TITLE: B-309734, Medicaid Demonstration Projects in Florida and Vermont Approved Under Section 1115 of the Social Security Act, July 24, 2007
BNUMBER: B-309734
DATE: July 24, 2007
**************************************************************************************************************************************
B-309734, Medicaid Demonstration Projects in Florida and Vermont Approved Under Section 1115 of the Social Security Act, July 24, 2007

   B-309734

   July 24, 2007

   The Honorable Michael O. Leavitt

   Secretary of Health and Human Services

   Subject: Medicaid Demonstration Projects in Florida and Vermont Approved
   Under Section 1115 of the Social Security Act

   Dear Mr. Secretary:

   In response to a congressional request, we are evaluating Medicaid
   demonstration projects in Florida and Vermont approved by the Department
   of Health and Human Services (HHS) under section 1115 of the Social
   Security Act (the act).[1] During the course of our work, we identified
   several issues that raise concerns about the consistency of these
   demonstration projects with federal law.[2] With respect to Florida, our
   concerns center on HHS's decision to waive requirements to provide covered
   benefits and limit cost sharing without addressing statutory limitations
   on its authority to do so. In the case of Vermont, HHS authorized the
   state to operate its own Medicaid managed care organization and, through
   this arrangement, to apply federal Medicaid matching funds to programs
   previously funded by the state. Given our concerns with these
   demonstration projects, discussed in detail below, we are bringing them to
   your attention. We recommend that you reexamine these projects in light of
   our concerns and, where appropriate, either modify the terms of these
   projects or seek statutory authorization for them to continue in their
   current form.

   BACKGROUND

   Through the Medicaid program established by title XIX of the act, the
   federal government shares with states the expense of furnishing medical
   services to certain low-income individuals. States operate their Medicaid
   programs under HHS approved plans and must meet certain statutory
   requirements for covered services, eligibility, and beneficiary cost
   sharing, among other things.[3] Section 1115 of the act, however,
   authorizes HHS to waive compliance with certain federal statutory
   requirements, as well as to authorize costs that would not otherwise be
   included as Medicaid expenditures, "[i]n the case of any experimental,
   pilot, or demonstration project which, in the judgment of the Secretary,
   is likely to assist in promoting the objectives of [the Medicaid
   program]." [4] By its own terms, section 1115 provides HHS with broad
   discretion to approve state initiatives that depart from federal statutory
   requirements, subject to a determination that they are experimental in
   nature and likely to assist in promoting program objectives. Describing
   these limitations, one court emphasized that section 1115 was not enacted
   "to enable states to save money or to evade federal requirements, but to
   `test out new ideas and ways of dealing with the problems'" programs were
   designed to address.[5]

   In October 2005, HHS approved Florida's 5-year demonstration project,
   Florida Medicaid Reform, to allow the state to give Medicaid beneficiaries
   more options with respect to their health care coverage.[6] Florida
   requires certain Medicaid beneficiaries to participate in the
   demonstration and enroll in designated managed care plans offered by
   organizations that compete for enrollees by designing customized benefit
   packages that may differ from the set of benefits covered under Florida's
   state plan. Alternatively, Medicaid beneficiaries required to participate
   in the demonstration may "opt out of Medicaid" and enroll instead in
   employer-sponsored plans or, if self-employed, private health plans.[7]
   These beneficiaries receive only the benefit of a premium paid by the
   state towards the cost of the employer-sponsored or private health
   plans.[8]

   In September 2005, HHS approved Vermont's 5-year demonstration project,
   Global Commitment to Health, under which the Office of Vermont Health
   Access  (OVHA)--an office within Vermont's Medicaid agency, the Agency of
   Human Services (AHS)--operates the state's sole managed care organization
   to provide coverage to the vast majority of Vermont's Medicaid population,
   subject to a fixed dollar limit on federal Medicaid funds.[9] To implement
   the demonstration, AHS entered into an intergovernmental agreement with
   OVHA under which AHS makes monthly capitation payments to OVHA.[10] HHS
   approved the intergovernmental agreement as a comprehensive risk contract
   between the state and a managed care organization and found that it
   complied with federal regulations governing Medicaid managed care.[11]
   Accordingly, AHS receives federal Medicaid matching funds for the
   capitation payments it makes to OVHA.

   Under the demonstration, savings from the AHS payments to OVHA are used
   for programs previously funded by the state.[12] For purposes of the
   demonstration, Vermont enacted legislation establishing the Global
   Commitment Fund (Fund) within the state treasury, which consists of
   capitation payments made by AHS to OVHA.[13] OVHA enters into agreements,
   with other state entities and with providers, for the delivery of Medicaid
   services, and payments are made from the Fund for these services. In
   addition, payments authorized by OVHA are made from the Fund to state
   agencies and departments that have entered into agreements with OVHA for
   "allowable managed care organization investments."[14] These state
   agencies and departments provide services previously funded by the state
   that do not exclusively benefit those eligible for Medicaid.

   DISCUSSION

     Florida Medicaid Reform--Waiver of Requirement to Provide Mandatory
     Benefits

   For Florida Medicaid Reform, HHS waived a statutory requirement that
   states cover specific hospital and medical benefits for groups of
   individuals required to be covered under its state plan (referred to as
   "mandatory populations"). Specifically, HHS waived section 1902(a)(10)(A)
   of the act, which requires states to cover specific benefits, including
   inpatient hospital services, outpatient hospital services, and laboratory
   and X-ray services, for these individuals.[15] HHS approved this waiver to
   allow Florida to limit benefits for newly eligible beneficiaries covered
   by the demonstration to emergency medical services and nursing home level
   of care for up to 30 days pending their selection of managed care plans
   (or automatic enrollment in managed care plans by the state). According to
   CMS, this waiver was designed to ensure that all non-emergency care would
   be delivered to Medicaid beneficiaries participating in the demonstration
   through a single delivery system that could coordinate and manage care.
   The waiver also allows Florida not to provide these required benefits to
   those who enroll in employer-sponsored or private health plans. [16] The
   benefit packages for these individuals are defined exclusively by the
   employer-sponsored or private health plans and may be more limited than
   the package of benefits covered under the state plan.[17] As discussed
   below, both aspects of the waiver raise concerns given statutory
   limitations on HHS's authority.

   While HHS has broad authority under section 1115 of the act to waive
   requirements of section 1902, this authority is not unlimited. Section
   1902(l)(4)(A) of the act expressly limits the agency's authority to allow
   states to curtail benefits through a section 1115 waiver, stating that HHS
   must require states providing services under such a waiver to cover the
   same benefits for certain pregnant women and children as would be required
   under a state plan.[18] The pregnant women and children covered by section
   1902(l)(4)(A) are: (i) pregnant women with family income at or below 133
   percent of the federal poverty level (FPL), (ii) children under age 6 with
   family income at or below 133 percent of the FPL, and (iii) children aged
   6 to 19 with family income at or below 100 percent of the FPL.[19]
   Therefore, with respect to these pregnant women and children, HHS may not
   authorize a state to forego its obligation to cover the statutorily
   defined set of benefits described above through a waiver under section
   1115.

   During the initial phase of the demonstration, "poverty-related
   children"--that is, children whose family incomes fall within certain
   limits--were required to participate in the demonstration and either be
   enrolled in managed care plans or employer-sponsored or private health
   plans.[20] There is significant overlap between these "poverty-related"
   children and the groups of children identified in section 1902(l)(4)(A).
   In addition, certain pregnant women included in section 1902(l)(4)(A) are
   expected to participate in the demonstration by its fifth year.
   Notwithstanding the requirements of section 1902(l)(4)(A), the terms and
   conditions governing the demonstration permit Florida to cover only
   emergency and nursing home level of care services for beneficiaries for up
   to 30 days pending enrollment in managed care plans and to not ensure the
   full range of benefits required under the state plan for those who enroll
   in employer-sponsored or private health plans.

   In response to our inquiries, CMS confirmed that HHS had not waived
   section 1902(l)(4)(A) and stated that Florida was not actually limiting
   coverage for children and pregnant women for up to 30 days pending their
   enrollment in managed care plans.[21] However, the terms and conditions
   governing the demonstration and the decision memorandum approving the
   demonstration state that beneficiaries will be eligible for only emergency
   services and nursing home level of care during this period.[22] Since HHS
   may not waive section 1902(a)(10)(A) for the pregnant women and children
   identified in section 1902(l)(4)(A), it should take steps to ensure that
   the state does not improperly limit services to these individuals pending
   their enrollment in managed care plans under the demonstration.

   The waiver of section 1902(a)(10)(A), and failure to maintain the
   protection required by section 1902(l)(4)(A), could have a more
   significant impact on those "opting out of Medicaid" and enrolling instead
   in employer-sponsored or private health plans since the package of
   benefits provided could be more limited than under the state plan.[23]
   With respect to this issue, CMS stated in essence that those eligible for
   Medicaid decline Medicaid eligibility by choosing the demonstration
   benefit of employer-sponsored or private health plans under Florida
   Medicaid Reform. As a result, they are entitled only to the payment of
   premiums under the authority of section 1115(a)(2) of the act, under which
   expenditures that would not otherwise qualify for Medicaid matching funds
   are regarded as matchable expenditures.[24]

   The language of section 1902(l)(4)(A) does not support CMS's explanation.
   As noted above, section 1902(a)(10)(A) requires states to provide
   identified benefits to certain groups of individuals, including certain
   pregnant women and children. Section 1902(l)(4)(A) effectively prohibits
   states from denying those benefits to the same groups of pregnant women
   and children under demonstration projects. CMS acknowledged that section
   1902(l)(4)(A) applied to Florida Medicaid Reform and did not dispute that
   individuals covered by that section were required to participate in the
   demonstration project. With respect to those enrolling in managed care
   plans, CMS stated that "even under customized benefit packages," required
   services must be provided.[25] In contrast, with respect to those choosing
   employer-sponsored or private health plans, CMS suggested that section
   1902(l)(4)(A) did not apply because those at issue were a "non-State plan
   population" due to their choice of employer-sponsored or private coverage.
   However, section 1902(l)(4)(A) does not identify such a choice as a basis
   for not ensuring that states provide benefits to the children and pregnant
   women within the scope of that section.

   Moreover, both the operation of the demonstration and information obtained
   from the state of Florida during our related evaluation suggest that the
   groups of individuals at issue are "state plan populations,"
   notwithstanding their choice of employer-sponsored or private health
   plans. Those who "opt" for employer-sponsored rather than managed care
   plans nevertheless must qualify for Medicaid under the state plan and
   almost all of those required to participate in the demonstration project
   during its initial phase were required to be covered by Florida's state
   plan, some in categories explicitly referenced in section
   1902(l)(4)(A).[26] Before individuals could "opt" for employer-sponsored
   or private health insurance and qualify for the state-paid premium under
   the demonstration project, Florida would necessarily have had to determine
   (or redetermine in the case of those already covered) that they qualified
   for Medicaid.[27] Further, HHS's determination that Florida's
   demonstration required a waiver of section 1902(a)(10)(A), which
   explicitly concerns those eligible for Medicaid under a state plan,
   signifies the agency's determination that those choosing
   employer-sponsored coverage were otherwise eligible for Medicaid under
   that section. Describing the operation of Florida Medicaid Reform, Florida
   officials confirmed this, stating

     Florida's 1115 Medicaid Reform Waiver does not change or affect Medicaid
     eligibility. An individual that opts out of Medicaid [under the
     demonstration] continues to be eligible for Medicaid. If a beneficiary
     is enrolled in an [employer-sponsored insurance] plan and later chooses
     to enroll in a [managed care] plan, then the beneficiary must wait until
     his/her open enrollment period . . . in order to request enrollment in
     the health plan. However, the beneficiary does not need to reapply to
     Medicaid. . . . If an individual were to opt out and enroll in the
     [employer-sponsored insurance] plan, but later lose Medicaid coverage
     due to excess income or assets, the beneficiary could reapply to
     Medicaid.[28]

   The state of Florida's comments about the operation of the demonstration
   project also confirm that those who choose employer-sponsored or private
   health plans under Florida Medicaid Reform differ from individuals who
   effectively become eligible for Medicaid under a section 1115
   demonstration project (referred to as "expansion populations"). The latter
   do not meet eligibility criteria for Medicaid under a state plan, but are
   treated as eligible exclusively by virtue of the demonstration
   project.[29] Under section 1115(a)(2) of the act, states may claim federal
   matching funds for the costs of services provided to these individuals
   even though they otherwise are not eligible for Medicaid. If they were to
   lose coverage due to a change in status, they, unlike participants in
   Florida Medicaid Reform, would have to establish their eligibility under
   the state plan.

     Florida Medicaid Reform--Waiver of Limits on Cost Sharing

   As part of Florida Medicaid Reform, HHS also waived statutory limits on
   the imposition of cost sharing requirements on Medicaid beneficiaries so
   that Florida could authorize coverage of employer-based or private health
   plans with cost sharing requirements in excess of those limits.[30]
   Specifically, the agency waived section 1902(a)(14) of the act, which
   incorporates section 1916 of the act by reference. With respect to
   individuals eligible for coverage under state plans, section 1916
   prohibits states from imposing cost sharing under their plans for a
   variety of services, including services to those under 18 and services to
   pregnant women, and provides that states may impose only nominal cost
   sharing under their plans for other services.[31] Those who "opt out of
   Medicaid" and enroll in employer-sponsored or private health plans under
   the Florida demonstration are required to share costs as specified by
   these plans, even if such cost sharing is higher than what the state would
   be authorized to impose under section 1916.[32]

   While section 1916(f) contemplates waivers of the cost sharing limits
   found in other parts of section 1916, it also establishes criteria for the
   imposition of other than nominal cost sharing under any waiver authority.
   It provides, for example, that cost sharing may not be imposed under any
   waiver authority unless the waiver is for a demonstration that tests a
   unique and previously untested use of co-payments and does not last longer
   than 2 years.[33] HHS did not apply the criteria of 1916(f) to the waiver
   of cost sharing limitations in the Florida Medicaid Reform demonstration.
   CMS explained that since those who enroll in employer-sponsored or private
   plans elect not to apply for benefits under the state plan, they fall
   outside the scope of section 1916 and section 1916(f) and, accordingly,
   that the waiver of section 1902(a)(14) approved as part of the Florida
   demonstration was not required.[34] As discussed above, CMS referred to
   the population at issue as being "eligible only for demonstration benefits
   authorized under Section 1115(a)(2) [of the act]," namely the premium
   payments.[35]

   Like CMS's response to our inquiry regarding the requirement to provide
   benefits to certain pregnant women and children, its comments here do not
   explain why the demonstration did not trigger section 1916 and therefore
   why the demonstration did not require a waiver of the cost sharing
   limitations contained in that section. To the extent that CMS made
   essentially the same point with respect to this issue--that is, that as a
   matter of eligibility, those enrolling in employer-sponsored or private
   health plans qualify only for benefits as defined by the terms of the
   demonstration project--the agency's comments raise similar concerns.
   Almost all of the individuals required to participate in the demonstration
   during the initial phase were also required to be covered under the state
   plan. While Florida will make premium payments on behalf of those who
   enroll in employer-sponsored or private health plans under the authority
   of section 1115(a)(2) of the act, these individuals differ from those who
   otherwise do not meet eligibility criteria under the state plan, but for
   whom the cost of services nonetheless gives rise to federal reimbursement,
   that is, expansion populations. While the limitations on cost sharing
   contained in section 1916 would not apply to such expansion
   populations,[36] CMS's comments do not adequately explain why the cost
   sharing limitations would not apply to Florida Medicaid Reform
   participants who, though enrolled in employer-sponsored or private health
   plans, remain eligible under Florida's state plan.

     Vermont's Global Commitment to Health

   To receive federal Medicaid matching funds for capitation payments made to
   a managed care organization, a state is required to enter into a contract
   with an entity determined to be a managed care organization. [37] This
   type of contract is generally referred to as a comprehensive risk contract
   and must meet specific statutory and regulatory requirements.[38] HHS
   approved the interagency agreement between AHS and OVHA as such a
   contract. HHS also approved the planned use of savings from capitation
   payments under the "contract" for programs previously funded by the state.

   HHS's approval of the Global Commitment to Health raises the question
   whether AHS and its component, OVHA, could enter into a contract as that
   term is used in the act because a contract implicitly requires an
   agreement between two parties.[39] The statutory definition of the term
   "managed care organization" is very broad[40] and does not specifically
   address whether state agencies may contract with their own components.[41]
   Statutory provisions concerning one particular state, however, suggest
   that explicit authority would be needed for a state to contract with
   another state office or agency as a Medicaid managed care organization.
   Section 4113 of the Omnibus Budget Reconciliation Act of 1987 added a new
   paragraph to section 1903(m) of the act, expressly defining the term
   "contract" for purposes of the managed care provisions to include an
   arrangement under which New Jersey would operate its own health
   maintenance organization.[42] New paragraph (6)(A) stated "in the case of
   [New Jersey], the term `contract' shall be deemed to include an
   undertaking by the State [Medicaid] agency . . . to operate a program
   meeting all requirements of this subsection."[43] New paragraph (6)(B),
   also added by section 4113, imposed a number of conditions on the
   "undertaking." Among other things, it required New Jersey to establish a
   separate entity responsible for operating the managed care program, but
   provided that a subdivision of the Medicaid agency could serve as that
   entity. [44]

   CMS acknowledged the specific provision regarding New Jersey, but stated
   that the provision was necessary primarily because New Jersey, in contrast
   to Vermont, originally declined to organize its publicly operated managed
   care organization as a distinct organizational entity (and therefore the
   arrangement could not be characterized as either a risk contract or an
   intergovernmental agreement).[45] The agency's comment is not responsive
   to the issue. As discussed above, section 1903(m)(6) defined the term
   "contract" to include an arrangement under which the New Jersey Medicaid
   agency would operate as a managed care organization and listed the
   conditions under which that definition would apply. Accordingly, the
   provision did not merely require New Jersey or other states to establish
   distinct organizational entities as a prerequisite to their serving as
   managed care organizations; rather, it expressly permitted the New Jersey
   Medicaid agency to operate such an organization and, therefore, to
   contract with itself. The absence of similar statutory language regarding
   Vermont suggests that Congress did not contemplate such an arrangement in
   that state.[46] CMS also pointed to the history of payments to state-owned
   hospitals and other facilities and stated that it has not precluded state
   Medicaid agencies from entering into contractual relationships with other
   "distinct units" of the state government.[47] While state agencies may
   enter into agreements with other state agencies, divisions, or providers
   for the purpose of providing Medicaid services or administering the
   Medicaid program, the agency's observations do not address the matter of
   authority for an agreement between an office within a state's Medicaid
   agency and that agency to qualify as a "contract" for purposes of the
   managed care provisions of the act.

   Other statutory provisions applicable to Medicaid managed care contracts
   suggest that contractual arrangements are to involve an arms-length
   agreement between two parties. Specifically, a state may not enter into or
   renew a contract with a Medicaid managed care organization unless it has
   established a range of sanctions, which may include civil money penalties
   and the appointment of temporary management, to be imposed on the
   organization in certain circumstances, such as for failing to provide
   medically necessary items or services required to be provided to
   enrollees, or for misrepresenting or falsifying information provided to
   the state.[48] In the case of Vermont, the intergovernmental agreement
   does not identify sanctions that AHS could impose on OVHA for violations
   of the terms of the agreement and we are unaware of any provision of state
   law that does so. Indeed, it is unclear how AHS would effectively impose
   sanctions on its own subdivision.

   Concerns about whether the arrangement between AHS and OVHA qualifies as a
   "contract" raise related questions about the basis under which federal
   Medicaid matching funds are available for the capitation payments made to
   OVHA and whether the arrangement should be treated like an interagency
   agreement for the provision of services under OMB Circular A-87. [49]
   Under the circular, costs of services provided by one agency to another
   within a state may include allowable direct costs plus a pro rata share of
   indirect costs.[50] Therefore, where services are provided under an
   interagency agreement, federal matching funds are available only for the
   costs incurred by the agency providing the services, or the expenditures
   made by that agency--here, OVHA--for its allowable direct and indirect
   costs of providing services. The circular does not provide for profit or
   other increments above cost--such as the savings in the AHS capitation
   payments to OVHA--and therefore does not provide a basis to treat savings
   as allowable costs for purposes of obtaining federal matching funds.[51]

   In response to our inquiries about the operation of the AHS-OVHA
   arrangement, CMS advised that it may be viewed as either a comprehensive
   risk contract or as an intra-governmental cost reimbursement arrangement,
   or "a hybrid" of the two.[52] A "hybrid" of these two types of
   arrangements does not seem possible, however, because one is
   capitation-based and the other is cost-based, and, in any case, CMS
   pointed to no authority for such a "hybrid." More importantly, the
   arrangement appears problematic viewed as either a comprehensive risk
   contract or a cost-reimbursement arrangement. Under a comprehensive risk
   contract, federal Medicaid matching funds are available for capitation
   payments made to a managed care organization on an actuarially sound basis
   for services provided to Medicaid eligible individuals.[53] Federal
   regulations require states to document the actuarial soundness of the
   rates and to provide assurance that the rates are based only on services
   covered under the state plan (or costs directly related to providing these
   services, including administrative costs) provided under the contract to
   Medicaid eligible individuals.[54] Notably, the intent of this regulatory
   limitation was to prevent states from obtaining federal Medicaid matching
   funds "for things such as State-funded services for which [matching funds]
   would not ordinarily be available, by including them in [a contract with a
   managed care organization]."[55] However, under the Global Commitment to
   Health, HHS expressly approved the use of savings from capitation payments
   made to OVHA for programs previously funded by the state. These programs
   are generally carried out by other agencies and do not exclusively benefit
   those eligible for Medicaid so that federal Medicaid matching funds would
   ordinarily not be available for them. [56]

   CMS also suggested that, since OVHA must fully expend the capitation
   payment for services for Medicaid-eligible individuals and the specified
   demonstration purposes, the arrangement between AHS and OVHA has more of
   the characteristics of a reasonable cost reimbursement payment methodology
   with the "contract" establishing the overall budget.[57] However, the
   arrangement between AHS and OVHA allows OVHA to direct funds received in
   excess of costs (that is, savings) to programs of other state agencies.
   That is to occur only if capitation payments to OVHA yield excess funds,
   and then only to the extent of the excess. By definition, such savings
   represent an increment of payment above the direct and indirect cost of
   providing services and, thus, we see no basis to characterize this
   arrangement as one for reimbursement of costs.

   CONCLUSION

   Our analysis of Florida Medicaid Reform and the Vermont Global Commitment
   to Health raises several legal concerns. With respect to Florida, our
   concerns center on HHS's decision to waive requirements to provide covered
   benefits and limit cost sharing without addressing statutory limitations
   on its authority to do so. This matter is most relevant to those enrolling
   in employer-sponsored or private health plans. In the case of Vermont, the
   agency's approval of an agreement between the Vermont Medicaid agency and
   one of its own components as a managed care contract, with federal
   matching funds provided for capitation payments, also raises legal
   concerns. Given these concerns, we believe that the Secretary should
   reexamine these demonstration projects and, as appropriate, either modify
   their terms or seek statutory authorization for them to continue in their
   present form.

   Sincerely yours,

   Gary L. Kepplinger
   General Counsel

   cc: The Honorable Henry A. Waxman      
       Chairman                           
       Committee on Oversight and         
       Government Reform                  
       House of Representatives
            
       The Honorable John D. Dingell      
       Chairman                           
       Committee on Energy and Commerce   
       House of Representatives
            
       The Honorable Frank J. Pallone,    
       Jr.                                
       Chairman                           
       Subcommittee on Health             
       Committee on Energy and Commerce   
       House of Representatives
           
       The Honorable Sherrod Brown        
       United States Senate               

   DIGEST

   B-309734

   Letter to Secretary of Health and Human Services (HHS) discusses legal
   concerns with demonstration projects in Florida and Vermont approved under
   section 1115 of the Social Security Act (42 U.S.C. sect. 1315 (2000)).
   With respect to Florida, concerns center on HHS's decision to waive
   requirements to provide covered benefits and limit cost sharing without
   addressing statutory limitations on its authority to do so. In the case of
   Vermont, legal concerns are related to HHS's decision to authorize the
   state to operate its own managed care organization and, through this
   arrangement, to apply federal Medicaid matching funds to programs
   previously funded by the state.

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

   [1] 42 U.S.C. sect. 1315 (2000).

   [2] We did not examine the extent to which arrangements in other states
   raise similar legal concerns.

   By letter of March 15, 2007, we solicited the views of the General Counsel
   of HHS on several questions about the Florida and Vermont demonstration
   projects. By letter of April 26, 2007, the Director of the Center for
   Medicaid and State Operations, Centers for Medicare & Medicaid Services
   (CMS), responded to our inquiries. Throughout this letter, we refer to
   this response as the CMS Letter.

   [3] See, e.g., Social Security Act sections 1902(a)(10)(A), 1905(a), 1916
   (codified at 42 U.S.C. sections 1396a(a)(10)(A), 1396d(a), 1396o (2000)).

   [4] 42 U.S.C. sections 1315(a)(1), (2)(A) (2000).

   [5] Beno v. Shalala, 30 F.3d 1057, 1069 (9^th Cir. 1994) (citations
   omitted).

   [6] The demonstration period is from July 1, 2006, through June 30, 2011.
   Florida Waiver Authorities, p. 1.

   [7] See Florida Medicaid Reform Section 1115 Demonstration, Special Terms
   and Conditions (Florida STCs), #36, 40, pp. 10, 13.

   [8] See Florida STCs, #68-70, pp. 19-20.

   [9] See Global Commitment to Health Section 1115 Demonstration, Special
   Terms and Conditions (GC STCs), #32, 51, pp. 16, 22. The demonstration
   period is from October 1, 2005, through September 30, 2010. Vermont Waiver
   Authorities, p. 1. For the purpose of this demonstration, state
   legislation authorized OVHA to serve as a publicly operated managed care
   organization. Vt. Stat. Ann. tit. 33 sect. 1901 (2006).

   [10] See Final Intergovernmental Agreement Between AHS and OVHA for the
   Administration and Operation of the Global Commitment to Health Waiver
   (Sept. 30, 2005). Capitation payments are payments that a state agency
   makes periodically on behalf of each recipient enrolled under a contract
   for the provision of medical services under the state plan, regardless of
   whether the particular recipient receives services during the period
   covered by the payment. 42 C.F.R. sect. 438.2 (2006).

   [11] Under a risk contract, the contractor assumes risk for the cost of
   covered services and incurs loss if the cost of furnishing the services
   exceeds the payments under the contract. 42 C.F.R. sect. 438.2 (2006). A
   comprehensive risk contract covers services identified in federal
   regulation. Id.

   [12] See GC STCs, #40, p. 17. These programs fall into four broad
   categories identified in the demonstration terms and conditions: (i)
   reducing the rate of uninsured and/or underinsured in Vermont; (ii)
   increasing the access of quality health care to uninsured, underinsured,
   and Medicaid beneficiaries; (iii) providing public health approaches to
   improve the health outcomes and the quality of life for Medicaid-eligible
   individuals in Vermont; and (iv) encouraging the formation and maintenance
   of public-private partnerships in health care.

   [13] See Vt. Stat. Ann. tit. 33 sect. 1901e (2006). The state legislature
   also established the "State Health Care Resources Fund," in the state
   treasury to finance the state share of expenditures made under this
   demonstration. See Vt. Stat. Ann. tit. 33 sect. 1901d (2006).

   [14] Vt. Stat. Ann. tit. 33 sect. 1901e (2006).

   [15] 42 U.S.C. sect. 1396a(a)(10)(A) (2000); see also Social Security Act
   sections 1905(a)(1)-(5), (17), and (21) (codified at 42 U.S.C. sections
   1396d(a)(1)-(5), (17), and (21) (2000)).

   [16] Florida Waiver Authorities, #8, pg. 2.

   [17] Under the demonstration, Florida is not required to provide benefits
   that would result in coverage equivalent to that provided under the state
   plan. Florida STCs, #70, p. 20.

   [18] 42 U.S.C. sect. 1396a(l)(4)(A) (2000). Section 1902(l)(4)(A) states,
   "In the case of any State which is providing medical assistance to its
   residents under a waiver granted under section 1115, the Secretary shall
   require the State to provide medical assistance for pregnant women and
   infants under age 1 described in subsection (a)(10)(A)(i)(IV) [of section
   1902] and for children described in subsection (a)(10)(A)(i)(VI) or
   subsection (a)(10)(A)(i)(VII) [of section 1902] in the same manner as the
   State would be required to provide such assistance for such individuals if
   the State had in effect a plan approved under this title."

   [19] Id.; see also Social Security Act sections 1902(l)(1), (2) (codified
   at 42 U.S.C. sections 1396a(l)(1), (2) (2000)). The statutory provisions
   contained in section 1902(l)(4)(A) refer to individuals described in
   sections 1902(l)(1) and (2). Subsection (l)(1) refers to pregnant women
   and children of varying ages and subsection (l)(2) provides corresponding
   family income levels. The scope of section 1902(l)(4)(A) is thus
   determined by reading the referenced provisions of section 1902(a)(10)(A)
   and sections 1902(l)(1) and (2) together.

   [20] "Poverty-related children" are defined as (i) children up to age 1
   with family income up to 200 percent of the FPL, (ii) children up to age 6
   with family income up to 133 percent of the FPL, and (iii) children up to
   age 21 with family income up to 100 percent of the FPL. Florida STCs, #30,
   p. 9.

   [21] CMS Letter, pp. 2-3. According to the terms and conditions of the
   demonstration, once enrolled in managed care plans, children and pregnant
   women protected by section 1902(l)(4)(A) will receive required benefits.
   Managed care plans must cover all categories of mandatory services,
   including medically necessary services for pregnant women and early
   periodic screening, diagnosis, and treatment services for children under
   21, as well as needed optional services covered under Florida's state plan
   as indicated by historical data. In addition, while the amount, duration,
   and scope of covered services may vary, plans may not have limits more
   restrictive than those in the state plan for children under the age of 21
   and pregnant women. See Florida STCs, #49, p. 15.

   [22] See Florida STCs, #36, p. 11. In addition, Florida law appears to
   provide that Medicaid recipients covered by the demonstration are not
   eligible for any services pending their enrollment in managed care plans
   since it provides that they are not eligible for mandatory or optional
   services. See Fla. Stat. Ann. sect. 409.91211 (West 2007).

   [23] CMS suggested that very few individuals had exercised this option.
   CMS Letter, p. 2. We understand that as of March 31, 2007, four
   individuals were enrolled in employer-sponsored or private health plans.

   [24] Responding to our inquiries about HHS's apparent failure to ensure
   that benefits would be provided to certain children and pregnant women,
   CMS said that section 1902(l)(4)(A) would not extend to individuals who
   have chosen not to apply under the state plan, and "instead have applied
   only for eligibility under the demonstration." CMS Letter, p. 2. In
   addition, in connection with the waiver of cost sharing limitations
   discussed below, CMS described those "opting" for employer-sponsored or
   private health plans as a "non-State plan population" and explained that
   they are "eligible only for demonstration benefits authorized under
   Section 1115(a)(2) [of the act]." Id. at 3. Demonstration documents
   describe these benefits as "employee costs of authorized
   employer-sponsored individual or family insurance coverage for individuals
   who would be eligible under the State plan but have elected not to apply
   under the State plan." Florida Expenditure Authority #1, p. 3.

   [25] CMS Letter, p. 2.

   [26] See Florida STCs, #30, p. 9 (describing these individuals as
   "mandatory Medicaid eligibles," with limited exceptions).

   [27] Id. at #36, pp. 10-11 (stating that at the time of their eligibility
   determination, new enrollees will be informed of their option to select a
   managed care plan or "opt out of Medicaid," and that at the time of their
   eligibility redetermination or their open enrollment period, current
   enrollees will be required to enroll in a managed care plan, but may "opt
   out of Medicaid" at any time). In addition, describing the automatic
   enrollment criteria, the terms and conditions state that each enrollee
   will be given 30 days to select a managed care plan after being determined
   eligible for Medicaid. Id.  at #38, p. 12.

   [28] Letter from Thomas W. Arnold, Deputy Secretary for Medicaid, Florida
   Agency for Health Care Administration, to Marjorie Kanof, Health Care
   Managing Director, GAO, May 23, 2007.

   [29] See Spry v. Thompson, 487  F.3d 1272 (9^th Cir. 2007) (discussing the
   distinction between those eligible for Medicaid under a state plan and
   expansion populations, and overturning a district court holding that
   populations eligible for Medicaid only under the terms of a section 1115
   demonstration project must be deemed to be eligible under a state plan and
   therefore subject to section 1916 of the act).

   [30] Florida Waiver Authorities, #4, p. 1. The Deficit Reduction Act of
   2005 (DRA) provided states with additional flexibility to impose cost
   sharing requirements on certain individuals in previously exempt
   populations and to impose more than nominal cost sharing on certain
   services under a state plan amendment. Pub. L. No. 109-171, sections
   6041-6043, 120 Stat. 4, 81-88 (2006) (to be codified at 42 U.S.C. sect.
   1396o-1). HHS's waiver of limitations on cost sharing for Florida Medicaid
   Reform did not involve the additional flexibility under the DRA.

   [31] 42 U.S.C. sections 1396o(a)(2), (3) and (b)(2), (3) (2000).

   [32] Under the demonstration, Florida is not required to provide any cost
   sharing assistance or to account for differences between the
   employer-sponsored or private health plans and Medicaid. Florida STCs,
   #83, p. 23.

   [33] Social Security Act sections 1916(f)(1), (2) (codified at 42 U.S.C.
   sections 1396o(f)(1), (2) (2000)).

   [34] CMS Letter, p. 4.

   [35] Id.  at 3.

   [36] See Spry at 1277.

   [37] Social Security Act sect. 1903(m)(2)(A)(i), (iii) (codified at 42
   U.S.C. sect. 1396b(m)(2)(A)(i), (iii) (2000)).

   [38] See id. at 1903(m)(2)(A); 42 C.F.R. sections 438.1, 438.2, and 438.6
   (2006).

   [39] See, e.g., Taller & Cooper v. Illuminating Electric Co., 172 F.2d 625
   (7^th Cir. 1949); see also Restatement (Second) of Contracts sect. 9
   (stating that a contract requires at least two parties as the law does not
   provide remedies for a breach of promise to oneself).

   [40] See Social Security Act sect. 1903(m)(1)(A) (codified at 42 U.S.C.
   sect. 1396b(m)(1)(A) (2000)). The definition includes "a health
   maintenance organization . . . , or any other public or private
   organization" meeting specified requirements.

   [41] HHS regulations define the term "grantee" as the entire state and,
   therefore, suggest that state agencies cannot enter into contracts with
   their components. See 45 C.F.R. sect. 92.3 (2006) (defining the term
   "grantee" to mean "the government to which a grant is awarded and which is
   accountable for the use of the funds provided" and noting that "the
   grantee is the entire legal entity even if only a particular component of
   the entity is designated in the grant award document.").

   [42] See Omnibus Budget Reconciliation Act of 1987 (OBRA), Pub. L. No.
   100-203, sect. 4113, 101 Stat. 1330, 1330-150 (1987) (adding new section
   1903(m)(6) to the act, codified at 42 U.S.C. sect.1396b(m)(6) (2000)). In
   1987, section 1903(m) of the act required states to enter into contracts
   with health maintenance organizations in order for expenditures made for
   their services to qualify for Medicaid matching funds. Although section
   1903(m) has been amended since that time, the requirement that a state and
   an organization enter into a contract has remained.

   [43] Id.

   [44] Id.

   [45] CMS Letter, p. 5. The legislative history of section 4113 indicates
   that action was taken with the intent to address "legal entity and
   contract problems" of the New Jersey arrangement. See 133 Cong. Rec.
   S29385 (daily ed. Oct. 27, 1987) (statement of Sen. Bradley).

   [46] CMS officials told us that the statutory provision regarding New
   Jersey demonstrates Congress's intention that such models of service
   delivery and financing should be permitted where appropriate. By its own
   terms, however, the provision does not demonstrate congressional intent to
   authorize all states to employ such a model of service delivery, but only
   the intent to provide such authority to New Jersey. See Collingsgru v.
   Palmyra Board of Education, 161 F.3d 225, 232 (3d Cir. 1998) (explaining
   that the explicit mention of one thing in a statute implies that Congress
   intended to exclude similar things that were not specifically mentioned).

   [47] CMS Letter, p. 5. CMS did not elaborate or explain what constitutes a
   "distinct unit" of state government.

   [48] Social Security Act sect. 1932(e)(1) (codified at 42 U.S.C. sect.
   1396u-2(e)(1) (2000)).

   [49] As a general matter, HHS regulations limit the use of grant funds to
   "allowable costs," which are determined in accordance with OMB Circular
   A-87. 45 C.F.R. sect. 92.22 (2006).

   [50] OMB Cir. No. A-87, Cost Principles for State, Local, and Indian
   Tribal Governments, Attachment A, sect. G, Interagency Services.

   [51] OMB Cir. No. A-87 at para. 5.

   [52] CMS Letter, pp. 7-8.

   [53] Social Security Act, sect. 1903(m)(2)(A)(iii) (codified at 42 U.S.C.
   sect. 1396b(m)(2)(A)(iii) (2000)).

   [54] 42 C.F.R. sect. 438.6(c)(4)(i), (ii)(A), (B) (2006). The regulations
   also authorize managed care contracts to cover services for enrollees in
   addition to those services covered under the state plan, though the cost
   of such services may not be included when determining payment rates. Id.
   at 438.6(e). Explaining why such services may not be included, CMS stated
   that entities would "typically use `savings,' (a portion of the risk
   payment not needed to cover state plan services) to cover [additional
   services]." Final Rule, Medicaid Program; Medicaid Managed Care: New
   Provisions, 67 Fed. Reg. 40,989, 41,005 (June 14, 2002).

   [55] Id.  at 41,000-41,001. Prior to the issuance of these regulations,
   CMS (then the Health Care Financing Administration) adopted a policy that
   HHS would not approve any state waiver application that contained a
   requirement for managed care organizations to use savings under the
   capitation rate for those not eligible for Medicaid. See Letter from Sally
   K. Richardson, Director CMSO, to state Medicaid Directors (June 24, 1998).
   As far as we know, CMS has not revoked this policy, and the Medicaid
   managed care regulations are consistent with it.

   [56] According to state officials, in State Fiscal Year 2006, a total of
   $43 million was spent on "managed care organization investments" in a
   number of state agencies. Programs funded included those related to health
   profession education, health research and statistics, and public health
   laboratory services. We understand that Vermont anticipates approximately
   $300 million in "savings," or 7 percent of total capitation payments, over
   the life of the demonstration project.

   [57] CMS Letter, p. 6.