Medicaid: HCFA Reversed Its Position and Approved Additional
State Financing Schemes (30-OCT-01, GAO-02-147).
States have been seeking ways to finance the $196 billion
Medicaid program, a jointly funded federal-state program
providing health care services to low-income, elderly, and
disabled people. Some states have taken advantage of the
flexibility that Congress built into the Medicaid program by
devising financing schemes that inappropriately boost the federal
share of program expenditures. These schemes were adding billions
of dollars a year to federal Medicaid costs without the states
paying their statutorily specified share of program costs and
with some of the federal funds being spent for non-Medicaid
purposes. After hearing about these financing schemes, Congress
acted by passing the Medicare, Medicaid, and SCHIP Benefits
Improvement and Protection Act of 2000 (BIPA). In response to
BIPA, the Health Care Financing Administration (HCFA) issued
regulations in January 2001 designed to curtail financing schemes
involving excessive payments to local government providers, for
which a separate upper payment limit did not exist. However, in
April 2001, less than one month after the revised upper payment
limit regulation became effective, HCFA decided to amend the
regulation to shorten the time some states were allowed to comply
with the new regulation. The position reversal resulted in its
approval of new financing schemes for several states that had
pending proposals mimicking the schemes identified last year. The
transition periods were of varying lengths, depending on how long
a state had been receiving excessive federal payments from one of
these schemes. Believing that states just starting to receive
excessive federal payments did not need the two-year transition
period established in the January regulation, HCFA decided to
shorten the transition period to limit federal liability.
Although the September regulation--which limited the length of
time states can operate their newly approved excessive funding
schemes--will reduce the drain on federal Medicaid funds, GAO
questions HCFA's decision to approve additional financing
schemes, given the explicit effort to curtail such schemes.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-02-147
ACCNO: A02385
TITLE: Medicaid: HCFA Reversed Its Position and Approved
Additional State Financing Schemes
DATE: 10/30/2001
SUBJECT: Federal aid programs
Federal/state relations
Health care programs
Program abuses
Federal funds
Medicaid Program
Medicaid Trust Fund
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GAO-02-147
Report to Congressional Requesters
United States General Accounting Office
GAO
October 2001 MEDICAID HCFA Reversed Its Position and Approved Additional
State Financing Schemes
GAO- 02- 147
Page i GAO- 02- 147 Medicaid State Financing Schemes Letter 1
Results in Brief 2 Background 3 HCFA?s Position Reversal Opened the Door for
More Excessive
Payments 8 HCFA?s Position Reversal Had Substantial Financial Effect 9
Conclusions 14 Agency and State Comments 15
Appendix I Chronology of HCFA?s Changing Position on Pending State Plan
Amendments 19
Appendix II Comments From the Centers for Medicare and Medicaid Services 20
Appendix III Comments From the Commonwealth of Virginia 22
Appendix IV Comments From the State of Wisconsin 25
Related GAO Products 26
Tables
Table 1: Previous Medicaid Financing Schemes for Generating Excessive
Federal Funds Without Committing a Corresponding State Contribution 5 Table
2: Overview of Process for Exploiting Upper Payment Limit 10 Table 3:
Federal Share of Excessive Payments in Virginia and
Wisconsin Under HCFA?s January 2001 Regulation 11 Table 4: Impact of
September 5, 2001, Rule on Excessive Federal
Payments to Virginia and Wisconsin 12 Contents
Page ii GAO- 02- 147 Medicaid State Financing Schemes Figures
Figure 1: Key Dates in Revising the Upper Payment Limit (UPL) Regulation and
Approving Pending Plan Amendments in Virginia and Wisconsin 13
Abbreviations
BIPA Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act
of 2000 CMS Centers for Medicare and Medicaid Services DSH disproportionate
share hospital HCFA Health Care Financing Administration HHS Department of
Health and Human Services OIG Office of Inspector General UPL upper payment
limit
Page 1 GAO- 02- 147 Medicaid State Financing Schemes
October 30, 2001 The Honorable Max Baucus Chairman The Honorable Charles E.
Grassley Ranking Minority Member Committee on Finance United States Senate
The Honorable Don Nickles United States Senate
States have been searching for ways to help finance the $196 billion
Medicaid program, a jointly funded federal- state program providing health
care services to certain low- income, elderly, and disabled people. Over the
years, some states have taken advantage of the flexibility that the Congress
has built into the Medicaid program by devising financing schemes that
inappropriately boost the federal share of program expenditures. Last year,
we testified about a regulatory loophole some states were exploiting to
increase federal Medicaid payments under existing ?upper payment limit?
provisions. 1 These provisions represent upper bounds on what the federal
government is willing to pay as its share of the costs of different classes
of covered services. States were inappropriately increasing federal Medicaid
payments by paying nursing homes and hospitals owned by local governments
more than they would normally receive and then having them return the bulk
of the extra money to the state. The states then sought federal matching
funds- based on the full amount they paid to providers- which they were free
to use as they wished. These schemes were adding billions of dollars a year
to federal Medicaid costs without the states paying their statutorily
specified share of program costs and with some of the federal funds being
spent for nonMedicaid purposes. The Congressional Budget Office concluded in
January 2001 that such schemes were the most notable factor behind recent
increases in federal Medicaid spending, which is growing at a rate nine
times that of the Medicaid population. 2
1 Medicaid: State Financing Schemes Again Drive Up Federal Payments
(GAO/ T- HEHS- 00- 193, Sept. 6, 2000). 2 The Budget and Economic Outlook:
Fiscal Years 2002- 2011 (Washington, D. C.: Congressional Budget Office,
Jan. 2001).
United States General Accounting Office Washington, DC 20548
Page 2 GAO- 02- 147 Medicaid State Financing Schemes
After hearing about this latest financing scheme, the Congress acted
promptly to stop it, as it has done in the past when similar schemes have
come to light. In response to the Medicare, Medicaid, and SCHIP Benefits
Improvement and Protection Act of 2000 (BIPA), 3 the Health Care Financing
Administration (HCFA) 4 issued regulations in January 2001 designed to
curtail financing schemes involving excessive payments to local government
providers, for which a separate upper payment limit did not exist. However,
in April 2001, less than 1 month after the revised upper payment limit
regulation became effective, HCFA decided to amend the regulation to shorten
the amount of time some states were allowed to comply with the new
regulation. This latest revision to the upper payment limit regulation was
published on September 5, 2001.
This report addresses (1) how HCFA?s actions to implement the January 2001
upper payment limit regulation permitted additional states to establish the
same type of financing schemes that it was attempting to curtail and (2) the
estimated additional costs to the federal government of the largest two of
these newly established schemes. In preparing this report, we reviewed
HCFA?s notices of proposed rule- making and final regulations and
documentation related to the four states affected by the September 2001
regulation: Florida, Michigan, Virginia, and Wisconsin. We focused our work
on Virginia and Wisconsin because they represented 96 percent of the
excessive federal payments the agency identified as subject to its latest
regulation. We also drew upon our earlier work. 5 We conducted our work
between August and September 2001 in accordance with generally accepted
government auditing standards.
HCFA reversed its stated position that it would deny approval of any pending
state plan amendments that would not comply with the new upper payment limit
regulation. The position reversal resulted in its approval of new financing
schemes for several states- including Virginia and Wisconsin- that had
pending proposals mimicking the schemes identified last year. These schemes
include funneling excessive Medicaid payments
3 P. L. 106- 554, Appendix F, Sec. 705, 114 Stat. 2763, 2763A- 575. 4 In
June 2001, HCFA was renamed the Centers for Medicare and Medicaid Services
(CMS). We continue to refer to HCFA where agency actions were taken under
its former name. 5 See list of related GAO products at the end of this
report. Results in Brief
Page 3 GAO- 02- 147 Medicaid State Financing Schemes
through local governments on behalf of nursing homes to secure federal
matching funds.
HCFA?s approval of Virginia?s and Wisconsin?s new financing schemes enables
these two states to generate an estimated $722 million in excessive federal
payments. The agency?s September regulation, which limited the length of
time states can operate their newly approved excessive funding schemes,
reduced these estimated excessive federal payments by about $483 million
from an earlier estimate of $1.2 billion. HCFA?s January regulation had
established transition periods to allow states time to reduce their reliance
on federal funds that state schemes had generated. The transition periods
were of varying lengths, depending on how long a state had been receiving
excessive federal payments from one of these schemes. Believing that states
just starting to receive excessive federal payments- such as Virginia and
Wisconsin- did not need the 2- year transition period established in the
January regulation, HCFA decided to shorten the transition period in order
to limit federal liability. While this September regulation will reduce the
drain on federal Medicaid funds, we question HCFA?s decision to approve
additional financing schemes, given the explicit effort to curtail such
schemes.
In commenting on a draft of this report, the Administrator of the Centers
for Medicare and Medicaid Services (CMS) and the Virginia and Wisconsin
state Medicaid directors disagreed with our conclusion that HCFA?s decision
in January 2001 to approve additional state financing schemes was
unjustified. We continue to believe that HCFA had the authority, the
discretion, and the responsibility to deny any proposed state plan
amendments that were inconsistent with protecting the fiscal integrity of
the Medicaid program.
The Congress has structured Medicaid as a federal- state partnership that
provides federal matching funds for covered state expenditures and, within
broad federal guidelines, gives states considerable flexibility in deciding
what medical services to cover and how much to reimburse medical providers.
At the federal level, the program is administered by CMS, within the
Department of Health and Human Services (HHS). Each state operates its
program under a plan that CMS must approve for compliance with current law
and regulations. CMS must also approve any amendments to the plan. On
average, the federal government pays 57 Background
Page 4 GAO- 02- 147 Medicaid State Financing Schemes
percent of Medicaid costs, which totaled an estimated $196 billion in fiscal
year 2000. 6
To ensure the reasonableness of payments to providers, HCFA established a
set of upper payment limits on the total amounts it would agree to pay for a
variety of services. 7 The upper limits are based on what Medicare (the
federal health care program for elderly and some disabled individuals) would
pay for comparable services. The upper payment limit is not a price to be
paid for each service provided or a limit on the amount paid to individual
facilities, but rather a ceiling on Medicaid payments for a category of
providers above which the federal government will not share. Because state
Medicaid payment rates are generally less than Medicare rates, states often
have large gaps between their actual Medicaid payments and what they would
pay using Medicare payment rates. States? upper payment limit schemes are
designed to exploit this gap so the state can obtain federal matching funds
without paying its statutorily determined share.
Despite limits on federal payments, the flexibility that states have to set
Medicaid?s payment rates has provided the opportunity for some to develop
various financing schemes in the past that inappropriately increased federal
Medicaid payments. Over more than a decade, states have used a variety of
schemes to boost federal Medicaid funding without contributing their
specified share. As these schemes came to light, they were subsequently
restricted by law or regulation (see table 1). For example, after HCFA
became aware of schemes involving excessive federal payments to state- owned
hospitals and nursing homes, it promulgated regulations to restrict
excessive payments to these providers. Such restrictions, however, did not
extend to certain government health care providers, such as local- and
county- level providers.
6 The federal matching rate varies for each state, ranging from 50 to 83
percent. States with lower per capita income receive a higher federal
matching rate. 7 Separate upper payment limits exist for several different
classes of services. These include inpatient hospital services, outpatient
hospital services, nursing facility services, and intermediate care services
for the mentally retarded. Previous State Financing
Schemes- and Efforts to Curtail Them- Go Back More Than a Decade
Page 5 GAO- 02- 147 Medicaid State Financing Schemes
Table 1: Previous Medicaid Financing Schemes for Generating Excessive
Federal Funds Without Committing a Corresponding State Contribution
Financing scheme Summary How subsequently restricted
Excessive payments to state facilities
Excessive payments were made to state- owned facilities, increasing federal
payments.
HCFA promulgated regulations in 1987 that established payment limits for
state operated inpatient and institutional facilities. Provider taxes and
contributions Revenues from provider- specific
taxes or donations were used to increase state Medicaid spending. The taxes
and contributions were matched with federal funds and paid to the providers.
These providers could then return most of the federal moneys to the state.
The Medicaid Voluntary Contribution and Provider Specific Tax Amendments of
1991 barred certain provider donations, placed restrictions on provider
taxes, and set other restrictions for state contributions. Excessive
disproportionate share hospital (DSH) payments
DSH payments are meant to compensate those hospitals that care for a
disproportionate number of low- income patients. Unusually large DSH
payments were made to certain hospitals, which then returned the bulk of the
state and federal funds to the state.
The Omnibus Budget Reconciliation Act of 1993 limited which hospitals could
receive DSH payments, capped the amount of DSH payments individual hospitals
could receive, and capped states? total DSH payments. The Balanced Budget
Act of 1997 further reduced state- specific DSH allotments for fiscal years
1998 through 2002. Excessive DSH payments to state mental hospitals
A large proportion of state DSH payments were directly returned to the state
treasury or were paid to state- operated psychiatric hospitals to indirectly
cover the cost of services provided to patients that Medicaid cannot
directly pay for.
The Balanced Budget Act of 1997 limited the proportion of a state?s DSH
payment that can be paid to state psychiatric hospitals.
Source: GAO/ T- HEHS- 00- 193, Sept. 6, 2000.
The financing scheme we identified last year was the latest variant being
used by some states. In this scheme, excessive payments were made to health
facilities owned by local governments. Such providers included county- owned
nursing homes and hospitals and local hospital districts. States determined
the amount of the excessive payments by computing the difference between the
upper payment limit (that is, the maximum payment eligible for a federal
match) and the total amount the state would normally have paid to Medicaid
providers. The state then made payments equaling all or part of the
difference to certain local government- operated Latest Financing Scheme
Involved Local Government Providers
Page 6 GAO- 02- 147 Medicaid State Financing Schemes
facilities. These excessive payments were separate and in addition to what
the state would normally pay for services these facilities provided. The
facilities would agree in advance to return most or all of the extra money.
Once the money was returned, the state then had additional money that it
could use to pay its share of future Medicaid payments- thus generating even
more federal matching funds- or to spend however else it decided. A
variation of this scheme involved local providers advancing funds to the
state, which it would then simply return to the local providers in the guise
of a payment for valid covered services. The state would then claim federal
matching funds on the excessive payment without having spent any state
funds.
Such funding arrangements violate the integrity of the Medicaid program for
several reasons. First, they effectively increase the federal matching
rates- which are set by law- because they generate additional federal
Medicaid expenditures, while total state contributions remain unchanged. For
example, as we testified last year, New Jersey?s financing arrangement with
local nursing homes would effectively increase the federal matching rate
from 50 percent to 62 percent if the state retained all $500 million of the
excessive federal funds it generated. Second, the schemes funnel federal
Medicaid dollars to the state that can be used at its discretion, with no
assurance that the money is used for valid Medicaid services. The state can
actually use these funds to supplant part of its share of Medicaid
expenditures, thereby essentially bringing in still more federal Medicaid
dollars. Third, these funding arrangements are inconsistent with statutory
requirements that the states ensure that Medicaid payments are economical
and efficient, because the chosen methods result in grossly excessive
payments, well beyond the cost of services provided. 8
By fiscal year 2000, the number of states taking advantage of these types of
schemes and making excessive payments to local government providers had
grown to 28, according to the HHS Inspector General, costing Medicaid an
estimated $5.8 billion that year alone. Last September, the HHS Office of
Inspector General (OIG) testified before the Senate Finance Committee that
in some cases it was clear the federal funds were not reimbursing valid
Medicaid costs. For example, the OIG found that between 1997 and 1999,
Pennsylvania generated about $1.9 billion in excessive federal Medicaid
payments, of which $407 million was known to have been spent on non-
Medicaid services; another $558 million was
8 42 U. S. C. sec. 1396( a)( 30)( A).
Page 7 GAO- 02- 147 Medicaid State Financing Schemes
unbudgeted and available to the state for non- Medicaid uses. Similarly, we
found that Iowa?s excessive payment arrangement with county nursing homes
resulted in average federal spending of about $969 daily per Medicaid bed-
an 18- fold increase from the prior federal spending level of $54 per bed
per day.
In December 2000, the Congress mandated that HCFA?s pending regulation be
finalized to revise the upper payment limit. 9 This regulation restricts the
ability of states to inappropriately generate federal funds through these
financing schemes with local government providers. In doing so, however, the
Congress and HCFA recognized that some states had used these schemes long
enough to develop considerable reliance on the excessive federal payments as
part of their overall state budgets. Thus, the regulation provided for three
transition periods, ranging from about 2 years to 8 years, before states had
to fully comply. In effect, this provision gave the states a period of time
during which they could continue to receive excessive federal payments. The
length of a state?s transition period depended on how long it had been using
the scheme. For those in effect since before October 1992, states could
continue to receive some excessive payments until October 2008. By contrast,
states with approved state plan amendments that did not comply with the
revised regulation and took effect after October 1999 would have their
payments phased out by October 2002. HCFA justified the shorter transition
period for these latter states because it had notified all states on July
26, 2000, that it intended to change the rules to close this loophole and
that the states should therefore not develop a reliance on these funds. The
regulation was published on January 12, 2001, and became effective on March
13, 2001.
9 In response to BIPA, HCFA established several new upper payment limits for
different provider classes in addition to those that already existed for
state- owned or -operated facilities (42 C. F. R. 447). These included an
aggregate upper payment limit for inpatient hospitals, nursing facilities,
and intermediate care facilities for the mentally retarded furnished by all
other government- owned or -operated facilities (that is, local government
facilities). An aggregate upper payment limit was also established for
outpatient hospital and clinic services provided by state government
facilities and a separate aggregate upper payment limit was established for
outpatient hospital and clinic services provided by all other government
facilities. The regulation also provided for an increased upper payment
limit- up to 150 percent of what would be paid for comparable services under
Medicare payment principles- for services provided by nonstate public
hospitals.
Page 8 GAO- 02- 147 Medicaid State Financing Schemes
HCFA decided in April 2001 to change its stated position on the January
upper payment regulation to allow approval of pending state plan amendments
under the old rule. This change allowed even more states to exploit the
upper payment limit loophole. While HCFA was developing the January
regulation, a number of state plan amendments with upper payment limit
provisions had been submitted but not approved. HCFA?s position about how to
handle pending plan amendments- submitted before the March 13, 2001,
effective date of the regulation but unapproved- changed over time, as
follows:
1. In responding to public comments as part of its January 2001 published
regulation, HCFA?s stated position was that pending state plan amendments
would be reviewed under the new regulation. HCFA indicated that, once the
final regulations were issued, it would rely on them to review state plan
amendments and would disapprove amendments that did not comply with them.
This meant that these states would not qualify for a transition period to
bring their plans into compliance with the new regulation?s requirements. 10
In publishing the January regulation, HCFA stated:
?We have given all states ample notice of our position that these programs
are abusive and of our intent to publish this regulation to curtail such
programs. To affirmatively approve pending applications would be
counterproductive to our purposes of preserving the fiscal integrity of the
Medicaid program.? 11
2. This stated position notwithstanding, the January 2001 regulation was
silent as to whether plan amendments currently under consideration would be
reviewed using the new regulation or the old one. On April 3, 2001, HCFA
indicated in a new proposed rule that it had decided to review pending plan
amendments under the old regulation, essentially
10 This statement of policy was expressed in the October 10, 2000, proposed
regulation and in the agency?s response to comments published with the final
regulation on January 12, 2001. The language of the proposed regulation
explicitly states that plan amendments not in compliance with the new
regulation would receive a transition period only if they were approved
before the effective date of the new regulation.
11 If CMS neither approves nor denies an amendment within 90 days, the
amendment is deemed approved. In some cases, the process may extend up to
180 days if additional information is requested from the state. Some earlier
state financing schemes were in effect as a result of this deemed approval
status because HCFA had decided not to affirmatively approve them. HCFA?s
Position
Reversal Opened the Door for More Excessive Payments
Page 9 GAO- 02- 147 Medicaid State Financing Schemes
reversing its earlier position. 12 Reviewing plan amendments under the old
regulation, without modification, gave states the opportunity to receive
excessive federal payments through September 30, 2002.
3. On September 5, 2001, CMS issued a rule shortening the transition period
from September 30, 2002, for those upper payment limit financing schemes in
plan amendments that were pending when the January regulation was issued,
that were subsequently approved, and that did not comply with the January
regulation. 13 CMS stated that the full transition period for these recent
plan amendments was not appropriate. The final rule limited the transition
period to 1 year after the effective date of the plan amendment or November
5, 2001, whichever is later.
These changes affected the amount of time given to states before they had to
comply with the upper payment limit regulation that went into effect on
March 13, 2001, and the period during which they could still collect
excessive federal matching payments. (See app. I for a chronology of events
related to HCFA?s change of position on pending state plan amendments.)
HCFA?s reversal of its position on approving abusive financing schemes
involved a number of states, with substantial financial effect. In April
2001, HCFA reported that 11 states with pending plan amendments might be
affected by its proposed rule to shorten the transition period. However, by
the time CMS issued the rule in September 2001, the number of states had
narrowed to four: Florida, Michigan, Virginia, and Wisconsin. 14 HCFA
approved Virginia?s and Wisconsin?s state plan amendments- which contain the
same kinds of inappropriate schemes we reported last year in other states-
on June 4, 2001, and May 8, 2001, respectively. Under the January 2001 rule,
CMS data show that these states would have generated over $1.2 billion in
excessive federal matching payments. The September
12 Because the wording in the January rule was not explicit, the agency had
the discretion to interpret the regulation differently, change its position,
and still comply with the new regulation, according to HHS legal and program
officials.
13 This new regulation applies to state plan amendments effective after
September 30, 1999, submitted to HCFA before March 13, 2001, and approved by
HCFA after January 21, 2001. 14 CMS indicated that the remaining seven
states would comply with the January 2001 regulation and therefore would not
be affected by the September regulation. HCFA?s Position
Reversal Had Substantial Financial Effect
Page 10 GAO- 02- 147 Medicaid State Financing Schemes
rule will reduce this estimate to about $722 million. In our view, approving
these state plan amendments and granting any transition period is
inconsistent with CMS? stated position about its intent to curtail such
schemes and continues to undermine the integrity of the financing
partnership.
As with the abusive schemes we have reported previously, Virginia and
Wisconsin were given approval to employ financing schemes that make
excessive Medicaid payments- well beyond the cost of the services provided-
to a few local governments on behalf of nursing homes. The excessive
payments are made to obtain federal matching funds, with the local providers
keeping little, if any, of the funds. The states, which contribute little or
none of their own funds, can ultimately retain the excessive federal
payments to use for any purpose they choose.
Virginia?s and Wisconsin?s approved plan amendments both rely on sameday
wire transfers involving banks, local governments that own or operate
nursing homes, and the state. These transfers create the illusion of
legitimate Medicaid payments, which are then used to bring in hundreds of
millions in matching federal Medicaid dollars. In both states, this
mechanism involves relatively few local- government- owned or -operated
nursing homes- six homes in Virginia and five in Wisconsin. There are
essentially six steps to the process, as shown in table 2. These steps
include having the local government take out a bank loan and wire the
proceeds to the state, which then immediately transfers the money back to
the local government. This round- trip transfer of funds can be completed in
a matter of minutes.
Table 2: Overview of Process for Exploiting Upper Payment Limit Step
Activity
1 State calculates difference in upper payment limit amount (what Medicare
would have paid for comparable services) and what the state actually pays
nursing homes for Medicaid services. 2 County government takes out a bank
loan that is based on calculation in step
1. The loan covers the full amount, both the state and the federal share, of
the excessive Medicaid payment. 3 County wires the loaned money from its
bank account directly to the state. 4 State creates an official ?Medicaid
payment? by immediately wiring the
loaned funds back to the county bank account. 5 County uses money returned
by the state to pay off the loan. 6 State can then claim the federal share
of the payment that it made to the
county.
Most Recent Plan Amendments Continue Abusive Funding Schemes
Page 11 GAO- 02- 147 Medicaid State Financing Schemes
A substantial amount of money is anticipated to be processed in these two
states through these same- day wire transactions and through the federal
matching funds generated by the transactions. As illustrated in table 3, the
amount of excessive federal matching funds that would have been generated
under the January rule exceeds $1.2 billion.
Table 3: Federal Share of Excessive Payments in Virginia and Wisconsin Under
HCFA?s January 2001 Regulation
Dollars in millions
State Fiscal year 2000 Fiscal year 2001 Fiscal year 2002 Total
Virginia $146 a $218 $364 Wisconsin $93 b 374 374 841
Total $93 $520 $592 $1,205
a Virginia can claim excessive payments for 8 months in fiscal year 2001. b
Wisconsin made excessive payments in 3 months of fiscal year 2000. These
earlier payments are allowed because the Wisconsin amendment was effective
July 1, 2000. Source: Calculations are based on CMS estimates, updated to
reflect the latest available statespecific data.
The payments permissible under Virginia?s and Wisconsin?s approved financing
schemes grossly exceed what the states typically pay for comparable
services. Moreover, the states are free to use the federal proceeds as they
wish. For example, Virginia would provide six local government nursing
homes, on average, an additional $617 in federal funds per Medicaid nursing
home resident per day over the $53 per day in federal funds, on average,
that these homes normally receive per Medicaid nursing home resident.
Wisconsin indicated, in documents submitted to HCFA, that the $748 million
in federal matching funds that it would draw down over fiscal years 2001 and
2002 will be deposited in a newly created and interest- earning Medicaid
Trust Fund. According to state information, the federal funds will be used
in future fiscal years to finance payment increases for a variety of
Medicaid providers, beyond nursing homes in three counties. If it does so,
the state would essentially be recycling federal funds to draw down
additional federal funds to be used for other purposes.
Page 12 GAO- 02- 147 Medicaid State Financing Schemes
By shortening the allowed transition period to comply with the new upper
payment limits, the September rule will reduce the magnitude of excessive
federal payments for these two states by about $483 million- from over $1.2
billion to about $722 million (see table 4).
Table 4: Impact of September 5, 2001, Rule on Excessive Federal Payments to
Virginia and Wisconsin
Dollars in millions
State Excessive federal
payments under January 2001 rule
Reduction (savings) under September 2001 rule Estimated excessive
federal payments
Virginia $364 $146 $218 Wisconsin 841 337 504
Total $1,205 $483 $722
Source: GAO analysis of state plan amendment documentation.
If both states had been limited to a 1- year transition period as specified
in the latest proposed rule, the estimated savings would have been higher.
However, the time associated with finalizing the rule and establishing its
effective date as November 5, 2001, essentially cost another $130 million in
excessive federal payments. Wisconsin will effectively have a period of over
16 months during which it can claim excessive federal payments. Because of
the July 2000 effective date of Wisconsin?s plan amendment, the state is
able to operate its financing scheme for 127 days beyond its 1- year
transition period. We estimate that for every day the state exceeds its 1-
year transition period, about $1 million can be generated in excessive
matching funds. In total, Wisconsin will be able to claim about $130 million
in additional excessive federal payments from July 1, 2001, to November 5,
2001.
Our review of the facts surrounding the Virginia and Wisconsin plan
amendments does not support the need for any transition period to comply
with the January 2001 regulation intended to curtail abusive upper payment
limit schemes. The fact that Virginia?s and Wisconsin?s plan amendments are
recent argues against the need for a transition period. Transition periods
established in HCFA?s January 2001 rule to allow states time to achieve
compliance with the new upper payment limit regulations were aimed at states
that had developed a budgetary reliance on excessive payment schemes.
Virginia and Wisconsin do not meet that criterion. As illustrated in figure
1, Virginia?s and Wisconsin?s plan amendments were September Rule Will
Reduce Magnitude of Expected Excessive Payments
No Apparent Justification for Transition Period for Newest Plan Amendments
Page 13 GAO- 02- 147 Medicaid State Financing Schemes
submitted and approved after HCFA began to take regulatory action to stop
these excessive payment schemes.
Figure 1: Key Dates in Revising the Upper Payment Limit (UPL) Regulation and
Approving Pending Plan Amendments in Virginia and Wisconsin
Virginia did not propose its excessive payment scheme until after HCFA
publicly released the draft of its regulation to curb such schemes.
Wisconsin first introduced its $374 million annual upper payment limit
provision to HCFA in February 2001, after the January rule was published, as
part of a response to HCFA questions on unrelated issues in a broader state
plan amendment submitted on September 21, 2000.
July 26, 2000 HCFA notifies states of intent to
change UPL regulation Timeline
February 7, 2001 Wisconsin submits UPL proposal as addition to a previous
state plan amendment October 10, 2000
HCFA publishes proposed rule to revise UPL regulation
November 30, 2000 Virginia submits state plan amendment with UPL provision
January 12, 2001 HCFA publishes revised UPL
regulation May 8, 2001 HCFA approves Wisconsin?s
plan amendment June 4, 2001 HCFA approves Virginia?s
plan amendment HCFA Action State Action
Page 14 GAO- 02- 147 Medicaid State Financing Schemes
CMS? response to public comments in its September 5, 2001, rule- making
appears to question the appropriateness of approving any new financing
schemes, especially Wisconsin?s. For example, CMS stated:
?We? believe that any State that submitted an amendment after the January
12, 2001 publication date of the final rule arguably had no basis to expect
the amendment would be approved or had any history of reliance on such
spending.?
Nevertheless, the agency did not apply this criterion to Wisconsin?s plan.
It concluded that the excessive payment provisions submitted February 7,
2001, did not constitute a new plan amendment but were rather a change to an
earlier plan amendment submitted in September 2000. According to agency
officials, there was no clear guidance on how to consider a revised state
proposal such as Wisconsin?s. 15
HCFA?s actions in implementing its revised upper payment limit regulations
are troubling. At the same time that HCFA was attempting to close a glaring
loophole, it allowed additional states to engage in the very schemes it was
trying to shut down, at a substantial additional cost to the federal
government. The January 2001 regulation was designed to provide a balance
between protecting the integrity of the Medicaid program and providing a
reasonable transition for those states that had developed some budgetary
reliance on excessive Medicaid payments. Given HCFA?s stated position since
July 2000 that it viewed these state financing schemes as abusive, we
believe that its approval of additional schemes was unjustified.
Experience tells us that even as the Congress and HCFA have in the past
identified and acted to close down various state financing schemes that
exploit the federal share of the Medicaid program, other schemes invariably
emerge. Consequently, continued vigilance is needed to identify and respond
to the next scheme before it reaches the financial magnitude that makes it
both a staple of state financing and a potential threat to the integrity of
the funding partnership. Furthermore, it is imperative that federal and
state partners work together to protect the financial integrity of the
Medicaid program and to ensure that scarce resources are
15 To prevent similar last- minute changes, HCFA stated in its April 3,
2001, proposed rule that any material changes submitted after March 13,
2001, to a pending plan amendment would be treated as a new plan amendment.
Conclusions
Page 15 GAO- 02- 147 Medicaid State Financing Schemes
appropriately used to meet the health needs of Medicaid- eligible
beneficiaries.
We obtained comments on a draft of this report from the Administrator of CMS
and the Virginia and Wisconsin state Medicaid directors (see apps. II, III,
and IV). They disagreed with our conclusion that HCFA?s decision to approve
additional state financing schemes was unjustified. However, the
Administrator pointed out the agency?s strong opposition to financing
schemes and its intent to ensure the protection of federal funds by ensuring
that states receive a federal match only for appropriate expenditures that
are also appropriately matched with state funds.
A central issue raised in these comments related to proposed state plan
amendments that were pending at the time of HCFA's issuance of the January
12, 2001, rule with its March 13 effective date. The CMS Administrator
commented that the treatment of pending amendments was not clearly addressed
in the January 12 rule and that our draft report did not cite any clear
statement on this issue. The Virginia Medicaid director asserted that HCFA's
approval of Virginia's plan amendment, which was pending at the time the
rule was finalized on January 12, was not only permissible but also
consistent with past practice and necessary to avoid the retroactive
application of the final rule. He further asserted that HCFA had no choice
but to approve Virginia's plan.
We agree that the January 12 rule was not clear on how to address pending
state plan amendments; we have revised the report to clarify that the rule
was silent on this point and added appendix I to provide a more complete
chronology of HCFA's changing position on approving state plan amendments.
We concluded that a careful analysis of the public record of proposed and
final rules demonstrated a fundamental shift in HCFA's position in how to
deal with a pending state plan amendment- from an initial stated intent to
deny any pending proposals that would not comply with the revised upper
payment limits to a subsequent decision to approve them.
We disagree, however, with Virginia's position that HCFA had no choice but
to approve its proposal. Under Medicaid, federal funding is authorized for
amounts spent for covered medical and other services. As our report points
out, the funding schemes that these pending amendments proposed do not
relate to amounts that would actually be spent for covered services but to
arrangements between states, counties, and local providers to obtain
excessive federal payments. The Administrator has the statutory Agency and
State
Comments and Our Evaluation
Page 16 GAO- 02- 147 Medicaid State Financing Schemes
authority to disapprove any proposed state plan amendment that is
inconsistent with the Medicaid statute. Given the long- standing and clearly
stated congressional and HCFA intent to eliminate abusive state financing
schemes and given the evidence that HCFA had in hand that Virginia's and
Wisconsin's proposals would continue such practices with no assurance that
excessive federal payments were being spent for valid Medicaid services and
beneficiaries, we continue to believe that HCFA had the statutory authority,
the discretion, and the responsibility to deny any such proposed state plan
amendments regardless of the extent to which similar abusive practices
existed in the past.
The CMS Administrator also commented that, once the Virginia and Wisconsin
state plan amendments were approved (June 4 and May 8, 2001, respectively),
he did not have the authority to retroactively deny payments under the
September 5 final rule that shortened transition periods for states with
newly approved amendments. Our analysis and report did not address issues
dealing with retroactive denial of payments. We concluded that HCFA?s
approvals of these two states? state plan amendments were unjustified, given
clearly stated congressional and HCFA intent to eliminate such abusive state
financing practices. Having affirmatively approved these two states? plan
amendments, however, we support the agency?s efforts to phase out federal
matching payments as quickly as possible.
The CMS Administrator and Virginia Medicaid director raised issues
pertaining to the scope of our work and the sense that we were singling out
certain states or individuals for criticism. We clearly pointed out in our
report that our scope was restricted to those four states that were affected
by the September 2001 regulation, and we further limited our work to
Virginia and Wisconsin because these two states accounted for 96 percent of
the excessive federal payments that the CMS actuary identified as resulting
from the regulation. In the course of our work, we did not investigate the
role that individual federal officials did or did not play, or whether any
officials recused themselves from the decision- making process. As specified
in the report, we based our analysis and conclusions on the public record of
HCFA?s proposed and final rules, public comments submitted as part of the
formal rule- making process, and supporting documentation that HCFA had
available on proposed state plan amendments.
Finally, the CMS Administrator commented that he has been especially vocal
about stopping financing schemes that simply recycle state dollars for
federal dollars with no real expenditure being made- a common
Page 17 GAO- 02- 147 Medicaid State Financing Schemes
practice across the country- and that he intends to end these practices in
order to ensure the fiscal integrity of the Medicaid program. We fully
support CMS efforts in this regard and believe that it should exert its full
authority and discretion to do so.
The Virginia Medicaid director also stated that HCFA has made clear on
numerous occasions that it permits states to engage in intergovernmental
transfers in connection with provider payments that do not exceed upper
payment limits and that such transfers are not inconsistent with governing
law. In this report, we did not take issue with intergovernmental transfers
as a legitimate tool or mechanism that state and local governments use in
jointly financing activities of government. We do take issue, however, with
the fact that this mechanism is often inappropriately used as a subterfuge
to create the illusion that a state has made payments for valid Medicaid
services for eligible Medicaid beneficiaries in order to claim matching
federal payments.
The Wisconsin Medicaid director commented that the state has had an approved
intergovernmental transfer funding mechanism in place since 1985, and
therefore our conclusion that it had no budgetary reliance on this funding,
which was the basis for HCFA?s granting states varying transition periods to
wean themselves from the excessive federal funding, was incorrect. We
disagree with this point of view. The $374 million annual upper payment
limit provision that Wisconsin submitted to HCFA on February 7, 2001, was
separate from, and in addition to, its previously approved arrangements
costing about $23 million annually. Wisconsin therefore had no established
historical budgetary reliance on its February 7 proposed financing scheme,
which HCFA approved in May 2001.
As arranged with your offices, unless you release its contents earlier, we
plan no further distribution of this report until 30 days after its issuance
date. At that time, we will send copies of this report to the Secretary of
Health and Human Services, the Administrator of CMS, and other interested
parties. We will make copies available to others upon request.
Page 18 GAO- 02- 147 Medicaid State Financing Schemes
If you or your staffs have any questions regarding this report, please
contact me on (202) 512- 7118 or Frank Pasquier on (206) 287- 4861. Other
major contributors included Tim Bushfield, Terry Saiki, Stan Stenersen, and
Stefanie Weldon.
Kathryn G. Allen Director, Health Care- Medicaid and
Private Health Insurance Issues
Appendix I: Chronology of HCFA?s Changing Position on Pending State Plan
Amendments
Page 19 GAO- 02- 147 Medicaid State Financing Schemes
Date Event Impact of event on states with pending amendments
July 26, 2000 HCFA sends letter to all state Medicaid directors
Letter announces HCFA?s intent to (1) phase out upper payment limit
financing mechanisms and (2) pursue steps that put an immediate end to
paying states that file plan amendments in the intervening period before any
regulation takes effect. October 10, 2000 HCFA issues
proposed rule The proposed rule says that states with pending plan
amendments not in compliance
with the new regulation would qualify for a transition period only if they
were approved before the effective date of the final regulation. December
21, 2000 Medicare,
Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000
The act directs the Secretary of Health and Human Services to issue a final
regulation based on the October 2000 proposed rule.
HCFA responds to public comments
HCFA again says that noncompliant pending plan amendments would be reviewed
under the new regulation. Plan amendments not in compliance with the new
regulations would not qualify for transition periods. January 12, 2001
HCFA issues final rule The final rule is silent as to whether plan
amendments currently under consideration would be reviewed using the new
regulation or the old one. According to HCFA officials, the language change
from the proposed rule resulted from an inadvertent editing revision. April
3, 2001 HCFA issues
proposed rule HCFA indicated that it had decided to review pending plan
amendments under the old
regulation, essentially reversing its earlier position. This change in
position gave states with such plan amendments the opportunity to receive
excess federal payments through September 30, 2002. The rule proposes
reducing the transition period to 1 year for such pending plan amendments.
September 5, 2001 CMS issues final
rule The final rule adopts shorter transition periods for plan amendments
that were pending when
the January regulation was issued, that were subsequently approved, and that
did not comply with the January regulation. The final rule limits the
transition period to 1 year after the effective date of the plan amendment
or November 5, 2001, whichever is later.
Appendix I: Chronology of HCFA?s Changing Position on Pending State Plan
Amendments
Appendix II: Comments From the Centers for Medicare and Medicaid Services
Page 20 GAO- 02- 147 Medicaid State Financing Schemes
Appendix II: Comments From the Centers for Medicare and Medicaid Services
Appendix II: Comments From the Centers for Medicare and Medicaid Services
Page 21 GAO- 02- 147 Medicaid State Financing Schemes
Appendix III: Comments From the Commonwealth of Virginia
Page 22 GAO- 02- 147 Medicaid State Financing Schemes
Appendix III: Comments From the Commonwealth of Virginia
Appendix III: Comments From the Commonwealth of Virginia
Page 23 GAO- 02- 147 Medicaid State Financing Schemes
Appendix III: Comments From the Commonwealth of Virginia
Page 24 GAO- 02- 147 Medicaid State Financing Schemes
Appendix IV: Comments From the State of Wisconsin
Page 25 GAO- 02- 147 Medicaid State Financing Schemes
Appendix IV: Comments From the State of Wisconsin
Related GAO Products Page 26 GAO- 02- 147 Medicaid State Financing Schemes
Medicaid: State Financing Schemes Again Drive Up Federal Payments
(GAO/ T- HEHS- 00- 193, Sept. 6, 2000).
Medicaid in Schools: Poor Oversight and Improper Payments Compromise
Potential Benefit (GAO/ T- HEHS/ OSI- 00- 87, Apr. 5, 2000).
Medicaid in Schools: Improper Payments Demand Improvement in HCFA Oversight
(GAO/ HEHS/ OSI- 00- 69, Apr. 5, 2000).
Medicaid: Disproportionate Share Payments to State Psychiatric Hospitals
(GAO/ HEHS- 98- 52, Jan. 23, 1998).
State Medicaid Financing Practices (GAO/ HEHS- 96- 76R, Jan. 23, 1996).
Michigan Financing Arrangements (GAO/ HEHS- 95- 146R, May 5, 1995).
Medicaid: States Use Illusory Approaches to Shift Program Costs to Federal
Government (GAO/ HEHS- 94- 133, Aug. 1, 1994). Related GAO Products
(290111)
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