    Medicaid Waivers: HHS Approvals of Pharmacy Plus Demonstrations
    Continue to Raise Cost and Oversight Concerns (30-JUN-04,
    GAO-04-480).

    Under section 1115 of the Social Security Act, the Secretary of
    Health and Human Services may waive certain Medicaid requirements
    for states seeking to deliver services through demonstration
    projects. By policy, these demonstrations must not increase
    federal spending. GAO has previously reported concerns with HHS's
    approval process. GAO was asked to provide information on a new
    Medicaid section 1115 demonstration initiative called Pharmacy
    Plus, intended to allow states to cover prescription drugs for
    seniors not otherwise eligible for Medicaid. GAO reviewed the (1)
    approval status of state proposals, (2) extent to which HHS
    ensured that demonstrations are budget neutral, (3) basis for
    savings assumptions, and (4) federal and state steps to evaluate
    and monitor the demonstrations.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-04-480
        ACCNO:   A10716
      TITLE:     Medicaid Waivers: HHS Approvals of Pharmacy Plus
    Demonstrations Continue to Raise Cost and Oversight Concerns
         DATE:   06/30/2004
      SUBJECT:   Budget controllability
    	     Budget outlays
    	     Disadvantaged persons
    	     Drugs
    	     Elderly persons
    	     Federal/state relations
    	     Health care programs
    	     Health insurance cost control
    	     Program evaluation
    	     State-administered programs
    	     Waivers
    	     Demonstration projects
    	     HHS Pharmacy Plus Initiative
    	     Medicaid Program

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    GAO-04-480

    United States General Accounting Office

    GAO

    Report to the Committee on Finance,

                                      U.S. Senate

    June 2004

    MEDICAID WAIVERS

        HHS Approvals of Pharmacy Plus Demonstrations Continue to Raise Cost and
                                   Oversight Concerns

    GAO-04-480

    Highlights of GAO-04-480, a report to the Committee on Finance, U.S.
    Senate

    Under section 1115 of the Social Security Act, the Secretary of Health and
    Human Services may waive certain Medicaid requirements for states seeking
    to deliver services through demonstration projects. By policy, these
    demonstrations must not increase federal spending. GAO has previously
    reported concerns with HHS's approval process.

    GAO was asked to provide information on a new Medicaid section 1115
    demonstration initiative called Pharmacy Plus, intended to allow states to
    cover prescription drugs for seniors not otherwise eligible for Medicaid.
    GAO reviewed the (1) approval status of state proposals, (2) extent to
    which HHS ensured that demonstrations are budget neutral, (3) basis for
    savings assumptions, and (4) federal and state steps to evaluate and
    monitor the demonstrations.

    GAO recommends that the Secretary of HHS strengthen the processes for
    approving and overseeing Pharmacy Plus and other Medicaid section 1115
    demonstrations. HHS concurred with several recommendations for
    strengthening demonstration approval and oversight but disagreed that
    review criteria should be clarified and applied to already-approved
    demonstrations. GAO maintains that the criteria for HHS's approvals should
    be clear and consistently applied.

    www.gao.gov/cgi-bin/getrpt?GAO-04-480.

    To view the full product, including the scope and methodology, click on
    the link above. For more information, contact Kathryn G. Allen at (202)
    512-7118.

    June 2004

    MEDICAID WAIVERS

    HHS Approvals of Pharmacy Plus Demonstrations Continue to Raise Cost and
    Oversight Concerns

    From January 2002 through May 2004, HHS reviewed Pharmacy Plus proposals
    from 15 states and approved four: Florida, Illinois, South Carolina, and
    Wisconsin. These demonstrations offer prescription drug coverage to
    low-income seniors not otherwise eligible for Medicaid. HHS denied
    proposals from Delaware and Hawaii as inconsistent with demonstration
    guidelines; most of the rest were not under active review because HHS had
    not determined how new Medicare prescription drug legislation will affect
    proposed or operating Pharmacy Plus demonstrations. Over 5 years, the four
    approved demonstrations will provide prescription drug coverage to half a
    million low-income people age 65 or older, at a projected cost of about
    $3.6 billion, of which the federal share would be about $2.1 billion.

    HHS has not adequately ensured that the four approved demonstrations will
    be budget neutral, that is, that the federal government will not spend
    more with the demonstrations than without them. HHS approved the
    demonstrations' 5-year spending limits using projections of cost and
    beneficiary enrollment growth that exceeded benchmarks that HHS said it
    considered in assessing budget neutrality, specifically, states' recent
    average growth rates and projections for Medicaid program growth
    nationwide. Neither HHS's negotiations with the states nor its rationale
    for approving higher growth rates is documented. Using the benchmark
    growth rates, GAO estimates that none of the four demonstrations will be
    budget neutral and federal spending may increase significantly, for
    example, by more than $1 billion in Illinois and $416 million in Wisconsin
    over 5 years.

    Unrealistic savings assumptions also contribute to demonstration spending
    limits that are not likely to be budget neutral. States assumed that
    keeping low-income seniors healthy-thus preventing them from spending down
    their financial resources on health services and "diverting" them from
    Medicaid eligibility-would generate sufficient savings to offset the
    increased costs of providing a new drug benefit. GAO found neither state
    experience nor other research to support such savings. Without
    statespecific evidence, HHS approved savings assumptions for the four
    states ranging from $480 million to $2 billion per state over 5 years. Had
    more conservative assumptions been used to estimate demonstration savings,
    the proposals likely could not have been approved as budget neutral.

    Efforts by the states and HHS to evaluate and monitor the Pharmacy Plus
    demonstrations are in their early stages. The four states have taken few
    steps to put their own required evaluation plans into practice, and an
    independent evaluation contracted by HHS and started in October 2002 is
    scheduled to report in September 2005. In the interim, HHS has not ensured
    that all states meet requirements for progress reporting on the
    demonstrations. The information that states have submitted is often
    insufficient for determining whether the demonstrations are operating as
    intended, and this shortcoming will limit HHS's oversight capability.

    Contents

      Letter

    Results in Brief
    Background
    HHS Has Reviewed 15 Pharmacy Plus Proposals and Approved 4
    HHS Has Not Ensured That Approved Demonstrations' Spending

    Limits Will Be Budget Neutral
    Pharmacy Plus Savings Assumptions Not Well Supported
    States Have Taken Few Steps to Evaluate Demonstrations, and

    HHS Has Not Ensured Sufficient or Timely Progress Reporting
    Conclusions
    Recommendations for Executive Action
    Agency and State Comments and Our Evaluation

    1

                                                                           3 7 10

    17 24

    29 35 36 37

    Appendix I 	Calculating a State's Pharmacy Plus Spending Limit for All
    Medicaid Seniors

    Appendix II 	Denied, Withdrawn, and Pending Pharmacy Plus Demonstration
    Proposals as of May 2004

    Appendix III Comments from the Department of Health and

      Human Services 49

    GAO's Response to the Department of Health and Human Services'
    Specific Comments on GAO's Findings 59

    Appendix IV Comments from the State of Florida

      Appendix V Comments from the State of Illinois 63

    Appendix VI 	Comments from the State of Wisconsin 65
    GAO's Response to the State of Wisconsin's Specific Comments 70

    Appendix VII GAO Contact and Staff Acknowledgments

    74

    GAO Contact 74 Acknowledgments 74

    Related GAO Products

    Tables

    Table 1: Highlights of Pharmacy Plus Demonstrations Approved as of May
    2004 Table 2: HHS-Approved, State Historical, and CMS Actuary Growth

    Rates Table 3: HHS-Approved and Benchmark 5-Year Spending Limits Table 4:
    States' Projections of Medicaid Senior Populations after 5

    Years, with and without HHS-Approved Pharmacy Plus Demonstrations

                                           11

                                         20 23

                                           25

    Figure

    Figure 1: Steps to Calculate Projected 5-Year Without-Demonstration Costs

    Abbreviations

    CBO Congressional Budget Office
    CMS Centers for Medicare & Medicaid Services
    FPL federal poverty level
    HHS Department of Health and Human Services
    HIFA Health Insurance Flexibility and Accountability
    MMA Medicare Prescription Drug, Improvement, and

    Modernization Act of 2003 OMB Office of Management and Budget PACE
    Pharmaceutical Assistance Contract for the Elderly PACENET Pharmaceutical
    Assistance Contract for the Elderly

    Needs Enhancement Tier SCHIP State Children's Health Insurance Program SSA
    Social Security Act

    This is a work of the U.S. government and is not subject to copyright
    protection in the United States. It may be reproduced and distributed in
    its entirety without further permission from GAO. However, because this
    work may contain copyrighted images or other material, permission from the
    copyright holder may be necessary if you wish to reproduce this material
    separately.

    United States General Accounting Office Washington, DC 20548

    June 30, 2004

    The Honorable Charles Grassley
    Chairman
    The Honorable Max Baucus
    Ranking Minority Member
    Committee on Finance
    United States Senate

    Under section 1115 of the Social Security Act (SSA), the Secretary of
    Health and Human Services may waive certain statutory requirements for
    Medicaid-the joint federal and state program financing health care for
    low-income families, certain seniors, and disabled individuals-in
    connection with experimental, pilot, or demonstration projects that are
    likely to promote program objectives.1 Because of the projects'
    experimental nature, the Department of Health and Human Services (HHS)
    requires demonstrations authorized under section 1115 to include
    measurable objectives and an evaluation component. In addition, since the
    early 1980s, HHS has required states to show that their proposals for
    section 1115 demonstrations are "budget neutral" for the federal
    government: that is, a proposed demonstration cannot raise federal
    expenditures beyond what they would be under a state's existing program.

    In January 2002, HHS announced the Medicaid Pharmacy Plus section
    1115 demonstration initiative, offering states the opportunity to provide
    a
    prescription drug benefit to two groups-seniors (people age 65 or older)
    and disabled individuals-whose incomes, although low, exceed levels
    that would qualify them for full Medicaid eligibility. Under this
    initiative,
    HHS and the Centers for Medicare & Medicaid Services (CMS), the agency
    within HHS that has primary responsibility for reviewing the
    demonstration proposals, encourage states to test over 5 years whether
    extending a drug benefit to seniors who are not eligible for Medicaid

    1Section 1115 allows waivers of requirements in Medicaid, the State
    Children's Health Insurance Program (SCHIP), and several other programs
    authorized under SSA. See section 1115 (codified at 42 U.S.C. S: 1315
    (2000)); see also section 2107(e) of SSA (codified at 42 U.S.C. S:
    1397gg(e)) (regarding the applicability of section 1115 to SCHIP).

    would maintain these seniors' health and hold down overall Medicaid
    costs.2

    Over the past decade, Congress and others have raised concerns about the
    extent to which HHS has ensured that approved section 1115 demonstration
    waivers promote the goals and fiscal integrity of both Medicaid and the
    State Children's Health Insurance Program (SCHIP). In particular, Congress
    has been concerned about HHS's waiver approval process and the federal
    costs associated with some of the demonstrations. Our past work has found,
    for example, that HHS's process for approving demonstrations is not always
    clear or open to public input and that the department has not always
    ensured the budget neutrality of approved demonstrations, thereby raising
    federal expenditures.3

    You asked us for information on the Pharmacy Plus initiative. We focused
    our review on the following four questions:

    1. 	How many states have applied for Pharmacy Plus demonstration waivers,
    and what is the status of their proposals?

    2. 	To what extent has HHS ensured that the approved demonstrations are
    budget neutral to the federal government?

    3. 	How well supported are states' assumptions about savings that may
    accrue to Medicaid from the Pharmacy Plus demonstration waivers?

    4. 	What steps are states and HHS taking to evaluate approved
    demonstrations and to monitor if they are functioning as intended?

    Our work is based on a review and analysis of Pharmacy Plus demonstration
    waiver proposals considered and approved by HHS from January 2002 through
    May 2004. Our analysis covers only demonstration proposals submitted in
    response to HHS's Pharmacy Plus initiative.4 To

    2Although CMS is the agency within HHS that has primary responsibility for
    reviewing section 1115 demonstration waiver proposals, we refer to HHS
    throughout this report as the primary program entity because the authority
    to grant waivers for the demonstrations resides with the Secretary of HHS.

    3A list of related GAO products appears at the end of this report.

    4We do not include proposals to provide a prescription drug benefit to
    low-income seniors under an amendment to an existing section 1115 Medicaid
    managed care waiver, like those approved for Vermont and Maryland, because
    such proposals are reviewed under different guidelines.

    determine the status of demonstrations under this initiative, we analyzed
    HHS data on all proposals it considered, including their number, outcomes,
    and characteristics. For approved demonstrations, we analyzed the
    applications as submitted by the states; HHS decision memorandums and
    approval letters; the applications as ultimately approved; HHS's terms and
    conditions for approved demonstrations; and, when available, the states'
    plans (called operational protocols) for how the demonstrations will
    operate. We also discussed the process of review and approval with
    officials of the reviewing agencies-HHS, CMS, and the Office of Management
    and Budget (OMB)-and we obtained information from officials representing
    the states with approved demonstrations. To assess budget neutrality, we
    obtained available budget justifications and documentation from state and
    federal officials and discussed with them the budget negotiations
    associated with each approved demonstration.5 To examine the assumptions
    behind the initiative and the likelihood of associated savings, we
    reviewed published literature and interviewed officials from the Kaiser
    Commission on Medicaid and the Uninsured and the Congressional Budget
    Office (CBO). We discussed plans for evaluating the approved
    demonstrations with HHS and state officials. During our review, Congress
    passed the Medicare Prescription Drug, Improvement, and Modernization Act
    of 2003, which adds a drug benefit to Medicare, the federal program
    providing health insurance for the majority of people age 65 or older
    regardless of income.6 We considered the limited information available as
    of May 2004 about the relationship between Pharmacy Plus and the act. We
    conducted our work from December 2002 through June 2004 in accordance with
    generally accepted government auditing standards.

                                    Results in Brief

    From January 2002 through May 2004, HHS reviewed Pharmacy Plus
    demonstration waiver proposals from 15 states. It approved four
    demonstrations (Florida, Illinois, South Carolina, and Wisconsin), denied
    two (Delaware and Hawaii), and considered nine other proposals. The four
    demonstrations, each approved for a 5-year period, cover most prescription
    drugs and incorporate cost sharing by beneficiaries. Together, the four
    demonstrations may enroll as many as half a million people age 65 or older
    whose incomes are higher than states' limits for Medicaid

    5To verify the accuracy of data included in state demonstration
    applications, we discussed these data and their sources with state
    officials.

    6Pub. L. No. 108-173, 117 Stat. 2066.

    eligibility. Combined 5-year state and federal spending for the four
    approved demonstrations' new drug benefit is projected to total
    approximately $3.6 billion, the federal share of which is estimated to be
    about $2.1 billion. The two proposals that HHS denied were inconsistent
    with Pharmacy Plus guidelines. One state had an existing program that
    covered the same population proposed for the demonstration; the other
    wanted to expand coverage to people with incomes above the initiative's
    limit of 200 percent of the federal poverty level (FPL). As of May 2004,
    most of the remaining nine demonstration proposals were not under active
    review by HHS, primarily because the department had not determined how the
    new Medicare legislation would affect the Pharmacy Plus initiative and
    whether HHS would continue to review Pharmacy Plus demonstration
    proposals.

    HHS has not adequately ensured that the four approved Pharmacy Plus
    demonstrations will be budget neutral, that is, that the federal
    government will spend no more with the demonstrations than without them.
    HHS has approved 5-year demonstration spending limits based on projections
    of cost and beneficiary enrollment growth that exceeded benchmarks that
    department officials said they considered in assessing states' proposals
    for budget neutrality. These cost and enrollment growth benchmarks
    incorporate the states' recent historical average growth rates and
    projections developed by CMS's Office of the Actuary for Medicaid program
    growth nationwide. HHS has not established written criteria for how it
    reviews or approves state-proposed cost or enrollment growth rates against
    these benchmarks. HHS's basis for approving state demonstrations' spending
    limits as budget neutral is not clear, particularly for Illinois and
    Wisconsin, for neither the department's negotiations with the states nor
    its rationale for approving higher-than-benchmark rates of estimated
    growth is documented. HHS's internal decision memorandums-which described
    the factors that HHS, CMS, OMB, and others considered in reviewing the
    demonstrations and which are not publicly available-did not provide the
    rationale for the approved spending limits, and neither did the publicly
    available demonstration approval letters. The approved 5-year spending
    limit for Illinois is more than $2 billion higher than it would have been
    had benchmark growth rates been applied; Wisconsin's approved spending
    limit is $713 million more than it would have been with benchmark rates.
    We estimate that over 5 years, with the approved demonstrations, the
    federal government could spend over $1 billion more in Illinois, $416
    million more in Wisconsin, $55 million more in Florida, and $42 million
    more in South Carolina than without the demonstrations, thus not meeting
    the stated policy of budget neutrality.

    States' assumptions about savings that may accrue to Medicaid from the
    Pharmacy Plus demonstrations are not well supported by state experience or
    research. The four states with approved demonstrations assumed that the
    cost of extending drug benefits to seniors now ineligible for Medicaid
    would be offset by savings accrued because demonstration beneficiaries
    would stay relatively healthy and therefore not deplete their income or
    assets to Medicaid eligibility levels. HHS approved the four states'
    savings assumptions-some projecting significant reductions in overall
    Medicaid senior enrollment and ranging from $480 million to $2 billion per
    state in combined federal and state spending over 5 years-without
    state-specific data supporting these assumptions. One state's estimate of
    savings, for example, was derived by determining how much the state needed
    to save in order to demonstrate that its proposal would be budget neutral,
    rather than how much the state could realistically expect to save. The
    limited research available indicates that health care savings due to
    improved access to prescription drugs are likely to be much less than what
    states assumed and HHS approved. Had more conservative savings assumptions
    been used to estimate the demonstrations' costs, the proposals likely
    could not have been approved as budget neutral. Because federal liability
    is capped by a 5-year spending limit for each demonstration, states will
    be at risk if anticipated savings do not accrue and if their demonstration
    spending reaches or exceeds the limits.

    As of February 2004, efforts by the states and HHS to evaluate and monitor
    the Pharmacy Plus demonstrations-and particularly states' efforts to begin
    implementing their evaluation plans to address stated evaluation
    objectives-were in their early stages. The four states with approved
    demonstrations had taken few steps toward implementing the evaluation
    plans required as a condition of demonstration approval: Florida and South
    Carolina had not decided whether state officials or an outside entity
    would conduct their evaluations. Illinois and Wisconsin officials believed
    that participating in the independent evaluation contracted by HHS and
    started in October 2002 would take the place of their own evaluations. HHS
    officials, by contrast, told us that state evaluations were still
    required. This independent evaluation is scheduled to report by September
    2005. But in the interim, HHS has not ensured that each state submits in
    its progress reports enough information for HHS to monitor that its
    demonstration is functioning as intended, that the information is in a
    form enabling comparisons across states, or that it is submitted in a
    timely manner. This lack of information limits the department's oversight
    capability. For example, Illinois did not submit required quarterly
    progress reports during the demonstration's first year of operation, and
    its annual report did not provide information that would allow HHS to
    assess

    whether the new drug benefit was enabling seniors to avoid enrollment for
    full Medicaid benefits.

    HHS's process for approving Medicaid demonstrations under the Pharmacy
    Plus initiative continues to raise some of the same cost and oversight
    concerns raised by other Medicaid section 1115 waiver approvals over the
    past decade, including a failure to adequately justify the basis for
    states' spending limits. We are recommending that the Secretary of HHS
    clarify criteria for reviewing and approving demonstration spending
    limits, consider applying these criteria to the four approved Pharmacy
    Plus demonstrations, and publicly document the basis for Medicaid section
    1115 demonstration approvals to better ensure that approved demonstrations
    will not raise costs to the federal government. We are also recommending
    that the Secretary ensure that approved Pharmacy Plus and other Medicaid
    section 1115 demonstrations fulfill the objectives stated in their
    evaluation plans and more actively monitor approved Pharmacy Plus and
    other Medicaid section 1115 demonstrations.

    In commenting on a draft of this report, HHS concurred with our
    recommendations related to evaluating and monitoring the section 1115
    demonstrations and documenting the basis for demonstration approvals. HHS
    did not concur with our recommendations that it clarify criteria for
    reviewing and approving states' proposed demonstration spending limits and
    consider applying those criteria to its approval decisions for the four
    Pharmacy Plus demonstrations. HHS indicated that while review criteria are
    important, they cannot always be strictly applied because of variations in
    state Medicaid programs and demonstration proposals, and it also stated
    that the four approved demonstrations were based on wellsupported budget
    estimates of future state spending. We have on several occasions raised
    concerns with HHS about the budget neutrality of particular Medicaid
    section 1115 demonstrations, and the Pharmacy Plus demonstrations are no
    exception. We acknowledge that variations in state demonstration proposals
    justify some review flexibility but believe that HHS has not clearly
    articulated or documented the rationale for its decisions in approving
    Pharmacy Plus demonstrations. Such lack of clarity raises questions about
    whether these demonstrations, involving billions of federal dollars, have
    been reviewed consistently.

    We also provided a draft of this report to Florida, Illinois, South
    Carolina, and Wisconsin. Illinois and Wisconsin officials commented that
    we overstated the demonstrations' financial risk to the federal government
    in light of data showing that to date, the demonstrations were operating
    well within their spending limits. Both states asserted that their
    pharmacy

    Background

    demonstrations were providing a valuable benefit to seniors and would be
    budget neutral. Although we do not dispute the health benefit to seniors
    of expanded access to prescription drugs, demonstrating savings to the
    Medicaid program as a result of this expanded access is a separate issue.
    Assumptions about such potential savings are not well supported by
    research or by data from the states, even though all the states except
    Wisconsin operated state-funded pharmacy assistance programs before
    applying for their demonstrations. Florida commented that the spending
    limit approved for its demonstration was less than 1 percent above the
    benchmark spending level. South Carolina and Wisconsin provided technical
    comments that were incorporated in the report as appropriate.

    Established in 1965 under title XIX of SSA, Medicaid is the nation's
    health care financing program for low-income families and certain people
    who are age 65 or older or disabled. The program accounted for about $244
    billion in federal and state expenditures in fiscal year 2002 and covered
    an estimated 53 million people.7 The states and the federal government
    share Medicaid spending according to a formula that provides a more
    generous federal match for states where per capita income is lower.8

    Medicaid is an open-ended entitlement program, meaning that the federal
    government is obligated to pay its share of expenditures for all people
    and services covered under an HHS-approved state Medicaid plan. To qualify
    for federal matching payments, state Medicaid programs are required by law
    to cover certain categories of beneficiaries, including pregnant women and
    children with family incomes below specific limits, as well as individuals
    with limited income and assets who are age 65 or older or

    7In fiscal year 2001, the latest year for which complete data are
    available, beneficiaries who were aged, blind, or disabled represented
    about 30 percent of those served by Medicaid but accounted for more than
    65 percent ($141 billion) of Medicaid's total $216 billion in federal and
    state spending. Beneficiaries age 65 and older accounted for 26.5 percent
    of total Medicaid spending, or $57 billion; blind or disabled individuals
    accounted for nearly 39 percent, or $84 billion.

    8In fiscal year 2003, the federal share of individual states' Medicaid
    expenditures ranged from 50 to 77 percent. Federal Medicaid matching rates
    were increased temporarily by 2.95 percentage points from April 1, 2003,
    through June 30, 2004, pursuant to title IV of the Jobs and Growth Tax
    Relief Reconciliation Act of 2003. See Pub. L. No. 108-27, S: 401(a)(3),
    117 Stat. 752, 764-765 (to be codified at 42 U.S.C. S: 1396d note).

    disabled.9 State programs are also required to cover certain services,
    including physician and hospital services and nursing home care. As long
    as states meet federal requirements and obtain HHS approval for their
    state Medicaid plans, they have considerable flexibility in designing and
    operating their programs. For example, states may choose to expand
    coverage to seniors whose incomes are above statutory limits, and all
    states have opted to provide prescription drug coverage. In addition,
    section 1115 of SSA permits the Secretary of HHS to waive certain
    statutory requirements applicable to Medicaid to allow states to provide
    services or cover individuals not otherwise eligible for Medicaid and to
    provide federal funding for services and populations not usually eligible
    for federal matching payments.10

    The Pharmacy Plus initiative allows states to provide a prescription drug
    benefit to certain Medicare beneficiaries, specifically seniors and
    disabled people, with incomes at or below 200 percent of FPL.11 Typically,
    Medicaid eligibility under an approved state plan provides access to all
    state Medicaid-covered services, but eligibility under a Pharmacy Plus
    demonstration covers only a prescription drug benefit.12 The premise
    behind the initiative is that expanded access to medically necessary drugs
    will help keep low-income seniors healthy enough to avoid medical expenses
    that could cause them to "spend down" their resources to the

    9Medicaid eligibility is determined by several factors, including
    individual or family income, age, and eligibility for certain other
    federal benefits. For example, although state Medicaid programs vary, most
    people who are age 65 or older, or are disabled, qualify automatically for
    Medicaid if their incomes and assets qualify them for cash assistance
    under the federal Supplemental Security Income program.

    10In fiscal year 2001, more than 20 percent of total federal Medicaid
    spending was governed by the terms and conditions of section 1115 waivers
    rather than by standard Medicaid program requirements. See Jeanne Lambrew,
    Section 1115 Waivers in Medicaid and the State Children's Health Insurance
    Program: An Overview (Washington, D.C.: Kaiser Commission on Medicaid and
    the Uninsured, 2001).

    11In 2003, the annual income that represented 200 percent of FPL was
    $17,960 for an individual, $24,240 for a family of two.

    12States are also required to ensure that beneficiaries receiving only the
    prescription drug benefit have access to primary care services to assist
    with medical management related to pharmacy products, although they are
    not required to pay for these services. Most Pharmacy Plus beneficiaries
    are seniors covered by Medicare, which generally covers hospital and
    physician services.

    point of Medicaid eligibility.13 The initiative assumes that budget
    neutrality for pharmacy-only coverage can be achieved by savings to
    Medicaid from fewer seniors' enrolling for full benefits, as well as from
    improved access to prescription drugs, improved service delivery or
    medication management, and better management of drug benefit costs.

    Unlike some other section 1115 demonstration waivers, the Pharmacy Plus
    initiative requires a participating state to accept a fixed spending limit
    as part of its budget neutrality agreement with HHS. This spending limit-
    sometimes called an aggregate spending limit or global budget cap- applies
    not only to services and beneficiaries in the state's demonstration drug
    program, but also to all services for all Medicaid seniors in the state.
    The Pharmacy Plus budget neutrality approach limits the amount the federal
    government will match for a demonstration according to expected growth in
    both service costs and enrollment (see app. I). Once a state has reached
    its Pharmacy Plus spending limit, it cannot receive additional federal
    matching dollars for any Medicaid services for seniors in the state, nor
    can the state restrict enrollment of seniors who qualify for full Medicaid
    benefits.14 Under the Pharmacy Plus scenario, a state accepts the
    financial risks inherent in a fixed budget cap for unanticipated changes
    in both cost and enrollment growth. For some other section 1115
    demonstrations, budget neutrality is based on a projected per capita cost
    for each demonstration beneficiary. This other scenario sets a limit on
    spending per person, but because federal matching funds are available for
    all people who enroll, a state does not have to accept financial risk for
    unexpected growth in enrollment.

    13To be eligible for Medicaid, seniors must meet income and asset limits
    specified by each state, within federal requirements. Some individuals
    with income and assets too high to be immediately eligible may qualify for
    coverage on a monthly basis if they incur such high medical costs that
    they "spend down" to a qualifying income and asset level. Such spending
    down often happens when people enter nursing homes and quickly deplete
    their resources.

    14According to the terms of approval for Pharmacy Plus demonstrations, to
    maintain budget neutrality, states may not alter eligibility or benefits
    for seniors who qualify for full Medicaid. States may pursue a variety of
    cost-control measures for the drug-only expansion, including limiting
    enrollment and increasing cost sharing for Pharmacy Plus beneficiaries.

    HHS Has Reviewed 15 Pharmacy Plus Proposals and Approved 4

    As of May 2004, HHS had approved four states' Pharmacy Plus demonstration
    proposals, denied two, and considered proposals from nine other states.
    All four approved demonstrations-Florida, Illinois, South Carolina, and
    Wisconsin-are to operate for 5 years, during which time they might enroll
    a total of half a million low-income individuals age 65 or older for the
    new prescription drug coverage. HHS denied two demonstration proposals,
    from Delaware and Hawaii, because they were not consistent with Pharmacy
    Plus guidelines. Of the remaining nine proposals, one was withdrawn by the
    state and others have been on hold since fall 2003, when Congress was
    considering Medicare prescription drug legislation. At the time we
    completed our work, legislation providing a new drug benefit through
    Medicare had been enacted, but HHS had not determined how the new drug
    program would affect the Pharmacy Plus initiative.

    HHS Approved Four Pharmacy Plus Demonstrations

    HHS has approved Pharmacy Plus demonstrations for low-income seniors in
    four states: Florida, Illinois, South Carolina, and Wisconsin.15 As of May
    2004, all four demonstrations had been implemented and under way for at
    least 17 months: Illinois', Florida's, and Wisconsin's demonstrations were
    implemented in 2002, South Carolina's in 2003 (see table 1). Together, the
    four approved demonstrations are projected to enroll as many as 527,800
    individuals for Medicaid prescription drug benefits only; as of April
    2004, they reported combined enrollment of nearly 372,200 people.
    Illinois' demonstration is the largest, with expected enrollment for the
    drug benefit of more than 250,000 seniors over 5 years. As of April 2004,
    more than 192,600 people were enrolled in Illinois' demonstration, the
    majority of them moved into the Medicaid program from an existing
    state-funded pharmacy assistance program.16

    15HHS approved a fifth demonstration proposal, from Indiana, in April
    2003, but the state declined to accept the terms of HHS's approval,
    primarily because of the state's concerns about the spending limit for all
    Medicaid seniors. Instead, Indiana proposed a different budget approach
    that would not require the state to project and commit to a spending limit
    covering all Medicaid seniors. Indiana's alternative proposal, submitted
    May 2003, was one of the nine proposals under consideration by HHS as of
    March 2004.

    16Illinois' state-funded program covered seniors and people with
    disabilities with incomes up to 250 percent of FPL. Participants who were
    65 or older with incomes at or below 200 percent of FPL were automatically
    enrolled in the demonstration on June 1, 2002. Eligible seniors with
    incomes from 201 to 250 percent of FPL and people with disabilities
    continue to be covered by the state-funded program.

      Table 1: Highlights of Pharmacy Plus Demonstrations Approved as of May 2004

    State and demonstration status
    (in order of approval) Description

    Illinois

    Approved January 2002
    Implemented June 2002
    Request for amendment submitted
    March 2003

    Projected enrollment: As many as 256,500 seniors with incomes at or below
    200 percent of FPL; 192,600 participants enrolled as of April 2004.
    Seniors with incomes at or below 200 percent of FPL who were participating
    in Illinois' previous state-funded program were automatically enrolled in
    the demonstration.

    Spending limit for all Medicaid seniors: $14.0 billion in federal and
    state Medicaid funding over 5 years; prescription drug benefit represents
    $1.4 billion.

    Benefits and cost sharing: Covers most prescription and some
    over-the-counter drugs recommended by physicians. Seniors with private
    insurance may choose to enroll for a $25 monthly rebate program. No cost
    sharing for participants with incomes below 100 percent of FPL;
    participants at or above 100 percent of FPL pay $1 for generic and $4 for
    brand-name drugs. All participants pay 20 percent coinsurance after their
    annual drug benefits under the program exceed $1,750.

    State program: Before the demonstration, Illinois' state-funded pharmacy
    assistance program enrolled about 170,000 participants. The state
    continues to operate a state	funded program covering prescription drugs
    for specified conditions for seniors with incomes from 201 to 250 percent
    of FPL and for people with disabilities and incomes up to 250 percent of
    FPL. Amendment sought to expand coverage to eligible seniors with incomes
    at or below 250 percent of FPL; amendment was pending as of March 2004.

    Florida

    Approved July 2002
    Implemented August 2002
    Request for amendment submitted
    September 2003

    Projected enrollment: As many as 58,500 seniors with incomes from 88 to
    120 percent of FPL; 54,400 participants enrolled as of April 2004.

    Spending limit for all Medicaid seniors: $16.7 billion in federal and
    state Medicaid
    funding over 5 years; prescription drug benefit represents $477 million.

    Benefits and cost sharing: Covers all prescription drugs up to a monthly
    benefit limit of
    $160 per participant. Except for some classes of drugs, such as mental
    health and HIV
    antiviral therapies, brand-name drugs are limited to four per month,
    although physicians
    are allowed to request exceptions. Participants pay $2 for generic drugs,
    $5 for drugs on
    the state's preferred drug list, and $15 for other brand-name drugs.

    State program: Before the demonstration, Florida's state-funded pharmacy
    assistance
    program enrolled about 9,000 participants. Replaced by the demonstration,
    the state
    funded program had the same income eligibility criteria as the
    demonstration but a lower
    benefit limit: $80 per participant per month. Amendment sought to expand
    eligibility to
    seniors with incomes at or below
    200 percent of FPL and to add a prescription drug discount program;
    amendment was
    pending as of March 2004.

    State and demonstration status
    (in order of approval) Description

    Wisconsin

    Approved July 2002 Implemented September 2002

    Projected enrollment: As many as 146,800 seniors with incomes at or below
    200 percent of FPL; 70,300 participants enrolled as of April 2004.

    Spending limit for all Medicaid seniors: $8.4 billion in federal and state
    Medicaid
    funding over 5 years; prescription drug benefit represents $919 million.

    Benefits and cost sharing: Covers prescription drugs, including insulin.
    Participants
    pay an annual enrollment fee of $30 and those with incomes above 160
    percent of FPL
    pay an annual deductible of $500. Participants pay $5 for generic and $15
    for brand
    name drugs (those with incomes from 160 to
    200 percent of FPL begin co-payments after meeting the required
    deductible).

    State program: Wisconsin did not have a state-funded pharmacy assistance
    program
    for seniors before this demonstration. When the state implemented the
    demonstration, it
    also began offering state-funded pharmacy benefits to seniors with incomes
    from 201 to
    240 percent of FPL.

    South Carolina

    Approved July 2002 Implemented January 2003 Projected enrollment: As many
    as 66,000 seniors with incomes up to 200 percent of FPL; 54,900 enrolled
    as of April 2004.

    Spending limit for all Medicaid seniors: $5.0 billion in federal and state
    Medicaid funding over 5 years; prescription drug benefit represents $764.7
    million.

    Benefits and cost sharing: Covers generic and, when no generic is
    available, brand	name prescription drugs, over-the-counter drugs
    prescribed by physicians, insulin and other self-injected drugs, and
    syringes. Except for medications for specified conditions, including
    behavioral health disorders, cardiac disease, cancer, HIV/AIDS, and
    terminal or life-threatening diseases, coverage limited to four
    prescriptions or refills per month. Participants pay an annual deductible
    of $500, plus $10 for generic drugs; $15 for brand	name drugs; and $21 for
    drugs requiring prior authorization.

    State program: Before the demonstration, South Carolina's state-funded
    pharmacy assistance program enrolled about 41,000 participants.
    Demonstration replaces that program and expands eligibility to seniors
    with incomes from 175 up to 200 percent of FPL.

    Source: GAO analysis of state and HHS documents.

    All the demonstrations except Florida's are approved to enroll seniors
    with incomes at or below 200 percent of FPL, the maximum eligible income
    established in HHS's Pharmacy Plus guidance.17 As approved, Florida's
    demonstration covers seniors with incomes from 88 to 120 percent of FPL,
    but in September 2003, the state submitted an amendment to expand income
    eligibility to 200 percent of FPL. Illinois also applied in March 2003 to
    amend its approved demonstration to expand eligibility, in its case to
    include seniors with incomes at or below 250 percent of FPL. The terms of
    Illinois' demonstration approval

    17Although HHS has identified the initiative's target population as
    seniors and people with disabilities who have incomes at or below 200
    percent of FPL, none of the states with approved pharmacy demonstrations
    have chosen to include people with disabilities.

    specifically permit the state to seek this amendment, as long as the state
    submits data supporting its ability to cover this expansion population at
    no additional cost to the federal government. As of March 2004, HHS was
    reviewing both amendments.

    Projected 5-year costs vary among the four approved demonstrations. For
    Florida, Illinois, South Carolina, and Wisconsin, total combined federal
    and state Medicaid spending on the new drug benefit alone is expected to
    be more than $3.6 billion over 5 years, of which the federal share would
    be approximately $2.1 billion. The combined federal and state Medicaid
    spending limits for the four demonstrations-for services to all Medicaid
    seniors in the four states-would total $44 billion over 5 years, with a
    federal share of at least $25 billion. The estimated 5-year costs solely
    for the drug benefit range from $477 million in Florida to $1.4 billion in
    Illinois, and combined 5-year federal and state spending limits (based on
    projected costs for services to all Medicaid seniors) range from $5.0
    billion in South Carolina to $16.7 billion in Florida.

    When they applied, three of the four states with approved demonstrations
    already operated state-funded pharmacy assistance programs for seniors.
    Most beneficiaries eligible for these programs are also eligible for
    Pharmacy Plus coverage. HHS allows the states to subsume all or a portion
    of an existing program under a demonstration, as long as the states'
    demonstrations propose to expand either the number of beneficiaries or the
    scope of drug coverage.18 In other words, the state may not simply secure
    federal matching dollars for the costs of an existing state-funded drug
    program with no expansion. To meet this condition, states with approved
    demonstrations either raised income eligibility thresholds or expanded the
    scope of drug coverage beyond that of their existing state programs. For
    example, Florida doubled its maximum monthly benefit from $80 to $160 per
    person, and South Carolina expanded eligibility to include seniors with
    incomes from 175 through 200 percent of FPL. Illinois' demonstration
    offered a more comprehensive

    18The Pharmacy Plus application form and standard terms and conditions for
    three of the four approved demonstrations do not include a specific
    maintenance-of-effort requirement. Only Illinois, the first Pharmacy Plus
    demonstration approved, has such a maintenance-ofeffort requirement. HHS
    officials told us that the department's policy regarding state maintenance
    of effort has been evolving. Since the Illinois approval, the officials
    told us that they have asked states to demonstrate that they are expanding
    their programs.

    drug benefit than its state-funded program did.19 Wisconsin did not
    previously have a state-funded pharmacy assistance program for seniors.20

    HHS Denied Two Demonstration Proposals

    In 2003, HHS denied Pharmacy Plus demonstration proposals from two states,
    Delaware and Hawaii. (See app. II for descriptions of denied, withdrawn,
    and pending proposals.) Delaware's proposal was denied primarily because
    HHS required that the state expand beyond the existing state-funded
    program and limit coverage to seniors with incomes at or below 200 percent
    of FPL. Delaware's state-funded pharmacy assistance program already
    covered seniors and disabled adults with incomes up to 200 percent of FPL
    or whose prescription drug costs exceeded 40 percent of their annual
    incomes. For this reason, the state could not expand either eligibility or
    coverage and stay within Pharmacy Plus guidelines. Although Delaware
    proposed adding a pharmacy benefit management component to monitor
    appropriate prescription use and to control costs, HHS found this proposed
    change to the existing program insufficient.21

    Hawaii proposed to make prescription drugs available at the discounted
    Medicaid rate to state residents of all ages with family incomes at or
    below 300 percent of FPL. This benefit was to be funded through
    participant cost sharing, manufacturer rebates, and a fixed state
    contribution of $1 per prescription. HHS's denial was based primarily on
    the request to cover individuals with incomes up to 300 percent instead of
    200 percent of FPL. Other reasons for the denial included the proposed
    coverage for all state residents, instead of targeting seniors and people
    with disabilities, and the

    19Illinois' state-funded program began in 1985 to cover prescriptions for
    cardiovascular disease and has expanded over the years to include drugs
    for several conditions, including arthritis, diabetes, Alzheimer's
    disease, cancer, glaucoma, lung disease, and Parkinson's disease.

    20Wisconsin began offering state-funded drug benefits to seniors with
    incomes from 200 up to and including 240 percent of FPL at the same time
    that it implemented its demonstration.

    21A Delaware Medicaid official expressed concern that HHS's denial was
    inconsistent with its guidelines, which, as set forth in the application
    form, indicate that states may be allowed to provide enhanced pharmacy
    benefit management services as one option for expanding state-funded
    programs under the demonstration. HHS officials told us that the denial of
    Delaware's proposal would not be reconsidered because the proposed
    expansion was not large enough, and approving it would simply make the
    state-funded program eligible for federal matching payments.

    minimal state financial participation of $1 per prescription in the first
    year of the demonstration.22

    HHS Has Considered Nine Other Demonstration Proposals

    From January 2002 through May 2004, HHS considered Pharmacy Plus
    demonstration proposals from nine other states: Arkansas, Connecticut,
    Indiana, Maine, Massachusetts, Michigan, New Jersey, North Carolina, and
    Rhode Island. As of May 2004, eight were still pending; one proposal, from
    Massachusetts, had been withdrawn. Most proposals would cover seniors with
    incomes at or below 200 percent of FPL; several would also cover adults
    with disabilities. The drug benefits would generally be comprehensive and
    require participant cost sharing, which in some cases would include an
    annual enrollment fee and 20 percent co-payment for each prescription. All
    but one of the states with pending proposals have state-funded pharmacy
    assistance programs that they propose to include in whole or in part in
    their demonstrations. (App. II describes these demonstration proposals.)

    As of May 2004, most of the pending proposals were not under active review
    by HHS primarily because the department had not determined the effect of
    the Medicare prescription drug legislation on the Pharmacy Plus
    demonstration proposals. HHS officials told us in October 2003 that
    Arkansas, Rhode Island, and Indiana officials had asked that review of
    their states' proposals be put on hold until after Congress had completed
    consideration of the Medicare legislation. At that time HHS was still
    reviewing a proposal from North Carolina but regarded proposals from four
    other states as inactive because longtime negotiations with those states
    had reached an impasse. Connecticut and New Jersey, for example, already
    had broad state-funded drug coverage for seniors with incomes up to 200
    percent of FPL. In such cases, HHS has been unwilling to approve federal
    financing for existing state-funded programs.

    Medicare Prescription Drug Legislation May Affect Pharmacy Plus Initiative

    The Medicare Prescription Drug, Improvement, and Modernization Act of 2003
    (MMA) will provide seniors access to a Medicare-covered prescription drug
    benefit and will likely affect how HHS and the states manage the Medicaid
    Pharmacy Plus initiative. This law gives Medicare

    22A Hawaii Medicaid official reported that the agency was unable to
    fundamentally change the nature of the proposal during HHS review because
    the proposal had been outlined in state law.

    beneficiaries the opportunity to enroll for prescription drug coverage to
    begin on January 1, 2006, and, as an interim measure, the opportunity to
    enroll for Medicare-endorsed drug discount cards beginning in June 2004.
    It also directs HHS to establish effective coordination between Medicare
    plans and state Medicaid and pharmacy assistance programs and to establish
    a commission to address these and other transition issues.23 In 2006, the
    Medicare drug benefit will replace Medicaid as the primary source of
    prescription drug coverage for low-income seniors who would have been
    eligible for both full benefits under Medicaid and drug benefits under
    Medicare plans.24 Under MMA, individuals with limited assets and incomes
    below 150 percent of FPL will be eligible for federal subsidies to assist
    with the drug benefit's cost-sharing requirements.25 But because Pharmacy
    Plus demonstrations in Illinois, South Carolina, and Wisconsin cover
    individuals with incomes above 150 percent and at or below 200 percent of
    FPL regardless of other assets, some current demonstration beneficiaries
    may not qualify for these subsidies. Pharmacy Plus beneficiaries are
    likewise ineligible for the Medicare drug discount cards.26

    23Specifically, the law establishes a State Pharmaceutical Assistance
    Transition Commission to develop a proposal for addressing the
    transitional issues facing statefunded pharmacy assistance programs and
    their participants because of implementation of the new Medicare
    prescription drug benefit. Members of the commission are to include
    representatives of states operating pharmacy benefit programs, interested
    organizations, private insurers, and others. The commission is required to
    submit a detailed proposal, including specific legislative or
    administrative recommendations, to Congress and the President by January
    1, 2005. See Pub. L. No. 108-173, S: 101(a), 117 Stat. 2071, 2128-31
    (adding sections 1860D-23 and 1860D-24 to SSA) (to be codified at 42
    U.S.C. S:S: 1395w-133 and 1395w-134); see also section 106, 117 Stat.
    2168-9.

    24See Section 103(c), 117 Stat. 2158 (amending section 1935 of SSA) (to be
    codified at 42 U.S.C. S: 1396n-5).

    25For example, individuals with incomes below 135 percent of FPL generally
    will be entitled to a full premium subsidy; individuals with incomes up to
    150 percent of FPL will be entitled to an income-related premium subsidy
    determined on a sliding scale. In addition, after reaching an
    out-of-pocket threshold of $3,600, individuals with incomes below 135
    percent of FPL will have no co-payment for covered drugs, while those with
    incomes below 150 percent of FPL will pay either $2 or $5 for each drug.
    See Section 101(a), 117 Stat. 2107-9 (adding sections 1860D-14(a)(1) and
    (2) to SSA) (to be codified at 42 U.S.C. S:S: 1395w-114(a)(1) and (2));
    see also section 101(a), 117 Stat. 2077-9 (adding section 1860D2(b)(4) to
    SSA) (to be codified at 42 U.S.C. S: 1395w-102(b)(4)).

    26See Section 101(a), 117 Stat. 2132-3 (adding section 1860D-31(b) to SSA)
    (to be codified at 42 U.S.C. S: 1395w-141(b)).

    HHS Has Not Ensured That Approved Demonstrations' Spending Limits Will Be
    Budget Neutral

    As of May 2004, HHS indicated it was considering how enactment of the new
    law would affect Pharmacy Plus demonstrations and proposals.27 Officials
    from the four states with approved demonstrations told us in December 2003
    that they were uncertain how the law would affect their demonstrations,
    but they had no plans to end the demonstrations early. After the Medicare
    prescription drug benefit begins in 2006, some demonstrations could be
    discontinued or modified. Early termination could have an impact on the
    demonstrations' budget neutrality, which often depends on savings in later
    years to offset higher start-up costs. Officials in Illinois and Florida
    indicated in December 2003 that their pharmacy demonstrations might be
    converted to state-funded programs in 2006.

    HHS has not adequately ensured that the spending limits it has approved
    for Pharmacy Plus demonstrations will be budget neutral-in other words,
    that the federal government will spend no more under the demonstrations
    than without them. For all four demonstrations, HHS approved 5-year
    spending limits based on projections of cost and beneficiary enrollment
    growth that exceeded benchmarks that department officials told us they
    considered in assessing the reasonableness of states' demonstration
    proposals. These cost and enrollment growth benchmarks incorporate states'
    historical experience and expectations for Medicaid program growth
    nationwide. The discrepancies between the growth benchmarks and the
    approved growth rates were greatest for Illinois and Wisconsin. Neither
    HHS's negotiations with the states nor the department's rationale for
    approving higher-than-benchmark growth rates is well documented. Had HHS
    based the 5-year demonstration spending limits on the benchmark growth
    rates, the federal share of approved spending would be considerably lower,
    particularly for Illinois and Wisconsin: specifically,

    27In commenting on a draft of this report, HHS said that it expected less
    need for Pharmacy Plus demonstrations when Medicare coverage for
    prescription drugs is expanded under MMA and that states would need to
    decide if they want to continue their demonstrations.

    $1 billion lower in Illinois and $416 million lower in Wisconsin.28 For
    Florida and South Carolina, the federal share of approved spending would
    have been $55 million and $42 million lower, respectively.

    HHS Approved Projected Growth Rates Exceeding Benchmarks

    HHS based the Pharmacy Plus demonstration spending limits it approved on a
    range of estimated future growth rates for cost per beneficiary and for
    enrollment, which in some cases exceeded benchmarks29 the department told
    us it considered in assessing the reasonableness of states' proposals. A
    standard Pharmacy Plus application form developed by HHS and a technical
    guidance document are the chief sources of criteria and formal guidance to
    states for developing demonstration proposals. But HHS has not established
    written criteria for how it reviews and approves the growth rates that
    states propose. These growth rates are key elements in the budget
    neutrality negotiations between states and the federal government because
    higher rates result in more generous spending limits, which represent the
    federal government's agreed-on maximum spending for all the states'
    Medicaid seniors during the demonstrations. An inappropriately high
    spending level can represent a higher federal liability than warranted.

    The process used by HHS and the states to determine whether states'
    proposed Pharmacy Plus demonstrations will be budget neutral requires
    comparing two cost estimates: (1) projected 5-year costs of a state's
    existing Medicaid program for seniors ("without-demonstration costs") and
    (2) projected 5-year costs of the state's existing program plus the drug
    benefits and beneficiaries added by the demonstration ("withdemonstration
    costs"). These calculations factor in projected growth in

    28We have reported that by allowing Illinois to include impermissible
    costs in its projected spending under the Medicaid program without the
    demonstration, HHS approved a Pharmacy Plus demonstration in the state
    that was not budget neutral, inappropriately raising allowed costs for the
    project by $275 million. We recommended to the Secretary of HHS that the
    agency ensure that valid methods are used to demonstrate budget neutrality
    and that it apply such methods to adjust the federal spending commitment
    under Illinois' demonstration. See U.S. General Accounting Office,
    Medicaid and SCHIP: Recent HHS Approvals of Demonstration Waiver Projects
    Raise Concerns, GAO-02-817 (Washington, D.C.: July 12, 2002). As of March
    2004, HHS had not adjusted the state's spending limit.

    29We use the term "benchmark" throughout this report to describe the cost
    and Medicaid enrollment growth rates HHS considered when making its
    approval decisions for Pharmacy Plus demonstrations. We use "benchmark"
    rather than "criterion" because, in contrast to its practice in approving
    some other section 1115 demonstrations, HHS did not have written cost or
    enrollment growth criteria for Pharmacy Plus.

    costs and enrollment each year. As long as projected with-demonstration
    costs do not exceed projected without-demonstration costs, the
    demonstration can be approved as budget neutral. As a result, the
    projected costs of a state's existing, without-waiver Medicaid program for
    seniors effectively sets the spending limit for all services provided to
    all Medicaid seniors in the state for the 5-year demonstration term.
    Appendix I outlines the basic steps HHS follows in setting Pharmacy Plus
    demonstration spending limits.

    To determine budget neutral spending limits for the pharmacy
    demonstrations, HHS officials told us they consider the following for
    estimating growth in costs and enrollment through the course of the
    demonstrations:

    o  	For cost growth per beneficiary, similar to guidelines for other types
    of section 1115 demonstrations,30 HHS seeks to approve a growth rate equal

    to the lower of either the state's historical average annual growth in
    perbeneficiary cost (that is, the average annual rate for the 5 years
    before the demonstration proposal) or the nationwide projected growth
    rate, developed by CMS's Office of the Actuary, for Medicaid cost per
    beneficiary age 65 or older.31

    o  	For enrollment growth, HHS considers the state's historical average
    annual growth in enrollment as a starting point and, to a lesser extent,
    the CMS Actuary's nationwide rate, but it allows states to present a
    rationale for a higher rate that anticipates rising future enrollments.

    HHS's approved growth rates in some cases exceeded these benchmarks (see
    table 2). For per-beneficiary cost growth rates in Florida, Illinois, and
    Wisconsin, HHS did not approve the lower of either the state's historical

    30The Health Insurance Flexibility and Accountability (HIFA) initiative,
    for example, another Medicaid section 1115 demonstration waiver
    initiative, specifies a similar benchmark for cost growth per beneficiary
    in its standard application form. The HIFA initiative provides two options
    for projecting cost growth per beneficiary: the Medical Care Consumer
    Price Index, developed by the Bureau of Labor Statistics, or a
    state-specific projection of what the program would have cost without the
    demonstration. For the second option, HHS policy is to apply the lower of
    state-specific experience-using 5 years of Medicaid data-or the CMS
    Actuary's Medicaid baseline for the eligible groups covered by the
    demonstration.

    31The CMS Actuary's growth projections in effect during budget discussions
    for the four approved Pharmacy Plus demonstrations were a 6.3 percent
    annual increase in cost per beneficiary and a 1.8 percent annual increase
    in enrollment.

    average rate or the CMS Actuary's rate of 6.3 percent. Similarly, for
    beneficiary enrollment growth rates, HHS approved rates for Illinois and
    Wisconsin that exceeded both the states' historical experience and the CMS
    Actuary's 1.8 percent projected annual growth rate. In Illinois' case, the
    approved rate for beneficiary enrollment growth-5 percent per year over
    the 5-year demonstration-was considerably higher than the state's 5-year
    historical average enrollment growth of 1.6 percent per year.

    Table 2: HHS-Approved, State Historical, and CMS Actuary Growth Rates

     Annual growth rates in percent Cost growth rates Enrollment growth rates State

    HHSapproved

                                                         State historical average

    CMS Actuary

    HHSapproved

                                                         State historical average

    CMS Actuary

                            Florida   6.5       6.5      6.3      1.4      1.4
                         Illinois a   5.5       4.5      6.3      5.0      1.6
                   South Carolina b   6.3      10.0      6.3      1.0      0.7
                          Wisconsin   6.3       5.4      6.3      2.0       0.01c

    Source: GAO analysis of HHS and state documents.

    aThe state historical average rates for Illinois (4.5 percent cost growth
    and 1.6 percent enrollment growth) reflect updated information provided by
    the state to HHS shortly before its approval decision on January 28, 2002.
    This information does not appear in the demonstration application that was
    submitted on July 31, 2001.

    bFor South Carolina, historical average rates reflect 3 years of data,
    rather than the generally required 5 years, because cost and enrollment
    data for Medicaid seniors were incomplete for 2 of the 5 years (data for
    certain long-term care waivers for seniors were not included).

    cThis figure is lower than the 0.12 percent enrollment growth rate
    Wisconsin proposed in its demonstration application. We included 5 years
    of data in calculating our average rate for the state, while the state
    itself averaged 3 years of data, excluding 2 years when enrollment
    declined slightly.

    Basis for Approved Spending Limits Not Clear or Well Documented

    HHS's basis is unclear for approving growth rates higher than the
    benchmarks in some cases, particularly for approving higher enrollment
    growth rates for Illinois and Wisconsin. The department's negotiation
    process with these two states, during which officials reached agreement on
    allowed growth rates, was not documented, nor was its rationale for
    approving rates that differed from the lower of state historical
    experience or the CMS Actuary's projections. In particular, HHS's internal
    decision memorandums-which described the factors that HHS, CMS, OMB, and
    others considered in reviewing the demonstrations and which are not
    publicly available-did not provide the rationale for the approved spending
    limits, and neither did the publicly available demonstration approval
    letters.

    HHS and state officials told us that Illinois and Wisconsin used a variety
    of arguments to convince the department that their situations warranted
    higher enrollment growth rates. But the states provided little specific
    documentation to HHS or to us to support these arguments. For example:

    o  	Illinois asserted that its projected annual enrollment growth rate for
    the demonstration years from 2002 through 2007 should be significantly
    higher than its 5-year average historical growth rate of 1.6 percent,
    because income eligibility levels for seniors in its Medicaid program
    increased from 41 to 100 percent of FPL from July 2000 through July 2002.
    As support, the state provided HHS with updated Medicaid enrollment
    data-which were more recent than those included in the original
    demonstration application and showed increased growth rates for seniors
    compared with earlier years-but these rates were still lower than the 5
    percent HHS approved and did not raise the historical average to 5
    percent.32 The state did not provide documents with actuarial projections
    of the estimated number of people expected to enroll in Medicaid because
    of the change in eligibility criteria. Illinois justified applying the 5
    percent annual growth rate to all 5 years of the pharmacy demonstration by
    providing a chart showing that enrollment in a different state program,
    SCHIP, had grown more than 5 percent per year on average for 3 years after
    that program's eligibility criteria were expanded. In our view, however,
    Illinois' SCHIP enrollment experience with children does not provide a
    reasonable basis for predicting enrollment by seniors in the Pharmacy Plus
    demonstration.

    o  	Wisconsin asserted that its projected annual enrollment growth rate
    for the demonstration years should be significantly higher than either its
    5-year unadjusted historical growth rate of 0.01 percent or the 0.12
    percent rate based on 3 years of historical data reported in its
    application because of the anticipated effects of a nationwide Social
    Security Administration mail outreach program to low-income Medicare
    beneficiaries. This outreach program informed seniors enrolled in Medicare
    about other benefits, including Medicaid assistance for Medicare
    cost-sharing

    32Illinois provided HHS with updated information on senior enrollment in
    the state's Medicaid program, including growth of 1.3 percent between
    state fiscal years 1999 and 2000 and 4.2 percent between state fiscal
    years 2000 and 2001. These updated figures are incorporated in the 5-year
    historical average enrollment growth rate of 1.6 percent, covering state
    fiscal years 1997 through 2001.

    requirements, for which they might qualify.33 Wisconsin officials told us
    they proposed a 4 percent future annual enrollment growth rate for seniors
    in the expectation that this outreach program, along with factors
    including an aging population and the economic downturn, would increase
    Medicaid enrollment. According to HHS, Wisconsin did not document any
    projections of how many newly eligible Medicaid individuals could be

    prompted to enroll after the Social Security Administration outreach
    mailing. Instead, it submitted information based on a review of a similar
    outreach effort in Minnesota. According to Wisconsin state officials,
    during negotiations HHS proposed 1 percent as a more reasonable growth
    rate, and HHS and state officials agreed to an approved enrollment growth
    rate of 2 percent per year. Our related work suggests that Wisconsin may
    be justified in claiming some increase in Medicaid enrollment as a result
    of the outreach program, but the effect appears to be less than 1 percent.
    Notably, although the Social Security Administration mail outreach program
    was nationwide, HHS did not consider its effects when approving enrollment
    rates for other states.34

    Demonstration Spending Limits Would Be Lower if Based on Benchmark Rates

    Application of benchmark rates for projected per-beneficiary cost and
    enrollment growth would have produced lower spending limits for all four
    approved Pharmacy Plus demonstrations (see table 3). Benchmark-based
    limits on combined federal and state spending would be approximately $3
    billion lower over 5 years than what HHS approved for the four
    demonstrations, and the federal share alone would come to about $1.6
    billion less. The higher-than-benchmark growth rates HHS approved for
    Illinois and Wisconsin accounted for most of these differences. Had the

    33The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection
    Act of 2000 requires the Social Security Administration to notify Medicare
    beneficiaries nationwide about other benefits, including Medicaid, for
    which they could potentially be eligible. See Pub. L. No. 106-554, App. F,
    S: 911(a), 114 Stat. 2763, 2763A-583 (adding section 1144 to SSA) (to be
    codified at 42 U.S.C. S: 1320b-14). See U.S. General Accounting Office,
    Medicare Savings Programs: Results of Social Security Administration's
    2002 Outreach to Low-Income Beneficiaries, GAO-04-363 (Washington, D.C.:
    Mar. 26, 2004).

    34See GAO-04-363. In 2002, the Social Security Administration outreach
    program sent letters to about 16.4 million low-income Medicare
    beneficiaries nationwide, yielding an estimated 74,000 additional
    individuals-a further increase in enrollment of 0.5 percent-enrolling in
    Medicaid programs that help low-income Medicare beneficiaries pay their
    Medicare premiums and, in some cases, their deductibles and coinsurance.
    On the basis of a sample, we estimated that Wisconsin experienced a
    statistically significant increase in additional Medicaid enrollment after
    the Social Security Administration mailing, although at 0.4 percent, the
    response was slightly less than the U.S. average. The Social Security
    Administration outreach program continued on a smaller scale in 2003 and
    thereafter.

    spending limit for Illinois' demonstration, in particular, been based
    strictly on the benchmark rates, combined federal and state spending would
    have been almost $2.2 billion, or 15 percent, lower, and the federal
    government's liability under the demonstration (at the state's 50 percent
    federal matching rate) lower by more than $1 billion. The difference is
    less pronounced for Wisconsin, where the approved federal and state
    spending limit exceeds what it would have been had benchmark rates been
    applied by about $713 million, translating into about $416 million in
    additional federal spending.

    Table 3: HHS-Approved and Benchmark 5-Year Spending Limits

                                  Dollars in millions

    Dollar difference (percentage Federal share of States HHS-approved
    Benchmark difference)a differenceb

                         Florida   $16,669    $16,575      $94 (0.6)          $55
                        Illinois      14,047   11,880    2,167 (15.4)       1,083
                  South Carolina       4,962   4,902       60 (1.2)
                       Wisconsin       8,378   7,666       713 (8.5)          416
                          Totala   $44,056    $41,023    $3,033 (6.9)      $1,596

    Source: GAO analysis of HHS and state documents.

    Notes: Figures reflect total approved federal and state spending limits
    for all Medicaid services for seniors over the 5 years of each
    demonstration, including spending on new Pharmacy Plus prescription drug
    benefits. We calculated benchmark spending limits using, for cost growth
    per beneficiary, the lower of either the state's historical average cost
    growth rate or the CMS Actuary's projected rate, and for enrollment
    growth, the state's unadjusted 5-year historical average enrollment growth
    rate, except for South Carolina, where we used the average of 3 years'
    data.

    aDollar differences and totals are based on numbers before rounding.

    bFederal share calculated by applying fiscal year 2003 federal Medicaid
    matching rates for each state to the dollar difference for that state:
    Florida, 58.8 percent; Illinois, 50 percent; South Carolina, 69.8 percent;
    and Wisconsin, 58.4 percent.

    The spending limits HHS approved for Illinois and Wisconsin exceed
    estimates based on consistent application of the benchmark growth rates by
    15.4 percent and 8.5 percent, respectively.35 The limits approved for

    35We calculated Wisconsin's benchmark spending limit based on the 0.01
    percent average annual enrollment growth rate for 5 years of historical
    data, which included 2 years when enrollment declined slightly. Had the
    0.12 percent average annual enrollment growth rate been used, based on 3
    years of historical data as the state proposed in its demonstration
    application, Wisconsin's combined federal and state spending limit would
    have been $7.9 billion, about 5.7 percent, or $477 million, below what HHS
    approved.

    Florida and South Carolina, while not budget neutral compared with the
    benchmark spending estimates, reflect relatively small differences.
    Florida's approved spending limit exceeds the benchmark estimate by less
    than 1 percent-$94 million of a 5-year approved federal and state spending
    limit of nearly $16.7 billion-and South Carolina's approved spending limit
    exceeds the benchmark by 1.2 percent, or $60 million.

    CBO has similarly reported that Pharmacy Plus demonstrations are likely to
    increase federal Medicaid spending. Before passage of MMA, CBO estimated
    that the Pharmacy Plus demonstrations would add about $18 billion to
    federal Medicaid spending over the 10 years from 2004 through 2013.
    According to CBO officials, the agency considered a range of scenarios for
    how the initiative might grow with new demonstration approvals and
    estimated the initiative's overall effect on Medicaid spending.36 The
    officials told us that CBO did not include any of the demonstrations'
    projected savings in its analysis because it did not find the argument
    that savings would occur convincing.

    Neither data from state experience nor other research supports the savings
    assumptions necessary for budget neutrality in the Pharmacy Plus
    demonstrations. In developing their demonstration proposals, states
    assumed that keeping low-income seniors healthy-thus preventing them from
    spending down their financial resources on health services and "diverting"
    them from Medicaid eligibility-would generate savings to help offset the
    increased costs of providing a new drug benefit. Without statespecific
    evidence, HHS approved savings assumptions negotiated with the states,
    including significant projected reductions in Medicaid senior enrollment.
    But the limited research available suggests that potential health care
    savings due to improved access to prescription drugs are likely to be much
    less than the levels the states assumed and HHS approved. Had more
    conservative savings assumptions been used to estimate the demonstrations'
    costs, the proposals likely could not have been approved as budget
    neutral. Moreover, concerns have arisen about what actions states might
    take to control spending on behalf of seniors if estimated

    Pharmacy Plus Savings Assumptions Not Well Supported

    36According to CBO officials, the agency did not analyze the cost impact
    of individual Pharmacy Plus demonstrations but estimated potential impact
    on Medicaid spending overall under various growth scenarios. CBO estimated
    that roughly 1.2 million people would join the Medicaid rolls for the
    prescription drug benefit only. See U.S. Congressional Budget Office, An
    Analysis of the President's Budgetary Proposals for Fiscal Year 2004: An
    Interim Report (Washington, D.C.: March 2003).

    savings do not accrue and states reach or exceed their spending limits
    under the demonstrations.

    HHS-Approved Savings Assumptions Are Not Supported by State Experience

    The approved Pharmacy Plus demonstrations count on expected savings based
    on reductions in the projected number of seniors who will enroll in
    states' Medicaid programs-ranging from a 3 percent reduction in Florida to
    a 25 percent reduction in South Carolina over the demonstrations' 5 years.
    The dollar amounts of combined federal and state savings projected under
    these assumptions in the demonstrations' budget neutrality calculations
    range from $480 million in Florida to $2 billion in Illinois (see table
    4).

    Table 4: States' Projections of Medicaid Senior Populations after 5 Years,
    with and without HHS-Approved Pharmacy Plus Demonstrations

                     Projections                Florida  Illinois South Wisconsin
                                                               Carolina
          Total projected Medicaid seniors,     210,200 186,683 90,006     70,412
           without demonstration, by year 5
        Total projected Medicaid seniors, with  204,300 145,240 67,946     57,297
               demonstration, by year 5
         Projected number of seniors diverted     5,900   41,442 22,060    13,115
               from Medicaid by year 5
         Annual reduction in Medicaid seniors         3             5 5     2.5-5
                     (percentage)
    Cumulative 5-year reduction in Medicaid        3           22 25
                 seniors (percentage)

    Projected dollar savings due to diversion of seniors from Medicaid
    by year 5 $480 million $2 billion $769 million $926 million

    Source: GAO analysis.

    Note: Analysis of state and HHS documents and of Jocelyn Guyer, The
    Financing of Pharmacy Plus Waivers: Trade-offs between Expanding Rx
    Coverage and Global Caps in Medicaid (Washington, D.C.: Kaiser Commission
    on Medicaid and the Uninsured, 2003).

    To project the extent to which Pharmacy Plus would reduce its new
    enrollment of Medicaid seniors, and thus its total senior enrollment,
    Florida made the relatively conservative assumption that the drug benefit
    would enable seniors to avoid Medicaid eligibility for 1 year; after 5
    years, the state's total projected number of Medicaid seniors would be
    5,900 (3 percent) lower with the demonstration than without it. The other
    states, in contrast, assumed that everyone diverted in each year of their
    demonstrations would remain out of Medicaid throughout the full
    demonstration period and would not, for example, enter a nursing home,
    which often results in Medicaid eligibility. As a result, Illinois, South
    Carolina, and Wisconsin projected reductions of nearly 20 percent or more
    in Medicaid senior enrollments at the end of 5 years. Had these states
    made more conservative assumptions-assuming, for example, as Florida chose
    to, that providing access to prescription drugs would delay seniors'

    entry into Medicaid by only 1 year instead of 5-their projected
    withdemonstration costs would have exceeded projected withoutdemonstration
    costs and would not have been budget neutral.

    Although states' demonstration proposals aim to achieve savings by
    expanding seniors' access to prescription drugs and improving their
    health, in practice it appears that some states' estimates of expected
    savings may have been derived in part by determining how much in savings
    was needed to demonstrate budget neutrality. In their proposals, none of
    the three states that previously had state-funded pharmacy assistance
    programs (Florida, Illinois, and South Carolina) provided data from those
    programs that specifically supported such high projected savings. Based on
    conversations with Wisconsin health care financing officials and a review
    of documents, we found that the state's demonstration savings estimates
    were a residual of the budget-negotiating process, derived from
    determining how much was needed in savings to demonstrate budget
    neutrality, rather than from research or data about what was realistic.

    Premise behind Approved Demonstrations Not Well Supported by Research

    The premise that Pharmacy Plus demonstrations will generate savings by
    keeping low-income seniors from becoming Medicaid-eligible is not
    supported by research. In a previous report, we reviewed the research
    studies cited in Illinois' demonstration proposal and found that they did
    not sufficiently support the state's theory that a full drug benefit for
    lowincome seniors would yield the projected level of savings.37 Although
    these studies indicated that access to prescription drugs benefited people
    in poor health, they all focused on people who already had specific
    diagnosed conditions, such as diabetes, heart disease, or HIV, rather than
    on a general population of seniors. An extensive 2003 review of research
    examining drug coverage for low-income seniors found relatively few
    studies about the effect on Medicaid spending of expanded access to a

    37GAO-02-817.

    broad prescription drug benefit.38 The one study this review considered
    most relevant, conducted in the mid-1980s, assessed Pennsylvania's
    statefunded program, Pharmaceutical Assistance Contract for the Elderly
    (PACE), and found that despite high enrollment, Medicaid entry among PACE
    participants was neither prevented nor delayed enough to have a
    discernible effect on the state's overall Medicaid budget.39 Other studies
    of broad prescription drug benefits for low-income seniors, including one
    of New York's program, found some reductions in participants' health care
    costs but mainly for inpatient hospital care, which, for people age 65 or
    older, is covered by Medicare rather than Medicaid.40 Still other studies
    in this review examined the more limited question of how access to
    appropriate drugs affects people already suffering from specific
    illnesses. Such research sheds little light on the cost-effectiveness of
    offering comprehensive drug benefits to a broad population of low-income
    seniors.

    Some states that have not submitted Pharmacy Plus proposals examined the
    diversion and savings assumptions behind the demonstrations and found that
    they would not likely be realized. For example, in considering whether to
    apply for a demonstration, Minnesota found a substantial risk that seniors
    receiving only a drug benefit would eventually become Medicaid-eligible
    over a 5-year follow-up period. In its optimal model, the study estimated
    that to generate enough savings to offset the new drug costs, the risk of
    Medicaid entry would have to be reduced by 50 percent

    38Ellen O'Brien, "Will Prescription Drug Coverage for the Low-income
    Elderly Pay for Itself? A Review of the Literature," Georgetown University
    Health Policy Institute working paper, prepared for the Kaiser Commission
    on Medicaid and the Uninsured, May 2003, cited with permission. See
    www.hpi.georgetown.edu/pdfs/obrienrxcostoff.pdf, downloaded March 16,
    2004. The author identified sources through a Medline search of the
    research literature and a manual search of citations in published papers.
    The analysis covered research literature on the effects of prescription
    drug coverage on low-income seniors, access limits in Medicaid and other
    insurance plans, studies of specific drugs or drug classes, and studies of
    the cost-effectiveness of recent prescription drugs.

    39Bruce Stuart and Daniel Lago, "Prescription Drug Coverage and Medical
    Indigence among the Elderly," Journal of Aging and Health, vol. 1, no. 4
    (1989), 452-469.

    40In 2002 we reported that in assessing the cost of a Medicare
    prescription drug benefit at that time, CBO, OMB, and CMS's Actuary did
    not accept the premise that providing a prescription drug benefit to
    low-income seniors would pay for itself (GAO-02-817). CBO raised several
    reasons for caution, including that greater use of drugs among seniors
    could increase the risk of side effects and adverse drug reactions, which
    could in turn increase use of hospitals, emergency rooms, and other health
    care services. CBO concluded that Medicare beneficiaries without any drug
    coverage already consumed a large number of prescription drugs, and
    therefore any savings due to increased access would likely be small.

    for non-nursing-home enrollees and by 30 percent for those who become
    eligible after entering a nursing home. Minnesota Medicaid officials
    concluded that this scenario was not realistic and dropped the state's
    Pharmacy Plus demonstration proposal.41

    Pennsylvania also conducted a Pharmacy Plus demonstration feasibility
    study for PACE and the related Pharmaceutical Assistance Contract for the
    Elderly Needs Enhancement Tier (PACENET) programs, which together enrolled
    about 270,000 seniors in 2002.42 The study found that to offset drug
    benefit costs, the programs would need aggressive cost containment,
    through such approaches as increased co-payments, reduced provider
    reimbursements, and a preferred drug list. In addition, the study noted
    that in states with generous drug benefits, savings from expansion to more
    seniors are particularly difficult to realize because most beneficiaries
    who would have avoided expensive nursing home care have already done so.
    As of March 2004, Pennsylvania had not submitted a Pharmacy Plus
    demonstration proposal.

    Concerns about Effects on States if Savings Do Not Accrue

    Although it is early in demonstration implementation, we and others have
    raised concerns about how states may be affected if savings under Pharmacy
    Plus do not accrue and the states' spending reaches or exceeds HHS's
    approved spending limits. We noted in our July 2002 report that the
    Illinois Pharmacy Plus demonstration, as approved, makes several risky
    assumptions with regard to the extent of the expected savings.43 In such
    cases the federal government would not be at financial risk, but the
    states would be, because the spending limits cover services for all the
    states' Medicaid seniors. Any expenditures for Medicaid seniors beyond the
    demonstration's federally matched spending limit would be entirely the
    state's responsibility. Officials in Florida and Wisconsin expressed
    concerns that their demonstration spending limits, based on fixed rates of
    growth projected over 5 years, could not be adjusted to reflect

    41The results of this study by JEN Associates of Cambridge, Massachusetts,
    were reported in a memorandum to the Minnesota Department of Human
    Services, "Feasibility Analysis of PDP Expansion," dated March 7, 2002.

    42Pennsylvania's PACE program has operated since 1984 and PACENET has
    provided an expanded benefit to additional low-income seniors since 1996.
    See Mercer Government Human Services Consulting, Pharmacy Plus 1115 Waiver
    Feasibility Study, Commonwealth of Pennsylvania (Phoenix: October 2002).

    43See GAO-02-817, 23-24.

    States Have Taken Few Steps to Evaluate Demonstrations, and HHS Has Not
    Ensured Sufficient or Timely Progress Reporting

    unpredictable changes in costs and enrollment growth. One study has raised
    concerns about the potential effects on Medicaid seniors, noting that as
    state spending approaches the limit of what the federal government will
    match, states may feel pressed to reduce optional expansions of
    eligibility or optional benefits.44 States could also try to control
    spending without reducing eligibility or services by lowering provider
    reimbursements-a step already taken in Illinois, although not in response
    to pharmacy demonstration enrollment or spending-or by implementing
    preferred drug lists.45

    As of February 2004, efforts by the states and HHS to evaluate and monitor
    the four approved demonstrations, and to address some of the research
    questions the Pharmacy Plus initiative raises, were in their early stages.
    The four states with approved demonstrations had taken few steps toward
    implementing the evaluation plans required as a condition of approval, and
    an independent evaluation of two of the demonstrations, contracted by HHS
    and started in October 2002, was not scheduled to report until September
    2005. In the interim, HHS has not ensured that the states' required
    progress reports contain sufficient information for monitoring whether the
    demonstrations are functioning as intended or that these reports are
    submitted in a timely manner.

    States Have Taken Few As a condition of Pharmacy Plus approval, HHS
    requires states to design Steps to Implement and carry out an evaluation
    and to report their results after the Evaluation Plans demonstration
    ends.46 States are required to submit a plan for this

    evaluation in their proposals and in the operational protocols that HHS
    approves before states begin the demonstrations. Although the four states
    with approved Pharmacy Plus demonstrations submitted the required
    evaluation plans-containing research hypotheses, possible outcome

    44Jocelyn Guyer, The Financing of Pharmacy Plus Waivers: Trade-offs
    between Expanding Rx Coverage and Global Caps in Medicaid (Washington,
    D.C.: Kaiser Commission on Medicaid and the Uninsured, May 2003).

    45According to an Illinois official, the reimbursement rate for all
    providers, including pharmacists, was cut by 6 percent in state fiscal
    year 2003, and that step helped the pharmacy demonstration operate well
    below its targeted first-year spending limit.

    46States are required to provide HHS with drafts of their final evaluation
    reports within 180 days of the end of the 5-year demonstrations; Pharmacy
    Plus terms and conditions do not require interim evaluation reports from
    the states. HHS also requires the states to cooperate with federal
    evaluators and contractors in the independent evaluation.

    measures, and data needs-as of February 2004, they had taken few steps to
    put their evaluation plans into practice.

    As HHS requires, the four states' initial proposals and operational
    protocols included plans for how they would evaluate whether their
    demonstrations were working as intended. With some variations, all the
    plans proposed to address the overall research question of how providing a
    pharmacy benefit to non-Medicaid-covered seniors would affect Medicaid
    costs, service use, and future eligibility trends, including whether
    savings achieved by diverting individuals from Medicaid eligibility would
    offset the benefit's cost. The first demonstration proposal, from
    Illinois, initially contained an extensive plan to assess demonstration
    outcomes; the plan later changed significantly. The initial plan proposed
    that the state collect data from sources such as Medicaid and Medicare
    claims systems, surveys of participants or case-study interviews, and
    demonstrationspecific claims. In terms of outcome measures, Illinois' plan
    proposed comparing seniors who do have the drug benefit with seniors who
    do not on such measures as hospitalization rates, health care service
    costs, use of emergency room services, and rates and length of nursing
    home stays. A later version of Illinois' plan (as described in the state's
    operational protocol), however, calls for using existing Medicaid claims
    data for only one outcome measure, Medicaid spending for seniors.

    Both South Carolina and Wisconsin adopted Illinois' relatively extensive
    initial evaluation plan in their demonstration proposals, and as of
    February 2004, neither South Carolina nor Wisconsin had changed its
    proposed plan. Florida, which did not submit an evaluation plan in its
    demonstration proposal, provided a two-paragraph discussion in its
    operational protocol. This discussion listed several hypotheses and
    indicators to be monitored, noted that data would be collected using the
    state's current Medicaid system, and gave no details about how or when the
    plan would be implemented.

    As of February 2004, the states had taken few steps to implement their
    demonstration evaluation plans or to determine how they would collect or
    analyze data to support their evaluations. States' evaluation activities
    were generally limited to collecting and reporting to HHS data from their
    existing Medicaid data systems. Although plans for Illinois, South
    Carolina, and Wisconsin call for starting their evaluations at the start
    of their demonstrations to draw on data about services used before and

    throughout beneficiaries' enrollment, these states and Florida indicated
    they were just beginning to collect and report data to implement their
    evaluation plans:

    o  	Florida and South Carolina officials told us that they had not decided
    whether their evaluations would be designed and conducted by the state
    Medicaid agency or by an outside entity such as a university. Neither
    state had developed an evaluation implementation schedule.

    o  	Illinois and Wisconsin reported providing extensive state data for
    HHS's independent evaluation of their demonstrations but, at the time of
    our review, had not begun their own evaluations. State officials told us
    they understood that participating in the independent evaluation would
    exempt them from conducting their own evaluations. But HHS officials told
    us that state evaluations were still required.

    HHS Has Contracted for an Independent Pharmacy Plus Evaluation

    HHS has contracted with independent university researchers for an
    extensive evaluation of the Pharmacy Plus demonstrations in Illinois and
    Wisconsin. The evaluation's goal is to document achievements and
    difficulties in implementing a Pharmacy Plus demonstration, as well as to
    identify impacts on entry into Medicaid and on costs to Medicare.
    According to HHS, the evaluation aims to address whether providing
    prescription drug benefits to non-Medicaid seniors will keep individuals
    relatively healthy, divert them from full Medicaid eligibility, and thus
    lower Medicaid and Medicare costs. To address these issues, the evaluation
    contract calls for four components of work, including (1) site visits to
    Illinois and Wisconsin to describe the demonstrations and their
    implementation; (2) telephone surveys of demonstration beneficiaries in
    those states about their health status, access to health care, and prior
    drug coverage; (3) analysis of Medicaid, Medicare, and demonstration
    claims data to assess patterns of drug use and effects on Medicaid and
    Medicare costs; and (4) an analysis of enrollment trends in each state's
    Medicaid program to determine if diversion assumptions are met. In
    addition, the evaluation aims to compare the experiences of demonstration
    beneficiaries with a similar population in another state that does not
    offer a prescription drug benefit.47

    47The evaluators chose Ohio because of its proximity to both Illinois and
    Wisconsin; the characteristics of its senior population; and likely
    similarities in the attitudes of that state's policymakers, physicians,
    and public about the use of long-term care services.

    Final results for all components of this planned 3-year evaluation, which
    began in October 2002, are scheduled to be reported to HHS by September
    2005.48 Specifically, a final report to HHS on the patterns of drug use is
    due in September 2004; final reports on the demonstrations' cost effects
    on Medicaid and Medicare are due in September 2005. The evaluation
    contract does not indicate when results from the work may be available to
    other researchers or the public.

    According to the HHS evaluation project officer, the independent
    evaluators completed state site visits to Illinois and Wisconsin in July
    2003 for the descriptive work component and submitted draft reports to HHS
    in December.49 These reports were in review as of March 2004, and the
    project officer expected them to be approved and posted on HHS's Web site,
    although he did not know when posting would occur. A report containing
    results from the second evaluation component, the telephone surveys of
    beneficiaries, was expected later in 2004.50

    HHS Has Not Ensured That States Meet Progress-Reporting Requirements

    HHS's monitoring and reporting requirements, which the states agree to
    carry out under HHS oversight, are set forth in the terms and conditions
    attached to each demonstration's approval letter. Although HHS and the
    states participated in required telephone conference calls to monitor the
    demonstrations' start-up, HHS has not ensured that all states submit the
    required quarterly and annual progress reports. The lack of sufficient and
    timely information from progress reports may impair the department's
    ability to monitor demonstration operations and accomplishments.

    48HHS selected Illinois and Wisconsin, the first two demonstrations to be
    implemented (in June and July 2002), for the independent evaluation. In
    March 2004, HHS's evaluation project officer indicated that the new
    Medicare prescription drug program and its potential effects on Pharmacy
    Plus demonstrations may lead the department to reassess plans and
    schedules for the independent evaluation.

    49The descriptions include such information as how each demonstration was
    established, demonstration features, each state's economic and political
    environment, obstacles encountered during program implementation, and the
    state's progress toward implementation and ensuring beneficiary access to
    prescription drugs.

    50The evaluators have also developed a database, including data provided
    from Illinois' and Wisconsin's Medicaid data systems, allowing them to
    track and analyze demonstration enrollment, costs, drug use, and
    demographics, along with HHS Medicare claims data for Pharmacy Plus
    beneficiaries from 1 year before enrollment in the demonstration through
    their first year.

    Monitoring and reporting requirements are not as clearly established for
    the Pharmacy Plus initiative as for the Health Insurance Flexibility and
    Accountability (HIFA) initiative:

    o  	The HIFA and Pharmacy Plus initiatives both require states to
    participate with HHS in monthly telephone monitoring calls. For pharmacy
    demonstrations, however, monthly calls are required for 6 months after
    implementation and only as needed thereafter; for most approved HIFA
    demonstrations, monthly calls are unlimited.

    o  	States with approved HIFA demonstrations are required to submit
    quarterly progress reports in a format agreed upon with HHS, and
    demonstration terms and conditions describe the required content of these
    reports. The terms and conditions for Pharmacy Plus demonstrations are
    less specific regarding progress report format and content.

    o  	HIFA demonstrations are expected to submit separate annual reports
    that discuss progress in evaluating the demonstrations, including results
    of data collection and analysis to test research hypotheses. Pharmacy Plus
    annual reports, in contrast, may be combined with or include the fourth
    quarterly progress report, may follow the same broad content guidelines as
    quarterly reports, and are not required to report progress in evaluation.

    As of March 2004, HHS and the four Pharmacy Plus states had participated
    in the initial monitoring phone calls and begun to gather data on how
    their demonstrations were working. HHS and the states confirmed
    participating in monthly telephone calls for the first 6 months and then
    agreeing to maintain contact as needed. An HHS official told us the
    department did not set agendas or document these informal contacts, which
    focused on demonstration operations as states tracked enrollment and began
    to gather information about drug use and expenditures for new
    beneficiaries. States reported taking some steps to develop the capacity
    to report on their demonstrations. Florida, Illinois, and Wisconsin, for
    example, reported having or developing data management systems containing
    state Medicaid and other data that are capable of generating
    demonstrationspecific reports. South Carolina expected to rely on existing
    Medicaid data systems. None of the states, however, were tracking the
    number of demonstration enrollees who had become eligible for Medicaid,
    although officials in three states reported the ability to do so. Further,
    the states had not provided information to HHS to assess whether diversion
    savings were occurring.

    The information that HHS requires states to report has been insufficient
    for determining whether the demonstrations are operating as intended.
    According to one HHS official, HHS has not prescribed a standard format
    for, or specific information to be provided in, either the quarterly or
    annual progress reports; rather, the department works with the states to
    obtain needed information. The Pharmacy Plus terms and conditions
    stipulate that written quarterly and annual progress reports contain, at
    minimum, (1) a discussion of events during the quarter, including
    "enrollment numbers, lessons learned, and a summary of expenditures";51
    (2) notable accomplishments; and (3) problems and questions that arose and
    how they were resolved. The same HHS official told us that in response to
    these general requirements, states' progress reports did not always
    include all information considered useful for monitoring purposes. For
    example, HHS reported that officials were working with Illinois to obtain
    additional information to complete its draft annual progress report.
    Illinois' six-page annual report, submitted in September 2003, reported
    only on new demonstration beneficiaries and did not include first-year
    starting or ending enrollment or cost information for the state's Medicaid
    senior program as a whole-the services and population affected by the
    Pharmacy Plus spending limit. One HHS official told us that after review
    of Illinois' report, these cost and enrollment data were specifically
    requested to assess whether the new drug benefit was keeping seniors from
    becoming eligible for full Medicaid benefits. As of February 2004,
    Illinois had not provided this information.

    Finally, HHS has not insisted on timely submission of the required
    quarterly and annual reports. Although Pharmacy Plus terms and conditions
    specify that quarterly reports are due 60 days after the end of the
    quarter, and annual reports are due 60 days after the end of the fourth
    quarter, HHS has not ensured that states submit the reports on time.
    Again, the department's policy is to work with the states toward
    compliance. As of January 2004, Florida and Wisconsin had submitted all
    required written quarterly reports, mostly on time, while South Carolina
    had submitted only one of three required progress reports.52 Illinois,
    whose

    51Centers for Medicare & Medicaid Services, Pharmacy Plus: A Demonstration
    Program under Section 1115: Model Special Terms and Conditions of Approval
    (Washington, D.C.: U.S. Department of Health and Human Services, n.d.), 4,
    www.cms.hhs.gov/medicaid/1115/pharmplustemptc.pdf (downloaded Apr. 6,
    2004).

    52According to an HHS official, quarterly reports for South Carolina's
    demonstration were delayed because the state had difficulty generating
    data on demonstration expenses, requiring department officials to work
    with the state on the problem.

    Conclusions

    demonstration was the first to be implemented, did not submit any of the
    three required quarterly reports before submitting its combined fourth
    quarterly and first annual report early in September 2003.

    HHS's approval and monitoring of state demonstrations under the Pharmacy
    Plus initiative raise cost and oversight concerns and, ultimately, program
    concerns. The department's approval of four states' demonstrations raises
    questions about HHS's basis for its decisions. Because HHS based the
    spending limits it approved on higher-thanjustified growth rates, these
    spending limits do not, in our view, represent reasonable estimates of
    demonstration costs over the 5-year trial periods and are not budget
    neutral. It was difficult to assess the reasonableness of the spending
    limits themselves, given that they were decided upon through an
    undocumented negotiation process, and neither public nor HHS internal
    documents stated the rationale for approving higher growth rates. We found
    that if HHS's benchmarks had been used to establish the spending limits,
    the federal government's liability for the four demonstrations could have
    been $1.6 billion lower over 5 years. Moreover, the approved
    demonstrations rely on highly questionable assumptions about the extent to
    which savings would accrue to Medicaid from improved health of people
    receiving the new pharmacy benefit, particularly since many of them
    already had pharmacy benefits through existing state-funded programs.

    In addition, the Pharmacy Plus initiative raises important evaluation
    questions about how improved access to prescription drugs may affect
    seniors' health and Medicaid and Medicare costs. Although some of these
    questions will likely be addressed by the independent evaluation of two
    states' demonstrations, in the interim HHS does not appear to be ensuring
    that states provide sufficient, consistent, and timely information for
    demonstration monitoring or that states begin implementing their own
    evaluation plans. The limited available information on how these
    demonstrations are operating makes it difficult to assess whether they are
    operating as intended.

    The concerns about HHS's approved Pharmacy Plus demonstrations parallel
    those we have raised about other section 1115 waiver demonstration
    approvals over the past decade. These include the extent to which the
    department is protecting the Medicaid program's fiscal integrity and the
    need for clear criteria and a public process when HHS reviews and approves
    demonstrations. Along with the authority to waive Medicaid requirements,
    and the flexibility given states to test new approaches for

    delivering services more efficiently and effectively, comes the
    responsibility for making decisions based on clear criteria and for
    monitoring the demonstrations and learning from them. More can and should
    be done to fulfill this responsibility.

    Recommendations for Executive Action

    In light of our findings that the four HHS-approved Pharmacy Plus
    demonstrations are likely to substantially increase federal Medicaid
    spending, as previously approved Medicaid section 1115 demonstrations have
    done; that HHS's review process and basis for these approvals have not
    been clearly set forth; and that approved demonstrations are not all
    meeting evaluation and monitoring requirements, we are making seven
    recommendations to the Secretary of HHS related to the section 1115
    demonstration process.

    To improve HHS's process for reviewing and approving states' budget
    neutrality proposals for Pharmacy Plus and other Medicaid section 1115
    demonstrations, we recommend that the Secretary take three actions:

    o  	For future demonstrations, clarify criteria for reviewing and
    approving states' proposed spending limits.

    o  	Consider applying these criteria to the four approved Pharmacy Plus
    demonstrations and reconsider the approval decisions, as appropriate.

    o  	Document and make public the basis for any section 1115 demonstration
    approvals, including the basis for the cost and enrollment growth rates
    used to arrive at the spending limits.

    To ensure that approved Pharmacy Plus and other Medicaid section 1115
    demonstrations fulfill the objectives stated in their evaluation plans, we
    recommend that the Secretary take two actions:

    o  	Ensure that states are taking appropriate steps to develop evaluation
    designs and to implement them by collecting and reporting the specific
    information needed for a full evaluation of the demonstration objectives.

    o  	On acceptance, make public the interim and final results of HHS's
    independent Pharmacy Plus evaluation.

    To ensure that the Secretary and other stakeholders have the information
    needed to monitor approved Pharmacy Plus and other Medicaid section 1115
    demonstrations to determine if they are functioning as intended, we
    recommend that the Secretary take two actions:

    o  	Ensure that states provide sufficient information in their
    demonstration progress reports, in a consistent format, to facilitate the
    department's monitoring.

    o  Ensure that states submit required demonstration progress reports in a

    Agency and State Comments and Our Evaluation

    timely manner.

    We provided a draft of this report for comment to HHS and the states of
    Florida, Illinois, South Carolina, and Wisconsin. HHS and Florida,
    Illinois, and Wisconsin responded with written comments, which are
    reproduced in appendixes III through VI, respectively. South Carolina
    provided technical comments, which we incorporated in our report as
    appropriate.

    HHS's Comments and Our Evaluation

    HHS concurred with five of our recommendations to strengthen the processes
    for approving and overseeing Pharmacy Plus and other Medicaid section 1115
    waivers and disagreed with two. It concurred with our recommendations to
    make public the basis for section 1115 demonstration approvals and to
    ensure that Pharmacy Plus and other Medicaid section 1115 demonstrations
    fulfill the objectives of their evaluation plans by working with the
    states toward useful program evaluations and making results of the
    independent Pharmacy Plus evaluation publicly available. HHS also
    concurred with our recommendation to ensure that adequate information is
    available to monitor the demonstrations to determine if they are
    functioning as intended. In this regard, HHS stated that it has provided
    each state that has implemented a Pharmacy Plus demonstration with an
    example of an outline and content to be used as a guide for progress
    reports and that it will make concerted efforts to ensure that states
    submit the reports in a timely manner.

    HHS did not concur with our recommendation that the Secretary of HHS
    clarify criteria for reviewing and approving states' proposed
    demonstration spending limits, indicating that although the department
    recognizes the importance of using criteria for reviewing budget
    neutrality, strict criteria cannot be determined in advance because
    states' circumstances differ. HHS also strongly disagreed with our
    recommendation that the Secretary consider applying clarified criteria to
    the four approved Pharmacy Plus demonstrations and reconsider the approval
    decisions as appropriate. HHS stated that it used criteria to review each
    of the approved, disapproved, and pending demonstration proposals;
    believes the four approved demonstrations were based on wellsupported
    budget estimates of future state spending; and does not believe

    it appropriate to reconsider approved demonstrations before the end of the
    approval periods.

    We agree with HHS that some flexibility is appropriate in considering the
    unique Medicaid section 1115 demonstrations proposed by different states.
    Consistent with our analyses of other section 1115 demonstration waivers
    over the past decade, however, we believe HHS's review process and
    decision criteria should be clear, and the results-particularly when
    approved spending limits deviate significantly from limits developed using
    benchmarks that HHS said it uses as a starting point-should be publicly
    explained and documented in the demonstrations' approval letters and terms
    and conditions. Even though HHS has developed a standard application form
    for Pharmacy Plus demonstrations, that form and other guidance does not
    provide written criteria for how HHS reviews and approves the growth rates
    that states propose. HHS's rationale for significantly deviating from
    benchmarks for projecting future program growth in establishing different
    states' spending limits has not been documented or made clear to us or to
    others, including other states that may be seeking approval of
    demonstration proposals. Without such clarity, questions arise as to how
    consistently states have been or will be treated in applying for
    demonstrations. Further, in our view, Pharmacy Plus demonstration
    approvals were based on questionable savings assumptions. We believe that
    HHS should establish clear criteria on which to base the spending limits
    and should reconsider its spending limit decisions for the approved
    Pharmacy Plus demonstrations in light of such criteria.

    HHS also commented that it was premature to evaluate the Pharmacy Plus
    demonstrations given the limited experience from 12 to 18 months of
    operation. HHS said that were the outcome predetermined, a demonstration
    would serve no purpose. The agency believes the Pharmacy Plus initiative
    provides states an opportunity to use a Medicaid demonstration to test if
    providing drug coverage will prevent the aged and disabled low-income
    population from becoming Medicaid eligible. HHS noted that the four
    approved demonstrations together are providing drug coverage to 346,000
    seniors who would otherwise be without this important benefit.

    We agree that it is too early to evaluate the outcomes of the 5-year
    demonstrations and that section 1115 demonstrations are intended to test
    new propositions. More needs to be done, however, to ensure that states'
    evaluations collect the information needed to determine whether those new
    propositions are functioning as intended. Four states have Pharmacy

    Plus demonstrations in place to test such propositions, and substantial
    federal funding is involved, including costs that were previously paid for
    by the states themselves. For these reasons, HHS has a responsibility to
    (1) make fiscally prudent decisions in its approvals, (2) ensure that
    savings hypotheses have some grounding in experience or research, and (3)
    ensure that the evaluations are planned and conducted in a way that will
    produce adequate information regarding the demonstrations' research
    hypotheses.

    We also agree that the demonstrations can provide a valuable benefit to
    low-income seniors and disabled individuals who might otherwise be without
    drug coverage. But three of the four states with approved demonstrations
    had state-funded drug coverage programs in place before implementing their
    Pharmacy Plus demonstrations, and these state-funded programs became
    eligible for federal matching funds when the demonstrations were approved.
    We therefore find HHS's statement that the demonstrations are providing
    drug coverage to seniors who would otherwise be without it to be an
    overstatement.

    HHS also commented on how MMA may affect the operation of approved
    Pharmacy Plus demonstrations and the review of pending and new
    demonstration proposals. HHS stated that seniors covered by the four
    Pharmacy Plus demonstrations will be able to begin receiving drug coverage
    under the Medicare Part D program in January 2006, and states will be able
    to use their own funds to "wrap around" the Medicare benefit to assist
    other Medicare beneficiaries whose incomes exceed the level for low-income
    subsidies. At that time, HHS believes there will be less need for Pharmacy
    Plus demonstrations, given expanded Medicare coverage for prescription
    drugs, and states operating the demonstrations will need to decide if they
    want to continue doing so and if their demonstrations can continue to be
    budget neutral. We have reviewed and incorporated this new information as
    appropriate.

    HHS's written comments appear in appendix III, along with our response to
    additional comments that HHS provided on the findings in our draft report.
    The department also provided technical comments, which we considered and
    incorporated as appropriate.

    Illinois' and Wisconsin's Illinois and Wisconsin officials commented that
    our draft report overstated Comments and Our the demonstrations' financial
    risk to the federal government and was Evaluation unnecessarily alarming
    in light of data showing that the demonstrations

    are operating well within their spending limits. In its comments, Illinois

    said that it stood by the growth rates it used to develop the spending
    limit for its Pharmacy Plus demonstration; it further argued for the
    soundness of its demonstration's premise-that providing a drug benefit to
    seniors will keep them healthier than if they had no drug coverage. In its
    comments, Wisconsin said that the draft report failed to consider the
    significant benefits its demonstration offers to the federal government
    and to seniors.

    We agree that providing a drug benefit to seniors could keep them
    healthier, and we do not dispute the benefit to seniors of the states'
    drug programs started or expanded through Pharmacy Plus demonstrations.
    The demonstrations were approved, however, on the presumption that the
    cost of each state's prescription drug program would be paid for in
    savings from keeping seniors with little or no previous drug coverage
    healthy enough that they would not become eligible for full Medicaid
    benefits. Illinois' demonstration was approved on this presumption even
    though most of the beneficiaries were already receiving some prescription
    drug coverage through the state's existing state-funded program. We remain
    concerned that HHS is not maintaining its policy to ensure demonstrations
    are budget neutral.

    Illinois also commented that it had taken all necessary steps to conduct
    its own evaluation and that it had cooperated fully with federal
    evaluators and HHS officials. Illinois said that although it officially
    filed its quarterly reports late, it submitted all the detailed data
    contained in those reports to CMS monthly. We are principally concerned
    with the extent to which the information that Illinois provided could be
    used to monitor whether the demonstration was operating as intended. Its
    one- to two-page quarterly reports, filed late, tallied the number of
    beneficiaries enrolled in the demonstration and drug expenditures to date
    and provided a narrative paragraph on accomplishments, problems, or
    issues. The information itself, however, furnishes little insight as to
    whether the demonstration is operating as intended or whether the benefit
    is reducing Medicaid costs.

    Wisconsin commented that the draft report failed to ascribe any value to
    the government of Wisconsin's agreement to cap its federal Medicaid
    funding for seniors as a condition of Pharmacy Plus demonstration
    approval. We believe the draft report accurately captured HHS's approach
    to limiting the federal liability for the Pharmacy Plus demonstrations by
    establishing a "cap," or spending limit, as a condition of approval. We
    remain neutral on the "value" of this cap for several reasons. Requiring
    states to abide by a spending limit is a departure from the open-ended
    entitlement nature of the Medicaid program. We also recognize that under

    the Medicaid program, states have considerable discretion to alter
    spending by increasing-or decreasing-coverage for certain populations and
    services. In addition, we recognize that HHS's budget neutrality practices
    provide for flexibility in approach and that HHS has established such a
    limit on other section 1115 demonstrations before the Pharmacy Plus
    initiative.

    Wisconsin also commented that the draft report failed to mention that the
    demonstrations were reviewed, determined reasonable, and approved by OMB.
    We recognize that OMB is involved in assessing budget neutrality and other
    aspects of Pharmacy Plus and mentioned that agency's role in our draft
    report. Nevertheless, as OMB officials told us, the authority for section
    1115 waiver approval rests with the Secretary of HHS, and responsibility
    for final Pharmacy Plus approval decisions rests with the Secretary and
    his designees.

    Wisconsin further commented that in criticizing CMS for not obtaining
    better evidence to support projected savings, our report fails to consider
    that the reason for demonstration projects is precisely to test such
    propositions. We maintain, however, that when HHS establishes a new
    initiative to encourage states to apply for Pharmacy Plus demonstrations,
    it is the agency's responsibility to ensure that each demonstration's
    evaluation objectives are reasonable, each demonstration's savings
    assumptions are realistic and grounded in some evidence, and the
    evaluations are well planned and data monitoring is established early
    enough to assure that the questions can be answered.

    Other States' Comments and Our Evaluation

    Florida commented that its demonstration was predicated upon savings to be
    achieved over the 5-year life of the program and that its proposed
    spending limit was close to-less than 1 percent above-the conservative
    benchmark spending level we calculated. We agree that Florida's spending
    limit was relatively close to a limit based on the benchmarks and included
    that information in the draft report.

    South Carolina provided technical comments that we incorporated as
    appropriate.

    As arranged with your offices, unless you release its contents earlier, we
    plan no further distribution of this report until 30 days after its date.
    At
    that time, we will send copies of this report to the Secretary of Health
    and
    Human Services, the Administrator of the Centers for Medicare &
    Medicaid Services, and others who are interested. We will also make
    copies available to others upon request. In addition, the report will be
    available at no charge on the GAO Web site at http://www.gao.gov.

    If you or your staff have any questions, please contact me at (202) 512
    7118. Another contact and other major contributors are listed in
    appendix VII.

    Kathryn G. Allen
    Director, Health Care-Medicaid

    and Private Health Insurance Issues

    Appendix I: Calculating a State's Pharmacy Plus Spending Limit for All
    Medicaid Seniors

    To achieve budget neutrality, a state's projected 5-year spending with its
    Pharmacy Plus demonstration cannot exceed 5-year projected costs without
    the demonstration. As a result, the projected costs of a state's existing
    Medicaid program for seniors effectively sets the spending limit while the
    demonstration is under way. Calculating this withoutdemonstration limit
    (steps 1-5 in fig. 1) starts with a base year, generally the most recent
    full year for which data are available; calculations for each subsequent
    year are based on numbers from the previous year. The result limits a
    state's Medicaid spending for all services provided to all Medicaid
    seniors in the state.

    Appendix I: Calculating a State's Pharmacy Plus Spending Limit for All
    Medicaid Seniors

    Figure 1: Steps to Calculate Projected 5-Year Without-Demonstration Costs
    Step 1

    Estimate Medicaid costs per senior for each year

    Estimate Medicaid senior enrollment for each year

    Determine 1-year costs for Medicaid seniors

    Determine costs for each of 4 more years

               Set Pharmacy Plus spending limit for all Medicaid seniors

    Source: GAO.

    Appendix I: Calculating a State's Pharmacy Plus Spending Limit for All
    Medicaid Seniors

    Calculating projected 5-year with-demonstration costs follows the same
    steps but, in addition, factors in the estimated number of new
    beneficiaries receiving only the prescription drug benefit; the costs of
    providing them the benefit; and the expected savings, mainly from keeping
    these beneficiaries healthy enough to avoid eligibility for full Medicaid.

    Appendix II: Denied, Withdrawn, and Pending Pharmacy Plus Demonstration
    Proposals as of May 2004

                              State and status Description

    Denied

    Hawaii Projected enrollment: Individuals with incomes at or below 300
    percent of the federal Submitted January 2003 poverty level (FPL).

    Denied April 2003 	Coverage and cost sharing: Sought federal assistance
    only for administrative costs for a demonstration to make prescription
    drugs available at the discounted Medicaid rate plus a dispensing fee.
    State was to contribute $1 toward the cost of each prescription in the
    first year, increasing to $8 by the fifth year.

    Reasons for denial: Exceeded the Pharmacy Plus income limit at or below
    200 percent of FPL, provided for only minimal state financial
    contributions to pharmacists, and did not include the necessary budget
    neutrality analysis.

    Delaware Projected enrollment: Seniors and adults with disabilities with
    incomes at or below Submitted December 2002 200 percent of FPL or, if
    income is above 200 percent of FPL, with prescription drug Denied July
    2003 expenses exceeding 40 percent of their incomes.

    Coverage and cost sharing: All prescriptions covered by the Medicaid state
    plan, up to an annual benefit limit of $2,500. Participants to pay
    co-payments of $5 or 25 percent of the cost per prescription, whichever is
    greater.

    Reason for denial: State already provided drug benefits to the people to
    be covered under the demonstration.

    Withdrawn

    Massachusettsa Submitted July 2002 Withdrawn March 2003 Projected
    enrollment: Seniors with incomes at or below 188 percent of FPL.

    Coverage and cost sharing: Same broad prescription drug coverage as state
    Medicaid plan. State proposed three levels of co-payments (exact amounts
    not specified): generic drugs, designated brand-name drugs, and all other
    brand-name drugs. Full cost of prescriptions to be covered after
    participants reached annual out-of-pocket spending limits: for example, a
    single person would pay the lesser of $2,000 or 10 percent of gross annual
    income.

    Reason for withdrawal: State's existing pharmacy assistance program for
    seniors already covered the populations to be included in the
    demonstration, and without an expansion the state and the Department of
    Health and Human Services (HHS) could not reach agreement on budget
    neutrality.

    Pending

    Connecticut Projected enrollment: Seniors and adults with disabilities
    with incomes up to 300 Submitted December 2001 percent of FPL.

    Coverage and cost sharing: All prescription drugs and insulin and syringes
    with specified exceptions, such as cosmetics and antihistamines. Annual
    registration fee of $25 and co-payments of $12 for those with incomes up
    to approximately 233 percent of FPL and $20 for those above.

    State program: Covers low-income seniors and people with disabilities with
    incomes up to approximately 233 percent of FPL. Demonstration would expand
    eligibility up to 300 percent of FPL.

    Appendix II: Denied, Withdrawn, and Pending Pharmacy Plus Demonstration
    Proposals as of May 2004

                              State and status Description

    New Jersey Projected enrollment: Seniors and adults with disabilities with
    incomes at or below Submitted March 2002 200 percent of FPL.

    Coverage and cost sharing: All prescription drugs covered by state
    Medicaid plan, with $5 co-payment for each prescription. For brand-name
    drug when generic is available, $5 co-payment plus cost difference between
    the two.

    State program: Covers seniors and adults with disabilities with incomes up
    to 222 percent of FPL if single and 202 percent if married. Demonstration
    would cover individuals with incomes at or below 200 percent of FPL.

    Arkansas Projected enrollment: Qualified Medicare beneficiaries age 65 or
    older with incomes at Submitted September 2002 or below 85 percent of FPL.

    Coverage and cost sharing: Would cover two prescriptions per beneficiary
    per month. Annual $25 enrollment fee and co-payments of $10 for each
    generic prescription and $20 for each brand-name drug.

    State program: No state-funded pharmacy assistance program for seniors at
    the time of demonstration proposal submission.

    Indiana

    Submitted June 2002
    Revised proposal submitted May 2003

    Projected enrollment: Seniors with incomes at or below 135 percent of FPL.

    Coverage and cost sharing: Same prescription drugs as the state's Medicaid
    program, plus insulin, up to annual benefit caps set on a sliding scale:
    $1,000 for people with incomes up to 100 percent of FPL; $750 for those
    with incomes up to 120 percent of FPL; and $500 for those with incomes at
    or below 135 percent of FPL. Participants would pay 50 percent of the
    discounted program price, which is the same as the Medicaid price, for
    each prescription.

    State program: Existing state-funded pharmacy program for low-income
    seniors to be covered under the demonstration with no change in
    eligibility or drug coverage. State indicated that increased enrollment
    was expected in the demonstration following a change from a mail-in rebate
    system to a point-of-sale system using a discount card.

    Maine Projected enrollment: Seniors age 62 or older and adults with
    disabilities with incomes Submitted August 2002 at or below 185 percent of
    FPL.

    Coverage and cost sharing: Prescription drugs for specified conditions
    with 20 percent co-payment for each prescription, or 10 percent if from
    mail-order sources. Broader range of drugs available for coverage with 20
    percent co-payment after $1,000 out-ofpocket expenses.

    State program: Demonstration would cover state-funded pharmacy program,
    expand conditions covered, and add voluntary mail-order purchase.

    Rhode Island

    Submitted October 2002

    Projected enrollment: Seniors and adults with disabilities or chronic
    illness, including chronic mental illness, with incomes at or below 200
    percent of FPL.

    Coverage and cost sharing: All prescription drugs covered by state
    Medicaid plan. Annual $25 enrollment fee (waived for first year of
    program) and co-payments that increase after participants have incurred
    $1,800 of drug expenses per year under the program, from $2 to $4 for
    generics and from $8 to $12 for brand-name drugs with no generic
    equivalent; other brand-name drugs have a $25 co-payment.

    State program: The demonstration would cover individuals with incomes at
    or below 200 percent of FPL from three state-funded pharmacy programs,
    while individuals in those programs with higher incomes would continue to
    be state funded. The scope of drugs covered by state programs would be
    expanded under the demonstration.

    Appendix II: Denied, Withdrawn, and Pending Pharmacy Plus Demonstration
    Proposals as of May 2004

                              State and status Description

    North Carolina Projected enrollment: Seniors with incomes at or below 200
    percent of FPL.

    Submitted January 2003 	Coverage and cost sharing: All prescription drugs
    and insulin. Co-payments of $5 for generic and $15 for brand-name drugs;
    annual benefit limit of $1,000 per participant.

    State program: Demonstration would cover and expand existing state-funded
    program by broadening prescription drugs covered from drugs for three
    specific conditions to those for all conditions, reducing cost sharing,
    and increasing annual benefit limit from $600 to $1,000.

    Michigan Projected enrollment: Seniors with incomes at or below 200
    percent of FPL.

    Submitted February 2003 	Coverage and cost sharing: Most prescription
    drugs covered by state Medicaid plan, plus insulin and syringes. Annual
    $25 enrollment fee and coinsurance of 20 percent of cost of each
    prescription up to a monthly cap on a sliding scale determined by
    household income. An additional co-payment would be charged for brand-name
    drugs with generic equivalents.

    State program: Demonstration would cover existing state-funded pharmacy
    assistance program with the same eligibility and coverage and expand
    enrollment.

    Source: GAO analysis of state and HHS documents.

    Notes: These descriptions of states' Pharmacy Plus demonstration proposals
    are based on the proposals as submitted for HHS review. Changes to
    proposals that may be made during the review process and before approval
    are not available in documents.

    aIn March 2003, Massachusetts withdrew two separate section 1115
    demonstration proposals from review: a Pharmacy Plus demonstration for
    seniors (the proposal described in this appendix) and a prescription drug
    benefit for individuals with disabilities as an amendment to the state's
    section 1115 Medicaid managed care demonstration. At the same time,
    Massachusetts submitted a new proposal-not a Pharmacy Plus proposal-to add
    a drug benefit for certain seniors and disabled individuals as an
    amendment to its existing managed care demonstration. In August 2003, that
    proposal was also withdrawn.

    Appendix III: Comments from the Department of Health and Human Services

    Appendix III: Comments from the Department of Health and Human Services

    Appendix III: Comments from the Department of Health and Human Services

    Appendix III: Comments from the Department of Health and Human Services

    Appendix III: Comments from the Department of Health and Human Services

    Appendix III: Comments from the Department of Health and Human Services

    Appendix III: Comments from the Department of Health and Human Services

    Appendix III: Comments from the Department of Health and Human Services

                                  Now pages 19 and 20.

    Appendix III: Comments from the Department of Health and Human Services

    Appendix III: Comments from the Department of Health and Human Services

    Appendix III: Comments from the Department of Health and Human Services

    GAO's Response to In addition to indicating whether it concurred with our
    seven recommendations, HHS commented on the report draft's findings in
    threethe Department of areas.

    Health and Human

    Services' Specific

    Comments on GAO's

    Findings

    Effect of HHS-Approved Pharmacy Plus Demonstrations on Federal Medicaid
    Spending

    HHS disagreed with our conclusion that the four approved Pharmacy Plus
    demonstrations will not prove to be budget neutral to the Medicaid program
    and will possibly result in increased federal Medicaid spending. HHS
    stated that the department takes seriously its responsibility to ensure
    budget neutrality in the Medicaid demonstrations it approves, noting that
    it approved four Pharmacy Plus demonstrations while denying two and
    reviewing but not approving nine other proposals whose budget estimates
    were not well supported.

    HHS was concerned that we missed the fundamental purpose of budget
    neutrality, which HHS says is not to hold states to a formula-driven cap
    but to estimate the amount of future Medicaid spending. HHS believes that
    the four approved demonstrations' spending limits were based on
    wellsupported budget estimates of future state spending,1 and said its
    policy has never been to hold states to benchmark levels of growth. Those
    benchmarks are, in HHS's view, a starting point in projecting how the
    program will grow, because HHS typically permits states to present
    rationales for higher growth rates.

    We agree that there may be state-specific circumstances that justify
    departures from benchmarks HHS considers as starting points. Nevertheless,
    we believe that, given the potential impact on federal Medicaid spending,
    HHS and states should justify and document any significant departures from
    those starting points. In conducting our assessment, we interviewed HHS
    officials and Illinois and Wisconsin state

    1HHS also stated that the 0.7 percent per year state historical average
    enrollment growth rate we cite for South Carolina (table 2) is in error,
    because its records showed that South Carolina's historical average for
    enrollment growth was 1.0 percent. In verifying the state's historical
    enrollment rate, we noted that the rate had been "rounded up" to the next
    full percentage from the 0.7 percent actual historical rate. For
    consistency with other rates in the table, we did not round it.

    Appendix III: Comments from the Department of Health and Human Services

    officials and requested all documents that were considered in their budget
    neutrality negotiations. Those interviews and documents, which we
    discussed in the draft report, did not fully support the higher growth
    rates that were approved. We note that enrollment growth rates, in
    particular, can have a significant multiplier effect on future spending
    estimates. Further, we note that HHS allowed at least one state to argue
    for a higher growth rate using broad justifications-such as the effect of
    the Social Security Administration's nationwide outreach program for
    low-income Medicare beneficiaries-that other states could also have used
    but did not, raising questions of clarity and consistency in both the
    process and the final decisions.

    Documentation of HHS's approval decisions and the basis for approved
    spending limits could provide a rationale for higher cost and enrollment
    growth rates and offer guidance and assurance of consistent treatment to
    other states applying for Pharmacy Plus demonstrations. Absent such
    documentation, neither HHS nor the states have adequately justified the
    departures from states' historical growth rates or the CMS Actuary's
    growth projections in establishing states' spending limits.

    HHS's Review Process and Basis for Approvals

    In its comments, HHS stated that the federal review process for Pharmacy
    Plus demonstration proposals is similar to the review process for other
    Medicaid section 1115 demonstrations, indicating that the process is
    necessarily interactive and involves numerous meetings within the federal
    team and with states. We acknowledge that the review process for Medicaid
    section 1115 demonstration proposals benefits from being inclusive and
    interactive, and we are not suggesting that HHS should establish a new or
    different review process specifically for the Pharmacy Plus
    demonstrations. Our concern is that the basis for its decisions and any
    agreed-upon spending limit be clear and justified, not only for Pharmacy
    Plus demonstrations but for all section 1115 approvals. As noted in the
    draft report, the concerns raised by HHS's approved Pharmacy Plus
    demonstrations parallel those we have raised about other section 1115
    waiver demonstration approvals over the past decade, including concerns
    about the extent to which the department is protecting the Medicaid
    program's fiscal integrity and the need for clear criteria and a public
    process in reviewing and approving demonstrations.

    Approved Demonstrations' HHS commented that the department plans to
    continue working with Evaluation and Monitoring states toward developing
    useful program evaluations based on consistent Requirements data
    collection as well as sufficient, consistent, and timely monitoring

    information. HHS also plans to make results of the independent Pharmacy

    Appendix III: Comments from the Department of Health and Human Services

    Plus evaluation available on the CMS Web site. With regard to states' own
    evaluations, HHS emphasized practical limitations, such as constraints on
    state financial and staff resources, indicating that while states ideally
    would develop evaluation plans before implementing demonstrations, in
    practice such plans often change. HHS commented that it obtains sufficient
    information for monitoring the demonstrations through telephone contacts
    and progress reports that respond to an example outline the department
    provided to each demonstration state.

    We recognize that state resources are limited, demonstration
    implementation tends to be a higher priority than evaluation, and the
    independent contractor evaluation of Pharmacy Plus will provide
    substantial information. Nonetheless, the lack of action to monitor key
    information-such as whether demonstration enrollees are being diverted
    from Medicaid-to plan how their evaluations will be conducted, or to
    collect data needed for such evaluations suggests a low priority for
    ensuring that evaluations can and will be done. HHS needs to ensure that
    states provide sufficient, consistent, and timely information for both
    demonstration monitoring and for determining whether the demonstrations
    are functioning as intended and to ensure that evaluation plans are put
    into place.

    Appendix IV: Comments from the State of Florida

                Page 63 GAO-04-480 Medicaid Pharmacy Plus Demonstrations

                Page 64 GAO-04-480 Medicaid Pharmacy Plus Demonstrations

    Appendix VI: Comments from the State of Wisconsin

    Appendix VI: Comments from the State of Wisconsin

    Appendix VI: Comments from the State of Wisconsin

    Appendix VI: Comments from the State of Wisconsin

    Appendix VI: Comments from the State of Wisconsin

                   Appendix VI: Comments from the State of Wisconsin

    GAO's Response to the State of Wisconsin's Specific Comments

    In addition to overall comments on our draft report contained in its
    letter and discussed in the body of this report, Wisconsin provided 11
    specific comments in an attachment to its letter, which is reproduced on
    pages 67 through 69. Our responses to Wisconsin's specific comments are
    numbered below to correspond with each of the state's numbered comments.

    1. 	Wisconsin commented that our $416 million figure (the estimated
    federal share of the difference between HHS-approved and benchmark 5-year
    spending limits in table 3) exaggerates the federal fiscal effect, because
    the actual costs of the demonstration's first years have come in under the
    projected costs. The state currently projects federal costs for the new
    drug benefit under the demonstration totaling $250 million over 5 years
    instead of roughly $537 million, which is the federal share of $919
    million approved for the new benefit (see table 1). Although we recognize
    that the actual costs of Wisconsin's demonstration to date are less than
    the costs projected at the time the waiver was approved, our analysis
    examined the extent to which HHS ensured that the demonstrations-in the
    form they were approved-maintained spending limits that were budget
    neutral to the federal government. Because Wisconsin's approved spending
    limit represents the total amount the state is authorized to spend over
    the demonstration's 5year life-span, the federal government could be
    liable for as much as $416 million more than what it would have been
    liable for had HHS held the state to a spending limit based on benchmark
    rates (see table 3).

    2. 	Wisconsin commented that it is unreasonable to hold HHS to applying
    the lower of two benchmark growth rates in calculating budget neutrality:
    state experience or projections by the Centers for Medicare & Medicaid
    Services' (CMS) Actuary for Medicaid costs. The state also expressed
    concern that our analysis did not incorporate factors other than the
    benchmarks that affect program growth. We believe that it is reasonable to
    expect HHS to use objective benchmark growth rates in projecting the
    Medicaid costs on which it bases spending limits and to document its
    reasons for deviating from those benchmarks-even if the department regards
    them as starting points. Otherwise, the department's rationale for setting
    higher spending limits (based on higher growth rates) for some states than
    for others is not apparent to other states involved in waiver negotiations
    and reviews. As noted in the draft report, HHS responded to Wisconsin's
    request for higher growth rates but did not, in our view, adequately
    document the basis for approving higher rates. In our own analysis of the
    spending limits, we did not include the additional factors that Wisconsin
    asserted

    Appendix VI: Comments from the State of Wisconsin

    should raise its spending limits because neither the state nor HHS
    provided adequate support to justify doing so.

    3. 	Wisconsin stated that our interpretation was unreasonably narrow in
    not accounting for potential savings accruing to Medicare, as well as to
    Medicaid, from expanding prescription drug coverage for seniors. We
    considered savings to Medicaid alone because HHS allows states to include
    savings only to Medicaid, not Medicare, in determining whether their
    Medicaid demonstrations are budget neutral.

    4. 	Wisconsin commented that because its historical cost growth rate has
    been rising, it was appropriate for HHS to calculate the state's spending
    limit using a rate higher than its historical 5-year average. We believe
    that whenever HHS allows growth rate projections that exceed its
    benchmarks, it should document the basis for this deviation.

    5. 	Wisconsin mentioned two state programs that it believes will, like the
    Social Security Administration's outreach program for low-income Medicare
    beneficiaries, help increase senior enrollment in Wisconsin's Medicaid
    program because they are likely to identify individuals who qualify for
    full Medicaid benefits. But the state did not quantify or provide any data
    or other evidence to show the potential effects of these programs or of
    Social Security Administration outreach. We did not include these effects
    in our benchmark analysis for the same reason we did not include other
    factors that Wisconsin believed should raise is spending limit (see our
    response to comment 2).

    6. 	Wisconsin noted that we found no firm evidence to support the idea
    that expanding drug coverage would produce significant savings in Medicaid
    by diverting or delaying Medicaid enrollment. The state asserts that this
    criticism ignores the central purpose of these demonstrations: to
    determine if an important health care benefit can be delivered cost
    effectively. We acknowledge the value of demonstrations to test health
    care alternatives, but we believe that the case for substantial savings to
    Medicaid due to expanded prescription drug coverage is not well supported.
    We also believe that HHS has not done enough to ensure that states develop
    and implement demonstration evaluation designs. Although we do not dispute
    Wisconsin's comment that research suggests coverage of prescription drugs
    benefits seniors, we believe that demonstrating the effects of drug
    coverage on avoiding Medicaid enrollment is a separate issue.

    7. 	Wisconsin has interpreted our mention of congressional concern about
    the extent to which HHS has ensured that section 1115 demonstration
    waivers promote the goals of Medicaid as implying that the state's

    Appendix VI: Comments from the State of Wisconsin

    demonstration is not providing critical prescription drugs to a vulnerable
    elderly, low-income, uninsured population. We did not intend to suggest
    that Wisconsin's demonstration is not a valuable benefit to these
    individuals. We were referring to our earlier work on section 1115
    Medicaid and State Children's Health Insurance Program (SCHIP)
    demonstrations, which, in addition to raising concerns about HHS's use of
    section 1115 waiver authority to approve demonstration spending limits
    that were not budget neutral, also found that HHS was allowing states to
    use unspent SCHIP funding to cover childless adults, despite SCHIP's
    statutory objective of expanding health coverage to low-income children.1

    8. 	Wisconsin commented that we mischaracterized the growth rates approved
    by HHS for the state's demonstration as too high. See our response to
    comment 2.

    9. 	Wisconsin objected to our conclusion that the lack of available
    information on how these demonstrations are operating compromises attempts
    to assess whether they are operating as intended. This statement does not
    apply to any one state alone but synthesizes our findings for the four
    approved demonstrations taken together. We acknowledge that Wisconsin has
    been responsive to HHS's requirements for informative and timely progress
    reports and have revised our report as appropriate.

    10. Wisconsin stated that its data reporting system allows its staff to
    monitor that the demonstration is operating as intended. In the draft
    report, we noted that Wisconsin officials reported having the capability
    for monitoring. We have not assessed Wisconsin's monitoring system.

    11. Wisconsin commented on the importance of, and Wisconsin's full
    participation in, CMS's contracted independent evaluation as an effective
    approach to reviewing the agency's assumptions relating to budget
    neutrality and program effectiveness. We believe the draft report captured
    the plans for this independent evaluation, as well as the apparent
    confusion over each state's responsibility for conducting

    1See GAO-02-817 and U.S. General Accounting Office, SCHIP: HHS Continues
    to Approve Waivers That Are Inconsistent with Program Goals, GAO-04-166R
    (Washington, D.C.: Jan. 5, 2004).

    Appendix VI: Comments from the State of Wisconsin

    its own evaluation. We have revised our report to reflect that Wisconsin
    officials believe the state is not required to conduct an evaluation,
    whereas HHS officials told us the state would be required to do so.

    Appendix VII: GAO Contact and Staff Acknowledgments

    GAO Contact Katherine Iritani, (206) 287-4820

    Acknowledgments 	In addition, Tim Bushfield, Ellen W. Chu, Helen
    Desaulniers, Behn Kelly, Suzanne Rubins, Ellen M. Smith, and Stan
    Stenersen made key contributions to this report.

    Related GAO Products

    SCHIP: HHS Continues to Approve Waivers That Are Inconsistent with Program
    Goals. GAO-04-166R. Washington, D.C.: January 5, 2004.

    Medicaid and SCHIP: Recent HHS Approvals of Demonstration Waiver Projects
    Raise Concerns. GAO-02-817. Washington, D.C.: July 12, 2002.

    Medicare and Medicaid: Implementing State Demonstrations for Dual
    Eligibles Has Proven Challenging. GAO/HEHS-00-94. Washington, D.C.: August
    18, 2000.

    Medicaid Section 1115 Waivers: Flexible Approach to Approving
    Demonstrations Could Increase Federal Costs. GAO/HEHS-96-44. Washington,
    D.C.: November 8, 1995.

    Medicaid: State Flexibility in Implementing Managed Care Programs Requires
    Appropriate Oversight. GAO/T-HEHS-95-206. Washington, D.C.: July 12, 1995.

    Medicaid: Statewide Section 1115 Demonstrations' Impact on Eligibility,
    Service Delivery, and Program Cost. GAO/T-HEHS-95-182. Washington, D.C.:
    June 21, 1995.

    Medicaid: Spending Pressures Drive States toward Program Reinvention.
    GAO/T-HEHS-95-129. Washington, D.C.: April 4, 1995.

    Medicaid: Spending Pressures Drive States toward Program Reinvention.
    GAO/HEHS-95-122. Washington, D.C.: April 4, 1995.

    Medicaid: Experience with State Waivers to Promote Cost Control and Access
    to Care. GAO/T-HEHS-95-115. Washington, D.C.: March 23, 1995.

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