NATHAN DEAL, Georgia                 BART GORDON, Tennessee
RICHARD BURR, North Carolina         PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
CHARLIE NORWOOD, Georgia             ANNA G. ESHOO, California
BARBARA CUBIN, Wyoming               BART STUPAK, Michigan
JOHN SHIMKUS, Illinois               ELIOT L. ENGEL, New York
HEATHER WILSON, New Mexico           ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona             GENE GREEN, Texas
CHARLES W. ``CHIP'' PICKERING,       KAREN McCARTHY, Missouri
Mississippi, Vice Chairman           TED STRICKLAND, Ohio
VITO FOSSELLA, New York              DIANA DeGETTE, Colorado
STEVE BUYER, Indiana                 LOIS CAPPS, California
GEORGE RADANOVICH, California        MICHAEL F. DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire       CHRISTOPHER JOHN, Louisiana
JOSEPH R. PITTS, Pennsylvania        TOM ALLEN, Maine
MARY BONO, California                JIM DAVIS, Florida
GREG WALDEN, Oregon                  JANICE D. SCHAKOWSKY, Illinois
LEE TERRY, Nebraska                  HILDA L. SOLIS, California
MIKE FERGUSON, New Jersey            CHARLES A. GONZALEZ, Texas
MIKE ROGERS, Michigan
DARRELL E. ISSA, California
C.L. ``BUTCH'' OTTER, Idaho
JOHN SULLIVAN, Oklahoma

                      Bud Albright, Staff Director

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

                         Subcommittee on Health

                  MICHAEL BILIRAKIS, Florida, Chairman

RALPH M. HALL, Texas                 SHERROD BROWN, Ohio
FRED UPTON, Michigan                   Ranking Member
JAMES C. GREENWOOD, Pennsylvania     HENRY A. WAXMAN, California
NATHAN DEAL, Georgia                 EDOLPHUS TOWNS, New York
RICHARD BURR, North Carolina         FRANK PALLONE, Jr., New Jersey
ED WHITFIELD, Kentucky               BART GORDON, Tennessee
CHARLIE NORWOOD, Georgia             ANNA G. ESHOO, California
  Vice Chairman                      BART STUPAK, Michigan
BARBARA CUBIN, Wyoming               ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois               GENE GREEN, Texas
HEATHER WILSON, New Mexico           TED STRICKLAND, Ohio
JOHN B. SHADEGG, Arizona             DIANA DeGETTE, Colorado
CHARLES W. ``CHIP'' PICKERING,       LOIS CAPPS, California
Mississippi                          CHRIS JOHN, Louisiana
STEVE BUYER, Indiana                 BOBBY L. RUSH, Illinois
JOSEPH R. PITTS, Pennsylvania        JOHN D. DINGELL, Michigan,
MIKE FERGUSON, New Jersey              (Ex Officio)
MIKE ROGERS, Michigan
JOE BARTON, Texas,
  (Ex Officio)

                                  (ii)




                            C O N T E N T S

                               __________
                                                                   Page

Hearings held:
    March 18, 2004...............................................     1
    April 1, 2004................................................    69
Testimony of:
    Allen, Kathryn G., Director of Health Care, Medicaid and 
      Private Health Insurance Issues, General Accounting Office.    15
    Edwards, Barbara, Deputy Director, Office of Medicaid, Ohio 
      Department of Job and Family Services......................    82
    Noce, Walter W., Jr., President and Chief Executive Officer, 
      Children's Hospital........................................    30
    Reeb, George M., Assistant Inspector General for Centers for 
      Medicare and Medicaid Audits, Office of Inspector General, 
      HHS........................................................    23
    Smith, Dennis, Director, Center for Medicaid and State 
      Operations, Centers for Medicare and Medicaid Services, 
      U.S. Department of Health and Human Services...............    73
Material submitted for the record:
    American Health Care Association, prepared statement of......    61
    American Hospital Association, prepared statement of.........    62
    Gage, Larry S., President, The National Association of Public 
      Hospitals and Health Systems, prepared statement of........    63
    National Governors Association, prepared statement of........    65

                                 (iii)

  

 
INTER-GOVERNMENTAL TRANSFERS: VIOLATIONS OF THE FEDERAL-STATE MEDICAID 
              PARTNERSHIP OR LEGITIMATE STATE BUDGET TOOL?

                              ----------                              


                        THURSDAY, MARCH 18, 2004

                  House of Representatives,
                  Committee on Energy and Commerce,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 9:30 a.m., in 
room 2123, Rayburn House Office building, Hon. Michael 
Bilirakis (chairman) presiding.
    Members present: Representatives Bilirakis, Hall, Upton, 
Greenwood, Deal, Burr, Norwood, Shimkus, Wilson, Buyer, Pitts, 
Barton (ex officio), Brown, Waxman, Pallone, Eshoo, Stupak, 
Engel, Green, Strickland, Capps, and Rush.
    Also present: Representatives Solis and Sullivan.
    Staff present: Charles Clapton, majority counsel; Jeremy 
Allen; health policy coordinator; Eugenia Edwards, legislative 
clerk; Bridgett Taylor, minority professional staff; Amy Hall, 
minority professional staff; and Jessica McNiece, minority 
research assistant.
    Mr. Norwood [presiding]. We will now call the hearing of 
the Health Subcommittee to order.
    If the witnesses would come on up and get comfortable at 
the table.
    Before I begin with my opening statement, I ask unanimous 
consent that members who wish to waive their opening statement 
will be given an additional 3 minutes in questioning. So just 
let us know, but let's keep in mind we do need to get the 
witnesses going as soon as possible.
    I would like to begin by thanking our witnesses for taking 
the time to join us and provide their perspectives on an 
important issue facing the Medicaid program. Today's hearing is 
the first in a series that will explore different aspects of 
the Medicaid program and strategies for modernizing this 
critical component of our health care safety net.
    Your testimony on the subject of intergovernmental 
transfers should prove valuable as the subcommittee moves 
forward with its work in this particular area.
    Medicaid is a joint partnership between the Federal 
Government and the States. States provide health coverage for 
eligible beneficiaries and then draw down a specified Federal 
match to cover these expenses. The Federal match, which is 
known as the Federal medical assistant percentage, or FMAP, 
varies, of course, from State to State.
    On average the Federal Government picks up approximately 57 
percent of our Nations total Medicaid tab. As we will, no 
doubt, discuss today, some states have used certain financing 
mechanisms, including intergovernmental transfers, or IGTs, in 
an effort to maximize the amount of Federal dollars States are 
able to draw down.
    While I will let our witnesses explain how IGTs work, I 
want to make two quick points. First, we have numerous examples 
of cases where States do not expend any of their own funds in 
securing these Federal payments.
    Second, I know that our witnesses will be able to cite 
specific instances where Federal Medicare payments were not 
used to pay for Medicaid covered services.
    These activities greatly concern us all, as they should and 
as members of this subcommittee. Inappropriate use of IGTs, 
while not technically illegal, fly in the face of the Federal-
State partnership that was originally envisioned under 
Medicaid. When States use IGTs to draw down extra Federal 
funds, they are making a unilateral decision to increase the 
Federal Government share of their Medicaid programs.
    In my opinion, these activities harm States, such as 
Florida, Mr. Bilirakis' home State, that have not been as 
aggressive in their use of these tactics.
    I hope members use this opportunity to learn more about 
this complicated subject and do not simply use this hearing as 
a forum for political grandstanding, they said.
    I want to put subcommittees on notice that I intend to hold 
further hearings on this topics. While members share divergent 
views regarding Medicaid, I think we should all share the goal 
of insuring that every single Federal dollar spent on Medicaid 
goes directly to providing Medicaid services, and that the 
integrity of the Federal-State partnership is maintained.
    I would, again, like to thank our witnesses for taking 
their time to join us today. I know that we all look forward to 
your testimony, and we are going to get to it as quickly as we 
can.
    Now, I would like to yield to the ranking member of the 
subcommittee, the gentleman from Ohio, for a 5-minute opening 
statement.
    Mr. Brown. Thank you, Mr. Chairman.
    Medicaid coverage is at risk for tens of millions of 
Americans who need Medicaid coverage. What is our response? 
Rather than focusing on shoring up Medicaid, we focus on ways 
of cutting more dollars from it.
    The President's budget cuts $24 billion from Medicaid over 
the next 10 years. While the details are sketchy, CMS 
apparently intends to eliminate certain mechanisms that States 
use to finance their share of the Medicaid program.
    Previous administrations have worked with Congress and with 
the States to address the misuse of intergovernmental transfers 
and other financing mechanisms. Because of these changes, the 
opportunity to divert funds from Medicaid has been 
significantly curtailed.
    Let's not fool ourselves. If we cut $24 billion from 
Medicaid, we won't be cutting dollars from unrelated State 
programs and State projects. We will be cutting people off from 
health care. Forty-nine States and the District of Columbia 
have plans to cut their Medicaid program this year. In my own 
State, Governor Taft has announced he plans to cut at least 
$120 million from Medicaid even though there are already 
waiting lists for critical services.
    A little boy in my district recent who tragically has an 
incurable, severely disabling and terminal illness was placed 
on a waiting list for care he absolutely and he desperately 
needed. The hell that he and his parents went through is 
something we should never again have to witness.
    Apparently to this administration that just does not 
matter. The Bush Administration is resurrecting old skeletons 
to justify the unjustifiable, to justify starving the Medicaid 
program instead of saving it. Medicaid is not an extravagance. 
Medicaid is not an afterthought. Medicaid anchors this Nation's 
health care system.
    Medicaid spending has increased dramatically over the past 
4 years not because of fraud, not because of abuse, but because 
of enrollment increases associated with the economic downturn, 
300,000 fewer jobs in my State alone in the last 3 years, of 
course there is a greater need for Medicaid services, and the 
increase has been because prescription prices and hospital 
costs are pushing up spending for public and private insurers 
alike.
    Medicaid is cost efficient. Medicaid provides health care 
for fewer dollars per enrollee than the private health 
insurance system.
    Not only does Medicaid protect the individuals covered 
under the program; it plays a major role in financing the 
health and long-term care sectors of our economy. That means 
protecting the health professionals who serve all of us, and it 
means jobs.
    The President will not replace the $24 billion he cuts from 
Medicaid even though Medicaid is the only reason that the 
uninsurance rate in this country has not exploded under his 
watch. It is the only reason 1.3 million low income seniors 
have access to nursing home care. It is the only reason 
children living in poverty receive care in a doctor's office 
rather than in an emergency room.
    I keep coming back to the same question. What has happened 
to this Nation's priorities since President Bush took office? 
Why are the most unfortunate among us the least important 
people in this country to our government?
    The government's role is to assist those in need, not to 
desert them. Corporate tax loopholes cost the government more 
than $155 billion each year. Last year corporate ex patriots 
cost the U.S. Government $70 billion in lost revenue moving 
offshore to Bermuda and other places.
    The Bush Administration, not concerned about that corporate 
tax cheating, the Bush Administration's decision to withhold 
Medicare cost estimates from Congress will cost taxpayers $534 
billion over the next 10 years. The Bush Administration 
decision to launch ``infomercials'' touting the Medicare bill 
will cost Americans at least $80 million.
    But the President and Congress just seem not too concerned 
about those tax dollars, yet we kick Medicaid when it is down. 
The President and Congress should be concerned about fraud and 
abuse, to be sure, but we should be far more concerned with 
investing the necessary dollars to keep Medicaid afloat. That 
is what our focus should be today.
    This subcommittee has sole jurisdiction over Medicaid. We 
bear significant responsibility for the formulation of national 
health care policy. We should not permit, much less help, the 
Bush Administration to demonize, to destabilize, and ultimately 
to destroy this essential safety net program.
    I yield back my time.
    Mr. Norwood. Thank you, Mr. Brown, so much for political 
grandstanding. I tried though.
    We are delighted to recognize the chairman of the full 
Commerce Committee who is with us this morning, Mr. Barton.
    Chairman Barton. Thank you, Mr. Chairman.
    I am going to take a point of personal privilege before my 
statement and announce that Chairman Tauzin was operated on 
yesterday at Johns Hopkins. It was a lengthy operation, but he 
came out with flying colors. The doctors indicate that the 
cancer was localized and that they have removed the tumor, and 
that it had not spread to any of the other organs in the 
vicinity. He is going to be in intensive care for a number of 
days, but will be able to take visitors some time next week.
    We have a small card here we are going to be sending 
around, and we are going to ask all of the members to sign it 
and say something nice about him in the card, you know, but 
Billy is doing well and Cecile says he is in good spirits.
    As to my opening statement on this hearing, I want to thank 
Chairman Bilirakis for holding it. I want to thank our 
witnesses for being here.
    The issue of intergovernmental transfers is something that 
needs to be addressed. In some instances they are legal. It 
appears in many instances they are abused, and in some 
instances some of what is being done may be illegal.
    Medicaid is a State-Federal partnership, and the 
partnership does not work when one of the partners tries to 
game the system, and it certainly appears that in some cases 
the system is being gamed. So I have a formal statement for the 
record, which I would ask unanimous consent to put in, but I am 
looking forward to the hearing, and I again want to thank the 
witnesses for being here today.
    Mr. Norwood. Thank you very much, Mr. Chairman.
    Mr. Waxman, you are now recognized for a 3-minute opening 
statement.
    Mr. Waxman. Thank you, Mr. Chairman.
    Every member of this committee is aware of the critical 
role the Medicaid program plays in providing health care 
services to some 50 million Americans, persons who are the most 
vulnerable and who frequently have the most complex and 
difficult health care problems.
    Further, Medicaid is a program that has always faced severe 
funding problems largely because it depends on significant 
State contributions. This is a true structural problem because 
at the very time when the economy weakens and people lose their 
jobs and health care coverage and need Medicaid's help, State 
revenue bases weaken, as well, making the State contribution 
doubly difficult.
    States and localities have long dealt with the fiscal 
demands of Medicaid by using a combination of funding sources. 
Intergovernmental transfers of local funds have been a 
recognized and explicitly legal source of funding for the 
program.
    In many States, including my own State of California, these 
funds have been used in conjunction with the DSH Program and 
upper payment limit rules to support not just critical local 
public hospitals, but children's hospitals and private 
institutions which serve large numbers of uninsured patients. 
They have maintained these institutions and allowed them to 
provide needed trauma care and community services, especially 
at a time when they provide so much service to those who have 
no insurance.
    I am sure we will hear about instances where there have 
been abuses of Medicaid funding, where inappropriate transfers 
have been used to leverage Federal dollars that have then been 
used for purposes other than health care. No one condones using 
scarce Medicaid dollars to build roads.
    But action has already been taken to close the loopholes in 
the law that has led to these abuses. I am not saying all of 
the problems are solved, but the most egregious abuses will not 
be permitted under the changes that have already been made in 
the Medicaid program.
    The upper payment limit regulations now being phased in 
have in effect essentially stopped the ability to use large 
differentials in payments to draw down Federal dollars for 
other State budget purposes.
    But I want to make one thing clear. I think we have 
squeezed too much with these regulations, and we cannot afford 
to do anything more. There was a decision in the last 
administration to set the limit for public facilities at 150 
percent of the Medicare rate, which was more appropriate.
    I do not object to maximizing use of Federal dollars to 
support health care in these vital institutions.
    Finally, let me add that as critical as I have sometimes 
been of States' administration of the program, I think they 
have a legitimate complaint about the way the Bush 
Administration continues to lay out one set of financing rules 
for States to rely upon and then summarily changes them.
    State budgets and systems are complex and any Federal 
proposal to change the law in these areas should be accompanied 
by notice, opportunity for public comment, and respectful 
transition periods. No one is helped when the Federal partner 
makes and unmakes its decisions so suddenly.
    I hope if the chairman disagrees with any of my comments he 
will not claim I am grandstanding. I am submitting these views 
with all sincerity, and I hope we can discuss it with civility 
and tolerance for differences.
    Yield back the balance of my time.
    Mr. Norwood. Actually, Mr. Waxman, I thought you did real 
well, and I know you were sincere.
    Ms. Wilson, you are now recognized for 3 minutes.
    Mr. Wilson. Thank you, Mr. Chairman.
    Medicaid is now the largest health care program in the 
country. It serves 48 million people and last year had a budget 
of $280 billion. It is about 7 percent of the Federal budget, 
and it is close to 15, between 15 and 20 percent of most State 
budgets.
    In my view Rube Goldberg would admire the financing scheme 
that underpins Medicaid. It is a scheme that is really set up 
to encourage States to maximize their Federal expenditures with 
accounting tricks and kickback schemes and to have State 
Medicaid directors focused on what they can do to get the next 
percentage of a penny of Federal match rather than focusing on 
how to improve the health care of the people who depend upon 
Medicaid.
    We know States are using upper payment limits and 
disproportionate share hospital payments for things other than 
health care; that they transfer in some cases transfer funds to 
public hospitals and then require those public hospitals to 
remit those funds without using them for health care back to 
State governments.
    The Federal match is based on per capita income, and when 
you have some States pursuing these schemes, that takes dollars 
from somebody else that needs those dollars to meet their own 
needs in health care.
    Now, there are some circumstances where these 
intergovernmental transfers are completely legitimate ways of 
local governments contributing to the State and local match. 
Every State has a different set-up for how they collect taxes, 
but there are other circumstances where they are being an abuse 
of the Medicaid system, and I think we may need to take action 
to stop it.
    I think also though that these tricks are only a symptom of 
a larger problem. Medicaid's whole financial structure is held 
together with baling wire and duct tape, and we need to look 
long term at how we change this structure. We should not be 
surprised that States play the game. We wrote the rules of the 
game, and the rules need to be changed so that the States win 
when the health of low income Americans, children, pregnant 
women, the adult disabled, and seniors improves.
    The system is not set up to improve anybody's health. It is 
set up to pay claims, and that is a fundamental problem with 
the financial structure of Medicaid.
    This system only continues to function because every State 
has multiple waivers to do something outside of the rules of 
the program. Think about that. You need a waiver from the 
Federal program to focus on improving somebody's health status.
    We need to change the rules, and the time is coming to 
fundamentally change the program so that States do not need 
these waivers and we have sound financial footing for the 
Medicaid system.
    Thank you, Mr. Chairman, and thank you for holding this 
hearing.
    Mr. Norwood. Thank you, Ms. Wilson.
    Mr. Pallone, do you wish to have an opening statement?
    Mr. Pallone. Yes, thank you, Mr. Chairman.
    Mr. Norwood. You are now recognized.
    Mr. Pallone. Mr. Chairman, I am deeply concerned about the 
impact that the Bush Administration is having on Medicaid. I 
believe we should be strengthening the program that is the 
largest source of insurance today in the United States, and 
instead the President is advocating a radical overhaul of 
Medicaid.
    In his fiscal year 2005 budget, the President cites his 
legislative goals that essentially destroy Medicaid, that is, 
turning the program into a allotments or block granting, 
curbing intergovernmental transfers and increasing audits on 
States and their financial management of Medicaid.
    We have heard that by block granting Medicaid States will 
have the flexibility necessary for expanding access to health 
care, but let's be clear. In reality, that is a proposal that 
simply blackmails the States. The block grant proposal caps the 
Federal share of Medicaid dollars so that States cannot receive 
adequate funding as their Medicaid needs rise.
    By shifting fiscal responsibility to States, the Medicaid 
block grant encourages States to limit their liability by 
capping enrollment, cutting benefits, and increasing cost 
sharing for millions of low income people.
    In addition, any short term relief that States receive up 
front under the block grant will have to be paid back at the 
end of the 10 year budget window. If that is not a bribe, then 
I do not know what is.
    Essentially by block granting a large portion of the 
Medicaid program, the President's proposal simply passes the 
buck onto hard-pressed States I am also disturbed by the 
administration's attempt to propose legislation to crack down 
on intergovernmental transfers, IGTs. When the Medicaid program 
was created in 1965, the system was financed by State 
contributions and in an exact match of Federal dollars. States 
have been using IGTs to increase the amount of matched Federal 
funds, and these extra dollars are allocated toward the same 
Medicaid services.
    My home State of New Jersey started using IGTs several 
years ago as a means for funding legitimate Medicaid services, 
specifically nursing home care. Without IGTs, it is nearly 
impossible for New Jersey to obtain other funding sources, and 
this is exacerbated by the fact that New Jersey and every State 
is facing severe budget shortages.
    Medicaid cuts, including a tax on IGTs, will only result in 
benefit cuts to the elderly, and unfortunately this seems to be 
the direction that the President desires.
    Last, the administration is proposing to spend $20 million 
to increase the number of State audits. Well, quite frankly, 
$20 million is valuable and better spent on health care 
services.
    Again, I used my home State of New Jersey as an example. We 
are experiencing a pending list of over 15 audits by the 
Department of Health and Human Services. Each case has been 
examined so far and has had a clean outcome, and I believe our 
State needs to be afforded the respect it deserves and must be 
afforded the ability to return to its work of serving its 
Medicaid beneficiaries and to stop wasting time gathering 
papers for an increased number of audits.
    By cutting Medicaid funding and offering the proposals 
outlined in his budget, the President is undermining access to 
care for the poor elderly, sick and disabled and overall the 
President's proposal weakens the health care safety net and 
adds to the widening credibility gap that is putting him and 
the Republicans that support his proposal further out of touch 
with the American people.
    Thank you, Mr. Chairman.
    Mr. Norwood. Mr. Buyer, you are recognized. You pass? You 
will be added time in questioning.
    I am delighted to recognize Ms. Eshoo.
    Ms. Eshoo. Thank you, Mr. Chairman, and good morning to 
everyone. And thank you for holding this important hearing on 
this important issue.
    I think we have before us today an issue that goes really 
to the heart of one of the most serious problems certainly 
facing my State, the State of California: insuring that low 
income families, seniors and people with disabilities have 
health care coverage.
    The Federal-State matching program for Medicaid in my view 
works. It is a program that really doesn't have the amount of 
resources that it should have in it, and certainly when our 
economy is failing and the States are having one of the 
roughest times in the history of our country, there is a reason 
why Medicaid is strained. There are more people that are 
dependent upon it.
    I understand that questions are raised about the program's 
financial management, specially with regard to whether Federal 
matching funds are being spent appropriately. Questions have 
been raised primarily about the intergovernmental transfers, 
and I think that we should have a very healthy discussion about 
that because if, in fact, dollars are being misused or abused, 
then that is what we should pursue.
    Some States inappropriately inflate the Federal share of 
Medicaid, but what we should do is go after that. If this is a 
ruse to really supposedly overhaul the program midstream 
because there is a misuse of any dollars I think is really 
unwise because what would be jeopardized is extraordinarily 
vulnerable both in terms of the people that are dependent upon 
the funds and certainly the States that are having such a touch 
time.
    IGTs, for everyone on this committee in cases we might be 
forgetting it during the hearing, are legal and legitimate 
mechanisms, funding mechanisms for the States. They were put 
into place by both Democrats and Republicans, and to change 
this program at a time when many States are in a fiscal crisis, 
when there is a rising number of Medicaid beneficiaries and 
uninsured, I think would be reckless.
    Mr. Chairman, I just want to point out something that comes 
with the statement from the National Governors Association that 
is part of our packet this morning, and it is on page 1. It is 
under State and local governments, and I am going to quote from 
it.
    ``Without the benefit of IGTs, large county-based States, 
such as New York, California, Wisconsin, and North Carolina, to 
name just a few, would literally be unable to finance their 
Medicaid programs, destroying the safety net in many parts of 
the country and drastically increasing the number of the 
uninsured.''
    So I think that every member has got to look to and talk to 
and work with their Governors regardless of whether it is a 
Republican Governor or a Democratic government. This is a huge 
issue for our States, and it certainly is for mine.
    IGTs are the funding mechanism for the disproportionate 
share of the hospital program in my State of California, and 
these DSH funds are essentially for California's safety net 
hospitals to be able to provide health care services.
    Is my time up?
    Mr. Norwood. Yes, ma'am.
    Ms. Eshoo. My goodness. At any rate, I look forward to 
nearing from our witnesses, Mr. Chairman, and I think that we 
need to tread lightly, tread lightly. If we are going to reform 
something, let's separate the wheat from the chaff, but let's 
not let anyone fall through that fragile safety net that has 
been constructed.
    Thank you.
    Mr. Norwood. Thank you, Ms. Eshoo.
    I do not know how others feel about it, but I think 
generally a hearing like this is a learning experience for us 
all. I do not have an ulterior motive. I just want to hear and 
learn about what is going on.
    With unanimous consent, I would like to refer to the 
chairman for an introduction.
    Chairman Barton. Thank you, Congressman Norwood.
    I do not normally take point of personal privilege twice in 
one hearing before it even gets started, but the gentleman back 
to my right was a military fellow for me several years ago. He 
is a graduate of Texas A&M. Brigadier General Bill Webber, who 
is one of the two brigadier generals that led the 3rd Infantry 
Division into Baghdad, part of that time was at the head of the 
sphere. So I want to welcome him to the Congress and thank him 
for his fine patriotic work.
    Mr. Norwood. Thank you, General.
    And, Mr. Chairman, I have got it figured out now. He went 
to A&M. That is what this is all about.
    Mr. Shimkus, do you wish to have an opening statement?
    Mr. Shimkus. Just briefly, Mr. Chairman. Thank you.
    Tip of the sphere is the acronym for the infantry, not just 
the head of the sphere, but the tip of the sphere.
    And this IGT thing is an interesting debate, and as 
governing officials we have to as much as we would not like to 
shine the light of day on funding, it is really what we have to 
do.
    Now, Illinois is an IGT State. My first really health care 
battle was with the Clinton administration. It was one of the 
few times I was in the West Wing with Secretary Shalala on IGT, 
trying to save the intergovernmental transfer funding stream 
for Illinois' poor health care facilities that were relying on 
IGT to make ends meet.
    So here we go again, and I think it is a tough issue to 
debate. It is important, but I think we can't lose sight of how 
those States who have been using the intergovernmental 
transfer, at least in the State of Illinois, have gone to help 
the poor and stressed facilities that are providing needed 
health care benefits to the poor.
    And so I think it is an important hearing, Mr. Chairman, 
and I thank you for your time. I yield back.
    Mr. Norwood. Thank you very much, Mr. Shimkus.
    And now my good friend, Ms. Capps, would you like to have 
an opening statement?
    Ms. Shimkus. No, I will waive.
    Mr. Norwood. You will waive. Very well.
    Let's see. We go to Mr. Stupak. Would you dare to have an 
opening statement?
    Mr. Stupak. I would prefer to make an opening.
    Mr. Norwood. You are recognized.
    Mr. Stupak. Thank you, Mr. Chairman.
    Welcome to our witnesses.
    I would like to open this committee meeting with a reminder 
that any cut to Medicaid will cause seniors to lose benefits, 
children of working families to be turned away, and 
reimbursements of health care professionals to drop again.
    In Michigan, Medicaid has been a Godsend for families and 
seniors, especially during the economic turndown. In the past 4 
years, Michigan's program has grown by almost 30 percent, now 
covering about 1.35 million people.
    The President has proposed cutting Michigan's Medicaid 
budget by $385 million over 10 years. Overall, the President 
would cut Medicaid nationally by over $23.5 billion over 10 
years. How does a State like Michigan whose Medicaid enrollment 
has increased 30 percent in 4 years fill a $385 million hole? 
Not easy and with a lot of pain.
    Michigan could cut the home and community-based waiver 
program that allowed people to stay in their homes instead of 
nursing homes. Michigan could cut 77,000 of Michigan's most 
vulnerable adults, or Michigan could cut its low prescription 
drug benefit program for 14,000 low income seniors. This is not 
acceptable. It is unconscionable.
    Today we begin to dissect how States finance their Medicaid 
programs in an effort to find $23.5 billion in so-called 
``waste, fraud and abuse.'' I am for transparency and honest 
bookkeeping, but I believe the purpose here is dubious. 
Certainly there are abuses that need to be addressed, but I 
find it hard to believe that the States are defrauding the 
government by $23.5 billion.
    I have noticed a pattern that every time the majority 
starts talking about Medicaid reform they are also pushing for 
more tax cuts. I cannot support cuts to Medicaid when 
Michigan's unemployment rate is around 7 percent and when we 
have over 43 million uninsured people nationwide, yet the 
majority wants another $150 billion in tax cuts. The numbers 
just don't add up.
    I am looking forward to the discussions we are going to 
have here today and through on this issue, and with that I 
yield back the balance of my time, Mr. Chairman.
    Mr. Norwood. Thank you, Mr. Stupak.
    Mr. Green, I apologize to you. You were supposed to be 
next, Mr. Stupak said you did not care. So you are now 
recognized.
    Mr. Green. Well, that is the way he plays basketball, too. 
He's always trying to go around me.
    Thank you, Mr. Chairman, and I do have a statement.
    I would like to thank you for holding the hearing to 
discuss the intergovernmental transfers, or IGTs as it is 
abbreviated, in the Medicaid program. There are few areas of 
Medicaid that are more arcane and difficult to understand than 
the IGT, and there are going to be countless acronyms thrown 
around during the hearing which may leave many of us more 
confused than enlightened. But being from a State that has a 
long history of using IGTs to draw down Federal dollars, I 
would like to take a moment to discuss the importance of the 
mechanism and advocate for the protection of States that are 
legitimately using IGTs to provide health care for millions of 
low income individuals.
    My home State of Texas is one of the last in the Nation to 
have only a Statewide sales tax, no income tax. So a lot of our 
revenue is generated at the local level. As a result, nine 
large public hospitals provide the IGTs that equal the State's 
match portion to draw down Federal Medicaid funding.
    This funding helps Texas capture Federal matching funds 
through the Medicaid disproportionate share program and the 
upper payment limit. The mechanism enabled Texas to draw down 
$504.3 million in Federal funds, all of which they have 
disbursed to public and private DSH hospitals.
    Now, I know this sounds complicated, but it is perfectly 
legal and perfectly legitimate, and nothing about this is shady 
or underhanded or inappropriate. And our State, county and 
municipal governments help underwrite our Federal health care 
programs. Very little State funding. It is how our program is 
designed by the local government, and that is the way it has 
worked, not as best as I would like it, but still the Harris 
County Hospital District, which is a major health provider for 
low income and Medicaid populations in the city of Houston, 
uses IGT to drawdown $72.7 million in upper payment limits and 
$26.6 million DSH funding in 2003.
    The revenue stream is a critical component of the 
District's proposed for fiscal year 2005, $750 million. So you 
can tell we are talking about, you know, not a small portion of 
this Harris County Hospital district's budget.
    Now, I know that some States have abused the IGT to draw 
down Federal dollars and have spent them on non-health care 
related costs, such as roads and bridges, but we have addressed 
these issues many times to stem the abuses, and while there is 
still more that we could do, any effort to eliminate IGTs would 
be detrimental to not only my State but a number of States.
    We need to make sure that the Texas program and other 
programs that follow the rules are protected, and, again, hank 
you, Mr. Chairman.
    And to follow up my colleague, Mr. Shimkus, I was probably 
only in the West Wing one time under the Clinton 
administration, too. That was when I told them I would vote 
against NAFTA.
    Mr. Norwood. Thank you, mr. Green.
    Mr. Burr, do you wish to make an opening statement?
    Mr. Burr. Mr. Chairman I would. I'd like to.
    Mr. Norwood. You are recognized.
    Mr. Burr. I would like to thank you for holding this 
hearing.
    I think that it is safe to say that all of us are disgusted 
at how intergovernmental transfer find their way from the 
health care arena to highways and other infrastructure needs, 
and we want to see that stopped.
    I think the one challenge for this committee and this 
Congress is to make sure that we do not in any way, shape or 
form change our commitment to the health care needs across this 
country and at the State levels.
    I think that this hearing is important to understand not 
only why intergovernmental transfers are used, but how we might 
be able to change it or if we can change it so that if there is 
a process of flexibility, that it can only go to meet the 
health care needs; that we cannot have some of the abuses that 
exist.
    I do not think we are as much here today to start a process 
to find somebody to blame or to hang. We are here to figure out 
how to make the system better.
    I want to thank our witnesses who are willing to come 
today. I want to challenge the members on this committee that 
have always displayed a tremendous amount of interest in how to 
make the system better; to listen very carefully; to ask all of 
the important questions; to go through the process of multiple 
hearings and then, in a bipartisan way, try to plug the 
problems and enforce those things that we produce up here that 
benefit those human faces that we see at home every week that 
we go there.
    So, Mr. Chairman, I thank you for the committee's 
willingness to do this. I also understand the importance of 
what we are now headed into, and I know that every member is 
committed to make sure that we do this right.
    I thank you, and I yield back.
    Mr. Norwood. Thank you. I appreciate it from the gentleman 
from North Carolina.
    Ms. Solis, do you wish to make an opening statement?
    Ms. Solis. Yes.
    Mr. Norwood. You are recognized.
    Ms. Solis. Thank you very much, Mr. Chairman, and thank you 
for the opportunity to also be here. I am not officially on 
this subcommittee, but have a keen interest also.
    I represent California. As was mentioned earlier by other 
members, it is a very important part of this discussion here 
today.
    So I want to, first of all, thank the panelists for being 
here, and I would like to especially thank our representative 
and CEO from the Children's Hospital of Los Angeles. For more 
than 100 years, the Children's Hospital of Los Angeles has been 
a valuable resource for our children and our families in L.A. 
county, and I thank you for the diligent work that your staff 
provides to the many, many youngsters that come from my 
district, from the 32nd Congressional District.
    California's Medicaid program, known as MediCAL provides 
access and health care to well over 6.5 million low income 
Californians, including children, working families, pregnant 
women, immigrants, and the disabled and elderly. California has 
a history of lawfully using the intergovernmental transfer 
program to provide crucial help to safety net hospitals. These 
are hospitals that are integral to our community.
    The ones that I represent in my district are the White 
Memorial Center in East Los Angeles and the Citrus Valley 
Health partners in West Covina, and while I share the 
administration's concern with insuring that Medicaid dollars 
are used appropriately, I also know that proposals to limit the 
use of legal, legitimate IGTs, such as California's, could 
seriously damage our health care safety net.
    One out of every six Californians and one out of every four 
California children are covered by MediCAL. We absolutely must 
keep in mind as we move forward with these discussions.
    I look forward to hearing from the witnesses.
    Thank you, Mr. Chairman.
    Mr. Norwood. Thank you, Ms. Solis.
    And, Mr. Greenwood, would you care to make an opening?
    Mr. Greenwood. I will be very brief, Mr. Chairman.
    Mr. Norwood. You are recognized.
    Mr. Greenwood. And I thank Chairman Bilirakis for holding 
this committee hearing. It is important. We have a lot to 
learn, and I am among those who is here because I want to learn 
more about this issue.
    But I do think there is a fundamental flaw with the whole 
notion of intergovernmental transfers, a fundamental flaw, and 
the fundamental flaw is that this Medicaid system was a system 
that was designed to be roughly 50-50 split, and there are 
variations between the States obviously, but it was supposed to 
be a shared notion that if the State was willing to belly up to 
the bar and make some sacrifices, tax its citizens, raise some 
money for health care, that we at the Federal level would be a 
partner.
    And there is obviously a consulting industry that has 
arisen in this country where individuals who work in the State 
Medicaid programs figure out how to do this. They go out into 
the private sector and then they come back and they consult 
with States, and they have come up with these solutions where 
essentially the State gets to manipulate the process so that 
the program is funded essentially 100 percent with Federal 
dollars.
    That is unsustainable. It is not the way the program was 
designed to be. My State of Pennsylvania is right in the thick 
of it, doing it with great alacrity, but it is wrong, and you 
cannot sustain it. It is not the way the system was designed to 
be worked, and we will never get control of the Medicaid 
funding problem and the growth rates and make sure that it is 
really a sustainable program for the long run unless we get 
real serious and make some difficult choices about IGTs.
    Thank you, Mr. Chairman.
    Mr. Norwood. Mr. Hall, do you care to have an opening 
statement?
    It is of interest to me that there are a number of members 
of the full Commerce Committee here that are not on the Health 
Care Committee that are here, and I think that is a very good 
sign that there is a great deal of interest.
    Are there any other members who have not made an opening 
statement who wish to do so?
    [Additional statements submitted for the record follow:]

Prepared Statement of Hon. Michael Bilirakis, Chairman, Subcommittee on 
                                 Health

    I now call this hearing of the Health Subcommittee to order. I 
would like to begin by thanking our witnesses for taking the time to 
join us and provide their perspectives on an important issue facing the 
Medicaid program. Today's hearing is the first in a series that will 
explore different aspects of the Medicaid program and strategies for 
modernizing this critical component of our healthcare safety net. Your 
testimony on the subject of intergovernmental transfers should prove 
valuable as the subcommittee moves forward with its work in this area.
    Medicaid is a joint partnership between the federal government and 
the states. States provide health coverage for eligible beneficiaries, 
and then draw down a specified federal match to cover these expenses. 
The federal match, which is known as the federal medical assistance 
percentage, or ``FMAP,'' varies from state to state. On average, the 
federal government picks up approximately 57% of our nation's total 
Medicaid tab.
    As we will no doubt discuss today, some states have used certain 
financing mechanisms, including intergovernmental transfers, or 
``IGTs,'' in an effort to maximize the amount of federal dollars states 
are able to draw down. While I will let our witnesses explain how IGTs 
work, I want to make two quick points. First, we have numerous examples 
of cases where states do not expend any of their own funds in securing 
these federal payments. Second, I know that our witnesses will be able 
to cite specific instances where federal Medicaid payments were not 
used to pay for Medicaid-covered services.
    These activities greatly concern me, as they should all members of 
the subcommittee. Inappropriate uses of IGTs, while not technically 
illegal, fly in the face of the federal state partnership that was 
originally envisioned under Medicaid. When states use IGTs to draw down 
extra federal funds, they are making a unilateral decision to increase 
the federal government's share of their Medicaid programs. In my 
opinion, these activities harm states, such as Florida, that have not 
been as aggressive in their uses of these tactics.
    I hope members use this opportunity to learn more about this 
complicated subject and not simply use this hearing as a forum for 
political grandstanding. That said, I want to put members of the 
subcommittee on notice that I intend to hold further hearings on this 
topic. While members share divergent views regarding Medicaid, I think 
we should all share the goal of ensuring that every single federal 
dollar spent on Medicaid goes directly to providing Medicaid services 
and that the integrity of the federal-state partnership is maintained.
    I would like to again thank our witnesses for taking the time to 
join us today--I know we all look forward to your testimony. I now 
yield to the ranking member of the subcommittee, the gentleman from 
Ohio, for an opening statement.

                                 ______
                                 
 Prepared Statement of Hon. Eliot Engel, a Representative in Congress 
                       from the State of New York

    Mr. Chairman, I am a bit troubled about the tone and the apparent 
intent of this hearing today. The Administration and this Committee 
appears to be targeting states that utilize intergovernmental transfers 
and seeking to cut almost $10 billion in 5 years from critical health 
care funding. At a time of fiscal crisis, high unemployment, and over 
40 million Americans lacking health insurance, I believe it is highly 
irresponsible to seek further cuts in our nation's fragile health care 
safety net.
    Last week we heard testimony from Secretary Thompson regarding the 
Presidents budget for health care. In looking over the President's 
budget I was disappointed to see that there is little in the way of 
bolstering health care for the uninsured, aside from a modest increase 
for community health centers. Instead, the Administration's main goal 
seems to be cutting even further funding for the poorest and frailest 
Americans in the Medicaid program by what it calls ``curbing'' the use 
of intergovernmental transfers. However, the budget is high on rhetoric 
with little detail into how these cuts are to be implemented.
    Mr. Chairman, I and other Members of this Committee fought hard to 
reach an agreement a few years ago that allowed some states, including 
New York, that utilize intergovernmental transfers to continue doing so 
if the revenue generated was used for health care purposes for a 
transitional time period. New York has always used money generated from 
intergovernmental transfers to plug holes in the very fragile health 
care safety net in the state. When I hear that President Bush and my 
Republican colleagues are trying to save money by cutting health care 
funding it boggles my mind because in the end we will either pay now or 
we will pay a much heavier price later. In this case, with a 
floundering economy and those without jobs and insurance on the rise, 
we will pay a very heavy price by saving money on the backs of those 
most in need.
    Mr. Chairman, in my limited time I could not begin to talk about 
all the problems that this country faces in caring for the poor and 
uninsured. The move to cut $10 billion in Medicaid funding exemplifies 
what this Administration stands for: an attack on the poor and 
uninsured and a lack of vision in regards to what our countries needs 
are.
    I want to thank the witness for their time and I yield back.

    Mr. Norwood. Well, members of the committee and for our 
guests, I would like to take a minute and introduce our 
witnesses to us all. First we have Kathryn Allen, who is the 
Director of Health Care, Medicaid and Private Health Insurance 
Issues with the GAO.
    Ms. Allen, we are delighted you are here. Thank you.
    Mr. George Reeb, thank you for being here. Assistant 
Inspector General for Centers for Medicare and Medicaid Audits, 
Office of Inspector General with HHS.
    And Mr. Walter Noce. Did I say that right? President and 
Chief Executive Officer of Children's Hospital, Los Angeles.
    Ladies and gentlemen, your full statement obviously will be 
placed into the record, and generally we allow about 5 minutes 
of oral testimony. I am going to be a little lenient today 
since we only have three witnesses, and if you run over a 
little bit, I am going to ignore that, but just keep it within 
decent bounds.
    With that, Ms. Allen, we would love to hear from you now, 
please.

   STATEMENTS OF KATHRYN G. ALLEN, DIRECTOR OF HEALTH CARE, 
   MEDICAID AND PRIVATE HEALTH INSURANCE ISSUES, GOVERNMENT 
ACCOUNTING OFFICE; GEORGE M. REEB, ASSISTANT INSPECTOR GENERAL 
    FOR CENTERS FOR MEDICARE AND MEDICAID AUDITS, OFFICE OF 
INSPECTOR GENERAL, HHS; AND WALTER W. NOCE, JR., PRESIDENT AND 
          CHIEF EXECUTIVE OFFICER, CHILDREN'S HOSPITAL

    Ms. Allen. Thank you, Mr. Chairman, Mr. Brown, and other 
members of the subcommittee.
    I appreciate the opportunity to be here today to testify as 
you address these very important issues of States' use of 
intergovernmental transfers, or IGTs, in the Medicaid program.
    As we have already heard this morning, Medicaid fulfills a 
very crucial national role by financing health services to 
about 50 million low income Americans. It now finances more 
individuals than does the Medicare program.
    The population served is extremely heterogeneous. Medicaid 
pays for health care for about one in five of all children 
nationwide, one in five of individuals with chronic 
disabilities who live in the community, and two in three of all 
nursing home residents.
    Congress structured the Medicaid program as a shared 
Federal-State responsibility, as has been pointed out already 
this morning, with the Federal share of each State's payments 
determined by a formula which is set in law.
    The Federal Government pays for at least half of every 
State's Medicaid program and up to two-thirds for some States 
that have less fiscal capacity to finance this care. Through 
broad Federal guidelines, States have considerable discretion 
to design and implement their programs. For more than a decade, 
however, States have used a number of what we call creative 
financing schemes to inappropriately increase the Federal share 
of Medicaid spending.
    Now, IGTs is just one of the tools that States have used to 
do this. In a broad sense, States and local governments use 
IGTs to carry out important shared functions, such as 
collecting and redistributing revenues to provide essential 
government services.
    But States have also used IGTs to transfer funds to and 
from State or local government owned facilities as part of 
complex schemes that inappropriately boost the Federal share of 
Medicaid costs.
    These financing schemes have taken various forms over the 
years. Many of us know them as provider taxes and donations, 
disproportionate share hospital, or DSH payments, and upper 
payment limit, or UPL schemes. My written statement provides 
more detail on how each of these works.
    While the details differ, they share certain common 
features. They take advantage of statutory and regulatory 
loopholes. Some States make large Medicaid payments to certain 
providers, such as counties that operate nursing homes. These 
payments typically exceed by far the established Medicaid 
payment rate for those facilities that receive the payment.
    The payment from the State then triggers the Federal match 
at the State's established matching rate. Such transactions 
create the illusion of a valid State payment to qualify 
providers who deliver services to eligible individuals.
    In reality, however, this payment is only temporary because 
it is essentially a round trip transaction. The money does not 
stay with the provider. Most or all of the payment returns to 
the State, and once this round trip is completed, the State 
uses the returned funds to supplant its own share of future 
Medicaid spending or even uses the funds for non-Medicaid 
purposes.
    Financing schemes such as these undermine the Federal-State 
partnership in three ways. First, States using these schemes 
effectively increase the Federal matching rate beyond that 
which is established in law. It does so by inflating Federal 
spending while State contributions remain unchanged or in some 
cases even decline.
    Second, there is no assurance that these increased Federal 
payments are used for valid Medicaid services for eligible 
individuals on whose behalf the payments are made.
    And, third, the schemes enable States to pay a few public 
providers amounts that grossly exceed the cost of services 
provided, which is inconsistent with the statutory requirement 
that Medicaid rates be economical and efficient.
    As these questionable practices have come to light over the 
years, the Congress and the administration have, indeed, acted 
to curtail them through statutory and regulatory reform. 
Despite these actions, however, problems persist. For example, 
as has already been mentioned this morning, the UPL loophole 
has been reduced, but it has not been eliminated. States can 
still claim excessive Federal funds for certain classes of 
facilities, such as county-owned nursing homes. They can still 
channel all of the funds through one or more facilities in the 
same round trip transaction as described earlier.
    To close this loophole altogether, GAO is suggesting that 
Congress consider a recommendation that remains open from one 
of our earlier reports, that is, to prohibit Medicaid payments 
that exceed actual costs for any government owned facility.
    In response to the question that is posed in the title of 
today's hearing, GAO believes that IGTs can be, they are a 
legitimate State budget tool when used in the course of 
fulfilling legitimate governmental functions.
    However, IGTs have come to be closely associated with, if 
not synonymous with, abusive schemes. While the Congress and 
the administration have acted to address the schemes identified 
to date, new variations continue to emerge year after year.
    Experience shows that some States are likely to continue 
looking for creative means to supplant State funding, making a 
compelling case for sustained vigilance. We need to continue to 
spot and stop the next emergent scheme before it grows to the 
point of becoming a staple of State funding.
    In conclusion, Mr. Chairman, States are, indeed, currently 
feeling considerable budget pressure as a result of reduced 
revenues in recent years and increased Medicaid costs. 
Understandably, many States are quite concerned about the 
actual or potential loss of Federal Medicaid funding that they 
have come to rely upon.
    The challenge here will be to find the proper balance 
between States' flexibility to administer their Medicaid 
programs in accordance with their priorities and the shared 
Federal-State fiduciary responsibility to manage the program 
efficiently and economically in a way that ensures the 
program's fiscal integrity, but also in a way that ensures that 
public dollars designated for Medicaid beneficiaries are, in 
fact, spent on their care.
    Mr. Chairman, this concludes my prepared statement.
    [The prepared statement of Kathryn G. Allen follows:]

Prepared Statement of Kathryn G. Allen, Director, Health Care--Medicaid 
  and Private Health Insurance Issues, U.S. General Accounting Office

    Mr. Chairman and Members of the Subcommittee: I am pleased to be 
here today as you explore the issue of states' use of intergovernmental 
transfers in the federal-state Medicaid program. Medicaid finances 
health care for an estimated 53 million low-income Americans at a cost 
of $244 billion.1 Medicaid is the third-largest mandatory 
spending program in the federal budget and one of the largest 
components of state budgets, second only to education. The program 
fulfills a crucial national role by providing health coverage for a 
variety of vulnerable populations, including low-income families with 
children and certain people who are elderly, blind, or disabled. 
Congress has structured Medicaid as a shared responsibility of the 
federal government and the states, with the federal share of each 
state's Medicaid payments determined by a formula specified by law. The 
Centers for Medicare & Medicaid Services (CMS), within the Department 
of Health and Human Services (HHS), is the federal agency responsible 
for the program, and the states design and administer their programs 
with considerable discretion and flexibility.
---------------------------------------------------------------------------
    \1\ Estimated federal-state cost is for fiscal year 2002, the 
latest year for which data are available.
---------------------------------------------------------------------------
    For more than a decade, states have used a number of creative 
financing schemes to inappropriately increase the federal share of 
Medicaid expenditures. Intergovernmental transfers, or IGTs, are one of 
the tools that have enabled them to do so. State and local governments 
use IGTs to carry out their shared governmental functions, such as 
collecting and redistributing revenues to provide essential government 
services. But by using IGTs, states can also transfer funds to or from 
local-government entities, such as government-owned nursing homes, as 
part of complex financing schemes that inappropriately boost the 
federal share of Medicaid costs. In my testimony today, I will (1) 
describe how some state financing schemes have operated, including the 
role of IGTs in these schemes; (2) discuss how such financing schemes 
compromise the federal-state partnership that is the foundation of the 
Medicaid program; and (3) discuss what can be done to further curtail 
state financing schemes. My testimony today is based on our prior work 
assessing state financing schemes and federal oversight of them. We 
conducted this body of work from June 1993 through January 2004 in 
accordance with generally accepted government auditing 
standards.2
---------------------------------------------------------------------------
    \2\ See related GAO products at the end of this statement.
---------------------------------------------------------------------------
    In summary, for many years states have used varied financing 
schemes, sometimes involving IGTs, to inappropriately increase federal 
matching payments. Taking advantage of statutory and regulatory 
loopholes, some states, for example, have made large Medicaid payments 
to certain providers, such as nursing homes operated by local 
governments, which have greatly exceeded the established Medicaid 
payment rate. These state expenditures would enable states to claim 
large federal matching payments. Such transactions create the illusion 
of valid expenditures for services delivered by local-government 
providers to Medicaid-eligible individuals. In reality, the spending is 
often only temporary because states require the local governments to 
return all or most of the money to the states through IGTs. Once states 
receive the returned funds, they can use them to supplant the states' 
own share of future Medicaid spending or even use them for non-Medicaid 
purposes. Because such arrangements effectively increase the federal 
Medicaid share above what is set under law, they violate the fiscal 
integrity of Medicaid's federal-state partnership. As new schemes have 
come to light, Congress and CMS have taken legislative and regulatory 
actions to curtail them; nonetheless, problems remain. We believe 
Congress and CMS should continue their efforts to preclude states' 
ability to claim excessive federal Medicaid payments, and we suggest 
that Congress consider a recommendation that remains open from our 
prior work, that is, to prohibit Medicaid payments that exceed actual 
costs for any government-owned facility.

                               BACKGROUND

    Title XIX of the Social Security Act authorizes federal funding to 
states for Medicaid, which finances health care services including 
acute and long-term care for certain low-income, aged, or disabled 
individuals. States have considerable flexibility in designing and 
operating their Medicaid programs. Within broad federal requirements, 
each state determines which services to cover and to what extent, 
establishes its own eligibility requirements, sets provider payment 
rates, and develops its own administrative structure. In addition to 
groups for which federal law requires coverage--such as children and 
pregnant women at specified income levels and certain persons with 
disabilities--states may choose to expand eligibility or add benefits 
that the statute defines as optional.
    Medicaid is an open-ended entitlement: states are generally 
obligated to pay for covered services provided to eligible individuals, 
and the federal government is obligated to pay its share of a state's 
expenditures under a CMS-approved state Medicaid plan. The federal 
share of each state's Medicaid expenditures is based on a statutory 
formula linked to a state's per capita income in relation to national 
per capita income. In 2002, the specified federal share of each state's 
expenditures ranged from 50 percent to 76 percent; in the aggregate, 
the federal share of total Medicaid expenditures was 57 
percent.3 The Social Security Act provides that up to 60 
percent of the state share of Medicaid spending can come from local-
government revenues and sources.4 Some states design their 
Medicaid programs to require local governments to contribute to the 
programs' costs.
---------------------------------------------------------------------------
    \3\ In May 2003, Congress passed the Jobs and Growth Tax Relief 
Reconciliation Act, which appropriated $10 billion for a temporary 
increase in the federal matching rate for states. This across-the-board 
increase of 2.95 percent was effective from April 1, 2003, through June 
30, 2004.
    \4\ See 42 U.S.C.  1396a(a)(2) (2000).
---------------------------------------------------------------------------
 SOME STATE FINANCING SCHEMES HAVE USED IGTS TO CREATE THE ILLUSION OF 
                      VALID MEDICAID EXPENDITURES

    For more than a decade, some states have used various financing 
schemes, some involving IGTs, to create the illusion of a valid state 
Medicaid expenditure to a health care provider. This payment has 
enabled states to claim federal matching funds regardless of whether 
the program services paid for had actually been provided. As various 
schemes have come to light, Congress and CMS 5 have taken 
actions to curtail them (see table 1). Many of these schemes involve 
payment arrangements between the state and government-owned or 
government-operated providers, such as local-government-operated 
nursing homes.
---------------------------------------------------------------------------
    \5\ In June 2001, the Health Care Financing Administration (HCFA) 
was renamed the Centers for Medicare & Medicaid Services (CMS). We 
continue to refer to HCFA throughout this testimony where agency 
actions were taken under its former name.

  Table 1: Medicaid Financing Schemes Used to Inappropriately Generate
          Federal Payments and Federal Actions to Address Them
------------------------------------------------------------------------
      Financing arrangement           Description        Action taken
------------------------------------------------------------------------
Excessive payments to state       States made         In 1987, the
 health facilities.                excessive           Health Care
                                   Medicaid payments   Financing
                                   to state-owned      Administration
                                   health              (HCFA) issued
                                   facilities, which   regulations that
                                   subsequently        established
                                   returned these      payment limits
                                   funds to the        specifically for
                                   state treasuries.   inpatient and
                                                       institutional
                                                       facilities
                                                       operated by
                                                       states.
Provider taxes and donations....  Revenues from       The Medicaid
                                   provider-specific   Voluntary
                                   taxes on            Contribution and
                                   hospitals and       Provider-Specific
                                   other providers     Tax Amendments of
                                   and from provider   1991 essentially
                                   ``donations''       barred certain
                                   were matched with   provider
                                   federal funds and   donations, placed
                                   paid to the         a series of
                                   providers. These    restrictions on
                                   providers could     provider taxes,
                                   then return most    and set other
                                   of the federal      restrictions for
                                   payment to the      state
                                   states.             contributions.
Excessive disproportionate share  DSH payments are    The Omnibus Budget
 hospital (DSH) payments.          meant to            Reconciliation
                                   compensate those    Act of 1993
                                   hospitals that      placed limits on
                                   care for a          which hospitals
                                   disproportionate    could receive DSH
                                   number of low-      payments and
                                   income patients.    capped both the
                                   Unusually large     amount of DSH
                                   DSH payments were   payments states
                                   made to certain     could make and
                                   hospitals, which    the amount
                                   then returned the   individual
                                   bulk of the state   hospitals could
                                   and federal funds   receive.
                                   to the state.
Excessive DSH payments to state   A large share of    The Balanced
 mental hospitals.                 DSH payments were   Budget Act of
                                   paid to state-      1997 limited the
                                   operated            proportion of a
                                   psychiatric         state's DSH
                                   hospitals, where    payments that can
                                   they were used to   be paid to state
                                   pay for services    psychiatric
                                   not covered by      hospitals.
                                   Medicaid or were
                                   returned to the
                                   state treasuries.
Upper payment limit (UPL) for     In an effort to     The Medicare,
 local government health           ensure that         Medicaid, and
 facilities.                       Medicaid payments   SCHIP Benefits
                                   are reasonable,     Improvement and
                                   federal             Protection Act of
                                   regulations         2000 required
                                   prohibit Medicaid   HCFA to issue a
                                   from paying more    final regulation
                                   than a reasonable   that established
                                   estimate of the     a separate
                                   amount that would   payment limit for
                                   be paid under       each of several
                                   Medicare payment    classes of local
                                   principles for      government health
                                   comparable          facilities. In
                                   services. This      2002, CMS issued
                                   UPL applies to      a regulation that
                                   payments            further lowered
                                   aggregated across   the payment limit
                                   a class of          for local public
                                   facilities and      hospitals.
                                   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.
------------------------------------------------------------------------
Source: GAO.

    A variant of these creative financing arrangements involves states' 
exploitation of Medicaid's upper payment limit (UPL) provisions.\6\ 
These schemes share certain characteristics, including IGTS, with other 
financing schemes from prior years (see table 1). In particular, these 
arrangements create the illusion that a state has made a large Medicaid 
payment-separate from and in addition to Medicaid expenditures that 
providers have already received for covered services-which enables the 
state to obtain a federal matching payment. In reality, the large 
payment is temporary, since the funds essentially make a roundtrip from 
the state to the Medicaid providers and back to the state. As a result 
of such round-trip arrangements, states obtain excessive federal 
Medicaid matching funds while their own state expenditures remain 
unchanged or even decrease. Figure 1, which is based on our earlier 
work, illustrates how this mechanism operated in one state 
(Michigan).\7\
---------------------------------------------------------------------------
    \6\ The UPL sets the ceiling on what the federal government will 
pay as its share of the Medicaid costs for different classes of covered 
services and often exceeds what states actually pay providers for 
Medicaid-covered services. States were able to exploit the UPL loophole 
by paying nursing homes and hospitals owned by local governments much 
more than the established Medicaid payment rate and requiring the 
providers to return, through IGTS, the excess payments to the state.
    \7\ See U.S. General Accounting Office, Medicaid: States Use 
Illusory Approaches to Shift Program Costs to Federal Government, GAO/
HEHS-94-133 (Washington, D.C.: Aug. 1, 1994), and Major Management 
Challenges and Program Risks: Department of health and Human Services, 
GAO-03-101 (Washington, D.C.: January 2003).
---------------------------------------------------------------------------
    As shown in figure 1, the state made Medicaid payments totaling 
$277 million to certain county health facilities; the total included 
$155 million in federal funds and $122 million in state funds (step 1). 
On the same day that the county health facilities received the funds, 
they transferred all but $6 million back to the state, which retained 
$271 million (steps 2 and 3). From this transaction, the state realized 
a net gain of $149 million over the state's original outlay of $122 
million. In cases like this, local-government facilities can use IGTs 
to easily return the excessive Medicaid payments to the state via 
electronic wire transfers. We have found that these round-trip 
transfers can be accomplished in less than 1 hour. The IGT is critical, 
because if the payment does not go back to the state, the state gains 
no financial benefit and actually loses from the arrangement because it 
has simply paid the provider more than its standard Medicaid payment 
rate for the services. In a variant of this practice, some states 
require a few counties to initiate the transaction, by taking out bank 
loans for the total amount the states determined they can pay under the 
UPL. The counties wire the funds to the states, which then send most or 
all of the funds back to the counties as Medicaid payments. The 
counties use these ``Medicaid payments'' to repay the bank loans. 
Meanwhile, the states claim federal matching funds on the total amount.
    Consistent with past actions, Congress and CMS have taken steps to 
curtail UPL financing schemes when they have come to light. At the 
direction of Congress,\8\ the agency--then called the Health Care 
Financing Administration (HCFA)--finalized a regulation in 2001 that 
significantly narrowed the UPL loophole by limiting the amount of 
excessive funds states could claim.\9\ HCFA estimated that its 2001 
regulation would reduce the federal government's financial liability 
due to inappropriate UPL arrangements by $55 billion over 10 years;\10\ 
a related 2002 regulation was estimated to yield an additional $9 
billion over 5 years.\11\ CMS recognized that some states had developed 
a long-standing reliance on these excessive UPL funds, and the law and 
regulation authorized transition periods of up to 8 years for states to 
come into compliance with the new requirements.\12\ As we recently 
reported,\13\ however, even under the new regulations, states can still 
aggregate payments to all local-government nursing homes under one UPL 
to generate excessive federal matching payments beyond their standard 
Medicaid claims. For example, CMS information about states complying 
with the new regulation indicates that, through UPL arrangements with 
public nursing homes and other public facilities, states can still 
claim about $2.2 billion annually in federal matching funds exceeding 
their standard Medicaid claims.
---------------------------------------------------------------------------
    \8\ The Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000 directed HCFA to issue a final regulation to 
limit states' ability to claim excessive federal matching funds through 
UPL arrangements. See Pub. L. No. 106-554, App. F,  705(a), 114 Stat. 
2763A-463, 575576 (2000).
    \9\ Specifically, HCFA eliminated states' ability to combine, or 
aggregate, LJPLs across private and local-government providers. Before 
this regulation, a state could claim excessive payments on the basis of 
the combined amount potentially payable to all private and local-
government providers in the state. The regulation established separate 
UPLs for separate classes of non-state-government facilities (those 
owned by local governments), including inpatient hospitals, nursing 
homes, and intermediate care facilities for the mentally retarded, See 
66 Fed. Reg. 3148 (2001) (codified at 42 C.F.R. part 447 (2002)).
    \10\ HCFA's estimate covered UPL arrangements for nursing homes, 
inpatient hospital services, and outpatient hospital services.
    \11\ The 2002 regulation reduced the upper limit for local-
government hospitals from 150 percent to 100 percent.
    \12\ The length of a state's transition period was to be based in 
part on how long the state had had in place a UPL arrangement meeting 
certain specified criteria. During the assigned transition period--
established in 1-, 2-, 5-, or 8-year intervals--excessive UPL payments 
were to be phased out.
    \13\ See U.S. General Accounting Office, Medicaid: Improved Federal 
Oversight of State Financing Schemes Is Needed, GAO-04-228 (Washington 
D.C.: Feb. 13, 2004).
---------------------------------------------------------------------------
    FINANCING SCHEMES UNDERMINE MEDICAID'S FEDERAL-STATE PARTNERSHIP

    States' use of these creative financing mechanisms undermines the 
federal-state Medicaid partnership as well as the program's fiscal 
integrity in at least three ways.
    First, state financing schemes effectively increase the federal 
matching rate established under federal law by increasing federal 
expenditures while state contributions remain unchanged or even 
decrease. For example, for one state we analyzed (Wisconsin), we 
estimated that by obtaining excessive federal matching payments and 
using these funds as the state share of other Medicaid expenditures, 
the state effectively increased the federal matching share of its total 
Medicaid expenditures from 59 percent to 68 percent in state fiscal 
year 2001.\14\ The state did so by generating nearly $400 million in 
excessive federal matching funds via round-trip arrangements with three 
counties. Similarly, the HHS Office of the Inspector General found that 
a comparably structured arrangement in Pennsylvania effectively 
increased that state's statutorily determined matching rate from 54 
percent to about 65 percent.\15\
---------------------------------------------------------------------------
    \14\ U.S. General Accounting Office, Medicaid: HCFA Reversed Its 
Position and Approved Additional State Financing Schemes, GAO-02-147 
(Washington D.C.: Oct. 30, 2001), and GAO-04-228.
    \15\ U.S. Department of Health and Human Services, Office of the 
Inspector General, Review of the Commonwealth of Pennsylvania's Use of 
Intergovernmental Transfers to Finance Medicaid Supplementation 
Payments to County Nursing Facilities, A-03-00-00203 (Washington, D.C.: 
2001).
---------------------------------------------------------------------------
    Second, CMS has no assurance that these increased federal matching 
payments are used for Medicaid services. Federal Medicaid matching 
funds are intended for Medicaid-covered services for the Medicaid-
eligible individuals on whose behalf payments are made.\16\ Under state 
financing schemes, however, states can use funds returned to them at 
their own discretion. We recently examined how six states with large 
UPL financing schemes involving nursing homes used the federal funds 
they generated.\17\ As in the past, some states in our review deposited 
excessive funds from UPL arrangements into their general funds, which 
the states may or may not use for Medicaid purposes. For example, one 
state (Oregon) has used funds generated by its UPL arrangement to help 
finance education programs. Table 2 provides further information on how 
states used their UPL funds in recent years, as reported by the six 
states we reviewed.
---------------------------------------------------------------------------
    \16\ See 42 U.S.C.  1396 and  1396d(a).
    \17\ GAO-04-228.

      Table 2: Selected States' Use of Funds Generated through UPL
                              Arrangements
------------------------------------------------------------------------
                   State                                 Use
------------------------------------------------------------------------
Michigan..................................  Funds generated by the
                                             state's UPL arrangement are
                                             deposited in the state's
                                             general fund but are
                                             tracked separately as a
                                             local fund source. These
                                             local funds are earmarked
                                             for future Medicaid
                                             expenses and used as the
                                             state match, effectively
                                             recycling federal UPL
                                             matching funds to generate
                                             additional federal Medicaid
                                             matching funds.
New York..................................  Funds generated by the
                                             state's UPL arrangement are
                                             deposited into its Medical
                                             Assistance Account.
                                             Proceeds from this account
                                             are used to pay for the
                                             state share of the cost of
                                             Medicaid payments,
                                             effectively recycling
                                             federal funds to generate
                                             additional federal Medicaid
                                             matching funds.
Oregon....................................  Funds generated by the
                                             state's UPL arrangement are
                                             being used to help finance
                                             education programs and
                                             other non-Medicaid health
                                             programs. UPL matching
                                             funds recouped from
                                             providers are 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 are being used to
                                             replace financing from the
                                             state's general fund.
Pennsylvania..............................  Funds generated by the
                                             state's UPL arrangement are
                                             used for a number of
                                             Medicaid and non-Medicaid
                                             purposes, including long-
                                             term care and behavioral
                                             health services. In state
                                             fiscal years 2001-2003, the
                                             state generated $2.4
                                             billion in excessive
                                             federal matching funds, of
                                             which 43 percent was used
                                             for the state share of
                                             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. (Percentages do not
                                             total 100 percent because
                                             of rounding.)
Washington................................  Funds generated by the
                                             state's UPL arrangement are
                                             commingled with a number of
                                             other revenue sources in a
                                             state fund. The fund is
                                             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 is also transferred to
                                             the state's general fund.
                                             The fund is also used for
                                             selected Medicaid services
                                             and the State Children's
                                             Health Insurance Program,
                                             which effectively recycles
                                             the federal funds to
                                             generate additional federal
                                             Medicaid matching funds.
Wisconsin.................................  Funds generated by the
                                             state's UPL arrangement are
                                             deposited in a state fund,
                                             which is used to pay for
                                             Medicaid-covered services
                                             in both public and private
                                             nursing homes. Because the
                                             state uses these payments
                                             as the state share, the
                                             federal funds are
                                             effectively recycled to
                                             generate additional federal
                                             Medicaid matching funds.
------------------------------------------------------------------------
Source: GAO.

    Third, these state financing schemes undermine the fiscal integrity 
of the Medicaid program because they enable states to make to providers 
payments that significantly exceed their costs. In our view, this 
practice is inconsistent with the statutory requirement that states 
ensure that Medicaid payments are economical and 
efficient.18 Under UPL financing arrangements, some states 
pay a few public providers excessive amounts, well beyond the cost of 
services provided. We found, for example, that Virginia's proposed 
arrangement would allow the state to pay six local-government nursing 
homes, on average, $670 in federal funds per Medicaid nursing home 
resident per day--more than 12 times the $53 daily federal payment 
these nursing homes normally received, on average, per Medicaid 
resident.19
---------------------------------------------------------------------------
    \18\ See 42 U.S.C.  1396a(a)(30)(A).
    \19\ GAO-02-147.
---------------------------------------------------------------------------
  FURTHER FEDERAL ACTION WOULD HELP ADDRESS CONTINUING CONCERNS WITH 
                        STATE FINANCING SCHEMES

    Although CMS and the Congress have often acted to curtail states' 
financing schemes, problems persist. Improved CMS oversight and 
additional congressional action could help address continuing concerns 
with UPL financing schemes and other inappropriate arrangements.
    We recently reported that CMS has taken several actions to improve 
its oversight of state UPL arrangements, including forming a team to 
coordinate its review of states' proposed and continuing arrangements, 
drafting internal guidelines for reviewing state methods for 
calculating UPL amounts, and conducting financial reviews that have 
identified hundreds of millions of dollars in improper 
claims.20 Starting in August 2003, when considering states' 
proposals to change how they would pay nursing homes or other 
institutions, CMS also began to ask states to provide previously 
unrequested information. The information includes sources of state 
matching funds for supplemental payments to Medicaid providers, the 
extent to which total payments would exceed providers' costs, how a 
state would use the additional funds, and whether a state required 
providers to return payments (and, if so, how the state planned to 
spend such funds). As of October 2003, CMS indicated that it had asked 
30 states with proposed state Medicaid plan amendments to provide 
additional information, and the agency was in the process of receiving 
and reviewing states' initial responses.
---------------------------------------------------------------------------
    \20\ GAO-04-228.
---------------------------------------------------------------------------
    We also reported, however, that CMS's efforts do not go far enough 
to ensure that states' UPL claims are for Medicaid-covered services 
provided to eligible beneficiaries. Moreover, we remain concerned that 
in carrying out its oversight responsibilities, CMS at times takes 
actions inconsistent with its stated goals for limiting states' use of 
these arrangements. For example, we previously reported that while the 
agency was attempting to narrow the glaring UPL loophole in 2001, it 
was allowing additional states to engage in the very schemes it was 
trying to shut down, at a substantial cost to the federal 
government.21 More recently, we reported that CMS's granting 
two states the longest available transition period of 8 years, for 
phasing out excessive claims under their UPL arrangements, was not 
consistent with the agency's stated goals. We estimated that, as a 
result of these decisions, these two states can claim about $633 
million more in federal matching funds under their 8-year transition 
periods than they could have claimed under shorter transition periods 
consistent with CMS's stated policies and goals.22
---------------------------------------------------------------------------
    \21\ GAO-02-147.
    \22\ GAO-04-228.
---------------------------------------------------------------------------
    In our view, additional congressional action also could help 
address continuing concerns about Medicaid financing schemes. Although 
Congress and CMS have taken significant steps to help curb 
inappropriate UPL arrangements and other financing schemes, states can 
still claim federal matching funds for more than a public provider's 
actual costs of providing Medicaid-covered services. As long as states 
are allowed to make payments exceeding a facility's actual costs, the 
loophole remains. A recommendation open from one of our earlier reports 
would, if implemented, close the existing loophole and thus mitigate 
these continuing concerns. We previously recommended that Congress 
consider prohibiting Medicaid payments that exceed actual costs for any 
government-owned facility.23 If this recommendation were 
implemented, a facility's payment would be limited to the reasonable 
costs of covered services it actually provides to eligible 
beneficiaries, thus eliminating the possibility of the exorbitant 
payments that are now passed through individual facilities to states. 
The Administration appears to support such legislative action; the 
President's budget for fiscal year 2005 sets forth a legislative 
proposal to cap Medicaid payments to government providers (such as 
public hospitals or county-owned nursing homes) to the actual cost of 
providing services to Medicaid beneficiaries.24
---------------------------------------------------------------------------
    \23\ U.S. General Accounting Office, Medicaid: States Use Illusory 
Approaches to Shift Program Costs to Federal Government, GAO/HEHS-94-
133 (Washington D.C.: Aug. 1, 1994).
    \24\ U.S. Department of Health and Human Services, Budget in Brief 
FY 2005 (Washington, D.C.: Mar. 1, 2004), http://www.hhs.gov/budget/
docbudget.htm (downloaded Mar. 15, 2004).
---------------------------------------------------------------------------
                              CONCLUSIONS

    The term ``IGTs'' has come to be closely associated--if not 
synonymous--with the abusive financing schemes undertaken by some 
states in connection with illusory payments for Medicaid services to 
claim excessive federal matching funds. IGTs are a legitimate state 
budget tool and not problematic in themselves. But when they are used 
to carry out questionable financial transactions that inappropriately 
shift state Medicaid costs to the federal government, they become 
problematic.
    We believe the problem goes beyond IGTs. An observation we made in 
our first report on this issue in 1994 is as valid today as it was 
then: in our view, the Medicaid program should not allow states to 
benefit from arrangements where federal funds purported to benefit 
providers are given to providers with one hand, only to be taken back 
with the other.25 State financing schemes, variants of which 
have been applied for a decade or longer, circumvent the federal and 
state funding balance set under law. They have also resulted in the 
diversion of federal funds intended to pay for covered services for 
Medicaid-eligible individuals to whatever purpose a state chooses.
---------------------------------------------------------------------------
    \25\ GAO/HEHS-133.
---------------------------------------------------------------------------
    Although Congress and CMS have often acted to address Medicaid 
financing schemes once they become apparent, new variations continue to 
emerge. Experience shows that some states are likely to continue 
looking for creative means to supplant state financing, making a 
compelling case for the Congress and CMS to sustain vigilance over 
federal Medicaid payments. Understandably, states that have relied on 
federal funding as a staple for their own share of Medicaid spending 
are feeling the budgetary pressure from the actual or potential loss of 
these funds. The continuing challenge remains to find the proper 
balance between states' flexibility to administer their Medicaid 
programs and the shared federal-state fiduciary responsibility to 
manage program finances efficiently and economically in a way that 
ensures the program's fiscal integrity.
    Mr. Chairman, this concludes my prepared statement. I will be happy 
to answer any questions that you or Members of the Subcommittee may 
have.

    Mr. Norwood. Thank you very much, Ms. Allen.
    Mr. Reeb, you are now recognized for 5 minutes.

                   STATEMENT OF GEORGE M. REEB

    Mr. Reeb. Thank you.
    Good morning, Mr. chairman and members of the committee. I 
am here today to discuss intergovernmental transfers of 
Medicaid funds. We have found that current policies and 
practices involving intergovernmental transfers severely limit 
the ability of policymakers to manage, account for, and assess 
the benefits of Medicaid dollars. These complex fund transfers 
and financing mechanisms were in some cases designed solely to 
maximize Federal reimbursements to the States.
    Although action has been taken to curb the effect of such 
practices, significant vulnerabilities remain. States first use 
provider tax and donation programs to increase Federal Medicaid 
matching funds while at the same time reducing the use of State 
resources in the Medicaid program. The present use of 
intergovernmental transfers in areas such as nursing homes and 
hospital upper payment limits and disproportionate share 
hospital payments have opened new venues for States to employ 
creative financing mechanisms.
    But the consequences of the use of some intergovernmental 
transfers is the same as the use of tax and donation programs. 
States' share of cost of their Medicaid programs declines, and 
the increased Federal Medicaid funding derived from these 
financing mechanisms is often diverted to commingled accounts 
where it can be used for purposes unrelated to Medicaid.
    Let me first explain programs we noted where the Medicaid 
regulations allow State Medicaid agencies to pay different 
rates to the same class of providers as long as the payments in 
the aggregate do not exceed what Medicare would pay for the 
services. As you know, this is known as the upper payment 
limit.
    Based on audits in six States that we have reviewed, we 
have found payments were not related to cost. The facilities 
surrendered the upper payment limit dollars back to the States. 
Medicaid dollars were available for use for non-Medicaid 
expenditures, and Federal funds were used for State matching 
payments.
    In an effort to curb these abuses and insure the State 
Medicaid payment systems promote economy and efficiency, CMS 
issued a final rule in 2001 that modified the upper payment 
limit regulations. These changes have been a positive step, 
and, when fully implemented, will dramatically limit, though 
not eliminate, a State's manipulation of the Medicaid program 
because the regulation still does not require that the enhanced 
funds be retained by the targeted facilities to provide medical 
services to Medicaid beneficiaries.
    Another source of both benefit and abuse is the Medicaid 
disproportionate share payments made to financially assist 
hospitals that provide care to a large number of Medicaid 
beneficiaries and uninsured patients. Our work has shown that 
some States have diverted these funds by requiring public 
hospitals to return large portions, upwards of 80 to 90 percent 
of the payments back to the State Medicaid agencies through 
intergovernmental transfers.
    We believe that return of these funds contradicts the 
stated purpose of assisting these public safety net hospitals 
to pay for uncompensated care cost. In some States, the use of 
the enhanced payments under the upper payment limit regulations 
and the disproportionate share of program are combined as a 
method to increase Federal reimbursements.
    The possibility exists that all public provider types, 
especially those who are paid funds above their cost, could be 
used by States to maximize Federal revenues without insuring 
that the integrity of the basic Federal-State sharing of 
Medicaid cost is met.
    Three such areas that we presently have under review 
concern the potential use of intergovernmental transfers in 
school-based health services, payments to State employed 
physicians, and hospital graduate medical education programs. 
Our concern is that these payment types can be used in 
financing mechanisms which return a portion of the Federal 
funds back to the State, resulting in a net gain for the State 
government while inflating the Federal share above statutory 
matching percentages.
    The administration's fiscal year 2005 budget proposes two 
actions that would help improve the program integrity. The 
budget proposes to restrict the use of intergovernmental 
transfers, and it proposes to limit the Medicaid payments to 
individual public providers to no more than the cost of 
providing services to Medicaid beneficiaries.
    We have not yet had a chance to discuss these proposals 
with our Department, but we welcome their efforts to ensure 
better control over the benefit.
    We continue to recommend from our prior reports that the 
transition periods included in the upper payment limit 
regulation be shortened, that annual audits be performed by the 
State's upper payment limit calculations; that facility 
specific limits be used that are based on the cost of providing 
services to the Medicaid beneficiaries; that States be required 
to allow the public facilities to retain the upper payment 
limit funds that they receive; and that Medicaid payments that 
are merely returned to the public providers, after and within 
sometimes the same day, be declared a refund of those payments 
so that they can be back within the State pool of funds that 
could be used for true Medicaid services directly.
    Our overarching concern is to insure that Federal matching 
payments are in the proper proportion to State shares and that 
the funds are used to provide the intended health care services 
in the intended facility to the intended beneficiaries.
    This concludes my testimony. I would be happy to answer any 
questions.
    [The prepared statement of George M. Reeb follows:]

  Prepared Statement of George M. Reeb, Assistant Inspector General, 
                Centers for Medicare and Medicaid Audits

    Good morning Mr. Chairman and Members of the Committee. I am here 
today to discuss intergovernmental transfers of Medicaid funds. We have 
found that current policies and practices severely limit the ability of 
the Congress, the Department of Health and Human Services, and State 
and local governments to manage, account for, and assess the benefits 
of Medicaid dollars. Some fund transfers and financing mechanisms are 
designed solely to maximize Federal reimbursements to States and serve 
to obfuscate the source and final use of both Federal and State funds. 
Action by the Congress and the Centers for Medicare and Medicaid 
Services (CMS), through issuance of revised regulations in 2001, has 
helped to curb the effect of such practices, but significant 
vulnerabilities remain.
    First, I will describe the Federal/State Medicaid partnership and 
accountability principles. Then, based on audits we have completed over 
the years, I will summarize some serious problems we uncovered with 
respect to taxes and donations, enhanced payments to certain health 
care providers, and disproportionate share hospital payments. I will 
specifically describe how States use intergovernmental transfers to 
divert funds away from their agreed upon purpose once the Federal share 
is received. Finally, I will discuss some newer concerns arising from 
our most recent work related to school based health services, state-
employed physicians, and hospital graduate medical education payments.

                 THE MEDICAID FEDERAL/STATE PARTNERSHIP

    The Social Security Act authorizes Federal grants to States for 
Medicaid programs that provide medical assistance to needy persons. 
Since the inception of the Medicaid program, the Federal Government, 
through CMS, and the States have shared in the cost of the program. 
Each State Medicaid program is administered by the State in accordance 
with an approved State plan. While the States have considerable 
flexibility in designing their State plans and operating their Medicaid 
programs, they must comply with broad Federal requirements. States 
incur expenditures for medical assistance payments to medical providers 
who furnish care and services to Medicaid-eligible individuals. The 
Federal Government pays its share of medical assistance expenditures to 
the States according to a defined formula, which yields the Federal 
medical assistance percentage. This percentage ranges from 50 percent 
to 83 percent, depending on each State's relative per capita income. My 
testimony deals with practices that distort these Federal/State 
matching requirements and cause the Federal Government to pay 
disproportionately more, without a corresponding benefit to the 
intended beneficiaries.

                    ACCOUNTABILITY OF MEDICAID FUNDS

    Effective use of State and Federal Medicaid funds depends on the 
consistent application of the following widely-accepted accountability 
principles:

 There should be assurance that the funds paid are actually used for 
        the intended purposes. For example, if disproportionate share 
        payments (payments to hospitals that provide care to large 
        numbers of Medicaid and uninsured patients) are made, they must 
        be used to reimburse hospitals for their uncompensated care 
        costs.
 The management oversight structure should be adequate to ensure that 
        Medicaid funds are paid only for health care services and 
        products that are appropriate and necessary.
 There should be a clear trail of responsibility within the State as 
        to who is accountable for the proper expenditure of Medicaid 
        funds.
 The State Medicaid agency must ensure that quality and timely 
        healthcare services are being delivered to properly eligible 
        beneficiaries.
    Our studies raise serious concerns that some or all of these 
aspects of accountability are lacking in some State Medicaid programs.

                STATE ABUSES OF MEDICAID PAYMENT SYSTEMS

    The Office of Inspector General (OIG) has focused considerable 
audit resources over the last several years on enhanced Medicaid 
payments made to hospitals and nursing facilities. Although these have 
proven to be troublesome areas, they are but a continuation of creative 
financing mechanisms that States began to use extensively starting over 
15 years ago.
    States first used provider donation and tax programs to increase 
Federal Medicaid matching funds while at the same time reducing the use 
of State resources in the Medicaid program. States would either arrange 
for providers to donate funds to the Medicaid program or certain 
provider groups would be levied special taxes. States were allowed by 
Federal regulations to use these funding sources as the State share of 
Medicaid expenditures. These collected funds were then repaid to the 
providers by increasing the total Medicaid reimbursement. As the 
reimbursements were raised, the providers recouped their donations or 
taxes, and the State could then use the Federal matching funds for 
whatever purpose it decided. The provider tax and donation programs 
were generally not about increasing services to Medicaid beneficiaries, 
nor about improving the quality of care provided to these 
beneficiaries. Rather, they were carefully crafted financing techniques 
that allowed States to reduce their share of Medicaid costs and force 
the Federal Government to pay significantly more.
    While both congressional and regulatory action has curtailed most 
of these problems with taxes and donations, the new uses of 
intergovernmental transfers in areas such as upper payment limits and 
disproportionate share hospital payments have opened new venues for 
States to employ creative financing mechanisms. States' use of 
intergovernmental transfers in certain ways has the same consequences 
as the old taxes and donations schemes: a State's share of the cost of 
its Medicaid program declines; Federal taxpayers in other States pay 
more than their share of Medicaid; and the increased Federal Medicaid 
funding derived from these financing mechanisms is often diverted to 
commingled accounts, where it can be used for purposes unrelated to 
Medicaid.
    I will discuss upper payment limits first.

Enhanced Payments Available under Upper Payment Limits.
    The Medicaid regulations allow State Medicaid agencies to pay 
different rates to the same class of providers as long as the payments, 
in aggregate, do not exceed what Medicare would pay for the services. 
This is known as the ``upper payment limit.'' Federal regulations in 
effect before March 13, 2001, established two separate aggregate limits 
within a State applicable to each group of health care facilities 
(i.e., nursing facilities, hospitals, and intermediate care facilities 
for the mentally retarded). For each group, the first limit applied to 
all providers in the State (private, State operated, and city or county 
operated). The second limit applied to only State-operated facilities. 
There was no separate aggregate limit that applied to non-State-owned 
public providers, such as city- and county-owned facilities. Therefore, 
State Medicaid agencies were able to calculate the total enhanced 
payment (the difference between the regular Medicaid payment and the 
Medicare payment amount for a similar service) amount to those 
providers on the basis of all private, State operated, and city or 
county operated facilities. The entire amount could then be distributed 
to only city- and county-owned facilities.
    Based on audit results in six States, we found that:

 Payments were not related to costs. In general, enhanced payments to 
        city- and county-owned providers were not based on the actual 
        cost of providing services to Medicaid beneficiaries or were 
        without a specific intent to increase the quality of care 
        provided by the public facilities that received the enhanced 
        payments.
 Facilities surrendered upper payment limit dollars to the State. City 
        and county nursing homes and hospitals did not always retain 
        all the enhanced payments that were intended for them. Instead, 
        billions of Federal Medicaid dollars were returned by these 
        providers to the States through intergovernmental transfers.
 Medicaid funds were used for non-Medicaid expenditures. Some of the 
        money sent back to the State governments through use of 
        intergovernmental transfers were deposited in the general fund 
        or earmarked for use in health-related service areas, but not 
        necessarily for the Medicaid services approved in the State 
        plan.
 Federal funds were used for State matching payments. Those funds that 
        were used for Medicaid purposes were used as the States' share 
        to match more Federal funds. That is, Federal funds were 
        diverted from their intended purpose to generate still more 
        Federal funds.
    In short, the States' use of intergovernmental transfers as part of 
the enhanced payment program was only a financing mechanism designed to 
maximize the Federal share of Medicaid while effectively avoiding the 
Federal/State matching requirements.
    An example of how a State used the upper payment limit rules, in 
conjunction with intergovernmental transfers, to their advantage is as 
follows:
          The State creates a State-maintained funding pool to increase 
        reimbursement to county government-owned nursing homes. The 
        State calculates the funding pool by determining the difference 
        between the upper payment limit (based on Medicare payment 
        principles) and the regular allowable Medicaid payments made to 
        all these facilities. The combined total of the differences for 
        all facilities in the State represents the funding pool. The 
        initial source of the State's share of the funding pool is the 
        State's general fund. With the State's share available, Federal 
        matching funds are claimed. The funds in the pool, including 
        Federal and State share, are then transferred to the county 
        providers as a Medicaid enhanced payment. Within a short time 
        frame, using intergovernmental transfers, the nursing 
        facilities return the majority of the enhanced payment to the 
        State.
          Little or none of the funds are retained by the nursing 
        facilities for the benefit of their Medicaid residents. The 
        gain from this financing mechanism accrues to the State 
        government, not the Medicaid facilities or beneficiaries. The 
        State commingles the Federal matching funds generated by these 
        enhanced payments with its general fund, in effect making them 
        available for any purpose, including the State share of 
        payments needed to obtain additional Federal funds.

CMS's Actions to Curb Upper Payment Limit Abuses
    In an effort to curb these abuses and ensure that State Medicaid 
payment systems promote economy and efficiency, CMS issued a final rule 
in 2001 which modified upper payment limit regulations in accordance 
with the Benefits Improvement and Protection Act of 2000. The 
regulatory action created three aggregate upper payment limits--one 
each for private, State, and non-State government-operated facilities. 
The creation of a separate aggregate payment limit for non-State 
government-owned facilities effectively reduces the amount of funds 
that States can gain by requiring public providers to return Medicaid 
payments through intergovernmental transfers. The new regulations will 
be gradually phased in and become fully effective on October 1, 2008.
    We commend CMS for changing the upper payment limit regulations. 
The CMS projected that these revisions would save $55 billion in 
Federal Medicaid funds over a 10-year period. However, as part of the 
regulatory changes, CMS increased the enhanced payments that States may 
pay public hospitals from 100 percent to 150 percent of the amount that 
would be paid under Medicare payment principles. We had recommended 
that the payments continue to be limited to 100 percent, and CMS 
subsequently took that action at an additional savings of $24.3 billion 
over 10 years.
    These regulatory changes have been a positive step in controlling 
the States' ability to use financing mechanisms that violate the 
Federal/State Medicaid partnership agreement. When fully implemented, 
these changes will dramatically limit, though not entirely eliminate, 
State manipulation of the Medicaid program because the regulation still 
does not require that the enhanced funds be retained by the targeted 
facilities to provide medical services to Medicaid beneficiaries. Thus, 
Federal funds continue to be vulnerable to diversion, especially 
through the use of intergovernmental transfers.
OIG's Additional Planned Work Involving Upper Payment Limits
    We are continuing our work in the area of States' use of upper 
payment limit regulations as a financing mechanism to increase Federal 
reimbursement. Our work is focused on three areas:

 States' adherence to the transition periods under the new 
        regulations.
 Application of the new aggregate limits by States that have just 
        begun to use the upper payment limit funding mechanisms.
 The possible impact on public nursing homes if the funds paid as part 
        of the upper payment limit regulations were left at the 
        facilities rather than being sent back to the States as part of 
        an intergovernmental transfer transaction.
    For example, we are currently performing audit work at a county 
nursing facility in a State that makes enhanced payments to public 
nursing facilities. During our three-year audit period, $132 million in 
Medicaid payments was directed to the nursing facility from the Federal 
Government, the county, and the State, using the upper payment limit 
provision. The county and State purported to contribute $66 million, 
generating a matching Federal share of $66 million (the State and 
Federal matching rate in 50%/50%).
    Preliminary work indicates, however, that of the $132 million, the 
nursing facility retained only $50 million. The remaining $82 million 
was returned to the county and State through intergovernmental 
transfers for discretionary use.

----------------------------------------------------------------------------------------------------------------
                                                                  Amount of Payment
         Government Payer           Total Payment to Nursing    Returned to Payer by        Net Payment (A-B)
                                          Facility (A)          Nursing Facility (B)
----------------------------------------------------------------------------------------------------------------
Federal...........................              $66 million                        $0               $66 million
County............................              $50 million               $46 million               $ 4 million
State.............................              $16 million               $36 million        ($20 million) Gain
Total.............................             $132 million               $82 million               $50 million
----------------------------------------------------------------------------------------------------------------

    As summarized in the table above, the Federal Government 
contributed $66 million and the County government contributed $4 
million towards the care of residents of the nursing facility, while 
the State was able to make a profit of $20 million.
    The nursing facility returned $82 million of the $132 million to 
the county and State through the use of intergovernmental transfers, 
despite the fact that during our audit period State surveyors had rated 
the nursing facility as in immediate jeopardy for a pattern of 
deficiencies and substandard care that constituted actual harm and 
required significant corrections. If the nursing home had retained more 
of its upper payment limit funding, it might have provided better 
quality of care.
    We plan to review additional individual nursing homes as part of 
our continuing work in the upper payment limit area.

Disproportionate Share Hospital Program
    Another financial mechanism that can be the source of both benefit 
and abuse is known as Medicaid disproportionate share hospital 
payments. Under this program, enhanced payments are made to financially 
assist hospitals that provide care to a large number of Medicaid 
beneficiaries and uninsured patients. These payments are important 
because public ``safety net'' hospitals face special circumstances and 
play a critical role in providing care to vulnerable populations.
    Our work has shown that the States can divert these funds in ways 
similar to upper payment limit funds. Audits in two States show that 
public hospitals, that received disproportionate share hospital 
payments, returned large portions (80 to 90 percent) of the payments 
back to State Medicaid agencies through intergovernmental transfers. 
Here is an example of one of those States:

 During fiscal years 1999 and 2000, the State made disproportionate 
        share hospital payments of approximately $738 million to acute 
        care hospitals.
 Approximately $632 million of the $738 million was transferred back 
        to the State.
 The result was that approximately 86 percent of the total 
        disproportionate share hospital payments were returned to the 
        State via an intergovernmental transfer.
    Once payments were returned, the States were able to use the funds 
for any purpose deemed appropriate. We believe the return of these 
funds contradicts the stated purpose of assisting these public safety-
net hospitals to pay for uncompensated care costs.
    In many States, the use of enhanced payments under the upper 
payment limit regulations and disproportionate share program are 
combined to increase Federal reimbursements. The financial relationship 
involves some States allowing hospitals to retain upper payment limit 
funds but requiring the return of disproportionate share hospital funds 
through intergovernmental transfers. In other cases, the reverse 
occurs--hospitals retain disproportionate share hospital funds but 
return upper payment limit funds.

                        EMERGING VULNERABILITIES

    The concerns we have had with States' use of intergovernmental 
transfers involving upper payment limit rules and disproportionate 
share payments extend beyond these areas. We foresee the possibility 
that all public provider types could be used by States to maximize 
Federal revenues without ensuring that the integrity of the basic 
Federal/State sharing of Medicaid costs is met. We are finding areas 
where States can manipulate Federal financing sources and neglect 
accountability over the payment of Medicaid funds. One of these areas 
concerns school based health services.
    States are permitted to use their Medicaid programs to help pay for 
certain health care services delivered to children in schools, such as 
physical and speech therapy services. Schools may also receive Medicaid 
reimbursement for the costs of administrative activities, such as 
Medicaid outreach activities, application assistance, and coordination 
and monitoring of health services.
    We have identified instances where States require the school 
districts to return a portion of the Federal funds back to the State 
through intergovernmental transfers, thus resulting in a net gain for 
the State government.
    In addition, we are beginning audit work involving States' 
potential use of intergovernmental transfers in two additional areas: 
state-employed physicians and hospital graduate medical education 
payments. Both of these provider types could be paid an enhanced 
payment that could serve as a mechanism for inflating the Federal share 
of payments for Medicaid services above the statutory Federal matching 
percentage. The additional payment amount made to public providers 
could then be returned to the State in a mechanism similar to what we 
have observed in the upper payment limit process at hospitals and 
nursing homes. Our concern is that any payment above a public 
provider's cost could become a part of a financing mechanism that would 
not ensure that the funds were used for the medical care to which they 
were intended. We have not yet issued any audit reports on these 
payment areas, but increasingly we are focusing on them.

      ENSURING THAT MEDICAID FUNDS ARE USED FOR MEDICAID SERVICES

    We are continuing our work in the areas noted above and plan to 
provide CMS with additional recommendations on how to help ensure that 
Medicaid expenditures are in fact used for medical care to Medicaid 
beneficiaries.
    The Administration's fiscal year 2005 proposed budget includes two 
actions that should help improve the integrity of the Medicaid program. 
First, the budget proposes to restrict the use of certain 
intergovernmental transfers that are in place solely to undermine the 
statutorily determined Federal matching rate. Second, the budget 
proposes to cap Medicaid payments to individual State and local 
government providers to no more than the cost of providing services to 
Medicaid beneficiaries. We have not yet had a chance to discuss these 
proposals with the Department but welcome their efforts to ensure 
better control of the benefit.
    In addition, some recommendations from our prior work involving 
upper payment limits and disproportionate share hospital payments have 
not yet been implemented. We believe they should be. Here is a summary 
of them.
    Upper payment limits. The following additional steps are important 
because the total number of States now making enhanced payments as part 
of the upper payment limit process has increased in recent years. We 
have and continue to recommend that:

1. The transitions periods included in the final upper payment limit 
        regulation be shortened since the controls are not in place to 
        ensure that these added funds are actually used for Medicaid 
        health care services.
2. Annual audits be performed of the States' upper payment limit 
        calculations to ensure compliance with the upper limits.
3. Facility-specific limits be used that are based on the cost of 
        providing services to Medicaid beneficiaries.
4. States be required to allow public facilities to retain upper 
        payment limit funding to provide health care services to 
        Medicaid beneficiaries.
5. Medicaid payments returned by public providers to the State be 
        declared a refund of those payments and used to offset the 
        Federal financial participation generated by the original 
        payment.
    Disproportionate share hospital payments. We continue to recommend 
that steps be taken to ensure that disproportionate share hospital 
funds remain at the hospitals to provide care to vulnerable 
populations, rather than being returned to the States through 
intergovernmental transfers. We believe that any Medicaid payment 
returned by a provider to the State should be treated as a credit 
applicable to the Medicaid program.
    Disproportionate share hospital payments serve an important purpose 
in trying to help hospitals cover their uncompensated care costs. But, 
without States being required to leave the funds at the hospitals, 
there is no assurance that the intended purposes of disproportionate 
share payments is being met.

                               CONCLUSION

    Our overarching concern is to ensure that Federal matching payments 
are in the proper proportion to States' shares and that the funds are 
used to provide the intended health care services in the intended 
facility to the intended beneficiaries. Changes are still needed to 
enable the Congress and the Department to be responsible stewards of 
Federal funds and measure the true cost and benefits of the Medicaid 
program.

    Mr. Norwood. Thank you very much, Mr. Reeb.
    Mr. Noce, you are now recognized for 5 minutes.

                STATEMENT OF WALTER W. NOCE, JR.

    Mr. Noce. Thank you, Mr. Chairman and members of----
    Mr. Norwood. Turn your mic on, please, or pull it closer.
    Mr. Noce. Thank you, Mr. Chairman, members of the 
committee, and a particular thanks to Congresswoman Solis for 
her acknowledgement of the fine work of the caregivers of my 
institution.
    In my remarks today I want to underscore four points. No 
one has a greater stake in the financial integrity of Medicaid 
than the providers of the patients assisted by the Medicaid 
program.
    At the same time, no one would be more affected by changes 
in the Medicaid financing than the enrollees and providers, 
including the poor children who rely on Medicaid for their 
coverage and other seriously ill children who rely on 
Children's Hospitals for their care.
    In California, at least, local financing of Medicaid is a 
longstanding part of the program, and although there are many 
State and Federal issues that may be discussed around the 
legitimate ways States reach their Federal match, in the end 
adequate funding for the program must be provided.
    We ask that, as this committee considers possible changes 
that might experiment with the State or Federal Medicaid 
matching, it must be balanced with the need for stabilized 
funding for the providers and enrollees who serve and depend on 
this program, particularly in these challenging financial 
times.
    A few facts about children's health care. Medicaid is by 
far the Nation's largest payer of health care for children, 
despite the fact that they account for less than 25 percent of 
all Medicaid spending. More than half of all Medicaid enrollees 
are children; three-quarters are children and their mothers.
    Medicaid pays for the health care of one out of every 
children, one in every three infants, and one in every three 
children without special health care needs. Children's 
hospitals are only 3 percent of all hospitals, but we provide 
40 percent of all hospital care for the children in the United 
States.
    We are an indispensable part of the health care for every 
child, and our ability to deliver these services depends on the 
Medicaid program. We are major providers of both in-patient and 
out-patient services. For example, my own hospital provides 
85,000 days of in-patient care and more than 285,000 out-
patient visits a year. Children's hospitals nationally provide 
more than 80 percent of hospital care for all children with 
serious conditions, such as cancer and heart disease.
    We train most of the Nation's pediatricians and pediatric 
specialists and house the leading pediatric research centers. 
We are major safety net providers for the children in our 
communities.
    At my hospital we are doctor and clinic, dentist, hospital 
for low income children. We work hand in glove with other 
community health centers in our area providing staff and taking 
referrals for children needing specialty care.
    Medicaid is by far Children's Hospital's largest payer, but 
it doesn't come close to reimbursing us for the cost of that 
care. On average, Children's Hospitals devote nearly 50 percent 
of their patient care to children assisted by Medicaid. My own 
hospital has historically been 70 percent, and for this fiscal 
year we were at 75 percent.
    On average, Medicaid pays for less than 80 percent of the 
cost of patient care provided by a Children's Hospital. At my 
own hospital, the base Medicaid program pays for less than 70 
percent of the cost of in-patient care. This is even worse for 
out-patient and physician care. We receive slightly over $20 
for a clinic visit regardless of the primary care or specialty 
care that is provided and often mandated by State law.
    Disproportionate share payments, DSH payments, which have 
been at least partially funded through IGTs in States such as 
mine, have made a vital difference, but we are still underpaid. 
Even with DSH payments, Medicaid pays Children's Hospitals on 
average only 84 percent of the costs of the care of the 
patients that they care for. Without IGTs, the services to 
children in my State would be dramatically impaired.
    In conclusion, please consider that the vulnerable 
population that Medicaid serves, particularly children and the 
providers who serve them, when you consider changes in 
allowable State Medicaid financing, reductions in Federal 
Medicaid dollars to States inevitably translates into less 
money for those of us on the front lines, the safety net 
providers and the vulnerable populations that we serve.
    We welcome Federal oversight from Medicaid not only in 
terms of the integrity of its financing, but also in terms of 
the adequacy of its payments for providers and its ability to 
reach the populations it is intended to cover. Providers are 
already seriously underpaid, and eligible children remain 
unenrolled. The number of uninsured children could be reduced 
by more than two-thirds if all eligible children were just 
enrolled in the Medicaid and SCHIP programs.
    Every year my fellow hospital COs and I face legislative 
proposals in our States to cut payment rates, eligibility, and 
benefits for children, and months of uncertainty ensue about 
the outcome of those proposals. Yet with children representing 
less than 25 percent of Medicaid spending, and in my State only 
17 percent of Medicaid spending, cuts for children's services 
produce really very little savings.
    There may be a number of policy issues around State 
financing mechanisms, such as IGTs and differences in ways to 
resolve them, but in the end I would implore you not to make 
changes that have the unintended consequence of taking dollars 
away from safety net providers, such as my hospital, and the 
children who depend on them.
    Thank you, Mr. Chairman.
    [The prepared statement of Walter W. Noce, Jr. follows:]

    Prepared Statement of Walter W. Noce, Jr., President and Chief 
  Executive Officer, Childrens Hospital Los Angeles, Chair, National 
                  Association of Children's Hospitals

    Mr. Chairman, thank you for the opportunity to testify before you 
today on Medicaid and its financing.
    My name is Bill Noce, and I am the president and chief executive 
officer of Childrens Hospital Los Angeles (CHLA). I also chair the 
board of trustees of the National Association of Children's Hospitals 
(N.A.C.H.) in Alexandria, VA.
    Founded in 1995, N.A.C.H. is the public policy affiliate of the 
National Association of Children's Hospitals and Related Institutions 
(NACHRI). N.A.C.H. represents more than 120 children's hospitals 
nationwide, including independent acute care children's hospitals, 
children's hospitals within larger hospitals, and children's specialty 
and rehabilitation hospitals. N.A.C.H. assists them in fulfilling their 
missions of clinical care, education, research, and advocacy devoted to 
children's unique health needs.
    Founded more than 100 years ago, CHLA is a not-for-profit pediatric 
academic medical center. We provide nearly 300 beds for inpatient care, 
30 clinics, one of the nation's largest pediatric residency training 
programs, and one of the leading pediatric research centers to meet 
children's unique health care needs. We are a regional and national 
pediatric center for all children and our ability to do all of this 
depends on the performance of Medicaid.
    I am not an expert in designing different ways for states to 
achieve Medicaid matching dollars. Nor is CHLA, as a not-for-profit 
private institution, a transferring financing entity. I am, however, an 
expert in running a hospital staffed by dedicated physicians and other 
professionals whose sole mission is to provide health care to the 
sickest children. Unfortunately this has made me an expert in the 
challenges all children's hospitals face because of the lack of 
financial stability in the Medicaid program.

Overview: Three Main Points
    In my remarks, I would like to underscore three points.
     No one has a more vested interest in the financial integrity and 
strength of Medicaid than the providers devoted to patients assisted by 
Medicaid.
     No one will be hurt more by changes in the financing of Medicaid 
than enrollees and providers, including children's hospitals and the 
poor children who rely on Medicaid for their health coverage.
     Experimenting with state/federal Medicaid financing must be 
balanced with the need for stabilized funding for Medicaid and its 
multiple missions, particularly in challenging fiscal times.
Children's Hospitals Are Indispensable to Children's Health Care
    I would like to begin with a quick snapshot of children's 
hospitals, which illustrates the roles they play in children's health 
care.
    Children's health services, particularly specialty care, are 
concentrated in relatively few institutions. Only three percent of all 
hospitals, children's hospitals provide 40 percent of all hospital care 
for children in this country.

 Children's hospitals are the major providers of both inpatient and 
        outpatient services. For example, CHLA provides more than 
        85,000 days of inpatient care and more than 285,000 outpatient 
        visits a year.
 Nationally, children's hospitals provide more than 80 percent of the 
        hospital care required by children with serious illnesses, such 
        as cancer or heart disease.
 We train the majority of the nation's pediatricians, virtually all of 
        its pediatric subspecialists, and the majority of our pediatric 
        research scientists.
 We house the nation's leading pediatric biomedical and health 
        services research centers. More than a third of all of the 
        National Institutes of Health's pediatric research funding 
        supports the pediatric research in children's hospitals.
 We are also major safety net providers for the children in our 
        communities. At CHLA, for example, we are doctor, clinic, 
        dentist and hospital for low-income children. We work hand in 
        glove with the community health centers in our area, providing 
        staff and taking referrals for children needing specialty care
Children's Hospitals and Their Services Depend on Medicaid
    Medicaid is by far the largest payer of patient care provided by 
children's hospitals.
    On average, children's hospitals devote nearly 50% of their patient 
care to children assisted by Medicaid. My own hospital devotes 70% of 
our patient care to patients covered by MediCal--the California 
Medicaid program.
    Every year most of my children's hospital colleagues and I, along 
with pediatricians, struggle in our states to avoid Medicaid provider 
cuts or cuts in children's coverage.
    Medicaid currently does not come close to paying the cost of the 
care required for the children it covers. On average, Medicaid pays for 
76 percent of the cost of patient care provided by a children's 
hospital. In my own hospital, Medicaid pays for less than 70 percent of 
the cost of care. For outpatient primary and specialty care, as well as 
physician care, the picture is even worse.
    Disproportionate share hospital payments, which have been at least 
partially funded through intergovernmental transfers (IGTs) from public 
hospitals or hospital districts in some states such as mine, have made 
an important difference. Even with DSH payments, Medicaid still pays an 
average of only 84 percent of the cost of care. Without IGTs, I don't 
know that we would receive even that level of payment.

Children's Coverage Depends on Medicaid
    Medicaid serves many missions in the preserving the nation's health 
care safety net. One mission that is not always recognized is that 
Medicaid is by far the nation's largest payer of health care for 
children, particularly very ill children. Children are half of all 
Medicaid beneficiaries, yet they account for less than 25 percent of 
all Medicaid spending. On the other hand, two-thirds of Medicaid 
spending goes to provide services to the elderly and the disable, 
including very expensive long-term care services.
    Mr. Chairman, and other members of the Subcommittee, please keep 
this is mind as you evaluate the significance and effectiveness of 
Medicaid spending.

 Children account for more than half of all Medicaid recipients. Three 
        quarters are children and their mothers.
 Medicaid covers one in four children, one in three infants, and one 
        in three children with special health care needs.
 In the most recent economic downturn, two million additional children 
        would have been added to the ranks of the uninsured if it were 
        not for Medicaid.

Why Changes in Medicaid Financing Affect All Children
    N.A.C.H. and I want to ensure that all Medicaid dollars are spent 
on Medicaid-related services and that its financing is sound. But, we 
urge you to consider any changes in legitimate Medicaid financing in 
light of those of us ``on the frontlines,'' who will most directly feel 
the impact of reduced funds.
    Medicaid plays such a large role in financing children's hospitals 
that reductions in Medicaid spending would seriously damage our ability 
to serve all children, not just children of low-income families, as 
well as add to the numbers of uninsured children. For example:

 Reductions in Medicaid mean children's hospitals may have to look at 
        longer waiting times for visits to our clinics and emergency 
        departments, as well as potential clinic closings.
 They mean children's hospitals may have to look at the sustainability 
        of highly subsidized services, such as transport services, 
        pediatric dental services, or child abuse prevention and 
        treatment services.
 They mean children's hospitals may have to look at delaying service 
        expansions at a time when the demand for our services is 
        greater than ever.

Conclusion: Work on Medicaid as If It Matters to All Children
    In conclusion, I want to emphasize that we welcome your oversight 
of Medicaid not only in terms of the integrity of its financing but 
also, hopefully, in terms of its performance for providers and the 
vulnerable populations who depend on it.
    Medicaid's fiscal challenges are, in many ways, directly related to 
its success in addressing many disparate health care needs in this 
country. Yet, much remains to be done. In many cases, providers are 
seriously underpaid. And, we could reduce the number of uninsured 
children by more than two-thirds thereby insuring almost all children--
if all children eligible for Medicaid and the State Children's Health 
Insurance Program were simply enrolled.
    Local funding has had a longstanding role in Medicaid financing in 
many parts of the country. There may be a number of policy issues 
around IGTs and federal/state differences in ways to resolve them. But 
in the end, please don't make changes that have the unintended 
consequences of removing dollars from the safety net providers that 
depend on them. Reducing federal Medicaid funds that flow to states 
will ultimately be felt by providers and enrollees alike.
    Although federal oversight of the program is an integral element in 
the integrity of the financing of Medicaid, it is not time to reduce 
funding for Medicaid. Remember, fiscally responsible federal oversight 
and reducing funding for the program are two very different legislative 
exercises. As with past Congresses, we know you will approach your 
oversight of Medicaid guided by the needs of its vulnerable populations 
and the providers who serve them. It will affect the future of health 
care for every child in this country.
    Thank you for the opportunity to testify today.

    Mr. Norwood. Thank you very much, Mr. Noce.
    And I will recognize myself for a couple of questions.
    Ms. Allen you made a statement a minute ago that went 
something like this: prohibit Medicaid payments that exceed 
cost. That was a recommendation that you had made that is not 
in place.
    Whose cost?
    Ms. Allen. It would be the facility's cost to provide care, 
whether it be a nursing home or a hospital.
    Mr. Norwood. So are you suggesting that the hospital should 
reimburse for just what it costs the hospital to render the 
service and not make anything on it?
    Ms. Allen. We all know that there are different bases for 
costs, and what is important is that for some public programs, 
Medicare as well as Medicaid, there are other important public 
policy objectives that are achieved through the financing of 
these programs. For example, graduate medical education and 
safety net hospitals represent additional costs that are 
important public policy objectives. In both of the current 
programs, Medicaid and Medicare, those types of costs are 
considered to be legitimate and valid costs and can become part 
of the cost basis.
    So in this recommendation that we are making, we think that 
there is still room to consider those other public policy goals 
and to factor that into the base of cost.
    Mr. Norwood. If we were to do that, does that put an 
incentive out there for people to make sure their cost is 
higher?
    Ms. Allen. There needs to be a sense of what are reasonable 
costs, and the factor that is used now in the Medicaid program 
is that reasonable costs are tied to Medicare payments.
    Medicare, as you know, is regulated more at the Federal 
level than Medicaid is, and so there are certain cost limits in 
Medicare. Those limits are used and considered to be reasonable 
for Medicaid. So in implementing this recommendation, if there 
were to be reasonable costs established, it needs to be based 
on a test that is not yet perhaps established.
    Mr. Norwood. Mr. Noce, is your reimbursement rate in 
Medicaid anywhere close to Medicare?
    Mr. Noce. No.
    Mr. Norwood. So Medicaid is a already reimbursing under the 
top limit of Medicare.
    In my practice of dentistry, I see Medicaid patients. Who 
is going to best determine my cost, me or you?
    Ms. Allen. A combination, sir. GAO actually looked at 
exactly that issue a few years ago. In looking at access to 
dental services, we found that one of the primary barriers to 
providing care to Medicaid beneficiaries was the payment rate, 
and what we found was that the closer----
    Mr. Norwood. Which was determined by the State.
    Ms. Allen. Which is determined by the State, absolutely. 
The closer that the Medicaid rate can get to usual, customary, 
reasonable cost, the higher the provider participation rate 
will be.
    Mr. Norwood. I hear what you were suggesting in your 
statement, and I will not do it here, but all kind of little 
bells go off in my head if we were to allow you to have that 
provision that you are suggesting. My observation of it over 
the years has been simply that there is a whole lot less 
cheating out there than you think. The problem is that the 
State and the government reimbursement rates are so low people 
are just really trying to get by, to make it work so that they 
can continue to serve that particular patient.
    General Reeb, in your testimony, you cited the example of a 
nursing home that was providing substandard care to 
beneficiaries, yet the State required the home to pay over $80 
million back to the State's IGT. Would this money have been 
better used to insure that these beneficiaries received 
adequate care instead of enriching the State budget?
    Mr. Reeb. Absolutely. What we found was that if the money 
had remained at the nursing home, the total payments would have 
exceeded their total costs for that year for all patient types. 
That is how high the payment amount that was paid to them 
initially was. It actually exceeded costs for all paying 
patients, whether it be Medicaid, private patients or whatever.
    But the requirement up front was that as soon as they 
received the money, they had to transfer the bulk of it back, 
and the money from the Medicaid perspective that remained at 
the home was Federal money. There was only $4 million out of 
the $50 million that remained that was actually from county 
funds. No State funds actually stayed at that nursing home.
    Mr. Norwood. My time is almost up, but do we do annual 
audits of every State?
    Mr. Reeb. As a gross entity? No. The reviews are by a 
Medicaid agency within CMS that does financial analyses of 
specific aspects. From an OIG perspective, we audit certain 
topics like upper payment limits or disproportionate share.
    Mr. Norwood. So you spot it around to do audits to check 
things.
    Mr. Reeb. Yes, sir. There are State audit groups within 
each State who audit the Medicaid program within the context of 
the single audit program.
    Mr. Norwood. When my turn comes up again, I am going to go 
right back to that. I am curious about how much money out of 
the system goes into that versus the treatment or care of 
patients.
    Mr. Brown, you are now recognized.
    Mr. Brown. Thank you, Mr. Chairman.
    Mr. Noce, thank you for being here and for the work you do.
    We all hear obviously frequently about State budget 
problems in your State and my State and pretty much every State 
in between, and we also hear about the threats to health 
coverage under CHIP, under Medicaid, other health programs. 
Talk to us, if you would; give us a little more detail of what 
this means in California in terms of perhaps caps in 
enrollment, in terms of cutting coverage. Give us a better 
understanding of the threats in your State to its health care 
system.
    Mr. Noce. Well, I think the fiscal problems of our State 
have been pretty well publicized. We just passed a bond issue 
to make up for a past deficit, and we hope to work our way out 
of that. Our legislature has just convened and is starting to 
debate this next year's budget, and there are several proposals 
on the table, including cutting provider rates, including 
putting enrollment caps into the SCHIP program, in terms of 
caps on Healthy Families. That is our SCHIP. The California 
Children's Services, which is a State funded program related to 
children with special needs; capping many optional benefits 
under Medicaid; certainly cutting physician rates in the 
States, which of course has the effect of not having people get 
care because most of the physicians now will not accept 
Medicaid patients.
    We had a study done in my orthopedic department where only 
one in 50 orthopedists in L.A. County would accept within 2 
months' period of time a Medicaid child with a broken arm, but 
we recalled those same offices with private insurance, and 
every office could see them within 2 weeks, and that is really 
the environment that the patients that we serve are dealing 
with every day.
    As the chairman noticed, most of the significant Medicaid 
providers are simply struggling to get by. I mean, literally 
every day is figuring out how are we going to meet the demand 
for our services with the available resources that we have.
    Mr. Brown. Okay. Thank you.
    Mr. Reeb, the examples you gave showing billions of Federal 
dollars in excessive payments going into State coffers has to 
do with the State following laws and regulations in place 
before the administration's 2001 regulations. If a State were 
to follow the current law, the pot of money would be 
significantly smaller; is that correct?
    Mr. Reeb. Yes, sir. That is the plan.
    Mr. Brown. So can you tell me under current UPL and IGT 
law, so not including the payments being made under the 
transition rules, how much of total UPL money going to 
facilities is being returned to the State level as opposed to 
being kept by the facilities?
    Mr. Reeb. Well, we do not know yet. We asked CMS that 
question, as a matter of fact, about their tracking of the 
upper payment limits under the new regulations. GAO, I believe, 
in their report tried to make an estimate of how much at the 
end of the transition period that there might be that is 
remaining within the upper payment limit process, if you will.
    It is going to be an appreciable drop. There has been a $77 
billion scoring by CBO of the savings from the 2001 regulation, 
and then there are various States that are in the 5 year, the 2 
year, the 8 year phase-in period. New States are coming in.
    The difficulty that we have is in 2008 when they are fully 
transitioned, the behavior is unknown as to whether a State 
that presently has a nursing home upper payment limit program 
could institute a hospital upper payment program. You can have 
such programs for nursing homes, hospitals, and intermediate 
care for mentally retarded patients.
    So there are State behavior patterns evolving, and we do 
not know what will happen in several years from now. In present 
terms, we do not have a number. I defer to GAO, if I read their 
report properly, as to what it might be in 2008.
    Mr. Brown. Okay. Thank you.
    Mr. Norwood. Thank you, Mr. Brown.
    Ms. Wilson, you are now recognized for questions.
    Ms. Wilson. Thank you, Mr. Chairman.
    And I appreciate the testimony of the panelists that we 
have had here today.
    Director Allen, you made some comments about diversion or 
some examples of diversion of funds that were obtained through 
financing schemes to pay for education expenses in your 
testimony. Are you aware of other examples and can you be more 
specific about some of the things you have found where Medicaid 
dollars through these financing schemes have been used for 
things other than health care?
    Ms. Allen. Yes. In our most recent report, which we just 
released 2 days ago, we were looking at a variety of States, 
and in this case we looked at six States in terms of how they 
were using the funds.
    The example that you mentioned was from one State that 
spent about $130 million of its UPL funds to help fund its K 
through 12 education program, as well as its higher education 
program. They came down to the end of their budget year, they 
were out of money, they were looking for additional sources of 
money, and so they took the Medicaid UPL money to help pay for 
those functions.
    Ms. Wilson. Which State was that?
    Ms. Allen. That was the State of Oregon.
    Another State that we identified a couple of years ago NSO 
services as an example, although it should have been phased out 
by now. You see, what States do is they go in with a proposed 
methodology that explicitly says in this case we are going to 
pay nursing homes this amount of money. So in this case this 
State proposed such a methodology. CMS approved it. CMS had no 
reason to suspect that it was not going to be used for that 
purpose.
    The State then put that money into what it called a senior 
living trust fund that they wanted to use to help keep seniors 
out of nursing homes to help them enjoy community-based care 
and to provide some other services.
    These are very laudable goals. However, it was not for the 
purpose for which it was applied for, which was nursing home 
payment. That money went into the trust fund and has drawn 
interest over time. This is not something we have followed up 
on in an auditing capacity, but it has been reported in the 
media that in this last budget year that the State borrowed all 
of that trust fund balance to help balance the State budget.
    Now, the State said it will pay it back at some time, but 
we do not know if that will ever happen.
    Ms. Wilson. Which State was that?
    Ms. Allen. That was the State of Iowa.
    In our most recent report though what we saw more commonly 
was simply recycling of funds; that is, the funds would go back 
into the State general fund or into a specified Medicaid fund 
so that it would then supplant the State share of Medicaid 
spending.
    What that does then is to free up State funds for other 
purposes, and for those we do not have specifics on what those 
other purposes may be.
    Ms. Wilson. Mr. Reeb, you mentioned in your testimony some 
actions that could be taken to provide greater assurances that 
Medicaid dollars are used for their intended purpose, and you 
briefly touched on them in your oral testimony, but I wonder if 
you could expand on them and which ones you think are most 
important so that we can make sure that the money gets to 
health care providers.
    And I have tremendous sympathy, particular, Mr. Noce, for 
your situation, and I have seen it in my State where the 
providers facing State legislatures are under the gun. I mean, 
you have very little negotiating power when the Governor or the 
State legislature says, ``We are going to maximize Federal 
funds, and we are going to come up with a new scheme, and we 
are going to give you some money, but then you have to give us 
back some of it.''
    You do not have a lot of leverage in that situation. You 
have got to deal with what you have got to deal with, but I see 
that as really hurting the providers as well, and I am very 
concerned about it. And you cannot really squeal on it because, 
you know, they make the rules. They write the bills.
    So I have a lot of sympathy for that situation, but again, 
back to what we can do about it, what are the most important 
things we could do to make sure that the money for Medicaid 
gets to health care from your perspective?
    Mr. Reeb. The way we have come about this is once we looked 
at the upper payment limit process and the amount of money that 
becomes available for drawing Federal participation, the 
difficulty we had was that there was no assurance that the 
money ultimately is used in health care, or Medicaid 
especially. That is what it is being paid for. The information 
needed to be accurate so that you and other policymakers can, 
in fact, understand the amount actually going to care for the 
Medicaid population.
    So the most important thing to us is, when they say they 
are going to pay for a particular service to a particular 
provider for the Medicaid beneficiary, that the money stays 
there. If the money would stay there, this ties into Ms. 
Allen's point about cost. We are not looking to lower the cost. 
Whatever the cost may be, in our opinion, if you are going to 
pay the upper payment limit, pay up to that amount; keep it 
there. But, we found the added money that goes out, the 
enhanced payment, the profits that could be made, in effect is 
what then becomes available for the recycling back to the State 
through the IGT process.
    So the important thing to us is to make the money have a 
trail to it. That, in fact, it stays at the provider level at 
the point of service, whether it be the Children's Hospital in 
California or a doctor servicing someone Texas; that it stays 
there and is used for that intended purpose.
    Ms. Wilson. Thank you, Mr. Chairman.
    Mr. Brown. Mr. Chairman, can I ask a clarification on Ms. 
Allen's response to Ms. Wilson?
    Mr. Norwood. Will you yield to Mr. Brown?
    Mr. Brown. Just for one short question.
    Mr. Norwood. Well, you do not have any time.
    Unanimous consent for Mr. Brown?
    Mr. Brown. Thank you.
    Ms. Allen, the examples you gave, are they still going on 
or are they generally addressed by the 2001 regulations?
    Ms. Allen. The Oregon example is a current example. It just 
happened in the most recent budget year. The example from Iowa 
should be phased out because they had a 2-year transition 
period, and that has now expired.
    Mr. Norwood. Ms. Eshoo, you are now recognized.
    Ms. Eshoo. Thank you, Mr. Chairman.
    I want to pick up on States being audited. How many have 
been audited so far?
    Mr. Reeb. From an IG perspective, we audited initially the 
upper payment limit process. We audited initially six States. 
Then, based on that, the information was used as part of the 
regulation changes. Subsequent to the regulation in 2001, CMS 
asked us to look at 10 additional States to determine if the 
transition periods are accurately being carried out. We are in 
the middle, almost at the end, of doing those reviews. We are 
looking at six additional States that are brand new States to 
see whether or not the upper payment limit and 
intergovernmental transfer processes are improved or are 
similar to what we found in our original six.
    Ms. Eshoo. Now, that is what, 22, 22 States, just a little 
less than half of the country? What is the plan? Are all going 
to be audited before changes are made?
    Mr. Reeb. Not all of the States I do not believe have an 
upper payment limit process in place.
    Ms. Eshoo. How many States?
    Mr. Reeb. CMS was a little sketchy when we asked them the 
question. They did not have the data together, but I think it 
is around 40. That is the impression I have. I am not sure. 
Perhaps GAO knows better, but not every State has implemented 
this particular program.
    Ms. Eshoo. I do not really know who to direct this question 
to because there is not anyone from the administration 
testifying today.
    There are two things. It is how the monies are used, but at 
the other end of this is the administration has proposed $23 
billion in cuts. Now, is there a plan for this? I mean, what is 
behind the cut? I sit a guesstimate as to what the audits are 
going to find? I mean, it seems to me that we are trying to 
back into something having made up our minds what the end 
result of the problem is.
    So have you given any estimates in terms of what can be 
saved relative to the audits and the misuse of funds?
    Mr. Reeb. No, ma'am.
    Ms. Eshoo. Do we know how each State will be affected with 
the cuts?
    Mr. Reeb. I do not have the details and have not been a 
part of that particular----
    Ms. Eshoo. Have you been consulted about any of it, about 
the $23 billion?
    Mr. Reeb. Only to the extent that we are aware of the CMS 
plan to try to increase the oversight in program integrity 
within Medicaid. They do plan or hope to hire additional 
financial analysts. What they're trying to do, I believe, as a 
part of their new initiative is look at the plan amendments 
that come in from the States in advance, rather than at the 
back end try to determine what went on. They're trying to 
scrutinize better up front.
    Ms. Eshoo. But does the $23 billion have any relevance to 
the audits and what you have described?
    Mr. Reeb. I do not know.
    Ms. Eshoo. You do not know.
    Mr. Reeb. But there are two separate functions of audit 
work, if you will. We within the OIG are looking at fraud, 
waste, and abuse. Within the program itself, within CMS they 
have folks they call----
    Ms. Eshoo. Well, I appreciate that. I appreciate that. 
Given the scarcity of dollars or the strain, which was 
described so well by Mr. Noce, is that, you know, every dollar 
counts. We have a shortage of dollars in the system given the 
needs. Now we're looking for how we can make better use of the 
dollars because we do not want any of them wasted or abused or 
to plug up other holes in State budgets. This is for health 
care.
    But we also have a proposal from the administration for $23 
billion in cuts. That is why I am asking the question. Is there 
a nexus between your work in the audits and what you believe 
can be saved, given what this testimony is about?
    Mr. Reeb. We do not----
    Ms. Eshoo. Is there a relationship between the two? Have 
you given any estimates to the administration or been asked to 
do that?
    Mr. Reeb. No, ma'am. No, we have not.
    Ms. Eshoo. So we do not know how it is going to affect the 
States. We do not know where the $23 billion has come from. it 
does not seem to be tied to the whole issue that we are here 
for today, which is a legitimate one.
    I am very resentful of any State that would abuse the funds 
because in California we have done, excuse the expression, a 
damned good job with the dollars. We have done it honestly and 
we take very good care of people.
    Mr. Chairman, I think that this points to something, and 
that is that we need to have yet another hearing on this, and 
we need to have the administration here to give testimony as 
to, you know, what the plan is in writing relative to the $23 
billion proposed cut, and if, in fact, there is a nexus to what 
the issue of this hearing is about today.
    Mr. Norwood. Ms. Eshoo, I think that is a great idea. We 
will do that in 3 weeks.
    Mr. Buyer, you are now recognized.
    Mr. Buyer. Mr. Reeb, I would like to know whether or not 
there are any examples, or to any of the witnesses, examples of 
substandard care to patient beneficiaries by these State 
schemes to enrich their budgets. Did you find any examples to 
any particular nursing homes or hospitals?
    Mr. Reeb. Yes, sir. Within the OIG work, we had the example 
of the nursing home that, in fact, received sufficient funds 
from Medicaid that would have covered their total cost to 
operate the home. However, the money that they were required to 
transfer back to both their county and to the State dropped 
them below the amount of money that they needed to cover their 
cost. In fact, the home had been cited in the most severe 
category for bad care. It seemed to us that the budget for 
nursing care, the number of nurses in that particular home, had 
they been able to keep the funds, at least they would have had 
money available to perhaps increase the on board strength of 
nurses up to the level that they wanted to budget.
    Mr. Buyer. Mr. Reeb, with regard to DSH, Congress created 
these payments to assist the safety net hospitals with the 
paying of cost for uncompensated care. You cited an example of 
a State where hospitals are required to pay 86 percent of the 
total DSH payment back to the State.
    Doesn't this type of kickback directly contradict and 
undermine the intent of Congress in creating these types of 
payments?
    Mr. Reeb. It is definitely a problem. The DSH payments are 
supposed to be related to the cost of the uncompensated care. 
We have performed audits where we have found both the 
individual providers and the States have paid monies above the 
cost for the individual providers, and at the same time others 
where the money went out that equaled the uncompensated care 
costs, but they were required to intergovernmental transfer it 
back. So the purpose of the DSH funds to actually be at the 
point of service for uncompensated care is a mixed bag as to 
how well is it working.
    Mr. Buyer. In Indiana I am aware that when DSH payments go 
back to the State, they sit down and they negotiate then what 
percentage will be identified as administrative costs, and some 
of the percentage can be very high. So the actual dollars that 
end up going to help hospitals is shocking.
    Do you find that other States are not passing these DSH 
payments on to the hospitals?
    Mr. Reeb. Well, they have to be paid initially in order to 
be able to bill CMS for the Federal participation amount. Once 
the funds are returned, anything can be done with them; and, 
regarding the basis of cost, it is not outlined as to how much 
administrative cost is allowed.
    Mr. Buyer. Let me ask you this. What if Congress proposes 
to say that no State can withhold DSH payments, say, only 5 
percent for administrative costs? I mean if we actually came in 
and said it and began to hammer the States, does that make a 
little more sense?
    Mr. Reeb. Well, I think so as an auditor, from the 
standpoint that you are trying to separate the cost to try to 
get better accountability and better control to know what is 
going on.
    We have made similar recommendations in managed care 
programs, for instance, in Medicare, setting a limit for how 
much administrative costs could be. I am not aware, at least in 
the Medicaid program, where any such limits are mandated, but 
it would be an improvement.
    Mr. Buyer. It would be prudent for Congress to consider 
setting a percentage for which a cost for administrative 
expenses for a State. It is worthy of our discussion.
    Mr. Reeb. Yes, sir.
    Mr. Buyer. You concur.
    Mr. Reeb. Yes, sir.
    Mr. Buyer. Let me ask Mr. Noce. The GAO gave this 
recommendation that Congress consider to prohibit Medicaid 
payments that exceed actual cost to any government owned 
facility. Do you think that is a good idea?
    Mr. Noce. I think it is a question of the accounting rules 
for what accounts for costs, as we were talking about before. I 
think if we are talking about providing cost of care, I, for 
one, would vote for having a mandate that all Medicaid 
providers have to have their costs reimbursed.
    Mr. Buyer. Boy, this is a really simple statement. Let me 
see. To prohibit Medicaid payments that exceed actual cost to 
any government owned facility. Do you have a problem with that?
    Mr. Noce. Well, in all honesty, I am not in a government 
owned facility, but my----
    Mr. Buyer. But I am asking for your opinion. You have come 
here as a witness.
    Mr. Noce. My understanding is that there are some 
accounting rules that move money back in and out. So they have 
to count for revenue that really is not on their cost. I am 
most familiar with Los Angeles County, and I know the net 
dollars that they receive is not anywhere close to their cost 
either.
    And I can only speak for the experience in my State, but 
the public facilities----
    Mr. Buyer. You have never been an administrator of a 
publicly owned facility?
    Mr. Noce. I have not.
    Mr. Buyer. All right. Thank you.
    Mr. Noce. But I observe the one in my county, and I can 
assure you that they are not getting net Medicaid costs above 
their real costs of providing care for the patients that they 
serve.
    Mr. Buyer. Ms. Allen, have you examined Indiana?
    Ms. Allen. No, sir, we have not.
    Mr. Buyer. All right. I look forward to having a sidebar 
conversation with you. Okay?
    I yield back my time.
    Mr. Norwood. Is the gentleman yielding back?
    Mr. Waxman is recognized for 5 minutes.
    Mr. Waxman. Thank you, Mr. Chairman.
    I am going to ask Ms. Allen. There seems to be general 
agreement that when the upper payment limit regulations are 
fully implemented that most of the identified problems with 
drawing down excess funds will be eliminated. I recognize that 
during the transition period this will not be fully assured.
    However, I think most of us remember there was a good 
reason to have a transition period. If States had used a system 
that relied on such payments for a long period of time to 
support critical health care services, it was recognized that 
changing the rules overnight would cause a great deal of 
disruption and, indeed, loss of services by some very 
vulnerable people.
    The Inspector General recommends in their testimony that 
the transition periods be eliminated. Do you agree with that?
    Ms. Allen. Mr. Waxman, I think the GAO would agree with the 
points that you just laid out, that we do believe that those 
States that have incurred costs over a long period of time, 
those that have developed a longstanding budgetary reliance do 
deserve the opportunity to phase that out over time. It is 
important so that that will not be detrimental to the 
beneficiaries being served.
    Now, that is assuming that the money is going to the 
beneficiaries. At the same time, however, even if the States 
were using those funds to supplant State funding for other 
important State activities, I don't think that it would be 
prudent to create immediate harm to those either. So we would 
endorse transition periods.
    Having said that, in the report that we just issued 2 days 
ago, we did make a recommendation to CMS that for two States 
that were given an 8-year transition period we saw no basis for 
that, and recommended that those be reduced to something that 
would be more in keeping with when they, in fact, did establish 
their mechanisms because they had not established long-standing 
budgetary reliance.
    Mr. Waxman. The original concept behind the transition 
period was to give a longer period to States that had the 
system in effect for years and years. To me that makes a lot of 
practical sense, especially since this was part of the 
negotiation with them.
    I was interested in your conclusion that in certain cases 
the program of intergovernmental transfers was approved almost 
simultaneously with the new regulations, and yet an 8-year 
transition was granted. I believe that was the case in 
Wisconsin.
    Will you tell us a little bit more about what happened 
there?
    Ms. Allen. Yes. Actually there were two States that were 
very similar in terms of the timing. Those two States were 
Wisconsin and Virginia.
    HCFA, the predecessor to CMS, had been notifying the States 
for some time, beginning in the year 2000, that they were going 
to bring a halt to these practices. A letter had gone out in 
the summer of 2000 announcing this and suggesting that States 
not put forth anymore proposals.
    There was a proposed rulemaking in the fall of 2000 in 
which the Congress acted through BIPA, the Benefits Improvement 
and Protection Act, to compel CMS to finalize that regulation 
and put it in place.
    HCFA did implement the regulation in January 2001. The 
regulation was to take effect in mid-March. I think it was 
about March 13.
    In February of that same year, Wisconsin came in with a 
proposal that was much larger than anything it had in place 
before, and CMS ultimately approved that because it concluded 
that it was linked to a payment mechanism that had been in 
place many years prior.
    Our conclusion, though, was that these were two very 
different proposals that really were not similar to each other, 
and we concluded that approving that was really not justified.
    Mr. Waxman. As I understand it, the additional Federal 
funds drawn down from intergovernmental transfers from county 
owned nursing homes in Wisconsin are used both to pay the bad 
debt in public nursing homes and also provide more community 
care for people with disabilities as an alternative to nursing 
homes.
    I think the same is true in Iowa, and it is also my 
understanding that such community care expansion is an explicit 
provision in the Louisiana UPL State plan amendments. If all 
money paid to nursing homes was required to be retained by the 
nursing homes, what would become of the community care 
programs?
    Ms. Allen. There could be an impact. If that money now is 
being diverted to community based care, there could be an 
impact, and that would be unfortunate because many people are 
trying to increase the supply of community based services.
    But from a purist point of view and from where we sit at 
the General Accounting Office, we believe that the purposes for 
which the money is approved and designated should be the 
purpose for what it is used. If there is a desire on the part 
of States to use it for a different purpose, let's be 
straightforward and do it that way.
    Mr. Waxman. Thank you.
    Thank you very much, Mr. Chairman.
    Mr. Bilirakis. All right. What is the gentleman's pleasure? 
Would you like to get a comment from one of the others?
    Mr. Waxman. If anybody else wants to comment, that is 
certainly fine. I had another question, but I also have no more 
time.
    Mr. Bilirakis. All right. Thank you.
    Mr. Waxman. But if anybody wants to comment further on the 
questions that I asked.
    I do want to welcome Mr. Noce.
    Mr. Noce. Thank you, sir.
    Mr. Waxman. He has been a long time leader in health care 
in Los Angeles and is very eloquent about why we have to be 
concerned about what the impact will be on public and 
Children's Hospitals.
    Mr. Bilirakis. Thank you, Mr. Waxman.
    Mr. Greenwood is recognized for 5 minutes.
    Mr. Greenwood. Thank you very much, Mr. Chairman.
    Ms. Allen, in your document, there is a headline ``State 
Abuses of Medicaid Payment Services,'' and under that category 
do you have an order of magnitude of what you think the Federal 
overpayments to those States who are abusing the Medicaid 
payment system is or are?
    Ms. Allen. We have relied on CMS' estimate by closing the 
loophole, the upper payment limit loophole in the year 2001.
    Mr. Greenwood. That is $55 billion over 10 years.?
    Ms. Allen. That is the $55 billion over 10 years.
    Mr. Greenwood. But that is just one form of abuse.
    Ms. Allen. That is correct. The one that we have also 
talked about today, DSH, and I think Mr. Reeb would agree with 
this, has greatly diminished because part of the reforms to DSH 
back in the 1990's was to also institute facility specific 
caps, and I believe that the work that the IG has done would 
show that less of the money is going back to the State. More is 
staying with the hospitals, which is another endorsement of the 
proposal to consider having facility specific caps.
    But in direct answer to your question, we do not have an 
estimate of----
    Mr. Greenwood. Because there are certainly other mechanisms 
besides UPL and DSH. There is the whole notion of provider 
specific taxes or contributions----
    Ms. Allen. Yes.
    Mr. Greenwood. [continuing] held up as a match and then 
returned to the provider. Do you have any estimate of how big a 
problem that is?
    Ms. Allen. Not on that yet, sir. We know that that is a 
growing practice. We know that more and more States are 
submitting applications. We are beginning to get phone calls 
from States and from other representatives who are concerned 
about it, but we have not yet devoted any work effort to that.
    Mr. Greenwood. Mr. Reeb, do you have any ballpark figures 
on these numbers?
    Mr. Reeb. No. I agree with Ms. Allen. We have also been 
receiving the calls. There seems to be congressional staff 
interest in taxes and donations.
    Mr. Greenwood. How about the trend rates? You make 
reference, Ms. Allen, to the last 15 years, I think. Is this a 
growing problem?
    You say the DSH is diminishing, but do you have a sense as 
to whether the excess payments to States or the abuses is a 
growing phenomena?
    Ms. Allen. I would say that it goes in cycles. When the 
pattern began with provider taxes and donations in the early 
1990's, that grew exponentially, and then it was capped. Then 
it was DSH. It grew exponentially. Between 1990 and 1992, DSH 
grew from about $1 billion to $17 billion in 2 years.
    Through UPL, which has been in recent years, again, it took 
off, but that has been diminished. You bring up the issues of 
provider taxes and donations. That could be one of the next 
ones. We believe that CMS is keeping an eye on it, but we do 
not yet know exactly the details of how that is progressing or 
not.
    Mr. Greenwood. You talked about the idea of payments 
exceeding costs and the recommendations to make sure that 
doesn't happen. Could you just give us a specific example of 
how that could happen?
    How does payment for a particular service come to exceed 
the actual cost?
    Ms. Allen. I will give you a very specific example. One or 
two States went in for approval, again, for a very clear 
methodology about how they wanted to reimburse nursing homes, 
laid it out. Essentially it said, ``We would like to pay our 
nursing homes up to what Medicare would pay.'' CMS approved 
that.
    What a couple of the States did then was to funnel all of 
that money just through 5 or 6 nursing homes. We have two 
examples. In one State the Federal payment per day for six 
nursing homes went from $53 a day----
    Mr. Greenwood. Six hundred and seventy, right?
    Ms. Allen. Six hundred and seventy.
    Mr. Greenwood. I read your testimony.
    Ms. Allen. Exactly. But that money did not stay there. It 
was returned.
    In another case, it went----
    Mr. Greenwood. So let me understand that. Why did they do 
that? Why did they just do that with 6 or 7 facilities?
    Ms. Allen. Because those are the counties that agreed to 
participate in that scheme. You know, it is very interesting. 
It is my home State of Virginia, and I was very aware at the 
time of things that were going on in Richmond about this. The 
State had a very difficult time getting any county or 
municipality to participate. They were practically begging, and 
only one or two counties ultimately would agree to do it, and 
then there are only so many county nursing homes.
    So they chose that as the conduit for channeling the money 
that then just went back to the State.
    Mr. Greenwood. What would be the methodology if we were to 
enact that recommendation to determine what the costs actually 
are? Do you use Medicare? I mean, is that the standard that you 
recommend?
    Ms. Allen. That could be one basis, but as we also talked 
about, there are other policy goals that we might want to make 
sure that are included as part of the costs in terms of safety 
net hospitals that might have additional costs, GME costs, for 
example.
    I think it would require some work to develop that.
    Mr. Greenwood. Thank you, Mr. Chairman.
    Mr. Bilirakis. The Chair thanks the gentleman.
    Ms. Capps for 8 minutes.
    Ms. Capps. Thank you, Mr. Chairman.
    Mr. Noce, I have a question to ask you, but since I did not 
make an opening statement, I want to make a couple of remarks 
that I wanted to make just to set the stage for that. It has 
often been remarked that the measure of a civilization can be 
determined by its desire and its ability to care for its most 
vulnerable people. Surely if there is any population that fits 
that category it would be the Medicaid population.
    Now, our President's budget cuts $23.5 billion over the 
next 10 years in health care. These are to be authorized by 
this committee, and I'm a member of the budget committee as 
well, and it was acknowledged by the administration in setting 
the case for their budget that it would be expected that these 
cuts would come from Medicaid.
    As we prepared our budget for consideration by the full 
House yesterday, I introduced an amendment to eliminate these 
cuts in Medicaid to offset them with cutting in half the tax 
cut to the millionaires. I appreciated the support of many 
professional groups, provider groups, Governors, some groups 
that are represented here in our audience today, a wide range, 
not just Children's Hospitals. Believe me, it's a cross-section 
of those who provide services to the Medicaid population.
    My goal in listening to you all and in coming to terms with 
what the desires are with the intergovernmental transfer 
situation is that we be careful not to throw the baby out with 
the bath water.
    But I want to, Mr. Noce, give you a chance to comment 
further. As you were making your presentation I was rather 
nostalgic for a former budget chair, a member of the House from 
Ohio, Mr. Ocasek, who was considered a budget hawk, but when 
his twin babies were born prematurely, he had first hand 
experience with the Children's Hospital, and he authored 
legislation, which I was happy and honored to co-author with 
him and co-sponsor to substantially increase the funding base 
for Children's Hospital. He felt that they were so 
disproportionately or under funded in all the ways that they 
provide services in the high percentage of their patients who 
are Medicaid patients.
    Now, I know that California hospitals depend on this money 
to support the health care system, and I was hoping you would 
be able to kind of look into the future if we do make these 
drastic cuts in this time of economic disparity. Can you 
foresee how you will continue, not you personally as much as 
those you represent here on our panel today?
    What would it be like to have to really drastically scale 
down both for your providers and also particularly for those 
who are recipients of the care?
    Mr. Noce. Well, first I would need to say that our 
experience in California is that we do not participate in any 
of these types of programs that we have just heard about.
    Ms. Capps. I see.
    Mr. Noce. But what our concern is is that regulation 
sometimes is a shotgun rather than a rifle, and if the 
consequence of that was intergovernmental transfers in its 
entirety were eliminated and, therefore, the funds that 
currently flow into California were eliminated, it would have--
and I am not really saying this for dramatic effect for this 
committee--but for my hospital I already project because of 
some unique mandates in California, government rights to 
seismic safety and minimum nurse-staff ratios and other things. 
We are looking at a projected $25 to $30 million loss for the 
next several years.
    I get $35 million from these intergovernmental transfer 
type funding vehicles.
    Ms. Capps. Now, can I jump in?
    Mr. Noce. Sure.
    Ms. Capps. This loss that you are projecting, is that 
before we get to something that we might do in the future?
    Mr. Noce. Yes, that is with that included. The loss would 
jump to $60 to $70 million. We cannot cut or scale down. We 
have actually had discussions with my Board leaders. We do not 
believe that we could survive as an institution, and although 
we have not made a decision on this because nobody wants to 
face up to it, if I am interpreting the discussion, we would, 
in effect, close our hospital. We would become a pediatric 
research facility, and we would offer to lease the hospital to 
a public entity to wanted to run it because as a private 
hospital, we cannot sustain losses of $60 to $70 million. We 
would run through our cash in a couple of years.
    And, you know, that is obviously an assumption that that 
money is not replaced from some other source, but we do worry 
about that from a regulatory point of view. By the time the 
consequences are actually known through the process, it is too 
late for any individual provider.
    Ms. Capps. And you had mentioned in one of your responses 
that a pediatric orthopedic patient who is receiving Medicaid 
sometimes waits how long?
    Mr. Noce. Well, essentially they do not get care at all.
    Ms. Capps. We are talking about the United States of 
America.
    Mr. Noce. In some specialties, except for community 
clinics, a few safety net providers, the physician's offices do 
not take them. I mean the payment rate in California is 50 
percent to 60 percent of Medicaid rates, and if the State, as 
is proposed now, is cutting them even more, it just simply will 
not take Medicaid patients into their practices.
    Ms. Capps. What would a young person, a child with an 
orthopedic problem, a Medicaid patient, what would that family 
do in Los Angeles?
    Mr. Noce. They come to an emergency room of a safety net 
provider, Los Angeles County, my hospital, a couple of the 
others that were mentioned, White, California Hospital.
    Ms. Capps. But if they have some congenital deformity or 
some kind of spina bifida or something that really needs 
specialized care over a long period of time, what is the 
outlook?
    Mr. Noce. Well, then you are looking at two or three of us 
who have the capability to do that, and that is, frankly, our 
concern about some of this discussion, is you do not have to 
make very many changes. There are so few providers who provide 
for some of these populations that if the effect is to damage 
those few providers, and that is way downstream from what you 
were talking about in this committee, we literally would have 
no providers left to care for those types of patients.
    Ms. Capps. And some of these projected cuts you are seeing 
even without what we are anticipating doing here. Just given 
the situation both in California, but also with our economy and 
with some other hardships or difficulties that many providers 
are experiencing with some of our government programs.
    Mr. Noce. Yes, even with this funding flow, our State is 
currently considering enrollment caps on various programs, 
cutting physician rates. So this population is already at 
increased risk without this discussion.
    Ms. Capps. I am almost out of time. I wondered if either of 
the other two would want to comment on this.
    Mr. Reeb. We happen to have done an audit of the DSH 
program in California, and the difficulty that we had was that, 
in rough numbers, about $2.5 billion was paid, and $549 million 
went to private hospitals, such as Dr. Noce's, and the money 
that went to the public hospitals was intergovernmental 
transferred back to the counties. In net, just using 
mathematics of the total amount of money, the only money that 
stayed at public hospitals and private hospitals was Federal 
money. The State's share was coming back to the County.
    So that Federal net amount went out. If, in fact, the 
hospitals that handle the indigent care patients need more 
funds, from our reviews of California, there is an opportunity 
there for the State funds to remain at the provider level as 
well.
    Mr. Bilirakis. The gentlelady's time has expired.
    The Chair recognizes himself in spite of the fact that the 
staff here did not want me to.
    Mr. Green, I want you to know he favors you. He wanted me 
to go to you rather than to myself.
    Mr. Green. Well, thank you, Mr. Chairman, but I will be 
glad to wait my turn.
    Mr. Bilirakis. Mr. Noce; is that correct, Noce?
    Mr. Noce. That is correct.
    Mr. Bilirakis. Of course, you would prefer that all of the 
Medicaid dollars that are intended to go for Medicaid treatment 
for patients go for that purpose, would you not?
    Mr. Noce. Yes.
    Mr. Bilirakis. And you have heard some of the schemes here, 
and God knows over the years, and it is not just Medicaid 
dollars, but DSH dollars. We have had over a period of time 
hearings on, if you will, the diversion of a lot of DSH dollars 
to highway projects and States and whatnot.
    So you would prefer all of those dollars to go the way they 
are intended to go; isn't that correct?
    Mr. Noce. Yes.
    Mr. Bilirakis. All right. The President, in the process of, 
as Ms. Capps says, reducing Medicaid funding, is concerned 
about the intergovernmental transfers. We, of course, are the 
ones who determine what the ultimate budget is going to be 
here. It is recommendations made from every White House, and we 
will determine. I would like to think that hopefully some way 
that the Medicaid collars are intended to go to the States for 
our use for those particular purposes rather than turn out some 
of these schemes that they place, and I might add, even though 
it is not the subject of this hearing, the DSH dollars, because 
that has concerned me over the years.
    So would you agree with me that some of these schemes that 
we are talking about do endanger Medicaid beneficiaries by 
taking millions of dollars away from providers that are 
financially vulnerable and some that are already providing 
substandard care?
    Mr. Noce. If you mean by schemes that are taking and 
building roads and those types of things.
    Mr. Bilirakis. Exactly.
    Mr. Noce. I absolutely would agree with that.
    Mr. Bilirakis. Absolutely. Well, I think that is really our 
purpose here now more than anything else. You know, I do not 
disagree with Ms. Capps or others in this regard, but I think 
that for us to be encouraging, I hate to use the word when we 
are talking about vulnerable beneficiaries, but cheating here 
is a terrible way to go.
    If California, Florida, et cetera, et cetera, does not have 
enough Medicaid dollars, I think we should address those 
situations and do it in a legal way where we change the 
formulas or whatever the case might be there rather than to 
encourage intergovernmental transfers so that they are getting 
additional dollars, whether it be used for Medicaid or whether 
it be used for other purposes, you know, in a way that it was 
not intended.
    The existing Federal-State Medicaid partnership is a good 
one. Should, in fact, that be breached by virtue of allowing 
schemes to take place so that people can get, you know, 
additional dollars, I think we ought to look at it straight, 
just there are not enough dollars going to these particular 
things. It is a change of proportion, I guess is what I am 
saying, because the proportions vary, as you know. They vary, 
California, Florida, from West Virginia and so many of these 
other poorer States.
    So we are all agreed that many millions are diverted from 
Medicaid use, correct, Ms. Allen?
    Ms. Allen. Yes, that is correct.
    Mr. Bilirakis. Correct Mr. Reeb?
    Mr. Reeb. Yes.
    Mr. Bilirakis. And we are all agreed, are we, that these 
schemes disadvantage States if played by the rules and who 
consequently pay a greater share of Medicaid expenses? They are 
disadvantaged, are they not?
    Mr. Noce. Yes, sir.
    Mr. Bilirakis. What should we do about it, if anything? Mr. 
Noce, what should we do about it? Should we just leave things 
as they are?
    Mr. Noce. Well, I would be in support of very targeted 
regulations that would make sure that those abuses do not 
occur. I mean, the caution that I would raise would be I have 
seen regulation that is so broad that it has the effect of 
unintended consequences where there is no abuse and takes money 
away from those that really need it.
    Mr. Bilirakis. Amen to that.
    Mr. Noce. But I would be very much in favor of targeted 
regulation to prevent taking Medicaid dollars that are in too 
short supply and filling other needs of a State such as 
building roads.
    Mr. Bilirakis. Wouldn't you feel better about getting the 
dollars that you fill your hospital needs in a way that is the 
result of an existing Federal-State Medicaid partnership in 
terms of the proportion of dollars that come from the Federal 
Government to the State and whatnot, rather than depending 
upon, you know, some intergovernmental transfer type schemes 
that get you additional dollars? Wouldn't you be more 
comfortable with that?
    Mr. Noce. Well, at least----
    Mr. Bilirakis. Or would you rather have the money no matter 
how you get it?
    Mr. Noce. You know, in the end that is the bottom line.
    Mr. Bilirakis. That is the bottom line.
    Mr. Noce. But I would certainly be in favor of something 
that is stable and predictable. That is part of the problem 
with Medicaid, is that it is, from a provider point of view, it 
is very unpredictable about how much you are actually going to 
get. At least in our State, we do have a tradition of local and 
State sharing for some of our health care programs of long 
standing, but I certainly would be in favor of a simplified, 
predictable funding scheme that providers knew how much it was 
going to be and we could rely on it.
    Mr. Bilirakis. Yes, and you would not have to depend upon 
some sort of a creative way to get those needed dollars, 
correct?
    Mr. Noce. Well, I am on the receiving end.
    Mr. Bilirakis. Well, you would rather not have to depend 
upon that.
    Mr. Noce. You are exactly right. I would prefer not to come 
back and have to talk with you about 16 different ways that the 
program could be funded.
    Mr. Bilirakis. Ms. Allen, any comments?
    Ms. Allen. In response to your question about what can we 
do, I will come back to the recommendation that has been open 
for a while. We believe that if we were to focus on what 
facilities' costs are and reimburse them on a fair and 
reasonable basis, that will largely take care of that, of the 
problem we are talking about today.
    As long as States are able to aggregate pools of money 
across facilities and channel them through a few facilities, we 
will continue to have this abuse, but if you try to pay for 
services in individual facilities who are caring for 
individuals, then everyone should come out ahead.
    Mr. Bilirakis. Mr. Reeb.
    Mr. Reeb. Yes, we look for accountability. The present 
process allows for a distortion of how much really is going to 
serve Medicaid beneficiaries. So, if you could get a direct 
link and an audit trail, whether you want to have audits 
performed or not, someone can, in fact, track the fact that you 
paid for a Medicaid beneficiary for a particular service at a 
particular provider, and the money stayed there for that 
service.
    Mr. Bilirakis. Well, thank you, Mr. Reeb.
    I was not here at the outset of the hearing. I do want to 
welcome you and to thank you for taking time to be here at our 
invitation. I was tied up on a State Department matter, if you 
can believe it, but in any case, I do welcome you and thank 
you.
    And I would now recognize Mr. Green for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman.
    Mr. Reeb, in my opening statement I referenced nine urban 
hospitals throughout Texas, through IGTs provide the State 
portion of the Medicaid funding for the disproportional share 
allotment. Using IGTs, Texas is able to draw down the 
additional $504 million in Federal funds for a total of $840 
million.
    These funds are then redistributed back to these nine 
public hospitals, but also to 87 rural hospitals, 64 other 
urban hospitals, and seven Children's Hospitals. One hundred 
percent of the funds are returned to these hospitals to assist 
them with their uncompensated care cost.
    Is there anything you could see that could be illegal or 
troubling to you about this arrangement?
    Mr. Reeb. No, we would not have a problem. In fact, we 
audited the disproportionate share of payments in Texas a 
couple of years ago. We do not have a problem with the fact 
that the State's share is funded through a relationship with a 
county. That is certainly up to the State and local governments 
to work that out.
    It is only on the back end, after payments are made. If the 
funds do not remain at the provider level where the services 
are being rendered, the distortion that is then created by 
sending that money back to the general funds is what we have a 
problem with.
    Mr. Green. Okay. So you do not have a problem with that. In 
all honesty I disagree philosophically, but having served 20 
years in the legislature before I got here, we beat our head 
against the wall there to try and get additional State money, 
but it is the system that we have developed, and like a lot of 
urban areas and rural areas that need assistance, it is one 
that is at least providing it.
    Does CMS advocate that IGTs should be eliminated 
altogether?
    Mr. Reeb. I would not want to speak for them.
    Mr. Green. You do not know.
    Mr. Reeb. No, sir, I do not know.
    Mr. Green. And I appreciate your comment about the 
auditing, and again, if there is a problem of IGTs and it is 
broken, let's fix the problem instead of just throwing out the 
whole issue.
    Ms. Allen, the question of block granting is the solution 
to the fraud problem I have is that block granting would not 
eliminate problems that I think identify. Many of us are 
concerned about proposals coming out of the administration for 
block granting Medicaid programs and capping Federal funding 
for Medicaid which shifts the burden of the program onto the 
States who could not possibly absorb such a cost shift.
    And, again, using my own example in Texas, the State 
provides very little in funding for it, and yet we are going to 
give elected officials the authority to decide on it. I would 
seem like it would be much better to change and instead of 
changing the fundamental nature, it would jeopardize coverage 
for a lot of folks.
    And I have heard people suggest that these problems being 
discussed today show that the Medicaid program is out of 
control and must be curbed. Therefore, we need to block grant 
it to insure the integrity. I am concerned about block granting 
because I know over the years if your goal is to insure 
integrity, that may not be the best way to do it. You are 
transferring the authority to elected officials who may not 
have the tax or the funding or the dollars that they are using.
    Can you comment on the block grant as the solution to the 
States' activities we are hearing about today?
    Ms. Allen. Yes. Block grants have been discussed recently, 
and they are not new. I mean, 10 years or so ago there was a 
similar discussion.
    We think that in terms of considering financing the program 
differently, there are certain fundamentals that always have to 
be considered. One is that any financing mechanism or approach 
is vulnerable to abuses. Every system needs to have internal 
controls to make sure that you can follow the money, to make 
sure that it is being spent on eligible beneficiaries.
    For block grants, if they were to be considered more 
seriously, we would need to make sure that type of 
accountability is included. On the other hand, for block 
grants, the advantage could be that they can provide a little 
bit more budget certainty from the Federal point of view.
    The question though is that that's a different approach 
from how the Medicaid program has been designed from its 
outset. From the outset it has been designed to be sensitive to 
changes in economic conditions, countercyclical so that when 
economic conditions worsen, the formula will adjust to help 
States with their share of program costs.
    So if a block grant were to consider the economic cycles, 
that would be important. I would say though finally on this 
point, and I would be happy to continue the conversation if 
you'd like, but if you think about something like block grants, 
the question is: what is the basis for individual States' 
program spending? Where do you start?
    As you have already heard today, there are some States that 
have unduly maximized the Federal funding. How can that be 
balanced against other States that have played by the rules and 
would be disadvantaged if a baseline for future Federal funding 
was based on actual funding to date?
    So there are a number of things to consider in going to any 
type of different financing approach.
    Mr. Green. Well, I guess, Mr. Chairman, I do not have any 
seconds left, but there is a saying that I have heard in Texas 
for years about you do not throw the baby out with the bath 
water. If you have a system that is working and, again, subject 
to audit obviously, because we want to know where funding our 
tax dollars go to, then why eliminate a system that may be 
working in some States. Let's address the problem and not throw 
it all out.
    Thank you, Mr. Chairman.
    Mr. Bilirakis. The Chair thanks the gentleman.
    Mr. Stupak for 5 minutes.
    Mr. Stupak. Thank you, Mr. Chairman.
    Mr. Noce, if I may, you said something to the chairman that 
I sort of wanted to follow up on. You said to Mr. Bilirakis 
that you would support a targeted approach, but if that 
targeted approach actually takes money out of the system, 
wouldn't you agree that we need to replace that money to make 
sure that providers and beneficiaries are provided for and do 
not get hurt?
    Mr. Noce. Yes. My comments about the targeted approach was 
on those schemes that divert the money from the program to such 
things as building roads, but if any money is removed from the 
Medicaid system as a result of this, we are going to damage the 
providers and the beneficiaries unless there is some other 
revenue stream that backfills the money lost.
    Mr. Stupak. Okay. Thanks for that clarification.
    Ms. Allen, on a clarification, if I may, in your discussion 
with Mr. Greenwood, you mentioned Virginia nursing homes and 
you had trouble trying to get people to participate. Was that 
because of reimbursements from Medicaid or was it because of 
the scheme that was being used?
    I was unclear if it was the scheme or Medicaid.
    Ms. Allen. County officials recognized it for the scheme it 
was and said they did not want to participate.
    Mr. Stupak. Okay. So they saw the sham.
    Ms. Allen. Yes, exactly.
    Mr. Stupak. Okay. You know, in my opening I mentioned the 
budget pressure States are having and my State of Michigan is 
having a difficult time right now with unemployment, which as 
unemployment goes up more and more beneficiaries come into the 
system, and are driving States to either increase the cost to 
beneficiaries or else just cut people out of the program.
    And if we are looking at $23.5 billion proposed cut by the 
President, how are States going to pick up that difference? And 
I understand that is $23.5 billion over 10 years, but for 
Michigan it is about $30-some million a year.
    How would States pick that up?
    Ms. Allen. States would have to face very difficult 
choices, and I can think of at least three choices they would 
have to make. With less Federal funding, they would have to 
think about whether they would choose to cut the number of 
beneficiaries they serve or cut the level of services or type 
of services that they provide, or perhaps whether they would 
need to cut provider payment rates.
    All of those are very difficult decisions, but they would 
really have no other recourse.
    Mr. Stupak. You said in earlier testimony that when you 
were talking about the block grant system with Mr. Green that 
the Medicaid system was set up to be sensitive to changes in 
economics and States' budgets, things like this, and I think we 
would all say right now that most States are struggling right 
now.
    So how is the President's proposal then to make the cut 
sensitive or in keeping with the spirit of the Medicaid 
program?
    Ms. Allen. It might appear to be inconsistent on its face. 
I think an earlier question had to do with the details of the 
program, and I would just like to comment, too, that I have not 
seen any of the details of the cut, how it would be 
administered, what it consists of, and I think that it is 
important to see those details before we know what impact there 
will be.
    Mr. Stupak. Sure. In generalities, as you said, there are 
only three ways to do it. Either cut the providers or cut the 
beneficiaries or cut the benefits. There is no other way.
    Okay. Is Medicaid reimbursement basically to providers 
about half of what it is for Medicaid, roughly?
    Ms. Allen. Yes, maybe half to two-thirds, but it is low, 
yes.
    Mr. Stupak. Okay. Because I was reading this report here, 
and I am sorry Mr. Waxman is gone, but in California GAO found 
that physician fees were about 42 to 55 percent for Medicaid, 
and in New York it was even worse than that. Again, under 
Medicaid physician payment was like 29 to 39 percent.
    Since the report, and this was a 2001 report, State fiscal 
situations have worsen, both California and New York and 
Michigan, Oregon; name them. So if Congress was to implement 
the President's cuts of $23.5 billion, the States would almost 
have to go back to a provider type cut, would they not?
    Ms. Allen. A provider cut could be one of the alternatives, 
one of the options considered.
    Mr. Stupak. Okay. In Michigan, one of the proposals they 
have been talking about is the $900 flat fee so that if you 
come into the hospital in an in-patient stay, it would be $900 
no matter what it is. If it was open heart surgery or if it was 
a hip replacement, it is $900.
    Would that be legal underneath the Medicaid system or is 
the reimbursement tied into the service performed, or can a 
State just put a flat rate no matter what the hospital stay is 
and for that stay pay the provider, in this case the hospital, 
900 bucks? Is that appropriate underneath the Medicaid system?
    Ms. Allen. The statutory requirement for Medicaid payment 
is that the fee be consistent with economy, efficiency, and 
quality care. I do not know that that provision would meet 
those criteria, particularly if it is a very expensive 
procedure, like a bypass.
    Mr. Stupak. Hip replacement or bypass.
    Ms. Allen. Exactly. I do not know that that would be 
appropriate for that level of care, quite frankly.
    Mr. Noce. If I may, Mr. Congressman, that is exactly how we 
are paid in California.
    Mr. Stupak. Just a flat rate no matter what the service is?
    Mr. Noce. Yes.
    Mr. Bilirakis. Please respond to the question briefly if 
you can. I did not mean to cut you off completely, but your 
time is up.
    Mr. Stupak. Thank you.
    Mr. Bilirakis. Would someone want to respond?
    Mr. Stupak. I think they both did. Thank you.
    Mr. Bilirakis. Thank you.
    Mr. Rush is recognized for 8 minutes.
    Mr. Rush. Thank you, Mr. Chairman.
    I want to welcome the witnesses, and your comments have 
been fairly interesting, those that I was able to hear.
    Excuse me, Mr. Chairman. I have got to cut this thing off.
    Mr. Bilirakis. That is okay. Your time is running.
    Mr. Rush. All right. I am somewhat baffled because it seems 
to me like for the purposes of justifying cuts by the 
administration, it seems as though there is an effort to 
demonize States, including my State, so that it would seem the 
cuts would be justified. And there seems to be just a simple 
issue here, and the issue is whether or not funds are being 
diverted, Medicaid Federal dollars are being diverted away from 
the services by the IGTs, and if that is the case, then why 
couldn't we come up with another simple solution as opposed to 
just resorting to what some might consider draconian efforts?
    If you have cases in States where the funds are being 
diverted and used for other than health related services, other 
purposes, then why couldn't we just deal with that issue? Can 
anybody respond to that?
    Ms. Allen. I would be happy to. CMS is stepping up its 
efforts to do exactly that now. They recognize that there have 
been a lot of abuses. They are taking a much more proactive 
stance in terms of asking States ahead of time, before they 
approve their budgets, what they are going to be using their 
money for, what are the sources, and how they plan to use it 
and whether they plan to turn any money back to the States.
    CMS has just begun to collect all of that information. Our 
work shows that as of last fall they had begun to collect that 
from about 30 States and analyze it.
    I will say though that a number of States are very 
concerned about this new policy because they are concerned 
about how CMS is using the information and whether it is being 
done clearly and consistently in a way that is transparent to 
all.
    Mr. Rush. Thank you.
    Mr. Reeb, in the Office of Inspector General's report, the 
OIG contends that with regard to the revenue that Cook County 
in the State of Illinois returned to the State. We could not 
confirm the contention that the Illinois Department of Public 
Aid used the funds for health related services.
    However, according to the IDPA, the State of Illinois has 
increased funding for Medicare by a total of $27 billion from 
1992 to 2003, and over that same period, IGT funds a total of 
$5.2 billion. So Illinois has increased funding for Medicaid by 
a much bigger sum than the IGT funds that it receives.
    And aside from the technical accounting arguments with 
regard to the fungibility of money in the general fund, why 
does the OIG insist on stating that it cannot confirm that IGT 
funds were used for health care purposes?
    Mr. Reeb. Because we were not able to track the money that 
actually came back from the Cook County providers into the 
general fund. I mean, you can make the assumption as you are 
alluding to that, in fact, because total expenditures are up, 
those funds obviously must have been used. But we could not 
make that connection.
    In Illinois, the interesting wrinkle was that, if I 
remember right, the Cook County homes were keeping the upper 
payment limit funds, or a percentage of them, a large 
percentage, but they were not being paid any disproportionate 
share payments.
    When you get the combination of disproportionate share with 
upper payment limit with intergovernmental transfers, you have 
lost the flow of accountability. Total numbers may give you a 
comfort level to feel that, in fact, the funds must have been 
used for Medicaid, but you cannot really track it as such.
    Mr. Rush. Okay. Well, do you see any variable that, say, 
for instance, in Illinois 1.8 million individuals are now 
covered and over a million children? That has been an increase. 
If you increase the number of individuals who are covered, then 
of course your expenditures have to be commensurate with that, 
should reflect that in some kind of way; is that correct?
    Mr. Reeb. Yes, sir. I understand. I understand your point.
    Mr. Rush. So did the OIG look at that at all and make any--
did you look at anything? Let me ask you this. Did you look at 
anything? Did you try at all to figure out whether or not 
Illinois was actually diverting IGT funds from health related 
services to other uses?
    Did you look at anything to----
    Mr. Reeb. No, sir. We do not try to go into the general 
accounts and try to determine the use. It loses its identity. 
The Medicaid funds that were returned lost their identity when 
they go into the general Treasury. So to audit the entire 
State's expenditures, No. 1, it is not within our 
responsibility and purview, but it also would be fruitless.
    Mr. Rush. So is there any other means and methodology that 
you could have used other than looking at the entire general 
budget for the State? Is there any other methodology that you 
could have utilized that would have given you a better idea 
about what the State of Illinois was doing and was using their 
monies for?
    Mr. Reeb. Well, I think the comments from the State, that 
is why we put auditee comments into the reports, to make sure 
that we have the balance of both the auditor and the auditee 
and their comments, in return, said, in effect, ``I am using 
the funds for the purposes of health care because look at my 
expansion in Medicaid.''
    Mr. Rush. Thank you.
    I want to ask anybody on the panel in the few seconds that 
I have. In Illinois, the IGT revenue has been used exclusively 
to add funds to the State Medicaid program. IGT revenue has 
funded approximately 10 percent of the overall Medicaid program 
base, and not one dime of IGT money has gone to anything else 
but Medicaid services or care for the poor.
    Over 1.8 million individuals and 1 million children have 
been added to the Medicaid program. Is there anything wrong 
with this in terms of the increase, using the monies to 
increase the number of participants in the Medicaid program? Is 
there anything wrong with that?
    Mr. Bilirakis. Brief responses, please, to that.
    Ms. Allen. I am afraid I cannot comment on that because we 
have not looked at Illinois in the case of our work.
    Mr. Reeb. To the extent that we looked at it, as we have 
discussed, I can see your point that that is where the 
mathematics takes you. We have nothing to refute where you are 
going.
    Mr. Rush. Would you care to respond to that? Is anything 
wrong with it?
    Mr. Noce. The numbers are perfectly logical. If the number 
of beneficiaries go up, the expenditures in the program are 
going to go up.
    Mr. Bilirakis. The gentlemen's time has expired. Mr. Engel 
is recognized for 5 minutes.
    Mr. Engel. Thank you, Mr. Chairman.
    Mr. Reeb, I am curious about the move to curb, as the 
President's budget says, intergovernmental transfers. I know we 
have been talking about this obviously here this morning, but 
States that use these intergovernmental transfers, have their 
Medicaid plans approved by CMS, and those plans included 
intergovernmental transfer provisions.
    Now we hear, of course, that these legally approved funding 
mechanisms are accounting schemes. Why would CMS approve 
intergovernmental transfers in the past if they are accounting 
schemes?
    Mr. Reeb. Well, in and of themselves, intergovernmental 
transfers are not necessarily accounting schemes. So when CMS 
receives a State plan amendment, they approve it based on what 
is printed on the paper as to what the plan is for a State, how 
they are going to calculate the funding pool, how they are 
going to, in fact, use the funds.
    Some say, in effect, they are going to set up a separate 
health fund. Some say, they are going to expand into other 
areas. That kind of a thing.
    That is why CMS in 1999 asked us to look at it. Because of 
the growth in the State plan amendments for upper payment limit 
programs, CMS asked us to take a look at those initial six 
States, because they did not know whether or not it was playing 
out the way it was planned or not.
    Mr. Engel. Well, 3 years ago I and other members of this 
committee hammered out an agreement, as you know, that included 
a transitional period for States using IGTs so that their 
Medicaid and other critical health care safety net programs 
were not severely cut.
    Obviously, since then States have fallen even further into 
fiscal crisis, and obviously simply cannot afford to absorb a 
$10 billion cut in Medicaid funding without cutting critical 
health benefits to the frailest and poorest of Americans.
    Now, my home State of New York is one of the States in the 
transitional period and has always used revenue from IGTs to 
shore up its health care safety net. Are you or CMS or you 
advocating eliminating this transitional period which we 
thought was a compromise and worked so hard to hammer out? And 
it would essentially undermine this agreement which we reached 
in 2001 that allowed for the transitional period.
    Mr. Reeb. Our recommendations back when we first looked at 
the initial six States was that we felt the transition period 
should be shortened from what was planned. In some cases there 
was an 8-year transition for States that had already used upper 
payment limits, over $8 billion I believe, and the lack of 
accountability of where the funds were being used once they 
were being returned is what concerned us.
    So our interest in reducing the transition was to try to 
bring accountability into the mix as opposed to saying because 
they have been doing this for so many years, we will just let 
them do this for X number of years again.
    We were not a part of any deliberation that Congress had 
with individual States or the administration. We were just 
viewing it as an objective reviewer of what we were seeing in 
States that we were reviewing.
    Mr. Engel. Well, what bothers me about this is because 
obviously to me this is changing the rules in the middle of the 
game. If States are doing it and using it and anticipate it, 
you obviously know the hardship that it imposes on these States 
by changing the rules. If we hammer out what we thought was a 
compromise, we weren't totally happy wit it, but we felt this 
transitional period was a compromise and now there's an attempt 
to change it once again. So what bothers me, Mr. Reeb, is 
States like mine are being demonized for attempting to care for 
the poorest and the frailest across the country.
    You know, we hear about States trying to look for creative 
ways to game the system, but I think States like New York are 
looking for ways to care for the uninsured, which continues to 
grow. It is over 40 million Americans. We have obviously 
unemployment rising and more people are losing health insurance 
and seeking public assistance.
    So as the economy is failing, to do something like this is 
really counterproductive because more and more people need the 
health benefits, and you are making it harder for the States to 
provide them.
    Mr. Reeb. Well, we share the concern of the States in 
having adequate money to pay for health care. Our concern was 
that because of the lack of accountability, there is no 
assurance that, in fact, the funds are being used for health 
care. We try to match up the actual services to the actual 
provider being paid. Then, when making a decision or making an 
arrangement with the State and the Federal Government, accurate 
information is used.
    Mr. Engel. Well, I just think that cutting Medicaid is a 
mistake, and I think that we should stop some of these huge tax 
breaks for the rich so that we have money to provide adequate 
health care for our people who really need it.
    Ms. Allen, let me just ask you----
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Engel. Okay. I will submit the questions.
    Mr. Bilirakis. Please. We are all going to do that.
    Mr. Engel. Okay.
    Mr. Bilirakis. Mr. Strickland is recognized for 5 minutes.
    Mr. Strickland. Thank you, Mr. Chairman, and I apologize. I 
have had three subcommittees meeting at the same time this 
morning. So I am sorry that I arrived so late.
    And right in my office now I am missing an appointment with 
the Children's Hospitals of Ohio, as a matter of fact, Mr. 
Noce. So I have a question for you.
    You are not a government facility; is that correct?
    Mr. Noce. I am not.
    Mr. Strickland. Now, you obviously cannot make or receive 
intergovernmental transfers, but your facility, I would assume, 
benefits from the upper payment limit and the intergovernmental 
transfer arrangement in California.
    Can you describe to the committee what kinds of payments 
your hospital gets and what these payments are for?
    Mr. Noce. We get two primary revenue streams related to 
intergovernmental transfers. One is the disproportionate share 
hospital program, and the other is a program that I am not sure 
how it works in the Federal-State, but within our State we call 
it the 1255, and it is a grant program administered by a rate 
setting commission in our State that is given to certain 
hospitals who operate emergency departments and who also 
provide services to a high percentage of uninsured or MediCAL 
patients, and that is what we use the money for.
    I mean, I reported earlier that my hospital had 70 percent 
MediCAL. So that is where the money goes.
    Mr. Strickland. So what would happen to your facility and 
other facilities throughout your State if the system were to be 
stopped?
    Mr. Noce. If that money was not backfilled, my facility 
would have to think seriously, of closing because we are 
already projecting an operating loss of about $25 million a 
year, and adding on another $35 million, we could not survive 
that.
    Mr. Strickland. So assuming the States did not replace 
whatever you lost, and given the current fiscal situation that 
you face, you may close?
    Mr. Noce. Our board would have to seriously look at that. 
We would be looking at $60 to $70 million losses on a $290 
million expense base. You cannot----
    Mr. Strickland. Can you tell me how many children you may 
serve a year?
    Mr. Noce. We serve 85,000 in-patient days and 285,000 out-
patient visits a year.
    Mr. Strickland. And what percent of that would be children 
that would be Medicaid?
    Mr. Noce. Historically it is 70 percent; the first 6 months 
of this fiscal year it is 75 percent.
    Mr. Strickland. Where would those children go for care?
    Mr. Noce. Well, in our community, numbers of that magnitude 
could not go anywhere else. I am the largest provider by far in 
Los Angeles County for specialty Children's Hospitals.
    Mr. Strickland. So we would be talking about thousands of 
children who may go without needed medical care.
    Mr. Noce. Yes, unless somebody who is not doing pediatrics 
now stepped up, and I do not see that happening.
    Mr. Strickland. Thank you, sir.
    Ms. Allen, as States respond to the budget pressures, which 
I come from Ohio, and so anyone who knows anything about Ohio 
understands that we are in a critical situation. I just share 
with you.
    We have heard of a man in Oregon who could not afford the 
copayment for his seizure medication. He stopped taking it, and 
he died thereafter.
    In Arizona, a 59 year old woman with ovarian cancer was 
living on her disability payment of only $173 a month. Her 
medicines, 15 medicines each month cost her $80, leaving her 
$93 for everything else, food, rent, electricity, and other 
needs.
    Given these examples, don't you think that this Congress 
should be working to protect and shore up Medicaid rather than 
cut it?
    Given the number of uninsured which is escalating in our 
country, doesn't it make sense to protect the program that 
serves these most vulnerable Americans?
    Ms. Allen. Yes, it does make sense to protect the program. 
I believe the CMS Office of the Actuary has estimated over the 
past couple of years that over 5 million new beneficiaries have 
become eligible for Medicaid primarily for two reasons, but the 
predominant reason is because of the economic downturn.
    More people have less income, less insurance, and Medicaid 
has helped to pick up that slack.
    Mr. Strickland. So the need is increasing.
    Ms. Allen. Yes.
    Mr. Strickland. More poor people are looking to this 
program for the help they need, and we are actually thinking 
about reducing the budget by $23 billion?
    Ms. Allen. That is correct.
    Mr. Strickland. Those are the cold, hard facts.
    I want to thank you, Mr. Chairman, and I want to thank the 
witnesses.
    Mr. Bilirakis. I thank the gentleman.
    Ms. Allen, let me ask you very quickly. Are there ways to 
be able to determine how many of these dollars and to whom they 
are diverted for purposes other than Medicaid, you know, these 
schemes that we are talking about here?
    Are there ways to do that? I mean, can we, if we want to 
focus on something like that, can we do it?
    Ms. Allen. Yes, I believe we could do that. It would take 
some good, hard auditing, a lot of resources, but, yes, I 
believe we could.
    Mr. Bilirakis. Well, as we customarily do, we say to you 
fine panelists that we will submit questions to you and ask you 
to respond to them in a timely manner. That certainly would be 
one to Ms. Allen.
    And to those of any of you. I mean, Mr. Noce, if you have 
any ideas in that regard to help us out here, that would be 
helpful. I am not asking for, you know, the total dollars in 
intergovernmental transfers. I am talking about those that are 
misused for purposes other than Medicaid, Mr. Reeb.
    I thank all three of you for taking time to be here. You 
have been very patient. Well, we have had longer hearings, but 
we appreciate it very much.
    Thank you so much for your help.
    The hearing in adjourned.
    [Whereupon, at 12:07 p.m., the subcommittee hearing was 
adjourned.]
    [Additional material submitted for the record follows:]

       Prepared Statement of the American Health Care Association

    As the nation's largest publicly-funded health insurance program, 
Medicaid provides health and long term care coverage to over 1 million 
seniors and persons with disabilities daily, and serves almost 70 
percent of the nation's elderly and disabled patients residing in 
nursing homes.
    With a program of this scope and import, we thank Energy and 
Commerce Subcommittee Chairman Bilirakis, Ranking Member Brown and 
members of the Subcommittee for providing us the opportunity to discuss 
the importance of ensuring America's Medicaid-dependent population 
receives quality, compassionate care in the face of state and federal 
budgetary challenges of historic proportions.
    In the context of the topic of this hearing, Mr. Chairman, we want 
to say at the outset that states are not just struggling to stay afloat 
when it comes to caring for those most in need of help, they are 
drowning in a swirling sea of red ink caused by what we all have 
acknowledged is the worst collective state fiscal crisis since World 
War II.
    Granted, federal fiscal relief has helped states place a temporary 
finger in the dike--but the relief expires on June 30th, and it must 
not be forgotten that a recent Kaiser Commission survey found that, for 
many states, FY2004 marked the third consecutive year they were forced 
to take new actions to reduce spending growth in their Medicaid 
programs. This has resulted in provider reimbursement freezes and new 
coverage limitations on a number of vulnerable populations.
    According to Kaiser, states have also exhausted many one-time 
measures they have used to balance their budgets, and Medicaid budget 
shortfalls are likely in a majority of states for the foreseeable 
future. Continued expectations of low revenue growth as the economy 
remains sluggish combined with the growth in demand for Medicaid 
services means that states will continue to look for ways to cut 
programs, and limit coverage and benefits.
    Results from the Kaiser survey show that reimbursement rates for 
nursing home care in fiscal year 2003 were cut or frozen in 17 states. 
For FY 2004, 19 states either cut or froze rates for nursing home care; 
33 states were able to increase rates for nursing home care in FY 2003; 
29 states were able to do so in FY 2004.
    It is important to note that the increase or decrease of 
reimbursement rates is not a true barometer of whether Medicaid is 
effectively and efficiently paying for quality nursing home care; the 
key factor is determining whether reimbursement rates are keeping up 
with the real costs in the health care marketplace to provide those 
services.
    To identify and specifically quantify the shortfall between the 
Medicaid reimbursement rates and allowable costs of nursing homes in 
individual states, AHCA engaged BDO Seidman, LLP, an independent 
accounting firm.
    For the third consecutive year, BDO Seidman reviewed the extent to 
which reimbursement rates have kept pace with the costs to provide 
care. Using a database of Medicaid rates and cost report information, 
comparisons of Medicaid rates and allowable costs from 2001 (the most 
recent audited or desk-reviewed cost report data available) were 
derived for 37 states--representing almost 88% of all Medicaid patient 
days in the country.
    Results indicate that nationwide, the average shortfall in Medicaid 
reimbursement was $11.55 per day for every Medicaid patient. In 2001, 
un-reimbursed Medicaid-allowable costs exceeded $3.6 billion for these 
37 states, and exceeded $4.1 billion when the results are extrapolated 
to all 50 states. Rate increases in fiscal 2003 were, in many states, 
far less than the higher costs of providing quality care. In still 
other states, rates were either frozen or reduced--falling even farther 
below costs.
    At the same time, state legislators are facing growing political 
pressures to expand their programs to cover more populations--
especially during these challenging economic times. And not 
surprisingly, states struggle to find more resources for their Medicaid 
programs, and often utilize programs that include upper payment limits 
and intergovernmental transfers. The fact that states cannot rely on 
current funding to fund their programs is a symptom of a broken system. 
Our broken system must be reformed so that states have adequate dollars 
to fund needed Medicaid beneficiary services.
    As the Administration and Congress will correctly continue to 
debate Medicaid reform efforts throughout this year, it is essential to 
factor into any proposals the fact payment rates are simply not coming 
close to covering the true costs of providing quality care. If the 
states continue to fall short with their obligation to adequately fund 
Medicaid, the federal government, we maintain, has a statutory 
obligation to ensure continued access to quality care for our frail, 
elderly and disabled. The question is how we go about doing so.
    Congress has previously passed legislation that that altered 
federal law as it relates to intergovernmental transfers, and 
established several transition periods to ease states' reliance upon 
these funds. Implementing regulations from the Centers for Medicare and 
Medicaid Services (CMS) qualified states for necessary transition 
periods, and, logically, the longer a state has relied upon these 
funds, the longer they have to phase out their use.
    This is logical, but our concern and worry is that President Bush's 
proposed FY 2005 budget targets those funds necessary to ensure many of 
our states' frail, elderly and disabled continue receiving the Medicaid 
benefits and services that are a literal lifeline.
    Despite what some believe to be the case, these additional 
resources help make the difference between accessing necessary Medicaid 
services and not--and there will be a stark and consequential negative 
impact resulting from an potential abrupt policy about-face. A fair, 
reasonable transition period is necessary. We would oppose any rapid 
termination of states' ability to access funds to care for their most 
vulnerable.
    Any new federal policy directive must be implemented in a manner 
that is fair to all states, that provides states with a clear, 
unambiguous understanding of any new policy and any subsequent changes 
they are expected to make. Most important, changes of this magnitude 
impacting populations as vulnerable as those we represent must be made 
in an open, public and gradual process.

                                 ______
                                 
          Prepared Statement of American Hospital Association

    On behalf of our nearly 5,000 hospital, health care system, network 
and other health care provider members, the American Hospital 
Association (AHA) appreciates the opportunity to submit this statement 
for the record on the Medicaid program. The AHA shares the committee's 
concern that the Medicaid program must be strong in order to continue 
meeting the health care needs of our most vulnerable people. Nearly 50 
million poor, disabled and elderly people rely on Medicaid for their 
care. Over its nearly 40-year history, Medicaid truly has become the 
nation's health care safety net.
    The importance of this role has never been more critical than 
today. In the current economy, many Americans remain out of work, 
pushing them and their families into the ranks of the uninsured. 
Medicaid has historically served as a buffer to the perils of an 
uncertain economy by providing access to health care services for those 
who cannot afford it. Yet, the states still are experiencing serious 
fiscal crises. In the past two years nearly all states imposed Medicaid 
cutbacks in some form to fill budget gaps, or used up all of their 
specials funds to prevent direct cuts in Medicaid eligibility or key 
services. The vast majority of states expect to consider proposals to 
cut Medicaid eligibility, health services and payments to health care 
providers. It is imperative that any federal action to address the 
current crisis, and any federal efforts to change the current structure 
of the Medicaid program, must not put further financial pressure on the 
states nor diminish the guarantee of coverage for our most vulnerable 
Americans.
    Provide Fiscal Relief--The AHA believes that the current fiscal 
crisis faced by states demands immediate and meaningful federal 
support. That support could be in the form of an extension of last 
year's increase in Medicaid's federal matching percentage or other 
relief that would allow states to use such funds to help support their 
Medicaid programs. States should not be forced to radically transform 
their programs to receive such fiscal relief.
    Protect the Vulnerable--The AHA believes that this nation has an 
obligation to care for the neediest of our society. A federally 
enforced entitlement to a set of meaningful benefits for this 
population must be maintained. We must not erode the guarantee to 
coverage for that has long been a fundamental feature of the Medicaid 
program. We should take no action that would exacerbate the swelling of 
the ranks of the uninsured.
    Maintain Financial Integrity--The AHA believes that the federal and 
state governments have an obligation and responsibility to maintain 
their financial commitment to the program. We ask Members of the 
Committee to work with us to eliminate any provisions in the Fiscal 
Year (FY) 2005 Budget Resolution currently pending before the House 
Budget Committee that would reduce funding to the Medicaid program. 
Such cuts would be a devastating blow to hospitals and to the poor and 
uninsured patients they serve. Many of these hospitals are in financial 
jeopardy; many are the sole source of care in their communities. Their 
failure would put communities at risk, because without them, medical 
services, social services and important jobs would disappear.
    Protect Access to Care--The AHA believes that adequate provider 
payment is critical to ensuring that Medicaid beneficiaries have access 
to needed services by making certain there are providers of health care 
services available. Current Medicaid law has minimal protections that 
are mostly geared to making the payment rate-setting process more 
public. The AHA advocates that these current protections should be 
expanded and strengthened.
    The AHA also believes that federal oversight of state Medicaid 
programs serves as an important tool in protecting access to health 
care services for vulnerable people. The federal government oversight 
role ranges from overseeing Medicaid managed care plans to make certain 
enrollees have access to quality health care providers, to assuring the 
financial integrity of the program by making certain states spend their 
Medicaid funds on health care. The Administration already has the 
authority to protect the Medicaid program and therefore legislative 
remedies are not required.
    The Medicaid program has played a vital role in providing access to 
health care services to millions of Americans over its 40-year history. 
The bottom line is that if the Medicaid program did not provide this 
coverage, tens of millions would be added to the ranks of the 
uninsured. Disparate emergency-room visits are a poor substitute for 
health care coverage. America must do better. The AHA stands ready to 
assist the committee in any way as it tries to meet its many 
challenges.

                                 ______
                                 
     Prepared Statement of Larry S. Gage, President, The National 
           Association of Public Hospitals and Health Systems

    The National Association of Public Hospitals and Health Systems 
(NAPH) appreciates this opportunity to submit a statement for the 
record of the hearing of the Subcommittee on Health on the subject of 
intergovernmental transfers (IGTs) and state Medicaid financing. 
Medicaid provides critical support to its eligible recipients as well 
as to the safety net providers who serve the nation's rising numbers of 
uninsured. Concerns about Medicaid financing are especially relevant 
now, as tight state budgets increasingly jeopardize the ability of 
states to fully support the Medicaid program and as the Congress and 
the Administration consider ways to curtail Medicaid spending.
    NAPH does not condone the misuse of federal Medicaid funds and 
supports valid efforts to ensure that federal funds are used 
appropriately. However, we are opposed to any efforts that would 
deprive safety net hospitals of legal and appropriate sources of 
funding for their vital missions and services. The Congress should 
carefully weigh the potential impact that any effort to curtail 
Medicaid spending will have on safety net providers.
    NAPH represents more than 100 of America's metropolitan area safety 
net hospitals and health systems. The mission of NAPH members is to 
provide health care services to all individuals, regardless of 
insurance status or ability to pay. Medicaid provides essential support 
for safety net health care providers who provide access to care for 
millions of Medicaid and uninsured individuals, train many of our 
nation's physicians, nurses, and other health care professionals, and 
provide community-wide services like trauma care, burn care, and 
emergency preparedness in communities across the country.
    Approximately 58 percent of the patients served by NAPH members are 
either Medicaid recipients or patients without insurance. Medicare 
covers another 21 percent of the patients of NAPH members. Our members 
thus rely on governmental sources of financing to cover over three-
quarters of their costs. NAPH members provide over 25 percent of the 
nation's uncompensated hospital care while representing only two 
percent of acute care hospitals in the country. Medicaid is a major 
source of essential financing for America's institutional health safety 
net--38 percent of the net revenues of NAPH member hospitals are 
Medicaid revenues. Without adequate Medicaid support, most NAPH members 
simply would not survive.
    Medicaid DSH payments are the primary federal mechanism for 
providing additional support to hospitals that serve large volumes of 
Medicaid recipients and persons without insurance. These payments are 
essential to the nation's health care safety net. In addition to the 51 
million people currently covered by Medicaid, the number of uninsured 
Americans has risen to 44 million. Recognizing the demands that these 
rising numbers of Medicaid and uninsured patients place on safety net 
providers, last year Congress restored significant amounts of Medicaid 
Disproportionate Share Hospital (DSH) funding as part of the Medicare 
Prescription Drug, Improvement and Modernization Act (MMA). It is 
important to note that Medicaid DSH payments are specifically intended 
to ``take into account the situation of hospitals which serve a 
disproportionate number of low-income patients with special needs.'' 
1 This includes the unreimbursed costs of serving Medicaid 
as well as uninsured patients.2
---------------------------------------------------------------------------
    \1\ 42 U.S.C.  1396a(a)(13)(A)(iv), 1396r-4(a).
    \2\ 42 U.S.C.  1396r-4(g)(1)(A).
---------------------------------------------------------------------------
    In 2001 (the latest year for which data are available), Medicaid 
DSH payments covered 25 percent of the otherwise unreimbursed costs 
incurred by NAPH member systems, despite the fact that DSH payments 
constituted less than 6 percent of overall Medicaid spending. The 
recent restoration of DSH funding will help relieve some strain on 
public hospitals by helping hospitals cover a greater portion of the 
costs of Medicaid and uncompensated care. However, current attempts to 
limit IGTs would limit many states' ability to access this critical 
funding and would have a deleterious impact on safety net providers.
    Consistent with Medicaid law, many states use IGTs to help finance 
essential support payments for safety net providers. For example, a 
county-owned hospital may transfer public funds to the state Medicaid 
agency to support the non-federal share of Medicaid DSH payments. This 
is not abusive; it is a legitimate reallocation of responsibility for 
covering the non-federal share of Medicaid payments from the state to a 
local government. Such sharing of the financial burden between states 
and local governments is often critical to enabling states to provide 
DSH and other forms of critical support to safety net providers. Recent 
proposals to severely restrict IGTs would have a crippling impact, 
particularly on the safety net.
    The use of local as well as state funds for the non-federal share 
of Medicaid expenditures has been a fundamental part of the Medicaid 
program since its inception. Efforts to reform IGTs should respect the 
existing and historical local role in financing the Medicaid program. 
Medicaid is a partnership between the federal government, states and 
localities. The Medicaid statute has always referred to the ``federal'' 
and ``non-federal'' share, not the state share. Federal Medicaid law 
and regulations explicitly permit entities other than states to 
contribute some portion of the non-federal share of Medicaid payments 
through IGTs. Existing federal law allows states to fund up to 60% of 
the non-federal share of Medicaid costs through such 
expenditures.3 The Medicaid statute explicitly permits not 
only local governments but also local government health care providers 
to contribute the non-federal share.
---------------------------------------------------------------------------
    \3\ 42 U.S.C.  1396a(a)(2).
---------------------------------------------------------------------------
    Over the last several years, legislative and regulatory changes 
have addressed Medicaid financing abuses. Although some states have 
historically taken advantage of IGTs by using them to finance excessive 
payments to public providers which were subsequently returned to the 
state, Congress and the Centers for Medicare and Medicaid Services 
(CMS) have effectively curtailed the opportunity for such abuse by 
placing strict limits on payment amounts. Congress has imposed limits 
on statewide Disproportionate Share allotments, has capped DSH payments 
to individual hospitals based on unreimbursed costs and has mandated 
changes to upper payment limit (UPL) regulations to prevent abuse. The 
UPL changes alone have reduced federal payments by an estimated $85 
billion.
    There is no evidence of abuse under these strict new limits. The 
prepared statements of the governmental witnesses testifying today do 
not adequately acknowledge the extent to which the potential for 
abusive IGTs has already been limited. Many of the examples provided by 
both the U.S. General Accounting Office (GAO) and the Office of the 
Inspector General (OIG) in their testimony relate to arrangements that 
could not be established today under current regulations. The recent 
regulatory changes have not yet been fully evaluated, and adopting even 
more stringent restrictions would, at this point, be premature.
    Any ``fat'' in the system from IGT abuses has already been cut; 
further reductions will materially jeopardize access to care for 
Medicaid and low income patients. Regulatory changes have already 
removed $85 billion from the Medicaid program. Additional reforms in 
the name of reducing waste, fraud and abuse will primarily result in 
reduced payments to providers serving the neediest patients. 
Restrictions on the use of local funds will, in many states, eliminate 
the supplemental Medicaid payments--including DSH--that enable NAPH 
hospitals and other safety net providers to sustain their missions. 
Congress should avoid adopting broad changes without considering the 
consequences and the harm to the very patients Medicaid is supposed to 
help.
    NAPH appreciates the opportunity to share our observations about 
critical Medicaid financing issues. As the number of Americans living 
in poverty rises, strengthening the Medicaid program is critically 
important and any policy changes must take into consideration the 
potential impact on safety net providers who shoulder the burden of 
caring for our nation's poor and uninsured. We look forward to working 
with the Committee to develop solutions to the problems confronting our 
nation's poor and uninsured and the safety net providers that serve 
them.

                                 ______
                                 
        Prepared Statement of The National Governors Association

                              INTRODUCTION

    The Medicaid program is the largest and most important health care 
program in the country. It currently provides $300 billion per year in 
critical health care and long term care services to more than 50 
million low-income children, working families, frail seniors, and 
people with disabilities. It is a lifeline and a safety net for the 
most vulnerable members of our society.
    Medicaid is actually 56 separate programs and is administered by 
the states and territories and jointly financed by the states and the 
federal government. The percentage of the state's share varies 
depending on several factors, but averages about 57% federal and 43% 
state. The ``non-federal'' share can be financed entirely through state 
funds, but states also have the option to require local governments to 
share the costs. Of this ``non-federal'' share, up to 60% can be 
financed by local contributions. These contributions, or 
intergovernmental transfers (IGTs), were designed by Congress and are 
in the Medicaid statute, have been authorized by federal regulations, 
have been approved by HHS for many years, and are a legitimate 
mechanism that many states rely on to finance the Medicaid program.

Intergovernmental Transfers
    Section 1902(a)(2) of the Medicaid statute codifies this 
arrangement by requiring states to ``provide for financial 
participation by the State equal to not less than 40 per centum of the 
non-Federal share of the expenditures under the plan . . .''
    Furthermore, Section 1903(w)(6)(A) states, ``Notwithstanding the 
provisions of this subsection, the Secretary may not restrict States'' 
use of funds where such funds are derived from state or local taxes (or 
funds appropriated to state university teaching hospitals) transferred 
from or certified by units of government within a state as the non-
Federal share of expenditures under this title, regardless of whether 
the unit of government is also a health care provider . . .''
    Finally, this is also recognized in federal regulations, which 
authorize the use of public funds as the state share of Medicaid 
spending if the funds are ``transferred from other public agencies 
(including Indian tribes) to the state or local (Medicaid) agency and 
under its administrative control . . .'' (42 C.F.R. 433.51(b)).

State and Local Governments
    The funding of Medicaid follows two broad models: centralized, 
where the state is responsible for raising revenue and distributing to 
the local level; and decentralized, where the local entities have much 
greater authority to raise and spend revenue on their own. IGTs, in 
part, recognize that state-raised revenue and county-based revenue are 
essentially equal in the eyes of the law and therefore, neither should 
be discriminated against.
    Without the benefit of IGTs, large county-based states, such as New 
York, California, Wisconsin and North Carolina to name just a few, 
would literally be unable to finance their Medicaid programs, 
destroying the safety net in many parts of the country and drastically 
increasing the numbers of the uninsured.
    Therefore, attacks on the very existence of IGTs would 
fundamentally threaten the decentralized form of government that these 
states have chosen and would represent an attempt by the federal 
government to statutorily favor state governments that are centralized 
and do not rely on the ability of counties to raise revenue.
    We remain hopeful that this is not the intended result of any 
congressional or administrative actions.

Federal Concerns
    The Administration and some members of Congress have accused states 
of manipulating Medicaid financing mechanisms in inappropriate ways. 
States have been accused of misusing IGTs in association with 
Disproportionate Share Hospital (DSH) payments, Upper Payment Limits, 
and Provider Taxes. These claims are not new, and have resulted in the 
past in federal action clarifying what is appropriate.
    If there continue to be concerns about how states are financing 
Medicaid, we would recommend that discussions be had that are open, 
exhaustive, and include all impacted stakeholders. These discussions 
should at least acknowledge that not only are the state actions in 
question legal, but have been approved by HHS, and in many cases 
encouraged by them in the past.

Financing Mechanisms Encouraged by HHS
    An excellent example of how states and the federal government 
worked together is in Nebraska. The state, with the full support and 
blessing of both HHS central office and regional offices, developed a 
plan to increase reimbursement to nursing homes to the federal maximum. 
They then utilized an intergovernmental transfer and dedicated the 
extra money into a trust fund that would be used solely to assist 
nursing homes in a physical conversion to assisted living facilities. 
Everyone benefited. Nursing homes were able to embrace the economics 
and demand of the 21st century--the increasing preference of seniors to 
reside at home or in community settings. The state was able to 
transform its long-term care infrastructure to assisted living 
facilities--which are much cheaper to maintain than nursing homes. The 
federal government also benefited by saving money in the long run, and 
by working with the state to meet the shared goal of decreasing 
reliance on institutional care.

Do Not Change the Rules Midstream
    Regardless of what changes Congress may consider, it is critical 
that the financing rules of Medicaid not be changed midstream. States 
have acted within the parameters of the law and the regulations when 
negotiating budgets--and all financing mechanisms are both legal and 
approved by HHS. For these rules to be changed midstream, without 
notification or Congressional directive, would be a presumption of 
guilt that is inappropriate in a state-federal partnership. In 
addition, such changes may well constitute an illegal impoundment of 
funds and violate other bedrock provisions of the Medicaid program.
    It is therefore inappropriate for HHS, without legislation approved 
by Congress, to move forward with changing these rules and policies. We 
are finding that such a practice is occurring with increasing 
frequency, much to the concern of our members and their Congressional 
delegations. I would like to submit for the record a recent letter 
signed on behalf of the entire Iowa delegation, including Senate 
Finance Committee Chairman Grassley and House Budget Committee Chairman 
Nussle, expressing their concerns that HHS is moving forward with 
unilateral policy changes that could have significant impacts on 
Medicaid and the populations it serves.
    States who have already received federal approval for this funding 
have designated the money to go towards such important goals as 
financing expansions of home and community-based long term care, 
increasing physician reimbursements so that access to care is not 
jeopardized, ensuring that tier one trauma centers keep their doors 
open, and in many states, ensuring that small rural hospitals aren't 
forced to close or otherwise jeopardize patient care.

States Can Not Continue to Finance Medicaid and the Needs of the Dual 
        Eligibles
    Medicaid currently accounts for roughly 20% of any given state's 
budget, making it the second largest expenditure next to education. The 
Medicaid program is also growing at almost double digit rates, due to 
significant pressures in prescription drug costs and long-term care. 
Growth that large in a program Medicaid's size is unsustainable even in 
a good economy. Unfortunately, states are not in good fiscal standing. 
The combination of Medicaid growth and lower than projected revenue has 
created a situation where Medicaid costs are eating up every dollar of 
state revenue, leaving no room for increased funding for education or 
other key priorities.
    This unfortunate situation is exacerbated by the difficulty states 
have had in dealing with unfunded federal mandates and by the fact that 
increasing amounts of the Medicaid budget (and also state funded 
programs) are devoted to filling holes in the federal commitment to 
Medicare beneficiaries:
    Forty-two percent of the entire Medicaid budget is spent on 
services for elderly and disabled Medicare beneficiaries, the so-called 
``dual eligibles''. This is a shocking number when you consider that 
they comprise only twelve percent of the total number of people served 
by Medicaid and that they are all fully covered by the entire Medicare 
benefits package. Medicaid's responsibility includes acute care 
services beyond Medicare's limitations, prescription drug coverage 
which Medicare does not yet provide in any comprehensive fashion, 
payment of expensive co-pays, premiums, and deductibles, and most 
importantly, long-term care services.
    It is critical to be mindful that the Medicaid program is 
essentially the only funding source for long-term care services in the 
nation, paying approximately five times what Medicare does in total. 
Medicaid is responsible for more than sixty percent of all nursing home 
care in this country. As the baby boom demographic starts to reach 
Medicare eligibility within the next decade, these trends will worsen 
substantially unless common-sense reforms are enacted.
    Congress first attempted to address prescription drug coverage in 
the Medicare Catastrophic Act of 1988. This legislation created a drug 
benefit for seniors and required the Medicaid program to pay 
significant amounts of cost sharing for low-income seniors through the 
creation of the Qualified Medicare Beneficiary (QMB) and Specified Low-
Income Medicare Beneficiary (SLMB) programs. Congress quickly repealed 
the drug benefit, but left intact the Medicaid requirement to cover 
Medicare cost-sharing. Consequently for the past thirteen years, states 
have borne billions in increasing costs for the QMB and SLMB programs, 
and tens of billions in providing prescription drugs for low-income 
Medicare beneficiaries.
    We were strongly encouraged by Congress' recent effort to enact a 
comprehensive Medicare prescription drug benefit into law, and 
appreciate the decision to qualify the dual eligibles for the Medicare 
benefit. However, states will still be required to finance the vast 
majority of these costs, through the ``clawback'' effect. This will 
create an unprecedented reverse block grant of funds from states to the 
federal government, one in which states will have no control over how 
the money is spent.
    States have never been in a position to welcome these burdens on 
behalf of the federal government. Strong state revenue growth in the 
mid 1990s helped mask an unsustainable load that has now become 
unbearable. Without additional federal help, states will be unable to 
afford current Medicaid commitments, let alone ponder the significant 
expansions that would be needed to address the growing problem of the 
uninsured.
    States are spending significantly more money on the Medicaid 
program now than they were 10 years ago, despite the increased 
financing through Upper Payment Limit mechanisms. The state share of 
Medicaid in 2000 was $94 billion, as compared to only $50 billion in 
1992, and $70 billion in 1997. This demonstrates state commitment to 
funding the program and proves that the increases in the Medicaid 
budgets are not being financed overwhelmingly by federal funds.
    Finally, the temporary state fiscal relief will end in fiscal 2004. 
Because of this, and because of the continued growth of Medicaid 
overall, the total amount of state dollars in Medicaid will increase by 
15 to 20 percent from fiscal 2004 to fiscal 2005. This will create a 
fiscal situation ill-suited to absorb additional reductions in the 
federal commitment to Medicaid funds.

Conclusion
    The Governors oppose any reductions in Medicaid spending as well as 
changes to the current policy that would jeopardize funding for 
underserved populations. The current policy represents a well thought-
out balance that seeks both accountability and sufficient funding for 
the health care safety net. Changing the policy now could have 
disastrous consequences for public hospitals and the individuals they 
serve.


INTER-GOVERNMENTAL TRANSFERS: VIOLATIONS OF THE FEDERAL-STATE MEDICAID 
              PARTNERSHIP OR LEGITIMATE STATE BUDGET TOOL?

                              ----------                              


                        THURSDAY, APRIL 1, 2004

                  House of Representatives,
                  Committee on Energy and Commerce,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:26 p.m. , in 
room 2322, Rayburn House Office Building, Hon. Charlie Norwood 
(vice chairman of the subcommittee) presiding.
    Members present: Representatives Deal, Whitfield, Norwood, 
Wilson, Barton (ex officio), Brown, Waxman, Stupak, Green, 
Strickland, Capps, John, and Rush.
    Staff present: Chuck Clapton, majority counsel; Jeremy 
Allen, health policy coordinator; Eugenia Edwards, legislative 
clerk; Bridgett Taylor, minority professional staff; Amy Hall, 
minority professional staff; Purvee Kempf, minority 
professional staff; and David Vogel, minority staff assistant.
    Mr. Norwood. The committee will come to order. I now call 
this hearing of the Health Subcommittee to order.
    This is the second hearing the subcommittee has had on the 
subject of State uses of intergovernmental transfers to finance 
their share of their State's Medicaid program. While the 
Federal Government has taken steps to limit the use of these 
mechanisms, there is evidence to suggest that States are still 
able to draw down Federal Medicaid payments when no State 
expenditure has been made.
    Today, we will hear from two witnesses who will discuss 
this issue further, Dennis Smith, the Director of the Center of 
Medicaid and State Operations at the Centers for Medicare and 
Medicaid Services.
    Mr. Smith, you are most welcome.
    And he will discuss the Federal Government's effort to 
ensure the integrity of the Medicaid program and the 
administration's proposal to save $9.6 billion over 5 years by 
curbing IGTs that are in place solely to undermine the 
statutory determination of the Federal matching rate We will 
also hear from Barbara Edwards, the Deputy Director for Ohio's 
Office of Medicaid.
    Welcome, Ms. Edwards.
    Ms. Edwards is testifying on behalf of the National 
Governors Association and will provide a different perspective 
on State uses of IGTs.
    Thank you both for taking time to join us today. It is my 
sincere hope that this afternoon's hearing will help us move 
closer to answering two important questions: How widespread is 
the use of these questionable financing mechanisms; and how can 
we effectively balance the need to ensure that the fiscal 
integrity of the program is maintained without, at the same 
time, harming the millions of Americans who rely on this 
critical component of our health care system?
    I would like to close by stating for the record that 
today's hearing is not about cutting Medicaid programs. It is 
about making sure that Federal taxpayer dollars earmarked for 
Medicaid are actually used for that purpose. It is incumbent 
upon us to preserve the Federal-State partnership that is a 
hallmark of the Medicaid program.
    I would like to again thank our witnesses for joining us 
this afternoon, and with that, I would yield to the ranking 
member who is not here.
    Would you like me to yield to Mr. Waxman first?
    I would like to now----
    Mr. Waxman. Are you yielding to me?
    Mr. Norwood. I am asking since Mr. Brown is not here, the 
ranking member, we normally would go to him first. I will go to 
you first.
    Mr. Waxman. Thank you, Mr. Chairman, for going to me. You 
shouldn't go to me till third, because under the rules I came 
in third, but I am just going to reserve my opening statement 
and add some time on for the questions, but thank you very much 
for calling on me.
    Mr. Norwood. Mr. Deal, you are now recognized for an 
opening statement.
    Mr. Deal. Mr. Chairman, I will reserve my time.
    Mr. Norwood. Mrs. Capps, you reserve your time?
    Mrs. Capps. I welcome our guests and witnesses and reserve 
my time for additional questioning.
    Mr. Norwood. Mr. Green, you are recognized, but before you 
are, it is appropriate, I think, that this subcommittee make 
mention that this is the last hearing one of your staffers will 
be attending.
    Mr. Green. Mr. Chairman, I was going to mention that and 
put my statement into the record, although this is our second 
hearing on this issue in 2 weeks and this is the last hearing 
for my Legislative Director, Sharon Scribner, who will be 
leaving and, as we say in DC, ``going downtown.'' But Sharon 
has done a great job not only as Legislative Director, but on 
this subcommittee. She knows the priority I place on it and we 
have shared that priority. I know we will miss her, and so will 
a lot of folks who work with her.
    Thank you, Sharon.
    Thank you, Mr. Chairman, for that.
    Mr. Norwood. Mr. Waxman, you are recognized.
    Mr. Waxman. Mr. Chairman, I understand that Sherrod Brown 
is the ranking member of this subcommittee. He is on his way 
here, and I would just hope that we would wait a minute or 2 
for him.
    Mr. Norwood. Why don't we begin on our witnesses and then 
we will--I wasn't going to do that. I was going to let the 
witnesses make their statements, and if he walks in during, 
then we will--we are not trying to cut him off, but we also 
don't want him to hold up the hearing. Everybody is busy and 
these people are, too.
    Mr. Waxman. It is usually a courtesy that is given.
    Mr. Norwood. Well, there are two courtesies, one of which 
is to be on time and the other is to give courtesy to the 
ranking member, so we have two things going on here.
    Mr. Waxman. Well, maybe if I could just talk a second more, 
it appeared we were scheduled for 2 o'clock, and then we had a 
vote, so that sort of confused people, although we are all 
here, but I am sure he is just probably, from some old wound in 
his younger days----
    Mr. Norwood. Mr. Waxman, you are being very kind. Your time 
has expired, and I do appreciate where you are coming from.
    [Additional statements submitted for the record follow:]

Prepared Statement of Hon. Michael Bilirakis, Chairman, Subcommittee on 
                                 Health

    I now call this hearing of the Health Subcommittee to order. This 
is the second hearing the Health Subcommittee has held regarding the 
Medicaid program and, more specifically, state uses of 
intergovernmental transfers. In our hearing on March 18th, we heard 
testimony from the Office of Inspector General at the Department of 
Health and Human Services and the General Accounting Office describing 
how states are able to use certain financing mechanisms, including 
intergovernmental transfers, to draw down federal Medicaid payments 
without actually spending their own funds. The result is that in some 
cases, the federal government is contributing more to a state's 
Medicaid program then it should under federal law.
    Today we will explore this topic further and hear two more 
perspectives on this issue. Dennis Smith, the director of the Center 
for Medicaid and State Operations at the Centers for Medicare and 
Medicaid Services, will discuss the federal government's efforts to 
ensure the integrity of the Medicaid program and the administration's 
proposal to save $9.6 billion over five years by ``curbing IGTs that 
are in place solely to undermine the statutorily determined federal 
matching rate.''
    We will also hear from Barbara Edwards, the deputy director for 
Ohio's Office of Medicaid. Ms. Edwards is testifying on behalf of the 
National Governors Association and will provide a different perspective 
on state uses of IGTs. Thank you both for taking the time to join us 
today.
    Regardless of the fact that today is April Fool's Day, this is a 
very serious topic. In my mind it is our responsibility to ensure that 
federal Medicaid payments to states go towards reimbursing providers 
who provide services to Medicaid beneficiaries and not for other, non-
Medicaid purposes. No matter what your views on the Medicaid program 
might be, I find it baffling that some would resist efforts to protect 
the fiscal integrity of this program. I have no interest in ``cutting 
Medicaid.'' I do, however, have a strong interest in ensuring that the 
integrity of the federal-state partnership, as prescribed under federal 
law, is maintained.
    I would like to again thank our witnesses for taking the time to 
join us today--I know we all look forward to your testimony. I now 
yield to the ranking member of the subcommittee, the gentleman from 
Ohio, for an opening statement.

                                 ______
                                 
 Prepared Statement of Hon. Joe Barton, Chairman, Committee on Energy 
                              and Commerce

    Thank you, Chairman Bilirakis, for holding this important hearing 
today. I appreciate your Subcommittee's efforts to examine the problems 
associated with Medicaid financing. I also want to thank our witnesses, 
Dennis Smith, the Director of CMS Medicaid Operations and Barbara 
Edwards, the Deputy Director of the Ohio Medicaid program.
    Medicaid is the critically important program that was created to 
pay for the health care needs of the poorest Americans. It should never 
be a financing mechanism to help states pay for other state spending 
that has nothing to do with providing health care for the poor. Yet, 
that is exactly what some states are doing with Federal Medicaid 
funding.
    I was deeply disturbed to hear the testimony that the General 
Accounting Office and the HHS Inspector General recently provided to 
this Subcommittee. They identified how some states are misusing Federal 
Medicaid funds, to pay for such things as education expenses and to 
reduce their budget deficits. In a time of budget scarcity, it is 
unacceptable that vital Medicaid dollars are being taken away from 
providing care for vulnerable individuals and diverted to fund other 
state priorities--however worthy they may be.
    I was also troubled to learn about how some state financing schemes 
contribute to Medicaid beneficiaries being placed at an increased risk 
of receiving inadequate care. We heard the Inspector General testify 
about one state that required a nursing home to use an inter-
governmental transfer (``I-G-T'') to transmit approximately eighty-two 
million dollars back to the state. This transfer was happening at the 
same time that the state's auditors were finding a pattern of 
substandard care in that facility. We need to ask why states are able 
to remove millions of dollars from such institutions at a time when the 
facility was clearly in crisis and could have used those dollars to 
improve the treatment of Medicaid beneficiaries.
    I-G-Ts have many legal and permissible uses. No one is suggesting 
that all I-G-Ts should be prohibited or eliminated. We do, however, 
need to identify how to ensure that Federal Medicaid dollars are used 
to provide health care services for the poor. Schemes that divert these 
dollars away from such uses, or that violate the basic principles of 
the Federal-state Medicaid partnership, need to be stopped. I look 
forward to hearing from the witnesses today to learn how we achieve 
that goal.

                                 ______
                                 
  Prepared Statement of Hon. Frank Pallone, Jr., a Representative in 
                 Congress from the State of New Jersey

    Mr. Chairman, we were here two weeks ago to discuss the enormous 
burden that the Bush administration is placing on State Medicaid 
programs, and I am here again today to express my deep concerns about 
the direction the President is taking the Medicaid program. I believe 
we should be strengthening this program that is the largest source of 
insurance today in the United States, and that serves over 51 million 
seniors, disabled and poor Americans. Instead, the President is 
advocating a radical overhaul of Medicaid.
    Mr. Chairman, we must remember here that by proposing Medicaid 
reform, specifically with regard to IGTs, the attempt to ``crack down'' 
on fraud and abuse only serves to victimize beneficiaries. Our Medicaid 
programs are in trouble, our states are strapped for dollars, and there 
are real people who depend on these services for their life and 
livelihood.
    My home state of New Jersey has done nothing illegal, and any 
funding it has received through IGTs has gone directly back to the 
Medicaid population, primarily elderly residents of nursing homes. NJ 
is phasing out its IGT programs and is complying with every law on the 
books, but nevertheless, the state, like many others across the nation, 
is being held hostage by CMS.
    NJ has an extraordinary number of HHS audits that to date have all 
come clean, and that are invariably impeding the work of our Medicaid 
directors. In addition, any state plan amendment offered by NJ or other 
states that proposes an innovative avenue under statute for providing 
better and more efficient Medicaid services, or any health service, is 
literally be used as a ploy by CMS to scrutinize that state's record on 
Medicaid and employment of an IGT program.
    States are being told that unless they make changes to their IGT 
programs, their state plan amendment application cannot be considered. 
I would like to reiterate that States, particularly NJ, have not done 
anything illegal and have used funding to provide services for Medicaid 
beneficiaries. I am appalled that state plan amendments are being held 
hostage because of a state's IGT status, especially when the amendment 
has absolutely nothing to do with Medicaid.
    Mr. Chairman, the Bush administration cannot change the rules in 
the middle of the game. And might I add, this is not a game. By cutting 
Medicaid funding and offering the proposals outlined in his budget, the 
President is undermining access to care for the poor, elderly, sick and 
disabled, and overall, the President's proposals weaken the health care 
safety net and adds to the widening credibility gap that is putting 
him, and Republicans that support his proposal, further out of touch 
with the American people.

                                 ______
                                 
 Prepared Statement of Hon. Bart Stupak, a Representative in Congress 
                       from the State of Michigan

    Thank you Mr. Smith and Ms. Edwards for joining us today to discuss 
Medicaid financing. This is an issue of great importance to the State 
of Michigan.
    I would like to open with a reminder that any cut to Medicaid will 
cause seniors to lose benefits, children of working families to be 
turned away, and health care professional's reimbursements to drop yet 
again. In Michigan, Medicaid has been a godsend for families and 
seniors, especially during this economic downturn. In the past four 
years, Michigan's Medicaid program has grown by almost 30 percent, now 
covering about 1.35 million people.
    I am for transparency and honest-bookkeeping. But I believe the 
purpose of these hearings is dubious. Every time Republicans want to 
cut Medicaid to fund tax cuts they talk about ``reform.''
    Mr. Smith, in your prepared testimony, you say that that 
fundamental structural reforms are needed to return Medicaid to a 
``federal and state partnership.'' As the former director of Virginia's 
Medicaid program, I'm sure you know well the importance of the word 
``partnership.'' But, from what we've been hearing from states, CMS's 
recent actions have undermined the federal and state partnership. 
Frankly, many states believe they are under siege.
    Never has it been more important that states and federal 
governments work together. There are 43 million uninsured in this 
country. The unemployment rate in a large portion of my district is 12 
percent, 12 percent! And, again, Michigan's Medicaid roles have grown 
30 percent. Yet, the Administration doesn't seem to be interested in a 
partnership. For instance:
    The president's budget cut Medicaid by $23.5 billion dollars over 
ten years. That's a $385 million cut over 10 years for Michigan, or $77 
million per year. How does a state like Michigan, whose Medicaid 
enrollment has increased 30 percent in four years, fill a $385 million 
hole?
    Michigan could cut the Home and Community Based Waiver program that 
allows people to stay in their homes instead of nursing homes. Michigan 
could cut coverage for 77,000 of Michigan's most vulnerable adults. Or 
Michigan could cut its low prescription drug benefit program for 14,000 
low income seniors.
    There is wide agreement that during this economic downturn, with 
the ranks of uninsured growing, no cut to Medicaid is acceptable. In 
fact, 250 groups opposed the cuts in the House budget.
    In addition, the president's budget does not include an extension 
of $20 billion in state fiscal relief, including $10 billion in relief 
directly for Medicaid. The House and Senate budgets did not include an 
extension either. This critical funding expires June 30th.
    States are doing their part in meeting the needs of the uninsured. 
In Michigan, more than $400 million in state funds have been added to 
the FY05 Medicaid budget, including

 $168 million to replace the loss of federal fiscal relief set to 
        expire June 30th.
 $150 million to cover the cost of phasing out intergovernmental 
        transfers and
 $86 million for changes in the Medicaid caseload and the increased 
        utilization of services.
    Again, states are working hard to help the low-income working 
families and seniors. They need the federal government to be a partner 
in their work. I'm looking forward to hearing from Mr. Smith about how 
CMS intends to be that partner and from Ms. Edwards about what that 
partnership should look like.

    Mr. Norwood. Mr. Smith, you are now recognized to offer 
your statement. We would like to keep it to 5 minutes, but know 
that if you go over a little bit, I will be very generous.

 STATEMENTS OF DENNIS SMITH, DIRECTOR, CENTER FOR MEDICAID AND 
 STATE OPERATIONS, CENTERS FOR MEDICARE AND MEDICAID SERVICES, 
   U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES; AND BARBARA 
 EDWARDS, DEPUTY DIRECTOR, OFFICE OF MEDICAID, OHIO DEPARTMENT 
                   OF JOB AND FAMILY SERVICES

    Mr. Smith. Thank you, Mr. Chairman, and members of the 
subcommittee. I appreciate the opportunity to appear before you 
today. I have submitted a written statement for the record and 
will try to move quickly through some verbal comments.
    First, I want to assure everyone on this subcommittee that 
in no way are we attempting to prevent the States from using 
their right under the statute to share their cost of the 
Medicaid program with local government entities.
    Second, I would like to say at the outset again, the 
savings that have--we have estimated to the President's 
proposal represent less than 1 percent of total Federal 
Medicaid expenditures over the next 10-year period of time.
    There does appear to be a great deal of confusion about the 
term, the ``intergovernmental transfer,'' or IGT, and confusion 
about our position as well. I want to assure you that we 
consider an IGT that meets the conditions set out of the 
Medicaid statute to be a permissible source of State funding of 
Medicaid costs.
    Statutory provision governing IGTs is an exception to the 
very restrictive requirements governing provider-related 
donations. The IGT provision was meant to continue to allow 
units of local government, including government health care 
providers, to share in the costs of the State Medicaid program. 
This provision was necessary in light of the prohibitive nature 
of the provider-related donation requirements that are 
applicable to all nongovernmental entities.
    In order for a health care provider to transfer funds that 
are protected under the act, the health care provider must be 
part of the--it must be a unit of State or local government. 
Therefore, a governmental health care provider, to make a 
protected transfer, it must have access to State or local 
revenues; and accessing State or local tax revenues means that 
the provider must either have a direct taxing authority or must 
be able to access funding as an integral part of a governmental 
unit with taxing authority, so no contractual arrangement with 
the State or a local government is necessary for the health 
care provider to receive taxes.
    There has been a great deal of interest in our activities 
in reviewing State plan amendments and what we have been 
finding. Since August 2003, we have been asking States for 
additional information, and the questions that we have asked 
the States have been attached to my written statement, asking 
questions on how they are financing their share of the Medicaid 
program through the State plan amendment review process. These 
questions related to State financing are applied consistently 
and equally to all States under the State plan amendment 
review.
    During that review process we have discovered that several 
States made claims for Federal matching funds associated with 
certain Medicaid payments, payments which the health care 
providers are not ultimately allowed to retain. Instead, State 
and or local governments are requiring the health care provider 
to forgo or to retain certain Medicaid payments to the States, 
which effectively shifts the cost of the Medicaid program to 
the Federal Government.
    These asserted IGTs do not meet the conditions of the 
Medicaid statute, because they are not derived from State or 
local taxes. Instead, they represent a refund of some or all of 
the Medicaid payment, and there are is not a protected IGT, as 
some have claimed.
    It is critical to note that these financing techniques are 
prearranged and usually involve an agreement of participation. 
This means that only health care providers that willingly agree 
to participate in the redirection or return of Medicaid funding 
are eligible to receive the initial payment from the State. 
Upon receipt, the health care provider must send back to the 
State or local government or ultimately some part of the 
payment--at least some part of the payment. In many respects, 
it has been a very large percentage of the payment.
    Clearly, these financing mechanisms require that--which 
require the return of payments made for services provided to 
Medicaid individuals are not State or local tax receipts, which 
is a necessary requirement of the statutory provision of the 
governing IGTs. I would also note that they are not helping the 
providers themselves in that they have given up payments for 
services that they have provided to Medicaid-eligible 
individuals.
    These recycling mechanisms have created tensions among the 
States and undermine the integrity of the program. The Federal 
Government, we believe, should match real expenditures for the 
Medicaid population at the real statutorily described match 
rates, which are updated and recalculated on an annual basis.
    I have already exhausted my time. Let me move very quickly.
    We would like to give you an example of what we mean in 
terms of what we believe that the Federal Government should be 
matching, and again this is an example in our written statement 
as well. But to illustrate our point, the President's budget 
provides that States--that the Federal Government be matching 
real or net costs of the program. We believe that this is 
appropriate and supported by a number of General Accounting 
Office reports and the Department's own Office of Inspector 
General which recommended this approach about 2\1/2\ years ago.
    Specifically, the OIG has recommended that CMS, ``require 
that the return of Medicaid payments by a county or local 
government to the State be declared a refund of those payments 
and, thus, be used to offset Federal financial participation 
generated by the original payment.'' Some have alleged that our 
strategy would hurt safety net providers, but I think--in fact, 
we see--that the excess amounts being returned to the States 
themselves are not benefiting the providers.
    Our clear objective, as we have worked with the States and 
their plan amendments, has been to secure payments for those 
providing the services. We believe that the solution that we 
have laid out is a relatively simple one and one that is based 
on truly what payments were actually made for services provided 
themselves.
    So I appreciate the opportunity to appear before you today 
and look forward to your questions.
    [The prepared statement of Dennis Smith follows:]

 Prepared Statement of Dennis Smith, Director, Center for Medicaid and 
      State Operations, Centers for Medicare and Medicaid Services

    Chairman Bilirakis, Ranking Member Brown, distinguished Committee 
members, thank you for inviting me to discuss intergovernmental 
transfers (IGTs) and the financing of the largest government health 
insurance program in the United States, Medicaid. Medicaid and Medicare 
Federal expenditures are of similar magnitude, and, in fact, prior to 
implementation of MMA Medicaid expenditures exceeded those of Medicare 
and will continue to do so until 2005.
    There have been numerous studies over several years from the 
General Accounting Office (GAO) and the Office of Inspector General 
(OIG) regarding state actions to effectively shift a larger portion of 
state Medicaid costs to the Federal government. As the problem has been 
well documented elsewhere, I will focus my remarks on our views of 
intergovernmental transfers and our strategies for addressing this 
issue.

                               BACKGROUND

    Medicaid is a partnership between the Federal Government and the 
states. While the Federal Government provides financial matching 
payments to the states and is responsible for overseeing the Medicaid 
program, each state essentially designs and runs its own program. 
States have great flexibility in administering their programs, and the 
Federal Government pays the states a portion of their costs by matching 
certain spending levels, with statutorily determined matching rates, 
currently ranging between 50 and 77 percent. This creates a natural 
tension in which states strive to maximize Federal matching dollars.
    Over the last two decades, states have developed innovative ways of 
enhancing Federal matching dollars. In 1985, the Health Care Financing 
Administration (HCFA), now the Centers for Medicare and Medicaid 
Services (CMS), changed the regulations governing the way the Federal 
Government provides matching funds to states when they received private 
donations to help cover administrative costs. The rule change was 
merely intended to reduce record keeping and provide states more 
flexibility for accepting philanthropic donations.
    Additionally, regulations at the time allowed states to impose 
special taxes on specific provider groups. These regulations led states 
to impose taxes and receive donations from providers that led to new 
ways to finance states' share of Medicaid expenditures. In 1986, 
Congress was concerned that states were not reimbursing 
Disproportionate Share Hospitals (DSH) for their uncompensated care 
costs. Legislation was passed that eliminated any limit on DSH 
payments. The combination of new revenue sources from donations and 
taxes and the ability to pay unlimited DSH reimbursement led to a 
significant increase in Medicaid expenditures claimed by states. Once 
these exploding loopholes began to be limited, states pursued the Upper 
Payment Limit (UPL) loophole more aggressively. Using these mechanisms, 
many states have managed to inappropriately draw down more Federal 
Medicaid dollars with fewer state dollars, resulting in an effective 
FMAP that is higher than the statutorily determined matching rates, 
creating inequities among states. CMS has begun to close these 
loopholes and ensure that states receive appropriate matching rates, 
but it is a long, complicated process.

                        CMS OVERSIGHT ACTIVITIES

    CMS has a strong interest in strengthening financial oversight and 
ensuring payment accuracy and fiscal integrity. Federal matching funds 
must be a match for real Medicaid expenditures. At the Federal level, 
our primary role is to exercise proper oversight and review of state 
financial practices and to provide guidance and support for states' 
efforts to ensure program and fiscal integrity. While we have made 
substantial progress in helping states identify and reduce improper 
payments, we are now turning our attention to strengthening Medicaid 
Federal financial management activities.
    We have taken some initial steps to improve our financial 
management processes, but we know that more work can and must be done. 
As part of the President's FY 2003 Budget, we have dedicated $10 
million from the Health Care Fraud and Abuse Control (HCFAC) account to 
develop a comprehensive Medicaid program integrity plan. The FY 2004 
Budget allocated $20 million from HCFAC for this effort. The FY 2005 
Budget also proposes to allocate $20 million from HCFAC for this 
initiative. We are increasing attention to, and emphasizing the 
importance of Medicaid financial management at all levels of our Agency 
and across all of our regions. This effort involves improving Federal 
oversight capabilities of state Medicaid financial practices, and 
focusing attention on program areas of greatest risk, so that our 
resources are targeted appropriately. The following are examples of 
improvements and progress we have made as part of our Medicaid 
financial management and program integrity redesign.

Creating National Reimbursement Teams
    In an effort to improve national consistency in the issuance and 
application of Medicaid reimbursement policy, we have put together a 
team of Central and Regional Office staff, the National Institutional 
Reimbursement Team (NIRT), who are responsible for reviewing all 
institutional reimbursement state plan amendments, providing technical 
assistance to the states, and developing Medicaid institutional 
reimbursement regulations and policy. For example, the team is 
currently using a standard set of questions that must be answered by 
states before a state plan amendment will be approved and will help 
ensure that the payment methodology is clear. Questions include issues 
such as, ``Do providers retain all of the Medicaid payments including 
the Federal and state share (including normal per diem, DRG, DSH, 
supplemental, and enhanced payments) or is any portion of the payments 
returned to the state, local governmental entity, or any other 
intermediary organization?'' As a result of this effort, we will better 
know what we are paying for and how we are paying for it. The team's 
work will help ensure consistency in the application and review of our 
Medicaid policies. We also have established a Non-Institutional 
Provider Team (NIPT), which functions similarly to the NIRT, but for 
non-institutional providers, namely physicians. The NIRT and the NIPT 
have been working together on UPL transitions for those states with 
both inpatient and outpatient UPL phase-outs.

Upfront Reviews of State Funding Sources and Expenditures
    We will be redirecting and adding resources this year with the goal 
of changing the emphasis of the Financial Management (FM) review of 
state Medicaid/SCHIP programs from an after-the-fact review to an 
upfront and proactive review. Our new emphasis would be primarily to 
review the non-Federal share amounts and related expenditures prior to 
the beginning of the fiscal year so that any problems or issues can be 
resolved before any claims are submitted. This process would provide an 
approval of the state's operating plan for the upcoming year, with the 
goal of eliminating the need for CMS to intervene and disallow Federal 
Medicaid funding after it has already been spent by the state and to 
identify any unallowable funding mechanisms or expenditures before they 
actually happen. We recognize that the comment period provided for in 
the January 7 Federal Register notice was not sufficient. In that 
regard, CMS will be consulting with the National Governor's Association 
and the National Association of State Medicaid Directors (NASMD) to 
ensure full understanding of the process and requirements prior to its 
implementation. Furthermore, following these consultations, CMS intends 
to republish the notice in the Federal Register with a full 60-day 
comment period. This process will not be implemented until the full 
consultation with our state partners is complete.

Making Federal Matching Payments Only When State Plan Amendments Are 
        Approved
    In the past, states have been allowed to draw down Federal matching 
payments for state plan amendments that were submitted, but not yet 
approved. This allowed states to assume a financial risk if their plan 
amendment was subsequently disapproved. Since Federal matching payments 
were readily available while their state plan amendments were being 
considered, states had little incentive to ensure their plan amendments 
were approved. In fact, some state plan amendments were pending for 
years while the states continued to draw down Federal matching 
payments. In January 2001, we issued a state Medicaid Director letter 
informing the states that we would no longer make Federal matching 
payments until state plan amendments were approved, thus removing the 
previous incentive for states to keep plan amendments pending. For our 
part, we have changed our policy so that we will either approve or 
disapprove plan amendments within 90 days.

Partnership with State and Federal Oversight Agencies
    Another key element of our new financial management strategy is to 
strengthen our working relationships and our exchanges of information 
with several state entities. Every state has one or more audit entities 
responsible for ensuring that state expenditures, including those in 
the Medicaid and State Children's Health Insurance Programs, are 
properly made and documented. Furthermore, every Medicaid Agency has a 
surveillance and utilization review staff to pinpoint and pursue 
questionable provider claims and Agency payments. Finally, as you know, 
virtually all states operate a Medicaid Fraud Control Unit, typically 
housed in the Attorney General's office, to pursue instances of 
suspected Medicaid fraud. By better cultivating our relationships with 
state agencies that perform these types of functions, we believe we can 
continue to enhance our oversight of the Medicaid program nationwide. 
In addition, over the last several years, at the Federal level, we have 
developed a close collaboration with the Department of Health and Human 
Services' Office of the Inspector General. We intend to continue this 
relationship. CMS is in the process of hiring and assigning 100 new 
full time equivalent (FTE) positions that will be responsible for audit 
and compliance work within the CMS regions and in each state.

                        FY 2005 BUDGET PROPOSAL

    Since August 2003, CMS has been requesting information from states 
regarding detail on how states are financing their share of the 
Medicaid program costs under the Medicaid reimbursement State Plan 
Amendment (SPA) review process. The questions related to state 
financing of the Medicaid program are applied consistently and equally 
to all states under the SPA review process. New SPA proposals will not 
be approved until states have fully explained how they finance their 
Medicaid programs and until such time that states have agreed to 
terminate any financing practices that contradict the intent of the 
Federal-state partnership. (Attachment)
    During that SPA review process, CMS discovered that some states are 
utilizing financing techniques that do not comport with the intent of 
the Federal-state partnership. Specifically, CMS has discovered that 
several states make claims for Federal matching funds associated with 
certain Medicaid payments, payments of which the health care providers 
are not ultimately allowed to retain. Instead, through the ``guise'' of 
the IGT process, state and/or local governments require the health care 
provider to forgo and/or return certain Medicaid payments to the state 
(on the same day in many instances), which effectively shifts the cost 
of the Medicaid program to the Federal taxpayer.
    The result of such an arrangement is that the health care provider 
is unable to retain the full Medicaid payment amount to which it was 
entitled (a payment for which Federal funding was made available based 
on the full payment), and the state and/or local government may use the 
funds returned by the health care provider for costs outside the 
Medicaid program and/or to help draw additional Federal dollars for 
other Medicaid program costs. The net effect of this re-direction of 
Medicaid payments is that the Federal government bears a greater level 
of Medicaid program costs, which is inconsistent with the Federal 
medical assistance percentages specified in the Medicaid statute.
    Some may suggest that the action taken on UPL has addressed the 
concerns of the subcommittee. Experience shows this is not the case. 
Since we began our in depth review of state plan amendments that deal 
with reimbursement last summer, 82 have been approved, 4 have been 
disapproved and 5 have been withdrawn entirely by states. Thirty-nine 
SPAs have been temporarily withdrawn by states as a result of our 
requests for additional information. Another 153 SPAs are under review 
at CMS.
    The FY 2005 Budget proposes to build on past efforts to improve 
Federal oversight of Medicaid and ensure that Federal taxpayer dollars 
for Medicaid are going to their intended purpose. The Administration 
proposes to further improve the integrity of the Medicaid matching rate 
system through steps to curb IGTs that are in place solely to avoid the 
legally determined state financing. To be clear, CMS always considers 
legitimate IGTs permissible sources of state funding of Medicaid costs, 
which are meant to allow units of local governments, including 
government health care providers, to share in the cost of the state 
Medicaid program.
    In this regard, we are developing a proposal under which the 
Federal government, when matching a claimed state expenditure for a 
service provided by a public provider, will only provide matching 
payments on the basis of the state's true net expenditure. For a simple 
illustration, assume that a state with a 50/50 match rate submits a 
claim for $100 for service provided by a public provider. If the public 
provider is required to return 5 percent of the claim to the state as 
an intergovernmental transfer, we believe the net expenditure is only 
$95 so the federal match should be only $47.50 instead of $50. As noted 
previously, the Department's Office of Inspector General recommended 
this approach as part of its September 2001 final report. Specifically, 
the OIG recommended that CMS ``Require that the return of Medicaid 
payments by a county or local government to the State be declared a 
refund of those payments and thus be used to offset the FFP generated 
by the original payment.''
    The Administration proposes to restrict federal reimbursement for 
Medicaid payments to individual government providers to no more than 
the net cost of providing services to Medicaid beneficiaries. Limiting 
Federal reimbursement to no more than net cost would curb excessive 
payments while preserving a state's ability to pay reasonable rates to 
such providers. Both the U.S. General Accounting Office and the HHS 
Office of the Inspector General have recommended that payments to 
government owned facilities be tied to costs. GAO has recommended that 
Medicaid allow states to reimburse government facilities no more than 
costs, while OIG has recommended that facility specific limits be 
established based on costs. CMS is continuing to develop our full 
legislative proposal and intend to submit it shortly.

                               CONCLUSION

    Although CMS has several efforts underway to improve Medicaid's 
financial oversight and management, these are all temporary solutions. 
Medicaid financing needs fundamental structural reforms that will 
return the program to a Federal and state partnership and will reduce 
waste, fraud and abuse. CMS is interested in working with Congress and 
our state partners to resolve issues related to financial recycling 
mechanisms and making sure that Federal dollars remain in the Medicaid 
program and Medicaid payments remain with providers. We believe an 
approach under which the Federal government will provide matching 
payments on the basis of the state's true net expenditure when matching 
a claimed state expenditure for a service provided by a public provider 
would address the financial recycling mechanisms now in use.
    Through complex, creative financing mechanisms, states have 
artificially maximized Federal Medicaid matching funds. Such practices 
undermine accountability, responsibility, and ultimately, public trust. 
We look forward to working with you to find a permanent solution to 
this growing concern.

                               Attachment

Section 1903(a)(1) provides that Federal matching funds are only 
        available for expenditures made by States for services under 
        the approved State plan.
1. Do providers retain all of the Medicaid payments including the 
        Federal and State share (includes normal per diem, DRG, DSH, 
        supplemental, enhanced payments, other) or is any portion of 
        the payments returned to the State, local governmental entity, 
        or any other intermediary organization? If providers are 
        required to return any portion of payments, please provide a 
        full description of the repayment process. Include in your 
        response a full description the methodology for the return of 
        any of the payments, a complete listing of providers that 
        return a portion of their payments, the amount or percentage of 
        payments that are returned and the disposition and use of the 
        funds once they are returned to the State (ie, general fund, 
        medical services account, etc.) For DSH payments, please also 
        indicate if you are making DSH payments in excess of 100% of 
        costs and the percentage of payments in excess of 100% that are 
        returned to the State, local governmental entity, or any other 
        intermediary organization.
Section 1902(a)(2) provides that the lack of adequate funds from local 
        sources will not result in the lowering the amount, duration, 
        scope, or quality of care and services available under the 
        plan.
2. Please describe how the state share of each type of Medicaid payment 
        (normal per diem, DRG, supplemental, enhanced, other) is 
        funded. Please describe whether the state share is from 
        appropriations from the legislature, through intergovernmental 
        transfer agreements (IGTs), certified public expenditures 
        (CPEs), provider taxes, or any other mechanism used by the 
        state to provide state share. Please provide an estimate of 
        total expenditure and State share amounts for each type of 
        Medicaid payment. If any of the state share is being provided 
        through the use local funds using IGTs or CPEs, please fully 
        describe the matching arrangement. If CPEs are used, please 
        describe how the state verifies that the expenditures being 
        certified are eligible for Federal matching funds in accordance 
        with 42 CFR 433.51(b).
Section 1902(a)(30) requires that payments for services be consistent 
        with efficiency, economy, and quality of care. Section 
        1903(a)(1) provides for Federal financial participation to 
        States for expenditures for services under an approved State 
        plan.
3. If supplemental or enhanced payments are made, please provide the 
        total amount for each type of supplemental or enhanced payment 
        made to each provider type.
4. Please provide a detailed description of the methodology used by the 
        state to estimate the upper payment limit for each class of 
        providers (State owned or operated, non-state government owned 
        or operated, and privately owned or operated).
5. Does any public provider receive payments that in the aggregate 
        (normal per diem, DRG, supplemental, enhanced, other) exceed 
        their reasonable costs of providing services? If payments 
        exceed the cost of services, do you recoup the excess and 
        return the Federal share of the excess to CMS on the quarterly 
        expenditure report?

    Mr. Norwood. Thank you very much, Mr. Smith, and I want to 
say to the committee that we are out of regular order just a 
little bit, and I ask unanimous consent that rather than go to 
the next witness, we allow the ranking member to have his 5 
minutes of opening statement, which I think is the right and 
fair thing to do.
    If there is no objection, so ordered.
    Mr. Brown. Thank you, Mr. Chairman. Thank you for your 
fair-mindness. I apologize for my late arrival. I didn't 
realize that we had voice voted on the floor as early as the 
rest of you realized it.
    I want to thank our witnesses for joining us, especially 
thank Barb Edwards, who does a terrific job running the 
Medicaid program. Thank you both for joining us, especially 
you, Ms. Edwards.
    I want to begin by making a request to the chairman that we 
schedule a hearing that will give members the opportunity to 
hear from Medicaid beneficiaries. If there is fraud--and I will 
make that request personally of Mr. Bilirakis later. If there 
is fraud and abuse occurring, we should put a stop to it.
    I believe Ohio's Medicaid program acts in good faith and 
fully complies with existing laws and regulations. However, if 
some States are, in fact, stretching the rules, it must stop.
    That does not mean we should use that as an excuse to 
reduce the net funding available to State Medicaid programs. If 
we cut dollars from Medicaid, we should replace those dollars. 
It doesn't matter whether the States divert dollars from 
Medicaid into road construction or the President diverts 
dollars from Medicaid into tax cuts. Unless we replace those 
dollars, we hurt children, we hurt disabled people, we hurt 
seniors in nursing homes. We need to hear from these men and 
women.
    The President needs to hear from these men and women. His 
budget includes a $23 billion cut in Medicaid. That is 
irresponsible, and we should not follow his lead. I am going to 
request, as I mentioned, a hearing so members can see the human 
consequences of Medicaid cuts.
    Second, there are reports that CMS has been engaging in 
some questionable tactics to reduce Federal liability for 
Medicaid. State Medicaid directors reported that CMS is trying 
to change the rules midstream, that CMS has also been 
withholding payments in an attempt to convince States to block-
grant Medicaid programs.
    This isn't a game. The administration doesn't win if they 
figure out new and innovative ways to starve Medicaid. Instead, 
we all lose. We lose a health safety net that protects all of 
us. We lose ground because more Americans become uninsured as 
our economy continues to not produce the jobs that we need.
    If this administration wants to change Medicaid policy, it 
should do it in the light of day. It should follow the 
procedures in place to ensure public input and transparency. 
Under no circumstances should it change the rules despite the 
law.
    The laws governing Medicaid are under this subcommittee's 
jurisdiction. The buck stops with us. Not only are we 
responsible for ensuring that the States play by the rules, we 
are responsible for ensuring that CMS plays by the rules. 
Again, whether it is one of 50 States or the Bush 
administration playing fast and loose with the Medicaid rules, 
the victims are the same.
    I want to share with you, in closing, one Medicaid 
director's comments, a Medicaid director from a State with a 
Republican Governor. And this is a bit lengthy but I would like 
to read it.
    ``I am concerned the administration's attack not cause 
Congress to lose sight of the fact that Medicaid provides 
critically important health care services to real people with 
real health needs, that we pay real doctors and hospitals and 
nursing homes and pharmacies and home health aides to provide 
those services.
    ``In my State, Medicaid,'' this letter continues, ``ensures 
one of every three children, 50 percent of children under 5. 
Seventy-five percent of the expenditures are for people of all 
ages with disabilities and impoverished seniors; 50 percent of 
spending is for people with Medicare.
    ``My State has not been an abuser of IGT. We have 
legitimate local match dollars, especially in community health 
programs and MRDD, and a federally approved UPL program that 
provides enhanced payments to public hospitals. The UPL funds 
go to the providers, not to State coffers.
    ``In some areas, CMS is starting to change the rules. They 
are actually trying to enforce new standards that aren't 
contained in any rules. Increased scrutiny is leading to delays 
in State plan approvals, and they are questioning programs they 
have previously approved.
    ``I want to be clear,'' she writes, ``I am a strong 
supporter of the need for integrity in the fiscal 
relationship,'' I would add, we all are, ``between CMS and 
States over Medicaid. If our State has problems, we will fix 
them,'' she continues, ``but what we need is clarity in the 
standards, rules promulgated instead of 'Dear State Medicaid 
Director' letters that set policy without public debate, and a 
responsive Federal oversight agency that is committed to the 
success of these health plans. If these standards are going to 
change, many States will need transition time to accommodate 
new requirements without undue hardship to consumers.''
    In her last paragraph she concludes, ``I really hope the 
underlying need to address the cost drivers in the health care 
system,'' that it ``is not lost in this current debate over 
whether the State taxpayer, the Federal taxpayer is paying how 
much of the bill.''
    Mr. Chairman, there are at least three important messages 
in this Medicaid director's comments. One, don't forget that 
Medicaid is a lifeline for people in need--the young, the 
disabled, the elderly; two, don't try to stretch, manipulate or 
bypass the rules at the expense of those people in need; and 
three, don't fool ourselves into believing that cutting Federal 
dollars from Medicaid is a solution to any of these problems. 
Health care is necessary. Health care is expensive, whether or 
not Medicare covers it.
    I hope these messages register. Thank you, Mr. Chairman.
    Mr. Norwood. Thank you, Mr. Brown. I am sure they will 
register, and it is always good to hear from you and your 
thoughts about what should be done.
    Ms. Edwards, I apologize that we disrupted our normal 
schedule. You are now recognized, hopefully for 5 minutes, but 
we will be a little lenient for that.
    So if you would, begin.

                  STATEMENT OF BARBARA EDWARDS

    I am going to be very brief, because in fact I am the 
Medicaid Director that made many of the remarks that Mr. Brown 
has shared with you, and it really is the substance of my 
comments to you this afternoon. I would like to present a 
written comment from--on behalf of the National Governors 
Association for the record and simply reiterate what the 
Congressman said, that from Ohio's perspective, the use of 
intergovernmental transfers is an important funding stream in a 
couple of our programs, particularly in community mental health 
and in community mental retardation and developmental 
disabilities where we rely on local tax dollars.
    We also have an approved upper payment limit program, where 
hospitals that are public receive enhanced payments up to 100 
percent of the Medicare payment. The dollars go to those safety 
net hospitals in major urban areas and in rural areas in our 
State. They do not go to State coffers.
    I am optimistic that the intergovernmental transfers that 
Ohio currently employs, in fact, are--have been approved by CMS 
as legitimate and would continue to be.
    I think that you will see in the NGA's statement that the 
States broadly believe that the mechanisms that they have in 
place are compliant with current regulations and standards 
under Medicaid, in many cases have been approved by CMS 
explicitly; and I would just underscore that if, in fact, the 
rules are going to change--and certainly there have been 
instances in the past where Congress or the administration have 
made explicit changes in how Medicaid financing can be 
accomplished--that we have to recognize that if that results in 
reduced Federal financing in this current environment, that it 
undoubtedly would result in changes to the program at the State 
level.
    I certainly know that in Ohio we are in a condition where 
the revenues are continuing to lag below expectations. There 
are no reserves. State agencies are facing cuts even within 
this biennium from what was originally budgeted, and any loss 
of Federal funds will be felt at the program level through 
program cuts.
    We are committed to integrity in this program with regard 
to the fiscal relationship. I, in fact, believe that my office 
as the single State agency at the State level has a fiduciary 
responsibility to the Federal Government with regard to the 
administration and the financing of this program, and we take 
that seriously.
    What we need are clear standards, and we will do our best 
to meet them. What we often have today does feel like a 
changing set of expectations that are being figured out on a 
case-by-case basis as State plan amendments are filed.
    I have sympathy for the CMS folks in trying to figure out 
some of the questions that they are interested in at the State 
level, but it is a darn hard way to run a program at the State 
level if, in fact, you can't know what the standard is that you 
are going to be held accountable to with regard to financing. 
It has caused us, in fact, to begin to question arrangements 
that have been long-standing, and we aren't sure which plans 
and which standards are going to end up being acceptable and 
which are not, and that makes the management very difficult.
    So we do ask for clarity. We ask for standards that are 
established with public input from the stakeholders--in writing 
would be nice. And we look forward to continuing to have a 
strong Medicaid program.
    These are critical programs in our States. They serve 
important people, and we will all be winners if, in fact, we 
can get our focus back on the issue of the underlying costs in 
this program. It is the same taxpayer, whether it is the State 
taxpayer or the Federal taxpayer; and it is important that we 
return our focus as quickly as we can, I think, to the 
underlying challenges of what is driving the rising cost in 
health care, because that is what it is going to take for us to 
have a sustainable program over the long term.
    And I am happy to answer questions. Thank you.
    [The prepared statement of Barbara Edwards follows:]

        Prepared Statement of The National Governors Association

                              INTRODUCTION

    The Medicaid program is the largest and most important health care 
program in the country. It currently provides $300 billion per year in 
critical health care and long term care services to more than 50 
million low-income children, working families, frail seniors, and 
people with disabilities. It is a lifeline and a safety net for the 
most vulnerable members of our society.
    Medicaid is actually 56 separate programs administered by the 
states and territories and jointly financed by the states and the 
federal government. The percentage of the state's share varies 
depending on several factors, but averages about 57 percent federal and 
43 percent state. The ``non-federal'' share can be financed entirely 
through state funds, but states also have the option to require local 
governments to share the costs. Of this ``non-federal'' share, up to 
60% can be financed by local contributions. These contributions, or 
intergovernmental transfers (IGTs), were designed by Congress and are 
in the Medicaid statute, have been authorized by federal regulations, 
have been approved by the U.S. Department of Health and Human Services 
(HHS) for many years, and are a legitimate mechanism that many states 
rely on to finance the Medicaid program.

                      INTERGOVERNMENTAL TRANSFERS

    Section 1902(a)(2) of the Medicaid statute codifies this 
arrangement by requiring states to ``provide for financial 
participation by the State equal to not less than 40 per centum of the 
non-Federal share of the expenditures under the plan . . .''
    Furthermore, Section 1903(w)(6)(A) states, ``Notwithstanding the 
provisions of this subsection, the Secretary may not restrict States'' 
use of funds where such funds are derived from state or local taxes (or 
funds appropriated to state university teaching hospitals) transferred 
from or certified by units of government within a state as the non-
Federal share of expenditures under this title, regardless of whether 
the unit of government is also a health care provider . . .''
    Finally, this is also recognized in federal regulations, which 
authorize the use of public funds as the state share of Medicaid 
spending if the funds are ``transferred from other public agencies 
(including Indian tribes) to the state or local (Medicaid) agency and 
under its administrative control . . .'' (42 C.F.R. 433.51(b)).

                      STATE AND LOCAL GOVERNMENTS

    The funding of Medicaid follows two broad models: centralized, 
where the state is responsible for raising revenue and distributing to 
the local level; and decentralized, where the local entities have much 
greater authority to raise and spend revenue on their own. IGTs, in 
part, recognize that state-raised revenue and county-based revenue are 
essentially equal in the eyes of the law and therefore, neither should 
be discriminated against.
    Without the benefit of IGTs, large county-based states, such as New 
York, California, Wisconsin, and North Carolina to name just a few, 
would literally be unable to finance their Medicaid programs, 
destroying the safety net in many parts of the country and drastically 
increasing the numbers of the uninsured.
    Therefore, attacks on the very existence of IGTs would 
fundamentally threaten the decentralized form of government that these 
states have chosen and would represent an attempt by the federal 
government to statutorily favor state governments that are centralized 
and do not rely on the ability of counties to raise revenue.
    We remain hopeful that this is not the intended result of any 
congressional or administrative actions.

                            FEDERAL CONCERNS

    The Administration and some members of Congress have accused states 
of manipulating Medicaid financing mechanisms in inappropriate ways. 
States have been accused of misusing IGTs in association with 
Disproportionate Share Hospital (DSH) payments, Upper Payment Limits, 
and Provider Taxes. These claims are not new, and have resulted in the 
past in federal action clarifying what is appropriate.
    If there continue to be concerns about how states are financing 
Medicaid, we would recommend that discussions be held that are open, 
exhaustive, and include all impacted stakeholders. These discussions 
should at least acknowledge that not only are the state actions in 
question legal, but have been approved by HHS, and in many cases 
encouraged by them in the past.

                 FINANCING MECHANISMS ENCOURAGED BY HHS

    An excellent example of how states and the federal government 
worked together is in Nebraska. The state, with the full support and 
blessing of both the HHS central office and regional offices, developed 
a plan to increase reimbursement to nursing homes to the federal 
maximum. They then utilized an intergovernmental transfer and dedicated 
the extra money into a trust fund that would be used solely to assist 
nursing homes in a physical conversion to assisted living facilities. 
Everyone benefited. Nursing homes were able to embrace the economics 
and demand of the 21st century--the increasing preference of seniors to 
reside at home or in community settings. The state was able to 
transform its long-term care infrastructure to assisted living 
facilities ``which are much cheaper to maintain than nursing homes. The 
federal government also benefited by saving money in the long run, and 
by working with the state to meet the shared goal of decreasing 
reliance on institutional care.

                   DO NOT CHANGE THE RULES MIDSTREAM

    Regardless of what changes Congress may consider, it is critical 
that the financing rules of Medicaid not be changed midstream. States 
have acted within the parameters of the law and the regulations when 
negotiating budgets--and all financing mechanisms are both legal and 
approved by HHS. For these rules to be changed midstream, without 
notification or congressional directive, would be a presumption of 
guilt that is inappropriate in a state-federal partnership. In 
addition, such changes may well constitute an illegal impoundment of 
funds and violate other bedrock provisions of the Medicaid program.
    It is therefore inappropriate for HHS, without legislation approved 
by Congress, to move forward with changing these rules and policies. We 
are finding that such a practice is occurring with increasing 
frequency, much to the concern of our members and their Congressional 
delegations.
    States who have already received federal approval for this funding 
have designated the money to go towards such important goals as 
financing expansions of home- and community-based long-term care, 
increasing physician reimbursements so that access to care is not 
jeopardized, ensuring that tier one trauma centers keep their doors 
open, and in many states, ensuring that small rural hospitals are not 
forced to close or otherwise jeopardize patient care.

 STATES CANNOT CONTINUE TO FINANCE MEDICAID AND THE NEEDS OF THE DUAL 
                               ELIGIBLES

    Medicaid currently accounts for roughly 20 percent of any given 
state's budget, making it the second largest expenditure next to 
education. The Medicaid program is also growing at almost double digit 
rates, due to significant pressures in prescription drug costs and 
long-term care. Growth that large in a program Medicaid's size is 
unsustainable even in a good economy. Unfortunately, states are not in 
good fiscal standing. The combination of Medicaid growth and lower than 
projected revenue has created a situation where Medicaid costs are 
eating up every dollar of state revenue, leaving no room for increased 
funding for education or other key priorities.
    This unfortunate situation is exacerbated by the difficulty states 
have had in dealing with unfunded federal mandates and by the fact that 
increasing amounts of the Medicaid budget (and also state funded 
programs) are devoted to filling holes in the federal commitment to 
Medicare beneficiaries.
    Forty-two percent of the entire Medicaid budget is spent on 
services for elderly and disabled Medicare beneficiaries, the so-called 
``dual eligibles.'' This is a shocking number when you consider that 
they comprise only twelve percent of the total number of people served 
by Medicaid and that they are all fully covered by the entire Medicare 
benefits package. Medicaid's responsibility includes acute care 
services beyond Medicare's limitations, prescription drug coverage, 
which Medicare does not yet provide in any comprehensive fashion, 
payment of expensive co-pays, premiums, and deductibles, and most 
importantly, long-term care services.
    It is critical to be mindful that the Medicaid program is 
essentially the only funding source for long-term care services in the 
nation, paying approximately five times what Medicare does in total. 
Medicaid is responsible for more than sixty percent of all nursing home 
care in this country. As the baby boom demographic starts to reach 
Medicare eligibility within the next decade, these trends will worsen 
substantially unless common-sense reforms are enacted.
    Congress first attempted to address prescription drug coverage in 
the Medicare Catastrophic Act of 1988. This legislation created a drug 
benefit for seniors and required the Medicaid program to pay 
significant amounts of cost sharing for low-income seniors through the 
creation of the Qualified Medicare Beneficiary (QMB) and Specified Low-
Income Medicare Beneficiary (SLMB) programs. Congress quickly repealed 
the drug benefit, but left intact the Medicaid requirement to cover 
Medicare cost-sharing. Consequently for the past thirteen years, states 
have borne billions of dollars in increasing costs for the QMB and SLMB 
programs, and tens of billions of dollars in providing prescription 
drugs for low-income Medicare beneficiaries.
    We were strongly encouraged by Congress' recent effort to enact a 
comprehensive Medicare prescription drug benefit into law, and 
appreciate the decision to qualify the dual eligibles for the Medicare 
benefit. However, states will still be required to finance the vast 
majority of these costs, through the ``clawback'' effect. This will 
create an unprecedented reverse block grant of funds from states to the 
federal government, one in which states will have no control over how 
the money is spent.
    States have never been in a position to welcome these burdens on 
behalf of the federal government. Strong state revenue growth in the 
mid 1990s helped mask an unsustainable load that has now become 
unbearable. Without additional federal help, states will be unable to 
afford current Medicaid commitments, let alone ponder the significant 
expansions that would be needed to address the growing problem of the 
uninsured.
    States are spending significantly more money on the Medicaid 
program now than they were 10 years ago, despite the increased 
financing through Upper Payment Limit mechanisms. The state share of 
Medicaid in 2000 was $94 billion, as compared to only $50 billion in 
1992, and $70 billion in 1997. This demonstrates state commitment to 
funding the program and proves that the increases in the Medicaid 
budgets are not being financed overwhelmingly by federal funds.
    Finally, the temporary state fiscal relief will end in fiscal 2004. 
Because of this, and because of the continued growth of Medicaid 
overall, the total amount of state dollars in Medicaid will increase by 
15 percent to 20 percent from fiscal 2004 to fiscal 2005. This will 
create a fiscal situation ill-suited to absorb additional reductions in 
the federal commitment to Medicaid funds.

                               CONCLUSION

    The Governors oppose any reductions in Medicaid spending as well as 
changes to the current policy that would jeopardize funding for 
underserved populations. The current policy represents a well thought-
out balance that seeks both accountability and sufficient funding for 
the health care safety net. Changing the policy now could have 
disastrous consequences for public hospitals and the individuals they 
serve.

    Mr. Norwood. Thank you, Ms. Edwards, for your testimony and 
taking time to come all the way to Washington to give us your 
thoughts and feelings on this.
    I would now like to yield to the gentlelady from New 
Mexico, Mrs. Wilson, for 5 minutes of questions.
    Mrs. Wilson. Thank you, Mr. Chairman.
    Ms. Edwards, thank you for being here today. I have a 
certain amount of sympathy for your managerial challenges, 
having been formerly a cabinet secretary in State government 
for children in New Mexico.
    I wanted to ask you, as the State Medicaid Director, what 
data do you gather on the health status of those dependent upon 
Medicaid?
    Ms. Edwards. Congresswoman, we are, through our HMOs, doing 
some health survey in regard to folks as they enroll. We rely, 
however, pretty heavily on the broader public health surveys 
with regard to health status in general, so it is not a piece 
of information that for the general population we have a great 
deal of information on for folks as they enroll in Medicaid.
    We do consumer satisfaction surveys, generally by 
telephone, and part of those surveys involve asking questions 
about how a consumer perceives their own health status. We also 
sponsor a statewide survey that surveys more broadly than just 
the Medicaid enrollee, and there are some health status 
questions that are asked as a part of that survey process as 
well; but this is an area in which we still rely more on the 
public health survey than on work that we do directly with our 
consumer population.
    For folks that are in waiver programs, we have much more 
information on their health status.
    Mrs. Wilson. With respect to the HMOs that gather data, 
does Ohio have a waiver under which you cover Medicaid 
eligibles through HMOs?
    Ms. Edwards. Mr. Chairman, we are still operating our 
managed care program through waivers rather than under the 
State plan amendment, because that has accommodated our program 
design better, so we are using a waiver.
    Mrs. Wilson. Thank you.
    Mr. Smith, I thank you as well for being here today. I 
wanted to ask you a couple of questions about the upper payment 
limit issue and, particularly, whether you have estimates about 
how much Medicaid--how much it would affect the Medicaid budget 
if we eliminated. There is a question of excessive claims for 
upper-payment-limit States, and there is a phaseout in place. 
If that phaseout was shortened, if the transition period were 
shortened for those that were granted 5-year and 8-year 
phaseouts, how would that impact the Medicaid budget?
    Mr. Smith. I don't have the exact figures. I do want to--I 
do want to state, we have not proposed changing the transition 
periods that States now have, and in fact, again, our proposal 
would preserve the transition periods that States have under 
upper-payment limits. I think we can probably get the figure 
for you fairly quickly about how much is involved in those.
    At this point in time, you are basically talking about the 
5-year and 8-year transition periods for States. We can get 
that precise figure for you.
    Mrs. Wilson. I would be interested in that data, 
particularly as the GAO issued earlier this month a report on 
upper-payment limits which was, at least in part, critical of 
the way CMS is going about this; and I think that is a question 
of what these phaseout periods should be and how--you know, all 
of us want to get a dollar and 10 cents worth of value out of 
every dollar that we spend, and we want to make sure that the 
money gets to the people that need the care and that it 
improves the quality of their health and their lives. And that 
means, in part, seeing where money is not going in the right 
place.
    And if you could take a look at that, I would very much 
appreciate it.
    Mr. Smith. We can get you those figures.
    Mrs. Wilson. Thank you, Mr. Chairman.
    Mr. Norwood. Thank you, Mrs. Wilson.
    I now yield 5 minutes to Mr. Brown for questioning.
    Mr. Brown. Thank you, Mr. Chairman.
    Mr. Smith, as a Medicaid administrator, you certainly 
recognize the problems these days in the States. In the last 3 
or so years we have lost almost 3 million manufacturing jobs. 
We have lost in my State of Ohio, one of the hardest hit, we 
have lost some 236,000 jobs, which comes out to about 200 jobs 
every day in the last 3 years. Our manufacturing--those people 
who had pretty good health care benefits, have been 
particularly hard hit, so obviously Medicaid rolls in my State, 
as Ms. Edwards knows, and other States are continuing to 
expand.
    But it is not just Medicaid beneficiaries who obviously--
whom we serve that are so important. It is also--Medicaid has 
also been a pretty big engine to drive the economies in our 
States. In Ohio, in 2001, Medicaid contributed $11.5 billion in 
business activity. Its spending generated--Medicaid spending 
generated 132,000 jobs in Ohio, increased wages by--or provided 
$4.1 billion in wages. Each Medicaid dollar spent in Ohio--and 
I don't think other States are any different--generates 
somewhat in excess of $3 of business activity.
    In June of this year, as you know, the FMAP legislation 
which Mr. King and I worked on, and others in the House and 
Senate, the FMAP funds expire. The Federal share--that means 
Ohio will see the Federal share of its Medicaid program drop 
from 62.2 percent to 59.7 percent, a significant loss of funds. 
On top of that, the Bush administration is proposing a $23.5 
billion cut. They have given us no information on how much that 
means in each State, but clearly its impact is very significant 
in large and small States alike.
    This strikes me as pretty unwise economic policy. You give 
tax cuts to the wealthiest people in society who are unlikely 
to spend it instead of contributing to an economic engine like 
Medicaid that really will create--generate economic activity 
and create good jobs in the health care system.
    My question is, last year the administration opposed the 
FMAP--$10 billion at FMAP. The administration, the Republicans 
and Democrats alike in both Houses, went ahead and did it 
anyway. My question is, does the administration support this 
year, beginning in June as the $10 billion expires, some kind 
of fiscal relief for States for Medicaid?
    Mr. Smith. Mr. Brown, a couple of things. We did not put in 
the President's budget either an extension of the FMAP nor did 
we repropose specifically. The President's budget last year in 
fact would have provided the equivalent of an FMAP increase, 
had that been enacted.
    The $23 billion that you refer to--again, that is over a 
10-year period of time--that would not have an immediate impact 
on--that size of an immediate impact on the States themselves.
    Mr. Brown. The expiration of the $10 billion annually in 
June would?
    Mr. Smith. Congress passed a temporary FMAP increase last 
year.
    Mr. Brown. Let me interrupt you because I don't have a lot 
of time.
    So if you are not willing to say, yes, the President and 
the administration will support extending that FMAP money for 
another year of $10 or $15 or whatever billion, would you 
support some sort of targeted relief for those States that 
quantifiably can show that they have been hit the hardest?
    Mr. Smith. As you know, the President's budget does not 
include that at this point in time. I have not had further 
discussions about a proposal and whether or not that increase 
is going to be extended or not.
    Mr. Brown. Do you have any advice for people in my State, 
those that lose their jobs because of this 62 down to 59 
percent, representing the loss of funds? Those that lose their 
jobs or those that lose their health insurance, do you have any 
advice for them or solutions for us for them?
    Mr. Smith. We have, in fact, had a couple of different 
proposals that would help people who are uninsured or become 
uninsured. Medicaid obviously is one part of that solution 
and----
    Mr. Brown. But those solutions are not for tomorrow. Those 
solutions are not for June. Those are solutions some of us 
agree with, some of us don't, that would perhaps deal with the 
uninsured; but what about for those in June who get a pink slip 
because you are cut, you are not renewing the FMAP money, and 
for those who lose their health insurance in Ms. Edwards' State 
or any of the other 49 States?
    Mr. Smith. Mr. Brown, as you know, the FMAP--the Secretary 
has no authority to change a State's FMAP rate. We have no 
authority on our own to provide additional funding for the 
States themselves.
    The FMAP increase was a----
    Mr. Brown. Obviously, we have no authority because we did 
the $10 billion last year even though you were against it, but 
if you were for it, it would make it a whole lot easier to 
convince this Congress that maybe we ought to help the States 
on Medicaid.
    Okay, thank you.
    Mr. Smith. If I may also--you asked about the impact on the 
States of the $23 billion. It would have no impact on a State 
that has not been recycling Federal funds.
    Mr. Norwood. Thank you, Mr. Smith.
    It may be useful to the committee to recall back that 
Senators Collins and Nelson, when they worked this FMAP money 
through the Senate, indicated at the time that it was only a 
temporary thing. They never did--they never indicated once that 
it would be permanent.
    Mr. Brown. Well, Mr. Chairman, I think we operate under the 
assumption that----
    Mr. Norwood. You are recognized.
    Mr. Brown. [continuing] that this economy would grow some 
jobs and--am I speaking out of turn, Mr. Chairman?
    Mr. Norwood. Yes, you are.
    Mr. Brown. You have been awfully nice to me. I am just 
going to be quiet for the rest of the day.
    Mr. Norwood. Mr. Deal, you are now recognized for 8 
minutes' worth of questions.
    Mr. Deal. Thank you, Mr. Chairman.
    Mr. Smith, we have had discussions previously with regard 
to some specifics in my State of Georgia, and I would like to 
just review a few of those, if I might, at this point.
    Our State-by-State statute in 19--excuse me, 2003--
instituted a nursing home provider fee. In July 2003, our 
Medicaid State plan submitted an amendment to incorporate that 
nursing home provider fee as a part of an amendment.
    The discussions have been going on with your office for, I 
think, about 9 months. We thought--I think our State thought 
that the matter had been resolved.
    We understand there are 21 or 22 other States that also 
have a nursing home provider fee. The most recent wrinkle has 
apparently been a concern of UPL--some UPL concerns with regard 
to the nursing home provider fee. That was a new wrinkle that 
came very late in these discussions and, quite frankly, has 
caught our State off guard in that respect.
    Could you tell me, or could you provide me if you can't say 
right now--could you provide me with information as to what the 
UPL concern is as it relates to these fees; and has the same 
concern been voiced for the other 21 or so States that have the 
same basic format? We understand, for example, that New 
Hampshire has now been approved with theirs.
    We had a problem at one point apparently with the lack of 
uniformity, and a waiver was requested about the lack of 
uniformity, and I think we thought that was the problem. So we 
withdrew the waiver request and went back to the basic 
amendment. And that appears to still be a problem now with UPL.
    Could you enlighten me as to what that might be?
    Mr. Smith. Yes, Mr. Deal, and I appreciate the question.
    And the Georgia situation illustrates precisely what we 
have been seeing among the States themselves. We basically--
and, again, we have provided for the subcommittee the list of 
questions that we ask all States that have the financing State 
plan amendments.
    Basically, we are looking for two things. What is the 
source of funding? Again, Federal dollars follow State dollars, 
State, slash, or local dollars, so we are looking for, have you 
put up your share of the match? And second, does the money stay 
with the provider? The provider tax issue is the first part, is 
your source of funding good? And we have been working with the 
State--again, Georgia--we have been working over this period of 
time to where we understand Georgia is willing to modify their 
original proposal to where that would be a permissible provider 
tax.
    And as you note, a number of other States have also this 
year--and I believe we are working with 11 States all together 
in terms of that questionable variable rate provider taxes. So 
we believe we have solved the tax issue.
    The other part was, does the money stay with the provider 
itself? And again, in our review, I think people were focusing 
on the first part and not focusing on the second part, whereas, 
we have now identified the second part with the State. And I 
believe we have had a couple of recent discussions with the 
State to say, how can we--as you mentioned, New Hampshire and 
other States as well--how can we move forward on the State plan 
amendment, are you willing to make modifications, or at what 
point in time can modifications be made?
    So we try to--we do try to work these things out with the 
States themselves; and I am confident we can reach the same 
type of agreement with Georgia.
    Mr. Deal. As I understand, April 7 is sort of the deadline, 
is that correct----
    Mr. Smith. Yes, sir.
    Mr. Deal. [continuing] to get this resolved?
    Mr. Smith. We work on two 90-day clock periods, and my 
understanding is, we are next--we are near the end on the 
second 90-day clock, so we have to work very quickly, and that 
will be our intention.
    Mr. Deal. Will you give me assurances that you will do that 
for our State, because they have real concerns about the 
urgency of this matter?
    Mr. Smith. Absolutely.
    Mr. Deal. The second part of your focus, as you indicated, 
was whether or not the money stays with the provider. At this 
point, have there been policy guidelines developed as to what 
you must show in order to satisfy that criteria? And if not, 
are there policy guidelines being developed in that regard?
    Mr. Smith. In terms of--we believe that that is what the 
statute and all the regulations say now in terms of we are 
matching expenditures for services to Medicaid recipients. We 
think that is underlying the act. The questions that we have 
been asking have generally been getting down to what happens 
when payments are made, to what extent are payments then 
recycled; and there are States that do not use 
intergovernmental transfers at all, and it is completely State 
funded. There are no local funds whatsoever involved. There are 
States that, again, the source of revenue from the local level 
is tax revenue and there are no issues there.
    The question arises with the--if the payments are actually 
returned, we are questioning whether or not then we are really 
matching an expenditure. We, in many respects, were unaware of 
those situations until we started asking the questions and 
finding out how the flow of funds is actually working in the 
States.
    Mr. Deal. Maybe I am oversimplifying it, but obviously once 
money is returned, whether you call it a ``fee,'' whatever you 
want to call it, ``tax,'' whatever you choose to call it, once 
that money is returned to a State entity, a State governmental 
entity, I guess the--my question is, is there an automatic 
presumption that that is invalid just because it has been 
returned?
    Or can the States simply show that we have had money 
returned, but we are also using that money within the Medicaid 
system of our State? And what would they have to show in order 
to do that?
    Mr. Smith. Well, again, what we are trying to achieve and 
what we believe the program all along has required is that we 
are actually matching an expenditure. And I will quickly use an 
example.
    A claim for $100 in a 50-50 State, the State would have 
provided $50. When they submitted it to us, we would have 
provided the $50 match as well. But if the money then that was 
provided by that hospital or nursing home sends $5 back to the 
State, then it looks to us not to be a $100 expenditure, it 
looks only like a $95 expenditure and we should have, 
therefore, only been matching that part.
    I think this is consistent with the other parts of the 
program in terms of someone in a nursing home who is paying 
part of the cost of their care. Their share gets deducted 
first, and then the balance is allocated between the State and 
the Federal Government.
    So, again, if we have matched $100, if we have put up our 
$50, but the State gets part of that back, then you have 
shifted the matching rate for that expenditure, in our view.
    Mr. Deal. Thank you, Mr. Chairman.
    Mr. Norwood. Mr. Deal.
    Mr. Smith, I apologize, I am a little hard of hearing. Did 
I understand you to say that in the State of Georgia, that 
State plan amendment we have that we are all working on, you 
will help them get that done by April 7.
    Did I hear you say that, just for the record?
    Mr. Smith. You did, Mr. Chairman, yes.
    Mr. Norwood. I thought I heard that, but you know, you 
never can tell. It will reduce the cost of health care in 
Georgia if you will do that. It will prevent a great number of 
heart attacks. So let me just point out to you, it is very 
important.
    Mr. Smith. We will still need a little bit of help from the 
State.
    Mr. Norwood. You will get that.
    Mr. Smith. Thank you.
    Mr. Norwood. I would now like to recognize my friend, Mrs. 
Capps, for 8 minutes.
    Mrs. Capps. Thank you, Mr. Chairman.
    Ms. Edwards, thank you for being here today. The 
administration claims that by ending abuses of IGTs, they can 
cut $23 billion from the Medicaid budget over 10 years. I am 
really concerned that cuts of that size could jeopardize a 
State's ability to sustain their current Medicaid program.
    Can you tell us what kind of changes you and the Ohio State 
legislature are considering as you anticipate perhaps making 
such large--seeing such large chunks of Medicaid taken away? 
What kinds of impacts?
    You are close enough to communities where services are 
provided. What kind of impact would these cuts have, and, for 
example, the people who reside in nursing homes, the elderly 
and perhaps those young children with severe disabilities who 
depend on Medicaid for chronic medical needs?
    Ms. Edwards. I would reiterate that Ohio remains hopeful 
that our intergovernmental transfer procedures are, in fact, 
perfectly legitimate and would continue to be so under any set 
of standards, because we think, in fact, that they are 
legitimate.
    I think it is reality that when Medicaid is forced to cut 
the size of the program, whether it is the loss of Federal 
revenues or the inadequacy of the State revenues, there are 
really only three places to go: You have to look at what you 
pay to providers, you have to look at who you insure and where 
you have flexibility in that, and you have to look at what 
benefits you provide.
    Some of the benefits are optional, and in fact, Ohio, in 
the last budget cycle, had to look at all three of those issues 
because of the state of the State's budget. We made proposals 
that eliminated any rate increases for providers. We made 
proposals that reduced--we have reduced eligibility for low-
income parents.
    Other optional populations include children covered by the 
CHIP program. We also looked at eliminating some of the 
optional benefits for adults like dental and vision and 
podiatry services. Those are really the options you have under 
the program; they all have a tremendous impact.
    Providers are critical to having access to services, and if 
rates become inadequate, access can be threatened. Consumers--
you know, our proposal to reduce eligibility for parents would 
have caused 60,000 parents below poverty to become uninsured. 
And I would like to say ``thank you'' to Congress, because that 
is what we did with the dollars when the enhanced FMAP appeared 
in the State, literally at the 11\1/2\ hour, the passage of our 
405 budget. The conference committee, in fact, with the receipt 
of those funds, restored funding for the optional parent 
coverage, and that is something for which I am truly grateful.
    So those are really the options States have. It is 
benefits, it is people, and it is what you pay.
    Mrs. Capps. And you are hopeful. I mean, our budget cuts 
Medicaid, whether it comes from the IGTs or whatever source. So 
I remain hopeful, too, but I don't know.
    I have a quick question to ask you before I turn to Mr. 
Smith. Do you agree with Dennis Smith's statement that CMS 
regulations and rules are clear and consistent?
    Ms. Edwards. Respectfully, I do not.
    Mrs. Capps. Thank you.
    Mr. Smith, you cited 23--and this is a quick kind of 
response, and then I want to ask you some more in-depth 
questions. But you cited a $23 billion reduction in Medicaid 
over 10 years and suggested that it all arises from what you 
call, ``recycling.'' and I wonder if you have available in 
writing an analysis of which States and how much, that we could 
get information from you so that States can plan.
    Mr. Smith. Yes. We are compiling the State-by-State list of 
those States that we have identified through the plan review 
process as having recycling funds.
    Again, I would like to restate again that the $23 billion 
is over a 10-year period of time. Federal, Medicaid 
expenditures continue to go up every year.
    Mrs. Capps. I know, and my question is, if you are 
compiling it now, how do you know it is going to be that?
    Mr. Smith. That is our estimate based on the plan amendment 
reviews that we have to date. We have reviewed over 200 State 
plans----
    Mrs. Capps. So you are projecting based on analysis that 
you already have?
    Mr. Smith. Yes.
    Mrs. Capps. And we can have those made available?
    Mr. Smith. We would be happy to make it available to you. 
And again, as I said, this is--for an individual State, if you 
are not recycling Federal funds, this has no impact on you 
whatsoever.
    Mrs. Capps. A number of States represented on this 
committee have not yet recovered from what the National 
Governors Association has called the worst State fiscal crisis 
since World War II.
    Last year, over the strenuous objections of the 
administration, Congress enacted fiscal relief for the States 
in the form of a 2.95 percentage point increase in the Federal 
matching rate; and the hopefulness that I note in Ms. Edwards' 
response is, in part I think, based on that experience. This 
fiscal relief that you really could consider a legitimate 
intergovernmental transfer was crucial to the ability of a 
number of States to avoid making really drastic cuts in 
Medicaid eligibility, benefits and provider payments, the three 
things that Ms. Edwards outlined.
    Unfortunately, this fiscal relief now ends on June 30, and 
unfortunately, many State economies are still not out of the 
woods, mine in California included; and unfortunately, but not 
surprisingly, the budget for this fiscal year starting October 
1 does not propose to extend fiscal relief. Instead, it 
proposes to cut more.
    The results will have to mean more of the cuts in the three 
areas that Ms. Edwards outlined, more uninsured Americans, more 
uncompensated care for providers and fewer Medicaid funds 
flowing into the States that have to make these cuts, with a 
loss of capital that will further injure their economies.
    My question to you--I have two populations in mind. First 
of all, what should States do if they don't want to slash the 
service in their programs? And second, what are the individuals 
going to do who face these cuts? An elderly woman in a nursing 
home, where is she going to turn for coverage for her care if 
the Medicaid that she depends solely upon for her medical care 
is gone? Or a child with spina bifida?
    Mr. Smith. Thank you for the questions. I will try to 
answer them in a helpful way, but still be brief.
    A couple of things: Again, last year, the administration 
had a proposal. I know the proposal was met with some amount of 
skepticism which, again, we recognized last year that the 
States were feeling financial pressure, and we came up with a 
proposal that we believed would have helped them last year, 
would have helped them this year, would have helped them next 
year and for a few years into the future.
    So we did recognize the pressure that the States were 
under, and we were willing and believed it was good policy to 
kind of move up some money that was going to be in the outyears 
to earlier years to help them through those tougher times and 
to help them to make changes in their program that we believed 
would be helpful as well.
    There are a number of other things that States can do, are 
doing, we have helped them do. Twenty States now have 
supplemental rebate agreements for prescription drugs that we 
have approved.
    Mrs. Capps. That doesn't take care of nursing care.
    Mr. Smith. It does in terms of States achieving savings in 
their program, which is what we are trying--again, if the 
States need to find savings somewhere to be able to continue to 
afford services elsewhere in their program, and they are 
generating savings because of changes that they are making in 
the way they are paying for prescription drugs, in supplemental 
rebates, et cetera, that helps them control the cost of their 
program.
    We believe that--again, Medicaid on the long-term care side 
of the program is still generating an increasing share of the 
cost of the program. We believe you can improve the quality of 
services to the people who rely on your care and at less cost.
    Mrs. Capps. I understand I have used my time, but I just 
have to say that this is in the face of States that are not 
able to meet their match because of their own fiscal problem.
    Mr. Smith. Again, we agree that we believe a long-term 
approach to Medicaid is what we need to be talking about. We 
tried to start that dialog last year.
    Mrs. Capps. I hope someone will ask what that long-term 
dialog means. Thank you.
    Mr. Norwood. A lot of interesting things came up there, and 
at some point, I hope we get back to it.
    If you think the rolls are fair and consistent, and Ms. 
Edwards very politely said, maybe we don't, which is a proper 
question to ask. At some point in here I am going to ask you to 
respond to that, because if you think they aren't consistent 
and you think they are, something is not exactly right.
    Mr. Green, you are recognized for 8 minutes.
    Mr. Green. Thank you, Mr. Chairman, and again, I appreciate 
both our panelists for being here and particularly Ms. Edwards 
because we all have State-specific questions, and coming from 
Texas, I have some concerns. Let me ask some general questions, 
though.
    Mr. Smith, you said in your testimony that questions CMS 
requires for the State plan amendments are applied consistently 
and equally to all States under the SPA review process. Can you 
provide our committee with those criteria used by CMS in 
determining whether State plans are acceptable? Are these 
criteria made available to all the States when they are 
drafting them?
    And I will continue that I heard from many State Medicaid 
directors that are confused and frustrated because they think 
CMS may be moving the goalposts and delaying approving the 
SPAs. And CMS should, I hope, be responsive to these and give 
them the criteria so they can jump through whatever hoops are 
needed to deal with it.
    Can you share that--I guess going back, could you share the 
criteria with the committee for determining whether State plans 
are acceptable?
    Mr. Smith. Mr. Green, we have attached to my testimony the 
questions we asked the States, all States, and it is the 
answers to--it is their answers to the questions that 
determine--again, we are looking at two things: Is your source 
of funding good and does the money stay with the provider? And 
if the answer to both of those are positive, the plan amendment 
gets approved. And, in fact, we have approved 82 financing 
State plan amendments; we have only disapproved four.
    Mr. Green. I have a lot of questions. Let me ask Ms. 
Edwards to respond.
    Do you have a feeling about that as State director?
    Ms. Edwards. Let me give an example from real life, and I 
have to be very nice, because I still have a State plan 
amendment awaiting approval.
    Look, the reality is, the standards are changing. As CMS 
asks more questions, they think more thoughts and they form 
some opinions and then come back and ask more. But my best 
example of this is a very real one.
    Back in 2000 or 2001 we filed our first request for an 
upper-payment-limit program for non-State-owned public 
hospitals. It took almost a year to negotiate an approval to 
that State plan amendment, and this was pursuant to Federal 
regulations that are, in fact, promulgated and were available 
and presumably would be fairly clear about what was an 
acceptable way to do an upper-payment-limit program.
    Later in 2001, after receiving approval to the first State 
plan amendment, we filed an almost identical State plan 
amendment for the State-owned hospitals to institute a similar 
proposal for upper-payment limits up to 100 percent of Medicare 
to those hospitals. CMS would not approve the same methodology 
that they had just approved prior that year for the non-State-
owned hospitals. We spent another year or so negotiating a new 
methodology.
    We have since refiled the original State plan amendment to 
make it consistent with the second one, and it has been 6 
months, and we are still answering questions from CMS about 
what now ought to be identical to the second approved plan, and 
we still don't have approval.
    So I think that is an example. The standards aren't that 
clear. There may be very legitimate questions that are still 
being asked, but that is a reality for a State; and I think 
that, respectfully, that does not--it is not quite the simple 
process that Mr. Smith would suggest.
    Mr. Green. Mr. Smith, Texas does not have a plan up there 
now, but we have an unusual situation, I guess, although I am 
hearing more and more about it is not that unusual. We have 
nine public hospitals, urban hospitals, in Texas, and through 
IGTs they provide the State portion of Medicaid funding for the 
DSH allotments. In using the IGTs, Texas then is able to draw 
down Federal dollars that we share not only with those nine 
public hospitals, but also with 87 rural hospitals and 64 other 
urban hospitals, both profit and nonprofit, and seven 
children's hospitals. One hundred percent of those funds are 
returned to the hospitals to assist them with uncompensated 
care.
    Unfortunately, in Houston, I have a public hospital system, 
but again, they can't serve all the need in Houston, so we need 
the funding in some of my suburban hospitals that also serve 
poor folks.
    Now, is there anything illegal or troubling to you about 
this arrangement, because that was the decision Texas made long 
before I was the State legislator for 20 years, that health 
care would be provided on the local level?
    Mr. Smith. Mr. Green, again I assure you that is the way it 
works that the local--the counties are putting up the State 
share of the match and the money stays with the providers. That 
is exactly what we are trying to achieve.
    Mr. Green. One of my--in my time that I have left, my 
colleague from, Louisiana Mr. John, had to be over on the floor 
for a transportation bill and he wanted to ask the question, 
what State plan amendments with IGTs has CMS approved in full 
or in part, involving the 175 percent rule; and has CMS 
approved any State plan amendments involving an IGT with 175 
rule for the full term of the 175 percent rule?
    Mr. Smith. We have approved a couple of State plan 
amendments with the 175 percent with an agreement from the 
States that the part that has been recycled or the State 
intended to recycle, part of that 175 percent would end at a 
date certain. Again, we understood that 175 percent DSH 
provision as a way of helping public safety-net hospitals. We 
want the 175 percent to stay with the hospitals. That is our 
goal.
    Mr. Green. I hope CMS provided guidelines to the State so 
they would have that ability to respond and comply with it. Is 
there a set date that you have given?
    Mr. Smith. We have been working with the States so we do 
not interrupt their budget cycle. We have been forwarding it 
through the following budget cycle. We are trying to be 
responsive, and we believe it is very disruptive when you are 
in the middle of your budget cycle to be hit with a 
disallowance or a deferral.
    What we have been applying consistently is continuing that 
funding through the State budget cycle, which is why we may end 
up with different dates.
    Mr. Green. I am finding out more about Louisiana than I 
want to know, but if they recycle that money and it goes to the 
providers and does not stay with the original providers--for 
example, in Texas, we have nine public hospitals. And if it is 
distributed to other hospitals to help with uncompensated care, 
whether it is Texas or Louisiana, that would not be a problem 
as long as it is providing payments to providers to serve 
uncompensated care for poor folks?
    Mr. Smith. There are disproportionate share hospital rules, 
so I cannot give you a general okay. Each hospital has their 
own level that they can accept based on the uncompensated care.
    Mr. Green. Since Georgia got a time certain----
    Mr. Smith. I will have a conference call with Louisiana as 
soon as the hearing is over.
    Mr. Green. Okay. Louisiana is in the process of approving 
that final determination, hopefully by April 7. Nobody from 
Louisiana wants Georgia to get ahead of them.
    Mr. Smith. We have a conference call this afternoon.
    Mr. Norwood. They may not want us to, but we are going to.
    Mr. Waxman, you are now recognized.
    Mr. Waxman. Mr. Smith, intergovernmental transfers have 
long been recognized as a legal source of funding for the 
Medicaid program. They are explicitly recognized and protected 
in the law.
    Despite the provision of the law and despite the history of 
years of intergovernmental transfers as legitimate funding 
sources and despite instance after instance where State 
intergovernmental transfer plans have received explicit 
approval, it sounds like you decided to change the rules. Under 
what authority do you have to change the rules?
    If you want to cripple a State Medicaid program by taking 
billions of dollars away from them on intergovernmental 
transfers, isn't it up to you to propose specific legislative 
language to the Congress of the United States and let us decide 
what is appropriate to do?
    Mr. Smith. Mr. Waxman, again, we are in very much agreement 
on both points in that intergovernmental transfers----
    Mr. Waxman. My question is: Do you have the authority to 
change the rules on intergovernmental transfers?
    Mr. Smith. We do not believe we are changing the rules. We 
believe we are applying the rules that exist.
    Mr. Waxman. Can you give us what your plan is? The 
Committee on Ways and Means is holding a hearing at this moment 
on how this Administration would not even give us the cost 
estimates for the Medicare program.
    You are going one better, you are not even telling us what 
you are going to do on these intergovernmental transfers.
    Why aren't we, as Members of Congress, entitled to know? 
Why can't the States find out what you are proposing to do to 
revise the law by doing something that will withhold billions 
of dollars from them?
    Mr. Smith. On both points, you asked for legislation. We 
will be sending up legislation itself. We will send up what 
States we have identified through the State plan review process 
that we believe have problematic recycling.
    I have tried to----
    Mr. Waxman. We need specifics. You have to give us a State-
by-State breakdown.
    Mr. Smith. To the best of our knowledge based on our State 
plan reviews. If a State has not come in to us, we may not 
know.
    Mr. Waxman. I am not talking about when they apply for a 
State plan.
    Mr. Smith. But that is how we are finding out whether they 
are recycling money.
    Mr. Waxman. How do they know what the rules are?
    Mr. Smith. Mr. Waxman, the questions are all based on 
trying to understand how their funding works.
    Mr. Waxman. No, I think the question is, how do the Federal 
rules work? We have a history of the Federal rules working in a 
particular way. I think Ms. Edwards referred to this.
    States cannot run their programs if you change the rules 
and hold up their State plans. This is a Nation of laws, not 
arbitrary decisions by you when a State comes in for a plan to 
be changed. They should know exactly what the proposals are 
that they will need to meet.
    When will you give us the analysis and the legislative 
proposal?
    Mr. Smith. Shortly, I hope. I cannot give you a specific 
date.
    Mr. Waxman. We are being asked to cut billions of dollars 
out of the Medicaid program. We need specifics. Is April 7 a 
good day? We need specifics. We ought to get the information 
before we pass a budget, but we passed a budget. Give me a 
date.
    Mr. Smith. I will do my best to have it to you by April 7.
    Mr. Waxman. It seems to me that we want to know also what 
the impact would be on Medicaid beneficiaries and the providers 
that serve them.
    Mr. Smith, when did you start at HHS, in any capacity, as a 
consultant or employee?
    Mr. Smith. This is my third time back at HHS. I started 
about February 1, 2001.
    Mr. Waxman. Before that, you were the head of the Medicaid 
program in Virginia, weren't you?
    Mr. Smith. Yes.
    Mr. Waxman. As part of the Medicaid program in Virginia, 
did you work on a proposal for the Virginia Medicaid program 
upper payment limit which was submitted to the Federal 
Government?
    Mr. Smith. That was submitted to the Federal Government. I 
believe it was submitted under my signature.
    Mr. Waxman. And you participated, obviously, in this 
proposal. Did Claude Allen participate in the development of 
the UPL proposal for Virginia?
    Mr. Smith. I believe he was aware of it.
    Mr. Waxman. Aware of it? Did he participate in the 
development of it?
    Mr. Smith. It would be a long story to describe the entire 
history of that proposal. But he was aware of it. I am not 
aware of all of the discussions that took place.
    Mr. Waxman. Governor Gilmore was also part of the decision?
    Mr. Smith. Yes, Mr. Waxman.
    Mr. Waxman. A decision was made some time between 
inauguration and April 3 to revise the final Clinton regulation 
and to allow some State plan amendments to be approved under 
the old rules, that is, those issued in January.
    Did you participate in any way in discussions, meetings, 
briefings, papers, correspondence or decisions regarding that 
policy change?
    Mr. Smith. Regarding the policy, yes, I did.
    Mr. Waxman. Did Claude Allen participate in any way?
    Mr. Smith. I am not certain. I don't know that he had been 
in the Department as yet. I don't remember when he came to the 
Department.
    Mr. Waxman. Do you know if he was aware of the decision by 
HHS that was in the works?
    Mr. Smith. I don't know. I don't remember when he came to 
the Administration.
    Mr. Waxman. Did any person who had worked for the State of 
Virginia before coming to HHS participate in any way in 
discussions, meetings, briefing papers, correspondence, or 
decisions regarding that policy change? For example, Mr. Leean 
or Ms. Mantho?
    Mr. Smith. They were from Wisconsin.
    Mr. Waxman. This applies to both of them.
    Mr. Smith. I am sorry, I thought you asked about somebody 
else from Virginia. I believe I was the only one from Virginia.
    Mr. Waxman. Did they participate at HHS in this opening up 
of the rule?
    Mr. Smith. The policy itself, they very well may have.
    Mr. Waxman. Whose idea was it----
    Mr. Smith. Joe Leean was in a capacity that I don't know he 
would have been involved in that policy. He was doing things 
other than Medicaid. Offhand, I would doubt that he was 
involved at all.
    Mr. Waxman. Directly. How about indirectly?
    Mr. Smith. I have no idea.
    Mr. Waxman. Whose idea was it to reopen and revise the 
January 12 regulations?
    Mr. Smith. I believe there was a request from Governors to 
clarify what appeared to be ambiguous and vague rules.
    Mr. Waxman. Were there HHS staff who were against this 
reopening and revising the January 12 regulation?
    Mr. Smith. That is a very broad----
    Mr. Waxman. To your knowledge.
    Mr. Smith. My recollection is that we began looking into it 
again based upon a request from Governors that the original 
regulation had gaps in it.
    Mr. Waxman. So from Virginia and Wisconsin particularly, 
they were interested in changing?
    Mr. Smith. I don't remember who made the request.
    Mr. Waxman. I am going to ask more questions in writing.
    It seems to me this Administration came into power touting 
the idea of giving States more flexibility and more ways to get 
waivers. I remember when Governor Thompson was a Governor and 
not secretary, and he argued for this.
    Now it seems to me you are harassing the States when they 
want to change their plans with more and more requirements that 
they come through and show you. I suspect they are being 
harassed in order for them to give up on perfectly legal 
activities by threatening delays and investigations into their 
State plans.
    Are you trying to get them to adopt block grants by this 
sort of harassment?
    Mr. Smith. No, Mr. Waxman.
    Mr. Waxman. Thank you, Mr. Chairman.
    Mr. Smith. If I may make a couple of points?
    Again, the policy that you referred to, my recollection is 
it became an issue based upon a request from the Governors that 
the policy had gaps and was ambiguous and vague in that there 
were plan amendments in the pipeline, and there was uncertainty 
about effective dates, et cetera.
    The policy itself would have applied to all States, and 
again, at that point in time, we believed we were writing a 
general policy of general applicability to all States.
    In terms of State plan amendments from specific States, I 
was recused from Virginia at the time. The secretary and his 
staff were recused from Wisconsin, action on Wisconsin State 
plans at the time. I remain recused from any action on Virginia 
State plans as the secretary remains recused on any Wisconsin 
State plans.
    So in terms of any review of a policy and how that applied 
to either Virginia or Wisconsin, I was not involved, and the 
secretary was not involved.
    I hope that is helpful to you.
    Mr. Norwood. Mr. Stupak, you are recognized for 5 minutes.
    Mr. Stupak. Thank you, Mr. Chairman.
    Mr. Smith, Michigan has an application pending with HHS to 
create a multi-State prescription drug purchasing pool. 
Michigan has joined with Vermont to put forth an innovative 
approach to help the States save money along with the Federal 
Government. Michigan estimates that by pooling together, it 
will save them $40 million a year.
    Other States would like to join, like Nevada, Alaska, 
Minnesota and New Hampshire. In the year since Vermont and 
Michigan made their proposal, CMS has made one request for 
modification after another. And each time, both Michigan and 
Vermont have complied.
    In February, CMS said they were going to deny their 
program. The Michigan proposal makes sense to me because is 
combines the State's purchasing power, complies with CMS 
guidelines on supplemental rebates, will save the State, 
Federal Government and taxpayers' money, and is based on a 
free-market bidding using a commercial model.
    On July 1, 2003, in a National Public Radio interview, 
former CMS Administrator Tom Scully says, ``States have every 
right to negotiate and use their market power to get the best 
possible prices they can.''
    My question is, what is the problem with the Michigan-
Vermont prescription drug pooling program? Why is the 
Administration blocking the program? And what are the next 
steps and what is the timeframe for approval of this proposal?
    Mr. Smith. We are not trying to block it, but trying to get 
to an approval. Michigan has itself received a letter from us.
    Mr. Stupak. When was that letter sent? Three weeks ago, 
there was an article in Roll Call saying you were disapproving 
Michigan's plan.
    Mr. Smith. That was clarified. The letter itself was around 
the time of the National Governors Association meeting in 
Washington where Governor Granholm raised this issue to the 
secretary. The secretary assured the Governor that he had 
instructed me to get to an approval, and that is what we were 
working on.
    Mr. Stupak. So what timetable are we looking at for the 
approval?
    Mr. Smith. I don't know the exact status. We did send some 
additional questions to Michigan that we have shared with the 
other States that are involved in the purchasing pool as well, 
New Hampshire, et cetera. I am hopeful we will do that this 
month.
    Mr. Stupak. I understand the most recent problem was that 
CMS wanted the States to pick up PBM through a competitive 
bidding process.
    Mr. Smith. I believe they have done that.
    Mr. Stupak. So what is the hold-up now?
    Mr. Smith. I don't remember.
    Mr. Stupak. Can you get back to us on that?
    Mr. Smith. I am happy to. But the secretary has made it 
clear to me we will get to an approval.
    Mr. Stupak. I hope so. That $40 million, Michigan is facing 
financial troubles, like everybody else.
    We have some other States that want to join us, and we 
think it is a better proposal than the prescription drug plan 
that may possibly be coming.
    Second, States are desperately trying to figure out what 
the new Medicare Drug Law means to them. The higher-cost 
estimates released by CMS actually could negatively impact the 
States. As it stands now, the States are estimated to lose $1.2 
billion over the next 3 years as a result of this law.
    First, I am concerned the States are losing 50 percent of 
their prescription drug enrollees. Thus, they will lose a lot 
of leverage in negotiating supplemental rebates to help control 
drug costs.
    Second, the amount States have to pay to the Federal 
Government for drug costs under the so-called clawback 
provision is based on national drug growth rates. This will 
penalize States who have done a good job of controlling their 
drug costs.
    Third, States are penalized because the base year for 
determining their contribution is 2003. If States enacted cost 
controls since 2003, it will not be reflected in their payments 
to the Feds under the clawback.
    Finally and most importantly, if Part D drug plans have 
formularies that are more restrictive than those in Medicaid, 
seniors risk losing coverage of needed medicine.
    This bill seems like a bad deal for States and seniors. No. 
1, would the Administration support fixing any of these flaws? 
Can the Administration support fixing any of these flaws?
    No. 2, can the Administration fix any of these problems 
without legislation?
    No. 3, what is the Administration doing to ensure that 
lower-income seniors in rural plans have a choice of drug plans 
and a choice of plans that have a low premium?
    Mr. Smith. I will do my best. You get me back into the 
Medicare area that I am probably not the best expert to speak 
on.
    Mr. Stupak. The new drug law supersedes some of that, and 
it is going to hurt us.
    Mr. Smith. The point that the States are going to lose half 
of the people, again, my understanding at least--and I am happy 
to go back and refresh my memory--but I thought that, 
certainly, a very strong indication was that was a bipartisan 
effort. I think it was something like Medicare beneficiaries or 
Medicare beneficiaries first, that is where people have been 
moved out of Medicaid into Medicare so there is a uniform 
eligibility, et cetera, not based on State income.
    So the fact that States have--the fact that the dual 
eligibles have moved out of Medicaid into Medicare I thought 
was something that people were generally very supportive of, 
and that is what they were trying to do.
    In terms of what States can do to reduce the cost of drugs, 
again, we have approved supplemental rebates for 20 States, 
including Michigan, to which they are already getting 
additional rebates from pharmaceutical manufacturers. So we 
have been trying to do that.
    In terms of 2003 as the base year, obviously, Congress had 
to pick some point in time in which to base the State 
contribution on in order for the State contribution to work. We 
have been meeting with the States again to try to make those 
numbers as accurate as possible.
    The argument that States in 2004 and 2005 were going to 
dramatically change the way they have been delivering 
prescription drugs for quite some time, that that would be a 
dramatic impact on the cost of drugs, I have heard the 
argument. But I am not certain that it truly was going to make 
a lot of difference in calculating those per capita costs.
    Mr. Norwood. Thank you, Mr. Stupak.
    Mr. Stupak. I might follow that up with a written question.
    Mr. Norwood. We will leave the record open for written 
questions.
    Mr. Rush, you are recognized for 5 minutes.
    Mr. Rush. Thank you.
    Mr. Smith, can you tell this subcommittee what hard 
evidence you possess that would show and prove that States are 
abusing the system by diverting IGT funds to non-Medicaid 
services? Can you follow that up with a list of States that you 
think are abusing the system?
    Mr. Smith. We are preparing a list of States that are 
recycling funds.
    Again, Mr. Rush, the States have told us, ``Here is a claim 
for a Medicaid benefit to a Medicaid individual, we want your 
share of the cost of that expenditure,'' and we give it to 
them.
    The States themselves in our review process are now telling 
us, and I think in many respects we are finding this out for 
the first time, that at least part and in some States a huge 
part of that payment is being returned back to the State.
    Mr. Rush. What States----
    Mr. Smith. So we are having difficulty saying what 
expenditure.
    Mr. Rush. What States do you know are diverting these funds 
to roads and bridges and other non--other similar type non-
Medicaid services?
    Mr. Smith. When the funds are returned back to the State 
and are simply in the State fund, I think it would be very 
difficult to trace it from there.
    Mr. Rush. In Illinois, IGT has been used exclusively to add 
funds to the State Medicaid program. My State IGT has funded 
approximately 10 percent of the overall Medicaid base, and 
revenues generated have permitted my State to cover 1.8 million 
individuals and over a million children. It allows seniors, to 
the tune of 160,000 seniors, to have comprehensive drug 
coverage.
    According to the information that I have from the 
Governor's office, not one dime of IGT money has gone to 
anything other than Medicaid services and care for the poor. 
Can you tell me, would you consider that recycling or abusing 
the system?
    Mr. Smith. It sounds like, from what you have told me, that 
is recycling. If they are telling you they are recycling 10 
percent of the funds, you have effectively moved the match 
rate.
    Mr. Rush. And that is abusing the system? Is that what you 
are saying?
    Mr. Smith. I hate to put an adjective on it, only pointing 
out, by doing that, the State has changed its statutorily 
defined match rate.
    Mr. Rush. According to my State, we have increased funding 
for Medicaid by a total of $27 billion from 1992 to 2003, and 
over that same period, IGT funds have totaled $5.2 billion. And 
so Illinois has increased funding for Medicaid by a much bigger 
sum than the IGT funds it received. Is this a logical argument 
that Illinois has wrongfully diverted IGT funds to non-Medicaid 
services?
    Mr. Smith. Again, Mr. Rush, I would simply point out what 
you are telling me is the State itself has said they are not 
meeting their financial obligation to the Medicaid program. 
They are required to put up their share of the cost of the 
program.
    Mr. Rush. And you are saying that my State isn't?
    Mr. Smith. From what you are telling me, that is what it 
sounds like to me.
    Mr. Rush. Let me ask, is this something that is not in line 
with what the program, the IGT mission is?
    Mr. Smith. Again, I think what we are discovering as we are 
doing our State plan amendments, that the States, by having 
providers return Federal dollars that were claimed specifically 
to pay for a Medicaid service to a Medicaid beneficiary, some 
or a large portion of that expenditure is being returned to the 
State. That changes the State's match rate, and we believe that 
is an issue that needs to be addressed in order to preserve the 
integrity of the program.
    Mr. Norwood. Mr. Rush, your time has expired.
    We are happy to have Mr. Barton, the chairman of the full 
Committee on Energy and Commerce, with us, and you are 
recognized.
    Chairman Barton. Thank you, Mr. Chairman.
    Does CMS, Mr. Smith, have any analysis or any data that 
would indicate how much money might be saved if we were to 
reform IGTs in some way? What is the potential pool of savings 
if we were to statutorily make some changes in the way IGT 
payments are calculated or distributed?
    Mr. Smith. Our estimate is that would save the Federal 
Government $23 billion over a 10-year period of time which is 
about 1 percent of what we are projected to spend on Medicaid. 
The Federal share.
    Chairman Barton. Would these savings, if implemented, would 
they be basically shared across the board or would some States 
be more directly affected than other States? Do you have that 
analysis?
    Mr. Smith. We are compiling that analysis. It clearly would 
affect only States that recycle funds. So a State that is not 
recycling funds, our proposal would have no impact on them.
    Chairman Barton. My assumption is that the Administration, 
just like the majority of this committee, we do not oppose 
intergovernmental transfers per se, we simply think if you are 
going to have them, they need to be directed and calculated and 
used in such a way that the money actually goes for health care 
services that are eligible.Is that a fair statement?
    Mr. Smith. It is, Mr. Chairman, and we are in agreement. 
That is the purpose.
    Chairman Barton. Does the Administration have a position on 
whether we should start trying to make some of these changes in 
this budget cycle as opposed to waiting until the next 
Congress?
    Mr. Smith. Our proposal, again, our intention is to submit 
legislation to the Congress for its consideration. As part of 
that, in our discussions, there are States that have upper 
payment limit transition periods, and it would be our 
recommendation not to interfere with those because States have 
already built those into that. We do not intend to try to 
interfere with the previous public law that has already 
guaranteed certain States a transition period.
    Chairman Barton. I have only been chairman for about a 
month, but I have been a member of the subcommittee for a lot 
longer than that. It does not mean that it has not been 
presented, but I am not aware that we have actually received a 
definitive legislative proposal? Has that been presented or has 
it not been presented?
    Mr. Smith. You are correct, Mr. Chairman, we have not 
transmitted it yet.
    Chairman Barton. Is there an appropriate way for us to 
interact on the preparation of that proposal or is that 
something the executive branch has to do in a vacuum and then 
spring on us, and we react to it in shock and awe?
    Mr. Smith. It would be our intention to be helpful on what 
the legislation should be. That is our intention of submitting 
proposed legislation to you and then, obviously, providing any 
other assistance that we can in your consideration.
    Chairman Barton. It is not a given that the House and the 
Senate are going to agree on a budget resolution. Those 
discussions are going on right now.
    If that were to occur and we actually get a budget 
resolution between the House and the Senate, it is not a given 
that we are going to do reconciliation where the authorizing 
committees have to draft and present statutory changes to meet 
whatever savings are required by the reconciliation language.
    But if that does happen, if we actually go through 
reconciliation, we are going to start that in this committee 
sooner rather than later. I am not stating that we are going to 
do it. I have not touched base with the minority leadership on 
this committee. I have had some informal discussions with some 
of the members of this subcommittee on the majority side.
    But if in fact we are going to do this, I would strongly 
encourage you to, in whatever the appropriate method is 
acceptable, to begin to work with the subcommittee chairman and 
the ranking member on the minority side so we could possibly 
come up with a bipartisan set of proposals to meet some of 
these targets. That needs to begin as soon as possible, and 
that is on the assumption that we are going to go through with 
a budget which has a mandatory reconciliation that has to be 
met.
    Mr. Smith. I will carry that message back, Mr. Chairman, 
and clearly, we want to be helpful to you.
    Chairman Barton. I thank the chairman and yield back.
    Mr. Norwood. Thank you, Chairman Barton.
    Mr. Strickland, you are recognized for 5 minutes.
    Mr. Strickland. Thank you, Mr. Chairman.
    Mr. Smith, do you have a proposal to cut $23.5 billion or 
to save $23.5 billion from Medicaid?
    Mr. Smith. We have not submitted the legislation as yet. We 
have that under review internally. Our intent, after the 
chairman's admonition, is that we send it up as quickly as 
possible.
    The savings, the $23 billion, are over a 10-year period of 
time which represents about 1 percent of what the Federal 
Government is projected to spend.
    Mr. Strickland. I am sorry, I wasn't here earlier, but I 
have been told you indicated you do not have a specific 
proposal. Maybe you do.
    Mr. Smith. We have not cleared it internally. We do intend 
to submit it as legislation.
    Mr. Strickland. You will be able to tell us at some point 
what is in that proposal that will lead to a savings of $23.5 
billion?
    Mr. Smith. Yes, sir.
    Mr. Strickland. That is interesting. Do you have any idea 
when you may have that proposal available for us?
    Mr. Smith. We are working to get it cleared to where it can 
be transferred up in the normal fashion.
    Mr. Strickland. Would you estimate days, week, months?
    Mr. Smith. Weeks.
    Mr. Strickland. Weeks?
    Mr. Smith. One member asked me to have it by April 7, and I 
said I would do my best to have it by April 7. So days would be 
my response.
    Mr. Strickland. Ms. Edwards, you are a Buckeye, and I was 
not here for your opening statement, but my staff says you are 
terrific, so welcome.
    We understand there is a need to make sure that funds are 
expended appropriately, and there is no inappropriate use of 
funds.
    Some of us are concerned about the proposal that will cause 
CMS to delay or withhold funding to States which urgently need 
to cover the uninsured. Can you make a comment about your 
feelings regarding the new prospective budgeting requirement 
that CMS wants to implement?
    Ms. Edwards. I am assuming we are talking about the CMS-37 
proposal, that we require that States submit their Medicaid 
budget for review by the Federal staff prior to the beginning 
of a State's fiscal year and presumably prior to the release of 
any grant funds.
    I am a member of the Executive Committee For the National 
Association of State Medicaid Directors. We have spent the last 
1\1/2\ days with Dennis and some of his staff in conversation. 
One of the things that we have committed to doing is to help 
staff, a working group, take a hard look at what kind of 
process might work. Again, our emphasis is, we need clarity in 
the standards.
    So the first thing we need for a process like that to be 
useful and doable is to be clear what the standards are. 
Frankly, as we have pointed out, I am beginning my work right 
now for the fiscal year 2006 and 2007 budget. The original 
proposal, which I think has been withdrawn, was to begin this 
Federal review 150 days prior to the beginning of the fiscal 
year.
    Frankly, finding out within 30 or 60 days of the beginning 
of my fiscal year that I have a major problem with a funding 
stream is not enough time for the State of Ohio to make a 
change to our expectations and plans for the program. It would 
not even be enough time for us to take down benefits or 
eligibility groups in terms of coming within a different 
funding stream.
    I think we are going to urge that we have much more clarity 
on the standards up front, preferably in rules, written 
guidance with public input in the development of those 
standards. And, second, that we then have adequate time to 
really work through any issues, particularly in the transition 
phase.
    Again, the States are not opposed to fiscal integrity. 
Clarity is a good thing, and we are willing to work with CMS to 
provide the level of assurances needed. We do ask for their 
help in return. We need the rules to be clear before we start, 
not as we go.
    Mr. Strickland. Mr. Smith, would you agree what Ms. Edwards 
says is very reasonable and would you commit that you will take 
her concerns and work with her and other States to address her 
fears for what this process might do to States?
    Mr. Smith. Absolutely. As Barbara mentioned, we agreed 
today to form a work group, I believe, of four States being 
represented from the Medicaid director's side of it.
    There has been a lot of--I think we got off on the wrong 
foot with what we were trying to accomplish. The goal of what 
we were trying to accomplish was to avoid some of the 
unfortunate situations that States find themselves in now.
    We are very pleased that the States have agreed to do the 
working group and move forward.
    Mr. Norwood. Thank you very much.
    Mr. Engel, you are recognized for 5 minutes.
    Mr. Engel. Thank you, Mr. Chairman.
    Mr. Smith, the burden of providing basic health services to 
the poor and uninsured has grown tremendously over the last 
decade. Health care costs have surged, and the number of 
unemployed has surged just as strongly.
    In response, States have utilized many tools at their 
disposal to weave a very fragile safety net for those in need. 
My State of New York has done so as well.
    It appears that the Administration, at a time of high 
unemployment and a record number of uninsured, CMS is seeking 
to further curtail the ability of States to provide care to its 
most vulnerable population.
    In your testimony, you assert and I am quoting you, 
``Through a complex, creative financing mechanism, States have 
artificially maximized Federal Medicaid matching funds. Such 
practices undermine accountability, responsibility and 
ultimately public trust.''
    I disagree vehemently with that statement and believe at a 
time when more and more Americans are finding themselves 
without a job or health insurance, we need a strong public 
health infrastructure. And the effort to cut Medicaid funding 
undermines the public trust in their Government.
    The President's budget calls for $10 billion in savings 
from Medicaid by curbing these IGTs and the use of upper 
payment limits, and at the same time a temporary F-MAP increase 
will expire in June. What it all boils down to is, when facing 
these types of cuts, States are going to have to try to find 
creative ways to maximize Federal Medicaid matching funds, and 
I don't believe that cutting Medicaid funding is a solution to 
this problem.
    I think all of these issues would be avoided if we would 
adequately fund programs that provide health care to the poor 
and uninsured. Yet I hear nothing about how to deal with the 
real problems facing the Nation in this regard other than the 
Administration being willing to cut us off at our knees.
    Do you have any recommendation as to how States can 
continue to provide care for the millions of Americans who rely 
on our Government for assistance when we are cutting funding 
for essential programs like Medicaid?
    Mr. Smith. Well, I think a couple of things. One, we had a 
proposal last year in terms of taking a long-term look at the 
needs of Medicaid, not just a short-term look. On the 
uninsured, the President has had proposals on trying to provide 
assistance to individuals who are uninsured.
    In terms of the opening part of your comments in terms of 
the safety-net providers, that is precisely what we have been 
trying to do in terms of achieving that. What we have been 
discussing here earlier this afternoon is the money that is 
going to those safety-net hospitals is not staying there. The 
States are requiring them to send money back to them is what we 
are calling recycling.
    Congress saw this earlier, created the 175 percent 
uncompensated care rule for DSH, for the disproportionate share 
hospital payments. What we have been trying to achieve is for 
those safety-net providers to keep that money. That is our 
goal.
    Mr. Engel. The National Governors Association has said in 
written testimony to this committee in regards to the 
Administration's proposal on IGTs, ``changing the policy now 
would have disastrous consequences for public hospitals and the 
individuals they serve.''
    I would urge you to bring this message back to the 
Administration that the attack on the poor and uninsured is 
really wrong. I think it is a not well-thought-out policy, and 
it will exacerbate the growing problem of how to provide care 
to those in need. The public hospitals, do they support your 
proposal and actions? I don't believe they do.
    New York right now has a State plan amendment pending that 
would allow the State to move the DSH payment to 175 percent 
for hospitals. Our Republican Governor strongly supports that 
plan. It is my understanding that CMS is holding this plan up, 
and the law clearly states that New York is eligible for 2 
years of DSH payments at 175 percent. Why has CMS not approved 
this plan?
    Mr. Smith. I believe we have approved one of the plans that 
New York has submitted to us.
    Again, we certainly want to work with the States, and we 
have been trying through our plan amendment review process and 
discussions with the States to again achieve the goal that I 
stated which is the money actually stays with the provider who 
provided the service. We believe we should be matching an 
expenditure for a service that was provided.
    Mr. Norwood. Thank you. We are going to keep the record 
open.
    Mr. Engel. Can I just have 10 seconds. I want to say that I 
hope that CMS is not acting on this plan because you intend to 
disallow these types of transactions in the future. It is legal 
now, and as long as it is legal now, it should be approved. I 
will follow up with you on this.
    Thank you, Mr. Chairman.
    Mr. Norwood. Mr. Brown you are recognized for 30 seconds.
    Mr. Brown. I would like to request this letter be 
submitted. A number of us in the House and Senate wrote to the 
secretary expressing our serious concern with the CMS proposal 
to audit all State funding.
    [The information referred to follows:]

                       Cogress of the United States
                                     Washington, D.C. 20515

                                                     March 29, 2004
The Honorable Tommy G. Thompson
Secretary
Department of Health and Human Services
200 Independence Avenue, S.W.
Washington, D.C. 20201
    Dear Secretary Thompson:
    In January, the Centers for Medicaid and Medicare Services (CMS) 
issued a Federal Register notice requesting emergency clearance of a 
change in the way the Federal Government pays its share of Medicaid 
funding. This change would require prior federal approval of state 
Medicaid budgets and a more detailed and lengthy process before states 
could receive necessary federal Medicaid funding. Although the CMS 
ultimately withdrew the emergency clearance request in recognition of a 
faulty notice process, press reports have indicated that CMS intends to 
advance a very similar policy again in the near future.
    Though the stated purpose of the major change is to combat fraud, 
waste, and abuse, this overbroad budget pre-approval requirement could 
hurt the most vulnerable among us, including children, pregnant women, 
those living with disabilities, seriously and persistently mentally 
ill, and the elderly in nursing homes, among others. The Administration 
is now moving both to shift more costs and responsibilities for 
Medicaid to the states and to interfere with state discretion in 
setting state Medicaid budgets and financing the state share of 
Medicaid costs. This appears to be an attempt to make the program more 
difficult for states to administer, so that states will, under duress, 
accept a block grant or cap on their program in order to escape ever-
increasing federal restrictions.
    We appreciate your February 20, 2004, letter to Governor Kempthorne 
indicating you plan to allow for a formal comment period on proposed 
changes to the ``Form CMS-37'' but our concerns go to not only the 
process for making the change bat to the very substance of the CMS 
proposal. We recommend that you table the proposal altogether for three 
reasons.
    First, these proposed changes to the CMS-37 form constitute a 
dramatic shift in the guarantee of federal Medicaid funds that are 
distributed to states. This will have a dampening effect on states' 
willingness to provide health coverage under the Medicaid program. 
Currently, the Federal Government can only retrospectively disallow 
federal funding after proper notice and opportunity for states to 
appeal to through an independent judicial process. Under the CMS 
proposal, the Federal Government would prospectively withhold or delay 
access to funding if it believed the future use of such funds might be 
disallowed. Disputes between states and CMS could take months or even 
years to resolve, and it would appear that a state would bear the 
financial burden and uncertainty during this period of negotiation.
    Even in the best economic times, Governors and state legislatures 
will be constrained in their ability to provide health coverage to a 
growing population of vulnerable citizens if there is extreme 
uncertainty around the Federal Government's commitment to provide its 
share of funding. The flexibility that comes from the assurance of 
federal matching dollars to cover all eligible individuals is key to 
the success of this program and the willingness of states to 
participate in it. The CMS-proposed changes eliminate that flexibility, 
and could thus jeopardize the continued existence of health coverage to 
families under Medicaid.
    Second, the administrative burden caused by this proposal would 
divert staff attention away from providing health benefits to 
vulnerable populations, and would instead ensnare them in new and 
redundant bureaucratic tasks in order to respond to this new federal 
requirement. The Administration is already proposing cuts to state 
Medicaid budgets in its FY 2005 budget, and the loss of temporary 
fiscal relief money on June 30 will mean states will have $11 billion 
less in funding this year, in spite of an expected state budget deficit 
of $40 billion for the upcoming state fiscal year 2005. States will be 
hard pressed to continue their program in the face of these funding 
reductions coupled with new and unduly burdensome bureaucratic 
requirements.
    Third, CMS appears to be outside of its legal bounds in making such 
a change to the fundamental nature of the Medicaid program. The 
Medicaid statute allows for federal funding to states to be increased 
or decreased based on over or under payments in prior quarters; the 
statute does not allow reductions in funding for states based on 
expected future overpayments in subsequent quarters.\1\ Likewise, 
current federal regulations enumerate the only reasons the Secretary 
may withhold federal funding from states, specifically for 
impermissible expenditures in previous quarters \2\ or where a state's 
plan has changed so it no longer complies with federal requirements.\3\ 
There is no provision for withholding federal funds if the Secretary 
merely believes, without a full opportunity for a hearing, that the 
future use of such funds may be disallowed.
---------------------------------------------------------------------------
    \1\ Social Security Act  1903(d)(2)(A)
    \2\ 42 C.F.R. 430.30(d)(2)
    \3\ Social Security Act  1904; 42 C.F.R. 430.15
---------------------------------------------------------------------------
    If CMS is concerned that states are inappropriately requesting 
federal funds through various financing mechanisms, it can seek 
legislative changes or propose new regulations to address those 
problems, as it has previously. The failure to clearly identify and 
define specific forms of impermissible financial gamesmanship by states 
has contributed to the concern that the ultimate purpose of the new 
policy is to strangle the states with bureaucratic requirements and 
denial of federal funds and to coerce states into accepting capped 
federal payments in exchange for regulatory relief.
    In conclusion, we urge you to rethink and not republish this 
proposal which would jeopardize funding for health insurance coverage 
for the most vulnerable in our society. At a time when the number of 
uninsured continues to grow unabated, such a policy is unwise in the 
extreme.
            Sincerely,
                 John D. Dingell, Sherrod Brown, Charles B. Rangel,
                    Henry A. Waxman, Pete Stark, Edward M. Kennedy,
             Jeff Bingaman, Max Baucus, and John D. Rockefeller IV.

    Mr. Norwood. Without objection, so ordered.
    Mr. Brown. You said the only States that are recycling 
funds would be affected by this proposal. Secretary Thompson 
said 34 States would be affected. How many States will be 
affected?
    Mr. Smith. I think it would be in that ballpark.
    Mr. Brown. How many States are recycling funds?
    Mr. Smith. We believe it is in that neighborhood of 34. 
Again, we are finding this out through our State plan review 
process. Sometimes it is difficult for the State to accurately 
describe the way the flow of funding works.
    Mr. Brown. My State, represented by Ms. Edwards, is not one 
of them, right?
    Mr. Smith. Thirty-five is our count at this time.
    Mr. Brown. Before you said 34. You just added her?
    Ms. Edwards. We are all anxious to see who is on the list.
    Mr. Rush. Mr. Chairman, I would like to get a clarification 
in terms of something that Mr. Smith stated.
    Mr. Smith, you told Chairman Barton that the only concern 
over IGTs was they were being used for non-health-care 
expenditures.Is that correct? That is what you told Chairman 
Barton.
    Mr. Smith. I think I said several things.
    Mr. Rush. Including that the only concern was that IGTs 
were using funds for non-health-care expenditures.
    Mr. Smith. I think we were talking about Medicaid.
    Mr. Norwood. Mr. Rush, we will pull that exact answer from 
the record for you.
    Mr. Rush. I just wanted to find out.
    It seems if that was the case, I indicated my State, what 
it was doing for health care related expenditures. And you said 
they were recycling and it was wrong for us to do that.
    I am trying to get an understanding which one is right. Are 
you concerned about IGTs being used for non-health-care 
expenditures? And if they are being used for non-health-care 
expenditures, is that okay?
    Mr. Smith. Our concern is: Is a State fulfilling its 
obligation to match the Medicaid expenditures for which they 
are asking us to match?
    Mr. Norwood. Thank you very much.
    I recognize myself now for questioning and closing.
    I have waited until the end to ask my questions because I 
wanted to hear what the members were really interested in and 
were going to say. I am struck by a couple of things.
    No. 1, this group of members from the Energy and Commerce 
Committee who happen to be on the Health committee are deeply 
interested in this. I think we can clearly see that. Everybody 
here would have loved to have had 20 more minutes of 
questioning.
    The second thing I leave here with is, we are all in 
agreement. I think I am going to prove that with some questions 
I will ask you in just a minute, Mr. Smith.
    I really believe both sides, including yourself, are in 
agreement. The problem is there is a lack of trust. Now, I 
don't know that we can fix that very easily. There is a history 
why people do not trust CMS and all of that.
    Generally speaking, what you have been saying is exactly 
what many other members have been saying, too, so I am going to 
ask simple yes or no questions.
    Is CMS trying to eliminate IGTs?
    Mr. Smith. No.
    Mr. Norwood. Are you trying to get rid of IGTs that involve 
State financing schemes that unjustly enrich the State, divert 
Federal Medicaid dollars away from their intended use, or 
violate the basic principles of Federal-State Medicaid 
partnership?
    Mr. Smith. I think the answer is yes.
    Mr. Norwood. It is.
    Mr. Smith. What I want to clarify, though, is the recycling 
part that we are talking about is not an IGT really.
    A legal, permissible IGT, again from your first question, 
we are not touching that with a 10-foot pole.
    Mr. Norwood. But you do not want Federal dollars being 
matched against State dollars that are improperly being used 
and not then doing what we all want to do which is to treat the 
patient?
    Mr. Smith. We want the States to put up their share of the 
dollars that they are asking us for, for a service to a 
Medicaid recipient.
    Mr. Norwood. I have a simple question. Are all Medicaid 
payments currently being used exclusively for the intended 
purpose?
    Mr. Smith. We do not believe so.
    Mr. Norwood. Well then, are you aware of recent incidents 
where Medicaid funds were used for non-Medicaid expenditures, 
and I would love an example or two?
    Mr. Smith. When the funding is recycled from the provider 
back into the State budget, it is very difficult to trace that 
once it goes into the budget and how the funding flows from 
there. I do have some examples.
    In one State, the State made UPL quarterly payments via an 
electronic transfer to a nursing home bank account. The State 
immediately withdrew the amount of the payment less a $2,500 
participation fee. The approximate amount of Federal Medicaid 
payments returned to the State was more than $175 million.
    Mr. Norwood. Recent examples, please.
    Mr. Smith. Some of these, I don't have the dates.
    Mr. Norwood. Would you be good enough to submit to the 
committee recent examples where you believe Medicaid funds are 
not being used for Medicaid purposes at the State level?
    Mr. Smith. Yes.
    Mr. Norwood. In recent testimony before this subcommittee, 
the inspector general cited an example of a nursing home that 
was required to pay $80 million back to a State IGT. At the 
same time, this same facility was providing substandard care 
and exposing beneficiaries to harm. Would you agree this money 
should have been used to ensure that these beneficiaries 
received adequate care instead of enriching the State budget?
    Mr. Smith. Yes, and that is our goal.
    Mr. Norwood. That is my point. That is a horrible example. 
If there is substandard care and money is being funneled off 
for other purposes, you have to stop that no matter how scary 
it seems to some States that they may not get as much money 
because some schemes may not work. You are obligated to do 
that, I believe, for the patients first and, second, for the 
taxpayers.
    One other quick thought, in your testimony you described 
the Administration's proposal to limit Federal Medicaid 
matching payments to what the State actually spends. Isn't in a 
sense that the goal now?
    Mr. Smith. Yes.
    Mr. Norwood. That is what the law says we should do now?
    Mr. Smith. We believe it does. We believe that there should 
be permanency to that. We believe that also, again, whereas the 
focus has recently been on nursing homes and hospitals, 
whenever there is a public provider involved, there is a 
potential for this to occur.
    Again, we have seen new examples of going to other types of 
county providers potentially being involved in recycling. So we 
believe there does need to be permanency.
    Mr. Norwood. Can you tell me how you are going to determine 
what the State's net spending was or is? Do we know how to do 
that?
    Mr. Smith. We are trying mightily for the States to tell us 
exactly how much money is involved. To a large extent, we are 
relying on them to tell us the amount of money.
    Mr. Norwood. You have to know the right amount for this 
system to work. It makes sense, if we can get the systems all 
right so they can work and be enforced.
    Ms. Edwards, I would like to congratulate you as a witness. 
Ohio is very fortunate to have you running their program.
    Mr. Brown. It is hard to believe that someone as good as 
she is from Ohio, isn't it, Mr. Chairman?
    Mr. Norwood. It is. It gives me great hope. We appreciate 
you being here.
    I wish we could figure out why you believe the standards 
are not uniform and why Mr. Smith believes they are. There is 
something that we are not going to get in this afternoon's 
hearing, but we do need to get a better understanding of that.
    I thank all of the members, and I feel sure, I don't know 
this, but I think the chairman is going to have another hearing 
on this subject as it is vitally important to us.
    With that, this committee is now adjourned.
    [Whereupon, at 4:21 p.m., the subcommittee was adjourned.]

                                 
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