Financial Management: Oversight of Small Facilities for the Mentally
Retarded and Developmentally Disabled (Letter Report, 08/12/94,
GAO/AIMD-94-152).

This report provides baseline information on federal and state oversight
of facilities providing residential and other Medicaid funded services
to people with mental retardation and developmental disabilities. GAO
focused on small (15 beds or fewer) facilities in three
states--Colorado, Michigan, and New York--that were chosen to provide
diversity in terms of geographic dispersion and program size. GAO
identifies (1) federal and state requirements for financial and program
oversight and (2) whether the three states complied with those
requirements. GAO also identifies federal and state mechanisms for
investigating fraud and abuse and provides examples of what officials in
the three states believed were the best practices for preventing
financial fraud and ensuring quality care.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-94-152
     TITLE:  Financial Management: Oversight of Small Facilities for the 
             Mentally Retarded and Developmentally Disabled
      DATE:  08/12/94
   SUBJECT:  Financial management
             Mental care facilities
             Mental health care services
             Medicaid programs
             Federal/state relations
             Fraud
             Program abuses
             Emotionally disturbed persons
             Program management
             Handicapped persons
IDENTIFIER:  Medicaid Home and Community-Based Waiver Program
             Colorado
             Michigan
             New York
             
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Cover
================================================================ COVER


Report to the Chairman, Subcommittee on Regulation, Business
Opportunity, and Technology, Committee on Small Business, House of
Representatives

August 1994

FINANCIAL MANAGEMENT - OVERSIGHT
OF SMALL FACILITIES FOR THE
MENTALLY RETARDED AND
DEVELOPMENTALLY DISABLED

GAO/AIMD-94-152

Oversight of MR/DD Facilities


Abbreviations
=============================================================== ABBREV

  HCFA - Health Care Financing Administration
  HHS - Department of Health and Human Services
  ICFs/MR - intermediate care facilities for the mentally retarded
     and developmentally disabled
  MFCU - Medicaid Fraud Control Unit
  MR/DD - mental retardation and developmental disabilities
  OIG - Office of Inspector General

Letter
=============================================================== LETTER


B-257699

August 12, 1994

The Honorable Ron Wyden
Chairman, Subcommittee on Regulation,
 Business Opportunity, and Technology
Committee on Small Business
House of Representatives

Dear Mr.  Chairman: 

This report responds to your request that we provide baseline
information on federal and state financial and program oversight of
facilities providing residential and other Medicaid funded services
to people with mental retardation and developmental disabilities
(MR/DD).  As agreed with your office, we focused our review on small
(15 beds or fewer) private and nonprofit intermediate care facilities
for the mentally retarded and developmentally disabled (ICFs/MR) and
facilities providing residential and other services under a Medicaid
Home and Community Based Service Waiver (the Medicaid waiver
program). 

We judgmentally chose three states (Colorado, Michigan, and New York)
to provide diversity in terms of geographic dispersion and program
size.  Specifically, we identified (1) federal and state requirements
for financial and program oversight and (2) whether the three states
we visited complied with those requirements.  We also identified
federal and state mechanisms for investigating fraud and abuse and
obtained examples of what officials in the three states we visited
felt were best practices for preventing financial fraud and ensuring
quality care. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

While federal requirements for financial oversight of MR/DD service
providers are general in nature, the three states we reviewed
required most providers to have financial audits by an outside
agency.  To provide program oversight, cognizant federal and state
agencies utilize quality assurance inspections of ICFs/MR and of
facilities providing residential and other services under the
Medicaid waiver program.  These inspections are required by federal
and/or state regulations.  Our review, and the most recent Department
of Health and Human Services (HHS) examinations of the three states
we visited, found that these inspections were being performed as
required.  However, we found instances in which more attention could
be given to follow-up procedures to ensure that deficiencies are
corrected. 

Instances of possible fraud and abuse in ICFs/MR and Medicaid waiver
program facilities in the states we visited are investigated only
when cognizant federal or state officials receive an allegation or
referral.  While our survey of Medicaid Fraud Control Units in 41
states\1 having such units did not identify any fraudulent schemes
occurring on a national scale, the units reported several types of
fraudulent or abusive activity that were common to many states. 
These included facility operators using related party, or "non-arms
length," transactions to inflate charges and to bill for services not
provided.  Providers found guilty of fraud or other program abuses
can be excluded from receiving Medicaid funds by the HHS Office of
Inspector General (OIG).  The HHS-OIG maintains and distributes a
nationwide database, based on input from federal, state, and local
officials, of the excluded providers. 

Officials in the three states we visited identified several program
features that they believed helped ensure financial and program
integrity.  For example, in Colorado, individuals and entities
providing services to people with MR/DD must do so at a predetermined
reimbursement rate, thereby reducing the opportunity for inflated
billings. 


--------------------
\1 Subsequent to our survey, a 42nd state (Missouri) established a
Medicaid Fraud Control Unit. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Medicaid is a state-operated program financed with federal and state
(and sometimes local) funds.  It is administered under the oversight
of the Health Care Financing Administration (HCFA) within HHS.  Each
state manages its Medicaid program through a designated single state
Medicaid agency, usually the state human services department
responsible for welfare and social service programs.  The basic
Medicaid program responsibilities of that state agency include
eligibility determination, provider certification, claims processing,
review and inspection of facilities providing care, and maintenance
of the program's integrity and administration. 

States have broad discretion in carrying out these responsibilities
and administering the program.  However, the details on how each
state will run its program are contained in a contract with the
federal government called a "Medicaid State Plan." This arrangement
permits the level of services provided and reimbursement methodology
to vary from state to state, but it also helps to ensure that each
state follows broad federal requirements covering such things as the
minimum service levels, retention of records, and disclosure of
ownership interests. 

Needs of the MR/DD population are addressed through a number of
Medicaid funded facilities and services included in Medicaid State
Plans.  One of the most common facilities is the ICF/MR, which can
house from several to hundreds of residents.  Under Medicaid
regulations, ICFs/MR are required to provide, or arrange for, a full
range of medical and habilitative services based on the needs of the
residents.  To provide a more home-like setting, new ICFs/MR tend to
be small facilities of 15 beds or fewer. 

In addition, since 1981, states have used the Medicaid Home and
Community Based Service Waiver program to treat the MR/DD population. 
Under this program, commonly referred to as the Medicaid waiver
program, individuals who would be eligible for ICFs/MR can live at
home or in other community residences.  The Medicaid program funds
needed medical and health services for these individuals but does not
cover room and board.  This deviation from Medicaid State Plans is
permitted under a waiver agreement that must be approved by HCFA. 

Two of the three states we visited (Colorado and Michigan) contract
with community boards to administer their MR/DD programs.  Colorado
has 20 Community Centered Boards, and Michigan 55 Community Mental
Health Boards.  The boards, in turn, are responsible for contracting
with service providers and, in Colorado, may also operate facilities. 
In New York, MR/DD facilities are operated by nonprofit
organizations.  New York has decentralized some financial and program
oversight through the use of 19 District Developmental Service
Offices, which are staffed by state government employees.  Table 1
provides demographic data on the MR/DD population for fiscal year
1993 for the three states we visited. 



                           Table 1
           
            Demographic and Financial Information
           for MR/DD Population in States Surveyed
                     for Fiscal Year 1993

                                      Colora  Michig     New
                                          do      an    York
------------------------------------  ------  ------  ------
Individuals                            3,343   8,780  22,089

 Total receiving residential
 services (includes residents in
 state-operated and large ICFs/MR)
 Private or nonprofit ICFs/MR        0   2,835   6,794
 of 15 beds or less
Private or nonprofit community        1,177\   2,533     710
 residences of 15 beds or less             a
Facilities                               207   1,700   3,237

 Total facilities (includes state-
 operated and large ICFs/MR)
 Private or nonprofit ICFs/MR        0     472     722
 of 15 beds or less
Private or nonprofit community           170     522     135
 residences of 15 beds or less
Expenditures (in millions)            $108\b    $627  $2,974

 Total for all programs
 Private or nonprofit ICFs/MR       $0    $160  $2,319
 of 15 beds or less
Private or nonprofit community         $61\b    $105     $76
 residences of 15 beds or less
------------------------------------------------------------
Source:  Unaudited information provided by the states. 

\a Figure does not include people in alternative personal care
settings. 

\b Colorado was not able to provide expenditure data as of September
30, 1993.  Expenditures represent amounts allocated by the state for
its fiscal year, July 1, 1993, through June 30, 1994. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3

To obtain information on financial oversight requirements, we
reviewed federal and three states' regulations on, and instructions
for, financial requirements for facilities and operators of
facilities for the MR/DD.  We also obtained financial information on
each state.  We interviewed key HHS, HCFA, and state personnel to
determine how they use financial information and audit reports. 

To assess whether the three states were performing required financial
oversight, we selected random samples of 177 private or nonprofit
ICFs/MR and facilities that included residents participating in the
Medicaid waiver program (59 in each state).  We did not verify the
completeness of the lists the states provided and from which we
selected our sample facilities.  In some cases, an audit covered more
than one facility.  Of the 177 facilities in our sample, 132 were
covered by an independent financial audit requirement.  Most of the
remaining 45 facilities were not required to have an independent
financial audit but were required to have a cost report audited by
the state.  For these facilities, we obtained and reviewed the most
recent independent financial audit or cost report covering the
facility. 

To identify program oversight requirements applicable to MR/DD
facilities, we reviewed federal and state regulations and
instructions.  We interviewed key HHS, HCFA, and state personnel to
determine how they ensure that facilities adhere to program oversight
requirements. 

To assess whether the three states were performing required program
oversight, we reviewed the most recent certification or
recertification inspection for each of the 177 facilities in our
sample.  In addition, we reviewed state files to determine whether
deficiencies noted during an inspection were corrected.  Because
Colorado did not have private or nonprofit ICFs/MR of 15 beds or
fewer, we did not examine that state's inspection process for these
facilities.  For New York facilities serving people in the Medicaid
waiver program, we only reviewed initial certifications because the
statewide waiver program began less than a year before we started our
review. 

To identify federal and state mechanisms for investigating fraud and
abuse, we met with federal and state auditors responsible for
investigating Medicaid fraud and asked if they were aware of any
schemes that are used to bill for unnecessary or unperformed
services.  We surveyed the 41 state Medicaid Fraud Control Units
existing at the time of our survey to determine whether there were
any patterns of fraud in programs for people with MR/DD. 

To identify best practices that ensure financial and program
integrity, we asked officials in the three states we visited what
practices in their states they considered to be the most beneficial. 
We compared the best practices identified by these officials with
deficiencies identified by the Medicaid Fraud Control Units to
determine whether they might prevent or reduce fraud and abuse. 

We performed our work from October 1993 through July 1994 in
accordance with generally accepted government auditing standards.  We
discussed the results of our work with HHS and state program
officials and have incorporated their comments where appropriate. 


   FINANCIAL OVERSIGHT
   REQUIREMENTS
------------------------------------------------------------ Letter :4

Federal regulations specify broad requirements that the states must
meet regarding setting payment rates and conducting financial
oversight of MR/DD facilities.  The specific requirements for a state
are those set by the state and included in the state's HCFA approved
State Medicaid Plan or Medicaid Home and Community Based Service
Waiver.  States specify the type of financial reports to be submitted
by MR/DD facilities and whether the facilities must obtain financial
audits.  All three states we reviewed required cost reports and, for
most providers, independent financial audits. 

The following sections summarize the results of our review of federal
and state financial oversight requirements and the states' compliance
with them.  Appendix I presents comparative information on the
requirements. 


      INTERMEDIATE CARE FACILITIES
      FOR THE MENTALLY RETARDED
      AND DEVELOPMENTALLY DISABLED
---------------------------------------------------------- Letter :4.1

While ICFs/MR are jointly funded by states and the federal
government, the states have primary responsibility for financial
oversight.  Federal Medicaid law and regulations require states to
describe the rate-setting methods used for ICFs/MR in their Medicaid
State Plans but do not specify any single method.  As a result,
states employ a variety of rate-setting methods.  HCFA's reviews of
rate-setting procedures focus on ensuring that the procedures are
consistent with methods presented in the approved state plan.  The
staff of HHS-OIG, which has the authority to perform financial audits
of ICFs/MR, told us they would only do so on an exception basis. 


      HOME AND COMMUNITY BASED
      SERVICE WAIVERS
---------------------------------------------------------- Letter :4.2

Under the Medicaid Home and Community Based Service Waiver program,
Medicaid funding can be used for program services, such as physical
therapy, but not for room and board.  States develop their own
methods for calculating reimbursements to be made to operators of
facilities providing residential and other services to waiver
recipients.  Audits of reimbursements to ICFs/MR or to facilities
providing residential and other services under the Medicaid waiver
program are made at the states' discretion.  The HHS-OIG has the
authority to perform financial audits, but, again, staff from that
office told us they would only do so on an exception basis. 


      STATE REPORTING REQUIREMENTS
---------------------------------------------------------- Letter :4.3

All three states that we visited required providers to annually
prepare and submit financial reports.  In Colorado, operators of each
residential facility were required to submit annual cost reports to
the state.  Cost reports for facilities operated by Community
Centered Boards are to be submitted as supplemental information with
a board's annual financial statements.  State officials said they use
the cost reports to monitor facilities' revenues and expenses,
negotiate rate changes, and support requests for state
appropriations. 

In Colorado, Community Centered Boards and other operators of
residential facilities are also required to have an independent
financial statement audit annually.  The state is to ensure that
audits of Community Centered Boards are performed.  The boards are
responsible for ensuring that audits of non-board operated facilities
are completed.  While officials for the state MR/DD agency told us
that they do not have sufficient staff to determine whether the
boards are overseeing compliance with this requirement, our sample
did not identify any required audits that were not completed or
underway. 

Michigan requires annual cost reports and uses these reports to
reconcile service providers' and Community Mental Health Boards'
actual costs to budgeted costs.  These reconciliations, called cost
settlements, are used to determine if the provider was paid too much
or was due additional money from the state.  Service providers that
contract directly with the state are audited by an audit group
internal to the MR/DD agency.  Other providers in Michigan are
required to have an independent financial audit. 

In New York, MR/DD facilities submit annual consolidated financial
reports to the state.  These reports are used by the state for
special studies, the appeals process (when applicable), and
rate-setting.  While the reports are not audited, a small state-run
MR/DD audit group performs limited scope financial reviews of
facilities at its discretion.  According to its director, the group
did not have sufficient resources to conduct a full scope financial
audit of all providers in the state.  Also, organizations with
revenues and financial assistance in excess of $25,000 must file an
annual financial report with the state.  Those with revenues and
financial support in excess of $75,000 must have an independent
financial audit.  This requirement is not targeted to MR/DD
facilities, but it is a general New York state requirement for most
nonprofit groups.  According to state officials, the results of these
audits are rarely used as a tool for fiscal monitoring even though
they are filed in a central state location. 


      COMPLIANCE WITH FINANCIAL
      AUDIT REQUIREMENT
---------------------------------------------------------- Letter :4.4

We examined 64 independent financial audit reports covering 122 of
the 132 facilities in our sample required to have a financial audit. 
Nine of the 10 remaining facilities were not audited because they had
recently opened, changed owners, or just come under the audit
requirement.  The cognizant Community Centered Board had not
requested an audit of the remaining facility, but an audit of this
facility was being performed at the time of our review.  All of the
audit reports we reviewed contained unqualified opinions on the
entities' financial statements.  We did not evaluate the quality of
the audits performed for the 122 facilities. 


   PROGRAM OVERSIGHT REQUIREMENTS
------------------------------------------------------------ Letter :5

While financial oversight, including establishing requirements for
financial reporting and audit, are left primarily to the states, the
federal government has very specific quality-of-care requirements. 
For ICFs/MR, these requirements range from areas such as the level of
staffing at a facility to the dietary needs of the residents.  For
waiver facilities, states develop program requirements subject to
federal review and approval. 

Because Medicaid pays only for the habilitation or program services
these facilities provide, states set policies related to room and
board and other protective services.  For the three states we
visited, these policies included requirements for annual inspection
and certification (or re-certification) of facilities and following
up on deficiencies found by state inspectors.  Follow-up activity
would depend on the nature of the deficiency, but might consist of
ensuring that a facility filed a corrective action plan for
deficiencies noted during the inspection or re-inspection of the
facility. 

The following sections summarize the results of our review of federal
and state program oversight requirements and the states' compliance
with them.  Appendix II provides comparative information on these
requirements. 


      INTERMEDIATE CARE FACILITIES
      FOR THE MENTALLY RETARDED
      AND DEVELOPMENTALLY DISABLED
---------------------------------------------------------- Letter :5.1

Federal regulations specify 489 separate standards for quality of
care at ICFs/MR.  These standards focus on staff performance but also
address facility specifications and health and safety measures. 
Regulations also require the states to annually inspect the
facilities and certify their compliance with the standards.  These
annual inspections are a primary means for ensuring that the
facilities provide quality care. 

The 489 standards are organized into eight conditions of
participation: 

  governing body and management,

  client protection,

  facility staffing,

  active treatment services,

  client behavior and facility practices,

  health care services,

  physical environment, and

  dietetic services. 

According to federal regulations, an ICF/MR must substantially comply
with the specifications of all eight conditions of participation to
stay certified and continue to receive Medicaid reimbursement. 
However, a facility will generally not lose its certification if some
of the standards are not met, as long as the facility submits an
acceptable plan for correcting the deficiencies and client health and
safety are not in jeopardy.  HHS regional office staff annually
evaluate each state's operations, including the certification
process.  If HHS determines that a facility should not be certified,
the facility's participation in Medicaid can be terminated.  The most
recent HHS examinations of the three states we reviewed found that
the states were doing an acceptable certification job. 


      HOME AND COMMUNITY BASED
      SERVICE WAIVERS
---------------------------------------------------------- Letter :5.2

Federal quality of care standards for the waiver program are less
definitive than those for the ICF/MR program.  In the absence of
detailed federal standards, states establish their own standards,
which must be included in their waiver applications.  Federal
regulations require that state standards provide assurances that
"necessary safeguards have been taken to protect the health and
welfare of waiver clients." These safeguards must also include
standards for all types of providers that furnish services under the
waiver, as well as standards for the facilities where Medicaid waiver
program participants reside.  HCFA reviews the states' standards as
part of the waiver application approval process.  In addition, states
are required to ensure that these standards, as well as any state
licensing or certification requirements, are met and are to report
annually to HCFA on compliance. 

States are also required to commission an independent assessment of
their waiver programs and submit the results to HHS regional office
staff for evaluation.  HHS reviews waiver programs less frequently
than
ICFs/MR--3 years after inception for new programs and every 5 years
thereafter.  According to HCFA officials, HCFA regional offices also
review these programs, on an exception basis, when problems have been
reported. 


      STATE COMPLIANCE WITH
      PROGRAM REQUIREMENTS
---------------------------------------------------------- Letter :5.3

According to all 177 certification or recertification reports on
annual inspections of ICFs/MR and facilities providing services under
the Medicaid waiver program that we reviewed, the facilities had been
inspected within prescribed time limits.  However, we found that
necessary follow-up procedures to help ensure that deficiencies
identified during the inspections were corrected were not always
performed.  Of 177 facilities in our sample, state inspectors found
deficiencies at 167.  For these 167, we found that, in 15 instances,
required state follow-up procedures were not performed.  State
officials informed us that they would follow up on these cases and
that appropriate action would be taken.  Appendix III lists the most
common deficiencies disclosed by state inspectors for the facilities
in our sample. 


   FRAUD INVESTIGATION
------------------------------------------------------------ Letter :6

Federal officials with responsibility for investigating and tracking
fraud in the Medicaid program include HHS-OIG investigators and the
HHS-OIG Sanctions Group.  A total of 42 states have Medicaid Fraud
Control Units, which are the primary offices for investigating fraud. 
Responsibility for fraud investigation rests with the state Medicaid
agency in the remaining 8 states.  State audit offices can also
investigate fraud. 


      OFFICE OF INSPECTOR GENERAL
---------------------------------------------------------- Letter :6.1

HHS' Inspector General has broad authority to investigate fraud and
abuse in Medicare, Medicaid, and other HHS programs.  In the Medicaid
area, HHS-OIG audits have focused on reviewing state agencies'
implementation of and compliance with state Medicaid plan provisions. 
Since ICFs/MR and facilities providing services under a Medicaid
waiver are relatively small, the HHS-OIG has not routinely performed
extensive reviews of these facilities.  However, the HHS-OIG told us
that, at a state's request, it will assist in investigating suspected
large-scale or multistate fraud involving these facilities. 

Also, the HHS-OIG's Sanctions Group can exclude from Medicaid
programs those health care providers, individuals, and businesses
committing fraud or other program abuses.  The Sanctions Group does
not initiate exclusion actions or perform its own investigations of
fraud or abuse.  Rather, its determinations are based on evidence
provided by state Medicaid Fraud Control Units; federal, state, and
local prosecutors; state licensing boards; and others.  Under the
exclusion provisions, a sanctioned provider (individual or entity) is
prohibited from receiving Medicaid funds.  The Sanctions Group
maintains a nationwide list of providers that have been excluded from
receiving Medicaid funds (and funds from other programs under its
jurisdiction) and provides (1) a new list to state human services
departments, state licensing boards, insurance carriers, and other
interested parties twice a year and (2) updates to the listing
monthly. 


      STATE MEDICAID FRAUD CONTROL
      UNITS
---------------------------------------------------------- Letter :6.2

Colorado, Michigan, and New York are among 42 states\2 that have
certified Medicaid Fraud Control Units (MFCU).  The fraud units are
staffed by the states, but about 75 percent of the funding for the
units is federal.  These units investigate and prosecute allegations
of wrongdoing in Medicaid funded programs, including those for people
with MR/DD.  Investigations are normally performed only when a
complaint is filed or allegations are referred to the fraud unit for
investigation.  A primary source of referrals to MFCUs are program
integrity units within the single state Medicaid agencies. 

Our survey of the 41 state Medicaid Fraud Control Units existing at
the time of our review did not identify any fraudulent schemes
occurring on a national scale related to facilities for people with
MR/DD.  However, the units reported several types of fraudulent or
abusive activity common to many states, including

  use of related party transactions to overstate costs,

  inflation of cost reports,

  billing for services not rendered, and

  theft of patient funds. 

Table 2 summarizes the cases fraud units investigated from October
1990 through September 1993 at ICFs/MR or other group homes for
people with MR/DD in the three states we visited. 



                           Table 2
           
            Fraud Cases Identified in Three States
           From October 1990 Through September 1993

               Type of
               case(s)        Referral
State          identified\a   source         Action/result
-------------  -------------  -------------  ---------------
Colorado       The Colorado   Information    Referred to
               MFCU reported  developed in   HHS.
               one case       another
               involving      investigation
               inflated       .
               billings for
               medical
               supplies.

Michigan       The Michigan   Family         Two cases
               MFCU reported  referral and   resulted in
               that it had    information    convictions,
               investigated   developed in   one case was
               and            another        awaiting trial.
               prosecuted     investigation
               two cases of   .
               patient abuse
               and one case
               of
               embezzlement.

               The MFCU
               received
               approximately
               60 complaints
               during this
               time period.
               Most were
               closed
               shortly after
               receipt and
               referred to
               the
               appropriate
               state agency
               or law
               enforcement
               officials.

New York       The New York   Informants;    Several
               MFCU reported  referral from  convictions,
               that it had    HHS            several trials
               investigated   surveillance   pending, one
               and            unit.          civil
               prosecuted                    settlement.
               several cases
               involving
               rigging of
               bids on
               construction
               of ICF/MR
               facilities;
               related party
               transactions;
               inflated/
               bogus
               billings; and
               theft of
               patient
               funds.
------------------------------------------------------------
\a Type of case identified does not include instances reported by
MFCUs where the charge was dismissed or the plaintiff was found not
guilty.  Pending cases were included. 

Generally, MFCUs report all cases in which they have obtained an
indictment and conviction to the National Association of Attorneys
General, Medicaid Fraud Counsel.  The association acts as a
clearinghouse on Medicaid fraud and publishes the results of fraud
unit investigations in a newsletter.  The newsletter is distributed
to all fraud units and other interested parties 10 times a year and
provides a forum for the fraud units to discuss common areas of
concern.  Appendix IV lists the 42 MFCUs. 


--------------------
\2 See footnote 1. 


      STATE AUDIT AGENCIES
---------------------------------------------------------- Letter :6.3

In Colorado, Michigan, and New York, state auditor offices are
authorized to perform financial and program audits of facilities and
services for people with MR/DD.  However, state audit officials told
us that these audits are generally done only when complaints or
referrals are received.  According to one official at the Michigan
Auditor General's Office, some of the issues they have reviewed
include improper handling of patient's money, excessive
transportation costs, lease-purchase decisions made by Community
Mental Health Boards, and how administrative costs compare with
contract requirements. 


   BEST PRACTICES
------------------------------------------------------------ Letter :7

At our request, state officials in the three states we visited
identified several program features as "best practices" that they
believed helped to prevent fraud and ensure quality care.  These
practices included cost containment features such as fixed
reimbursement rates, program oversight by case managers and state
oversight agencies, and limitations on the number of facilities that
a provider can operate.  A description of best practices identified
by officials in these states is provided in
appendix V. 


---------------------------------------------------------- Letter :7.1

As agreed with your office, unless you publicly announce its contents
earlier, we will not distribute this report for 30 days.  At that
time, we will send copies to the Secretary of Health and Human
Services; state program officials in Colorado, Michigan, and New
York; the Director of the Office of Management and Budget; the
Chairmen and Ranking Minority Members of the cognizant appropriations
and oversight committees; and other interested parties. 

If you have any questions concerning this report, please call me at
(202) 512-3406.  Appendix VI lists major contributors to this report. 

Sincerely yours,

George H.  Stalcup
Associate Director
Financial Integrity Issues


FINANCIAL REPORTING AND AUDIT
REQUIREMENTS FOR ICFS/MR AND
FACILITIES PROVIDING WAIVER
SERVICES
=========================================================== Appendix I

Oversight
requirement     Federal         Colorado        Michigan        New York
--------------  --------------  --------------  --------------  ----------------
Reporting       HCFA approves   An annual cost  Each agency     Each provider of
                state plans.    report must be  that contracts  services must
                States develop  prepared and    to provide      submit a
                their own       submitted for   services to     consolidated
                financial       each            the state must  financial report
                reporting       residential     submit and      annually.
                requirements    facility.       have approved   Reports are used
                for ICFs/MR     These reports   a budgeted      for special
                within the      are used to     annual cost     studies, the
                broad federal   monitor         report. These   appeals process,
                requirements.   revenues and    reports are     if applicable,
                                expenses,       used as the     and rate setting
                There are no    negotiate rate  basis for a     development.
                specific        changes, and    final cost
                financial       support         settlement at
                reporting       requests for    the end of the
                requirements    state           year.
                for waiver      appropriations
                facilities.     .
                Federal
                regulations
                apply to
                aggregated
                data reported
                by the states
                to HCFA.

Audit           The HHS         There is no     Providers that  A small internal
                Inspector       state agency    contract        audit group,
                General has     internal audit  directly with   consisting of 5
                the authority   group, but      the state are   auditors,
                to conduct      most providers  audited by an   performs limited
                fiscal audits,  are required    internal audit  scope financial
                but this is     to have an      group. Others   audits on an
                rarely done.    independent     are required    exception basis.
                                financial       to have an      Also, all
                No specific     audit. The      independent     nonprofit
                requirements    controller for  financial       organizations
                are placed on   the MR/DD       audit.          with annual
                the states for  agency in                       revenues and
                financial       Colorado told                   financial
                audits of       us that                         assistance in
                ICFs/MR and     instead of                      excess of
                facilities      having an                       $75,000 are
                providing       internal audit                  subject to the
                services under  group, the                      general state
                a Medicaid      agency relies                   requirement for
                waiver.         on its quality                  individual
                                assurance                       financial audit.
                In general,     group to
                because MR/DD   identify key
                facilities are  issues.
                considered
                service
                vendors rather
                than
                subrecipients
                of federal
                funds,
                Medicaid funds
                paid by states
                to these
                providers are
                not subject to
                the Single
                Audit Act
                requirements.

--------------------------------------------------------------------------------

QUALITY ASSURANCE REQUIREMENTS FOR
ICFS/MR AND FACILITIES PROVIDING
WAIVER SERVICES
========================================================== Appendix II

                Federal         Colorado        Michigan        New York
--------------  --------------  --------------  --------------  ----------------
ICFs/MR         Medicaid        Colorado did    The state plan  The state plan
                statutes        not have        has designated  has designated
                require         private or      the Department  the Office of
                facilities to   nonprofit       of Mental       Mental
                meet eight      ICFs/MR of 15   Health as       Retardation and
                conditions of   beds or less.   responsible     Developmental
                participation.                  for             Disabilities as
                The focus is                    determining,    responsible for
                heavily                         through         determining,
                directed                        inspection,     through
                toward                          whether         inspection,
                ensuring that                   facilities      whether
                active                          meet federal    facilities meet
                treatment to                    requirements.   federal
                clients is                                      requirements.
                provided.                       Michigan
                States must                     Protection and  The Commission
                certify                         Advocacy        on Quality of
                annually that                   assists the     Care for the
                each facility                   developmentall  Mentally
                is complying                    y disabled and  Disabled
                with the                        mentally ill    investigates
                conditions of                   in gaining      unnatural or
                participation.                  access to       unusual deaths,
                Facilities not                  services and    provides
                complying are                   protecting      advocacy
                subject to                      their civil     services,
                decertificatio                  rights.         responds to
                n but can                                       complaints, and
                remain open if                                  conducts program
                they submit                                     and cost-
                and then carry                                  effectiveness
                out an                                          studies to both
                acceptable                                      improve service
                plan of                                         delivery and
                correction for                                  ensure that the
                deficiencies                                    quality of care
                noted.                                          provided is of a
                                                                uniform, high
                Federal law                                     quality.
                also requires
                states to
                establish
                advocacy
                groups to
                monitor
                programs for
                people with
                MR/DD.

Waiver          States are to   The state plan  The state uses  The state
services        provide         has designated  the same        requires,
                assurances      survey          quality         through annual
                that necessary  agencies, the   assurance       certification,
                safeguards      Department of   standards that  that facilities
                have been       Health, and     it uses for     where waiver
                taken to        the Division    ICFs/MR.        clients live
                protect the     for                             meet physical
                health and      Developmental   Michigan        plant and
                welfare of      Disabilities    Protection and  protective
                people with     as responsible  Advocacy        oversight
                MR/DD. Program  for             assists the     requirements.
                regulations do  determining,    developmentall  There is no
                not define      through         y disabled and  program review
                safeguards or   inspection,     mentally ill    included in the
                how they are    whether         in gaining      certification
                to be           facilities      access to       process.
                developed;      meet state      services and    Individual case
                however,        requirements.   protecting      managers are
                states must                     their civil     responsible for
                include         The Legal       rights.         overseeing the
                standards for   Center, an                      program
                all types of    advocacy        Also, the       services, such
                providers that  organization,   Association of  as assessing the
                furnish         provides legal  Retarded        recipient's
                services under  and other       Citizens has a  level of care
                the waiver, as  services to     residential     and ensuring
                well as         persons with    monitoring      care is
                standards for   disabilities.   program funded  provided.
                the facilities                  by the state.
                where Medicaid  Each of the     Association     The Commission
                waiver program  Community       representative  on Quality of
                participants    Centered        s visit         Care for the
                reside. In      Boards is       community       Mentally
                addition,       required to     residences for  Disabled
                states are      have a Human    the purpose of  investigates
                required to     Rights          observing the   unnatural or
                ensure that     Committee,      conditions of   unusual deaths,
                these           which has       the homes and   provides
                standards, as   oversight       their           advocacy
                well as any     responsibiliti  residents.      services,
                state           es for MR/DD                    responds to
                licensure or    programs and                    complaints, and
                certification   individuals.                    conducts program
                requirements,   These                           and cost-
                are met and     committees are                  effectiveness
                are to report   composed of                     studies to both
                annually on     persons with                    improve service
                compliance.     developmental                   delivery and to
                HCFA reviews    disabilities,                   ensure that the
                and approves    family                          quality of care
                the states'     members, and                    provided is of a
                standards as    program                         uniform, high
                part of the     participants.                   quality.
                waiver          Committees
                application     oversee
                process.        program
                                participants
                Federal law     on
                also requires   psychotropic
                states to       medications
                establish       and
                advocacy        restrictive
                groups to       behavioral
                monitor         mechanisms,
                programs for    and review
                people with     allegations of
                MR/DD.          abuse and
                                neglect.
--------------------------------------------------------------------------------

COMMON DEFICIENCIES NOTED BY STATE
INSPECTORS AT FACILITIES IN OUR
SAMPLE
========================================================= Appendix III

COLORADO


      WAIVER FACILITIES
      (59 FACILITIES)
----------------------------------------------------- Appendix III:0.1

  Uncleanliness and poor furnishings and equipment (37 facilities)

  Misuse of psychotropic medications, such as missing authorizations
     (21 facilities)

  Operators not fully complying with fire safety standards (21
     facilities)

  Buildings and structures poorly maintained (19 facilities)

MICHIGAN


      ICFS/MR (27 FACILITIES)
----------------------------------------------------- Appendix III:0.2

  Programs conducted for some residents without the informed consent
     of the client, parents, or legal guardian (7 facilities)

  Evacuation drills not held as frequently as required, and emergency
     and disaster plans not evaluated for effectiveness (6
     facilities)


      WAIVER FACILITIES
      (32 FACILITIES)
----------------------------------------------------- Appendix III:0.3

  Complete individual program plans not in place for all clients (21
     facilities)

  Adequate physician services not in place (7 facilities)

  Adequate professional program services not in place to ensure that
     client's individual program plans were implemented (7
     facilities)

NEW YORK


      ICFS/MR (49 FACILITIES)
----------------------------------------------------- Appendix III:0.4

  Some clients not receiving continuous active treatment, as required
     (18 facilities)

  Programs conducted for some residents without the informed consent
     of the client, parents, or legal guardian (17 facilities)

  Clients' active treatment not integrated, coordinated and monitored
     by a qualified mental retardation professional (16 facilities)


      WAIVER FACILITIES
      (10 FACILITIES)
----------------------------------------------------- Appendix III:0.5

  No quality of care deficiencies noted--all inspections we examined
     were for initial certifications performed prior to residents'
     occupancy


LIST OF MEDICAID FRAUD CONTROL
UNITS
========================================================== Appendix IV



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)


BEST PRACTICES IDENTIFIED BY STATE
OFFICIALS TO PREVENT FRAUD AND
ENSURE QUALITY CARE
=========================================================== Appendix V

COLORADO


      UNIFORM REPORTING AND
      FINANCIAL AUDIT REQUIREMENTS
------------------------------------------------------- Appendix V:0.1

A central agency, the Division for Developmental Disabilities,
established uniform reporting and financial audit requirements for
all Community Centered Boards and other service providers.  By having
standard financial reporting and accounting procedures and
definitions, the state is able to compare and evaluate the cost of
services provided across the state. 


      FIXED REIMBURSEMENT RATES
------------------------------------------------------- Appendix V:0.2

Individuals and entities providing services to people with MR/DD must
do so at a predetermined reimbursement rate, reducing the opportunity
to inflate billings. 


      HUMAN RIGHTS COMMITTEES
------------------------------------------------------- Appendix V:0.3

Each of the 20 regional-based Community Centered Boards providing
services to people with MR/DD must have a human rights committee
composed of individuals who are not employed by or involved with the
boards.  These committees oversee program participants on
psychotropic medications and restrictive behavioral mechanisms, and
review allegations of abuse and neglect. 


      CASE MANAGEMENT OVERSIGHT
------------------------------------------------------- Appendix V:0.4

Each program participant in Colorado has a case manager who works for
one of the Community Centered Boards.  These case managers are in
continual contact with participants as well as third party providers
to ensure that the participants are receiving proper care and
services. 

MICHIGAN


      PROVIDERS DO NOT OWN ICFS/MR
------------------------------------------------------- Appendix V:0.5

Officials believe the opportunity for providers to benefit from
related party transactions is reduced in Michigan because the state
leases all ICFs/MR as well as most facilities providing residential
services to people receiving services under a Medicaid waiver.  The
provider agrees with the state to provide services at the leased
site.  Since providers do not own the facilities, it is also easier
to replace providers that fail to perform satisfactorily.  Instead of
having to move the residents, the state can bring in a new provider
to furnish services at the same site. 


      PROVIDERS CAN OPERATE A
      LIMITED NUMBER OF FACILITIES
------------------------------------------------------- Appendix V:0.6

By not allowing a provider to operate more than 12 facilities, the
state limits its exposure to any one provider if a problem arises. 

NEW YORK


      REVIEW OF REAL PROPERTY
      LEASE AGREEMENTS
------------------------------------------------------- Appendix V:0.7

The state reviews all real property leases entered into by providers
of services to the MR/DD to ensure the existence of an arm's length
relationship between the parties to the lease, lessening the
opportunity for abuse through related party transactions. 


      COMMISSION ON QUALITY OF
      CARE FOR THE MENTALLY
      DISABLED
------------------------------------------------------- Appendix V:0.8

The state has an independent watchdog group called the State
Commission on the Quality of Care for the Mentally Disabled.  The
Commission's functions include investigating unnatural or unusual
deaths, providing advocacy services, responding to complaints, and
conducting program and cost effectiveness studies to both improve
service delivery and ensure that the care provided is of a uniform,
high quality. 


      NOT-FOR-PROFIT GROUPS
------------------------------------------------------- Appendix V:0.9

State officials believe that because all facilities are run by
established not-for-profit groups, such as United Cerebral Palsy,
Catholic Charities, and the Association for Retarded Citizens, there
is less chance of fraud and abuse. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix VI

ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION, WASHINGTON,
D.C. 

Gayle L.  Condon, Assistant Director
William L.  Anderson, III, Senior Audit Manager

NEW YORK REGIONAL OFFICE

David C.  Dorpfeld, Evaluator-in-charge
Bonnie L.  Derby, Evaluator
Kathleen A.  Grecco, Evaluator

DENVER REGIONAL OFFICE

Patricia Cheeseboro, Regional Assignment Manager
Alan J.  Dominicci, Evaluator

OFFICE OF GENERAL COUNSEL

Thomas H.  Armstrong, Assistant General Counsel
Barbara Timmerman, Senior Attorney

