Medicaid: Intergovernmental Transfers Have Facilitated State	 
Financing Schemes (18-MAR-04, GAO-04-574T).			 
                                                                 
Medicaid, the federal-state health financing program for many of 
the nation's most vulnerable populations, finances health care	 
for an estimated 53 million lowincome Americans, at a cost of	 
$244 billion in 2002. Congress structured Medicaid as a shared	 
fiduciary responsibility of the federal government and the	 
states, with the federal share of each state's Medicaid payments 
determined by a formula specified by law. In 2002, the federal	 
share of each state's expenditures ranged from 50 to 76 percent  
under this formula; in the aggregate, the federal share of total 
Medicaid expenditures was 57 percent. Some states have used a	 
number of creative financing schemes that take advantage of	 
statutory and regulatory loopholes to claim excessive federal	 
matching payments. GAO was asked to summarize prior work on how  
some of these schemes operated, including the role of		 
intergovernmental transfers (IGT), which enable government	 
entities--such as the state and local-government facilities like 
county nursing homes--to transfer funds among themselves. GAO was
also asked to discuss these schemes' effects on the federalstate 
Medicaid partnership and to discuss what can be done to curtail  
them.								 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-574T					        
    ACCNO:   A09530						        
  TITLE:     Medicaid: Intergovernmental Transfers Have Facilitated   
State Financing Schemes 					 
     DATE:   03/18/2004 
  SUBJECT:   Federal/state relations				 
	     Managed health care				 
	     Health care costs					 
	     Medical services rates				 
	     Cost sharing (finance)				 
	     Intergovernmental fiscal relations 		 
	     Medicaid Program					 

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GAO-04-574T

United States General Accounting Office

GAO Testimony

Before the Subcommittee on Health, Committee on Energy and Commerce, House
of Representatives

For Release on Delivery

Expected at 9:30 a.m. EST MEDICAID

Thursday, March 18, 2004

      Intergovernmental Transfers Have Facilitated State Financing Schemes

Statement of Kathryn G. Allen Director, Health Care-Medicaid and Private Health
Insurance Issues

GAO-04-574T

Highlights of GAO-04-574T, a testimony before the Subcommittee on Health,
Committee on Energy and Commerce, House of Representatives

Medicaid, the federal-state health financing program for many of the
nation's most vulnerable populations, finances health care for an
estimated 53 million lowincome Americans, at a cost of $244 billion in
2002. Congress structured Medicaid as a shared fiduciary responsibility of
the federal government and the states, with the federal share of each
state's Medicaid payments determined by a formula specified by law. In
2002, the federal share of each state's expenditures ranged from 50 to 76
percent under this formula; in the aggregate, the federal share of total
Medicaid expenditures was 57 percent.

Some states have used a number of creative financing schemes that take
advantage of statutory and regulatory loopholes to claim excessive federal
matching payments. GAO was asked to summarize prior work on how some of
these schemes operated, including the role of intergovernmental transfers
(IGT), which enable government entities-such as the state and
local-government facilities like county nursing homes-to transfer funds
among themselves. GAO was also asked to discuss these schemes' effects on
the federalstate Medicaid partnership and to discuss what can be done to
curtail them.

www.gao.gov/cgi-bin/getrpt?GAO-04-574T.

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.

March 18, 2004

MEDICAID

Intergovernmental Transfers Have Facilitated State Financing Schemes

For many years states have used varied financing schemes, sometimes
involving IGTs, to inappropriately increase federal Medicaid matching
payments. Some states, for example, receive federal matching funds on the
basis of large Medicaid payments to certain providers, such as nursing
homes operated by local governments, which greatly exceed established
Medicaid rates. In reality, the large payments are often temporary, since
states can require the local-government providers to return all or most of
the money to the states. States can use these funds-which essentially make
a round-trip from the states to providers and back to the states-at their
own discretion.

States' financing schemes undermine the federal-state Medicaid
partnership, as well as the program's fiscal integrity, in at least three
ways.

o  	The schemes effectively increase the federal matching rate established
under federal law by increasing federal expenditures while state
contributions remain unchanged or even decrease. GAO estimated that one
state effectively increased the federal matching share of its total
Medicaid expenditures from 59 percent to 68 percent in state fiscal year
2001, by obtaining excessive federal funds and using these as the state's
share of other Medicaid expenditures.

o  	There is no assurance that these increased federal matching payments
are used for Medicaid services, since states use funds returned to them
via these schemes at their own discretion. In examining how six states
with large schemes used the federal funds they generated, GAO found that
one state used the funds to help finance its education programs, and
others deposited the funds into state general funds or other special state
accounts that could be used for non-Medicaid purposes or to supplant the
states' share of other Medicaid expenditures.

o  	The schemes enable states to pay a few public providers amounts that
well exceed the costs of services provided, which is inconsistent with the
statutory requirement that states ensure economical and efficient Medicaid
payments. In one state, GAO found that the state's proposed scheme
increased the daily federal payment per Medicaid resident from $53 to $670
in six local-government-operated nursing homes.

Although Congress and the Centers for Medicare & Medicaid Services have
acted to curtail financing schemes when detected, problems persist. States
can still claim excessive federal matching funds for payments exceeding
public facilities' actual costs. GAO suggests that Congress consider a
recommendation open from prior work, that is, to prohibit Medicaid
payments that exceed actual costs for any government-owned facility.

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today as you explore the issue of states' use of
intergovernmental transfers in the federal-state Medicaid program.
Medicaid finances health care for an estimated 53 million low-income
Americans at a cost of $244 billion.1 Medicaid is the third-largest
mandatory spending program in the federal budget and one of the largest
components of state budgets, second only to education. The program
fulfills a crucial national role by providing health coverage for a
variety of vulnerable populations, including low-income families with
children and certain people who are elderly, blind, or disabled. Congress
has structured Medicaid as a shared responsibility of the federal
government and the states, with the federal share of each state's Medicaid
payments determined by a formula specified by law. The Centers for
Medicare & Medicaid Services (CMS), within the Department of Health and
Human Services (HHS), is the federal agency responsible for the program,
and the states design and administer their programs with considerable
discretion and flexibility.

For more than a decade, states have used a number of creative financing
schemes to inappropriately increase the federal share of Medicaid
expenditures. Intergovernmental transfers, or IGTs, are one of the tools
that have enabled them to do so. State and local governments use IGTs to
carry out their shared governmental functions, such as collecting and
redistributing revenues to provide essential government services. But by
using IGTs, states can also transfer funds to or from local-government
entities, such as government-owned nursing homes, as part of complex
financing schemes that inappropriately boost the federal share of Medicaid
costs. In my testimony today, I will (1) describe how some state financing
schemes have operated, including the role of IGTs in these schemes; (2)
discuss how such financing schemes compromise the federal-state
partnership that is the foundation of the Medicaid program; and (3)
discuss what can be done to further curtail state financing schemes. My
testimony today is based on our prior work assessing state financing
schemes and federal oversight of them. We conducted this body of work

1Estimated federal-state cost is for fiscal year 2002, the latest year for
which data are available.

from June 1993 through January 2004 in accordance with generally accepted
government auditing standards.2

In summary, for many years states have used varied financing schemes,
sometimes involving IGTs, to inappropriately increase federal matching
payments. Taking advantage of statutory and regulatory loopholes, some
states, for example, have made large Medicaid payments to certain
providers, such as nursing homes operated by local governments, which have
greatly exceeded the established Medicaid payment rate. These state
expenditures would enable states to claim large federal matching payments.
Such transactions create the illusion of valid expenditures for services
delivered by local-government providers to Medicaid-eligible individuals.
In reality, the spending is often only temporary because states require
the local governments to return all or most of the money to the states
through IGTs. Once states receive the returned funds, they can use them to
supplant the states' own share of future Medicaid spending or even use
them for non-Medicaid purposes. Because such arrangements effectively
increase the federal Medicaid share above what is set under law, they
violate the fiscal integrity of Medicaid's federal-state partnership. As
new schemes have come to light, Congress and CMS have taken legislative
and regulatory actions to curtail them; nonetheless, problems remain. We
believe Congress and CMS should continue their efforts to preclude states'
ability to claim excessive federal Medicaid payments, and we suggest that
Congress consider a recommendation that remains open from our prior work,
that is, to prohibit Medicaid payments that exceed actual costs for any
government-owned facility.

Background 	Title XIX of the Social Security Act authorizes federal
funding to states for Medicaid, which finances health care services
including acute and longterm care for certain low-income, aged, or
disabled individuals. States have considerable flexibility in designing
and operating their Medicaid programs. Within broad federal requirements,
each state determines which services to cover and to what extent,
establishes its own eligibility requirements, sets provider payment rates,
and develops its own administrative structure. In addition to groups for
which federal law requires coverage-such as children and pregnant women at
specified income levels and certain persons with disabilities-states may
choose to expand eligibility or add benefits that the statute defines as
optional.

            2See related GAO products at the end of this statement.

  Some State Financing Schemes Have Used IGTs to Create the Illusion of Valid
  Medicaid Expenditures

Medicaid is an open-ended entitlement: states are generally obligated to
pay for covered services provided to eligible individuals, and the federal
government is obligated to pay its share of a state's expenditures under a
CMS-approved state Medicaid plan. The federal share of each state's
Medicaid expenditures is based on a statutory formula linked to a state's
per capita income in relation to national per capita income. In 2002, the
specified federal share of each state's expenditures ranged from 50
percent to 76 percent; in the aggregate, the federal share of total
Medicaid expenditures was 57 percent.3 The Social Security Act provides
that up to 60 percent of the state share of Medicaid spending can come
from localgovernment revenues and sources.4 Some states design their
Medicaid programs to require local governments to contribute to the
programs' costs.

For more than a decade, some states have used various financing schemes,
some involving IGTs, to create the illusion of a valid state Medicaid
expenditure to a health care provider. This payment has enabled states to
claim federal matching funds regardless of whether the program services
paid for had actually been provided. As various schemes have come to
light, Congress and CMS5 have taken actions to curtail them (see table 1).
Many of these schemes involve payment arrangements between the state and
government-owned or government-operated providers, such as
localgovernment-operated nursing homes.

3In May 2003, Congress passed the Jobs and Growth Tax Relief
Reconciliation Act, which appropriated $10 billion for a temporary
increase in the federal matching rate for states. This across-the-board
increase of 2.95 percent was effective from April 1, 2003, through June
30, 2004.

4See 42 U.S.C. S: 1396a(a)(2) (2000).

5In June 2001, the Health Care Financing Administration (HCFA) was renamed
the Centers for Medicare & Medicaid Services (CMS). We continue to refer
to HCFA throughout this testimony where agency actions were taken under
its former name.

Table 1: Medicaid Financing Schemes Used to Inappropriately Generate
Federal Payments and Federal Actions to Address Them

Financing arrangement         Description               Action taken       
Excessive payments to States made excessive       In 1987, the Health Care 
           state         Medicaid payments to state- Financing                
     health facilities   owned health facilities,     Administration (HCFA)   
                         which subsequently returned          issued          
                          these funds to the state   regulations that         
                                 treasuries.         established payment      
                                                     limits specifically for  
                                                     inpatient and            
                                                     institutional facilities 
                                                          operated by states. 

Provider taxes and donations	Revenues from provider-specific taxes on
hospitals and other providers and from provider "donations" were matched
with federal funds and paid to the providers. These providers could then
return most of the federal payment to the states.

The Medicaid Voluntary Contribution and Provider-Specific Tax Amendments
of 1991 essentially barred certain provider donations, placed a series of
restrictions on provider taxes, and set other restrictions for state
contributions.

Excessive disproportionate DSH payments are meant to compensate those hospitals
                         share hospital (DSH) payments

that care for a disproportionate number of low-income patients. Unusually
large DSH payments were made to certain hospitals, which then returned the
bulk of the state and federal funds to the state.

The Omnibus Budget Reconciliation Act of 1993 placed limits on which
hospitals could receive DSH payments and capped both the amount of DSH
payments states could make and the amount individual hospitals could
receive.

Excessive DSH  A large share of DSH payments were  The Balanced Budget Act 
    payments to             paid to state-                    of 1997         
state mental  operated psychiatric hospitals,       limited the proportion 
     hospitals   where they were used to                     of a state's DSH 
                   pay for services not covered by     payments that can be   
                           Medicaid or were                paid to state      
                  returned to the state treasuries.   psychiatric hospitals.  

Upper payment limit (UPL) for local government health facilities In an
effort to ensure that Medicaid payments are reasonable, federal
regulations prohibit Medicaid from paying more than a reasonable estimate
of the amount that would be paid under Medicare payment principles for
comparable services. This UPL applies to payments aggregated across a
class of facilities and not for individual facilities. As a result of the
aggregate upper limit, states were able to make large supplemental
payments to a few local public health facilities, such as hospitals and
nursing homes. The local government health facilities then returned the
bulk of the state and federal payments to the states. The Medicare,
Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000
required HCFA to issue a final regulation that established a separate
payment limit for each of several classes of local government health
facilities. In 2002, CMS issued a regulation that further lowered the
payment limit for local public hospitals.

Source: GAO.

A variant of these creative financing arrangements involves states'
exploitation of Medicaid's upper payment limit (UPL) provisions.6 These
schemes share certain characteristics, including IGTs, with other
financing schemes from prior years (see table 1). In particular, these
arrangements create the illusion that a state has made a large Medicaid
payment- separate from and in addition to Medicaid expenditures that
providers have already received for covered services-which enables the
state to obtain a federal matching payment. In reality, the large payment
is temporary, since the funds essentially make a round-trip from the state
to the Medicaid providers and back to the state. As a result of such
round-trip arrangements, states obtain excessive federal Medicaid matching
funds while their own state expenditures remain unchanged or even
decrease. Figure 1, which is based on our earlier work, illustrates how
this mechanism operated in one state (Michigan).7

Figure 1: One State's Arrangement to Increase Federal Medicaid Payments
Inappropriately

                             Source: GAO analysis.

6The UPL sets the ceiling on what the federal government will pay as its
share of the Medicaid costs for different classes of covered services and
often exceeds what states actually pay providers for Medicaid-covered
services. States were able to exploit the UPL loophole by paying nursing
homes and hospitals owned by local governments much more than the
established Medicaid payment rate and requiring the providers to return,
through IGTs, the excess payments to the state.

7See U.S. General Accounting Office, Medicaid: States Use Illusory
Approaches to Shift Program Costs to Federal Government, GAO/HEHS-94-133
(Washington, D.C.: Aug. 1, 1994), and Major Management Challenges and
Program Risks: Department of Health and Human Services,, GAO-03-101
(Washington, D.C.: January 2003).

As shown in figure 1, the state made Medicaid payments totaling $277
million to certain county health facilities; the total included $155
million in federal funds and $122 million in state funds (step 1). On the
same day that the county health facilities received the funds, they
transferred all but $6 million back to the state, which retained $271
million (steps 2 and 3). From this transaction, the state realized a net
gain of $149 million over the state's original outlay of $122 million. In
cases like this, local-government facilities can use IGTs to easily return
the excessive Medicaid payments to the state via electronic wire
transfers. We have found that these round-trip transfers can be
accomplished in less than 1 hour. The IGT is critical, because if the
payment does not go back to the state, the state gains no financial
benefit and actually loses from the arrangement because it has simply paid
the provider more than its standard Medicaid payment rate for the
services. In a variant of this practice, some states require a few
counties to initiate the transaction, by taking out bank loans for the
total amount the states determined they can pay under the UPL. The
counties wire the funds to the states, which then send most or all of the
funds back to the counties as Medicaid payments. The counties use these
"Medicaid payments" to repay the bank loans. Meanwhile, the states claim
federal matching funds on the total amount.

Consistent with past actions, Congress and CMS have taken steps to curtail
UPL financing schemes when they have come to light. At the direction of
Congress,8 the agency-then called the Health Care Financing Administration
(HCFA)-finalized a regulation in 2001 that significantly narrowed the UPL
loophole by limiting the amount of excessive funds states could claim.9
HCFA estimated that its 2001 regulation would reduce the federal
government's financial liability due to inappropriate UPL arrangements by
$55 billion over 10 years;10 a related 2002 regulation was

8The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act
of 2000 directed HCFA to issue a final regulation to limit states' ability
to claim excessive federal matching funds through UPL arrangements. See
Pub. L. No. 106-554, App. F, S: 705(a), 114 Stat. 2763A-463, 575-576
(2000).

9Specifically, HCFA eliminated states' ability to combine, or aggregate,
UPLs across private and local-government providers. Before this
regulation, a state could claim excessive payments on the basis of the
combined amount potentially payable to all private and localgovernment
providers in the state. The regulation established separate UPLs for
separate classes of non-state-government facilities (those owned by local
governments), including inpatient hospitals, nursing homes, and
intermediate care facilities for the mentally retarded. See 66 Fed. Reg.
3148 (2001) (codified at 42 C.F.R. part 447 (2002)).

10HCFA's estimate covered UPL arrangements for nursing homes, inpatient
hospital services, and outpatient hospital services.

  Financing Schemes Undermine Medicaid's Federal-State Partnership

estimated to yield an additional $9 billion over 5 years.11 CMS recognized
that some states had developed a long-standing reliance on these excessive
UPL funds, and the law and regulation authorized transition periods of up
to 8 years for states to come into compliance with the new requirements.12
As we recently reported,13 however, even under the new regulations, states
can still aggregate payments to all local-government nursing homes under
one UPL to generate excessive federal matching payments beyond their
standard Medicaid claims. For example, CMS information about states
complying with the new regulation indicates that, through UPL arrangements
with public nursing homes and other public facilities, states can still
claim about $2.2 billion annually in federal matching funds exceeding
their standard Medicaid claims.

States' use of these creative financing mechanisms undermines the
federal-state Medicaid partnership as well as the program's fiscal
integrity in at least three ways.

First, state financing schemes effectively increase the federal matching
rate established under federal law by increasing federal expenditures
while state contributions remain unchanged or even decrease. For example,
for one state we analyzed (Wisconsin), we estimated that by obtaining
excessive federal matching payments and using these funds as the state
share of other Medicaid expenditures, the state effectively increased the
federal matching share of its total Medicaid expenditures from 59 percent
to 68 percent in state fiscal year 2001.14 The state did so by generating
nearly $400 million in excessive federal matching funds via round-trip
arrangements with three counties. Similarly, the HHS Office of the
Inspector General found that a comparably structured arrangement in

11The 2002 regulation reduced the upper limit for local-government
hospitals from 150 percent to 100 percent.

12The length of a state's transition period was to be based in part on how
long the state had had in place a UPL arrangement meeting certain
specified criteria. During the assigned transition period-established in
1-, 2-, 5-, or 8-year intervals-excessive UPL payments were to be phased
out.

13See U.S. General Accounting Office, Medicaid: Improved Federal Oversight
of State Financing Schemes Is Needed, GAO-04-228 (Washington D.C.: Feb.
13, 2004).

14U.S. General Accounting Office, Medicaid: HCFA Reversed Its Position and
Approved Additional State Financing Schemes, GAO-02-147 (Washington D.C.:
Oct. 30, 2001), and GAO-04-228.

Pennsylvania effectively increased that state's statutorily determined
matching rate from 54 percent to about 65 percent.15

Second, CMS has no assurance that these increased federal matching
payments are used for Medicaid services. Federal Medicaid matching funds
are intended for Medicaid-covered services for the Medicaid-eligible
individuals on whose behalf payments are made.16 Under state financing
schemes, however, states can use funds returned to them at their own
discretion. We recently examined how six states with large UPL financing
schemes involving nursing homes used the federal funds they generated.17
As in the past, some states in our review deposited excessive funds from
UPL arrangements into their general funds, which the states may or may not
use for Medicaid purposes. For example, one state (Oregon) has used funds
generated by its UPL arrangement to help finance education programs. Table
2 provides further information on how states used their UPL funds in
recent years, as reported by the six states we reviewed.

15U.S. Department of Health and Human Services, Office of the Inspector
General, Review of the Commonwealth of Pennsylvania's Use of
Intergovernmental Transfers to Finance Medicaid Supplementation Payments
to County Nursing Facilities, A-03-00-00203 (Washington, D.C.: 2001).

16See 42 U.S.C. S: 1396 and S: 1396d(a).

17GAO-04-228.

Table 2: Selected States' Use of Funds Generated through UPL Arrangements

State Use

Michigan 	Funds generated by the state's UPL arrangement are deposited in
the state's general fund but are tracked separately as a local fund
source. These local funds are earmarked for future Medicaid expenses and
used as the state match, effectively recycling federal UPL matching funds
to generate additional federal Medicaid matching funds.

New York 	Funds generated by the state's UPL arrangement are deposited
into its Medical Assistance Account. Proceeds from this account are used
to pay for the state share of the cost of Medicaid payments, effectively
recycling federal funds to generate additional federal Medicaid matching
funds.

Oregon 	Funds generated by the state's UPL arrangement are being used to
help finance education programs and other non-Medicaid health programs.
UPL matching funds recouped from providers are deposited into a special
UPL fund. Facing a large budget deficit, a February 2002 special session
of the Oregon legislature allocated the fund balance, about $131 million,
to finance kindergarten to 12th grade education programs. According to
state budget documents, the UPL funds are being used to replace financing
from the state's general fund.

Pennsylvania 	Funds generated by the state's UPL arrangement are used for
a number of Medicaid and non-Medicaid purposes, including long-term care
and behavioral health services. In state fiscal years 2001-2003, the state
generated $2.4 billion in excessive federal matching funds, of which 43
percent was used for the state share of Medicaid expenses (recycled to
generate additional federal matching funds), 6 percent was used for
non-Medicaid purposes, and 52 percent was unspent and available for
non-Medicaid uses. (Percentages do not total 100 percent because of
rounding.)

Washington 	Funds generated by the state's UPL arrangement are commingled
with a number of other revenue sources in a state fund. The fund is used
for various state health programs, including a state-funded basic health
plan, public health programs, and health benefits for home care workers. A
portion of the fund is also transferred to the state's general fund. The
fund is also used for selected Medicaid services and the State Children's
Health Insurance Program, which effectively recycles the federal funds to
generate additional federal Medicaid matching funds.

Wisconsin 	Funds generated by the state's UPL arrangement are deposited in
a state fund, which is used to pay for Medicaid-covered services in both
public and private nursing homes. Because the state uses these payments as
the state share, the federal funds are effectively recycled to generate
additional federal Medicaid matching funds.

Source: GAO.

Third, these state financing schemes undermine the fiscal integrity of the
Medicaid program because they enable states to make to providers payments
that significantly exceed their costs. In our view, this practice is
inconsistent with the statutory requirement that states ensure that
Medicaid payments are economical and efficient.18 Under UPL financing
arrangements, some states pay a few public providers excessive amounts,
well beyond the cost of services provided. We found, for example, that
Virginia's proposed arrangement would allow the state to pay six
localgovernment nursing homes, on average, $670 in federal funds per
Medicaid nursing home resident per day-more than 12 times the $53 daily
federal payment these nursing homes normally received, on average, per
Medicaid resident.19

  Further Federal Action Would Help Address Continuing Concerns with State
  Financing Schemes

Although CMS and the Congress have often acted to curtail states'
financing schemes, problems persist. Improved CMS oversight and additional
congressional action could help address continuing concerns with UPL
financing schemes and other inappropriate arrangements.

We recently reported that CMS has taken several actions to improve its
oversight of state UPL arrangements, including forming a team to
coordinate its review of states' proposed and continuing arrangements,
drafting internal guidelines for reviewing state methods for calculating
UPL amounts, and conducting financial reviews that have identified
hundreds of millions of dollars in improper claims.20 Starting in August
2003, when considering states' proposals to change how they would pay
nursing homes or other institutions, CMS also began to ask states to
provide previously unrequested information. The information includes
sources of state matching funds for supplemental payments to Medicaid
providers, the extent to which total payments would exceed providers'
costs, how a state would use the additional funds, and whether a state
required providers to return payments (and, if so, how the state planned
to spend such funds). As of October 2003, CMS indicated that it had asked
30 states with proposed state Medicaid plan amendments to provide
additional information, and the agency was in the process of receiving and
reviewing states' initial responses.

18See 42 U.S.C. S: 1396a(a)(30)(A).
19GAO-02-147.
20GAO-04-228.

We also reported, however, that CMS's efforts do not go far enough to
ensure that states' UPL claims are for Medicaid-covered services provided
to eligible beneficiaries. Moreover, we remain concerned that in carrying
out its oversight responsibilities, CMS at times takes actions
inconsistent with its stated goals for limiting states' use of these
arrangements. For example, we previously reported that while the agency
was attempting to narrow the glaring UPL loophole in 2001, it was allowing
additional states to engage in the very schemes it was trying to shut
down, at a substantial cost to the federal government.21 More recently, we
reported that CMS's granting two states the longest available transition
period of 8 years, for phasing out excessive claims under their UPL
arrangements, was not consistent with the agency's stated goals. We
estimated that, as a result of these decisions, these two states can claim
about $633 million more in federal matching funds under their 8-year
transition periods than they could have claimed under shorter transition
periods consistent with CMS's stated policies and goals.22

In our view, additional congressional action also could help address
continuing concerns about Medicaid financing schemes. Although Congress
and CMS have taken significant steps to help curb inappropriate UPL
arrangements and other financing schemes, states can still claim federal
matching funds for more than a public provider's actual costs of providing
Medicaid-covered services. As long as states are allowed to make payments
exceeding a facility's actual costs, the loophole remains. A
recommendation open from one of our earlier reports would, if implemented,
close the existing loophole and thus mitigate these continuing concerns.
We previously recommended that Congress consider prohibiting Medicaid
payments that exceed actual costs for any government-owned facility.23 If
this recommendation were implemented, a facility's payment would be
limited to the reasonable costs of covered services it actually provides
to eligible beneficiaries, thus eliminating the possibility of the
exorbitant payments that are now passed through individual facilities to
states. The Administration appears to support such legislative action; the
President's budget for fiscal year 2005 sets forth a legislative proposal
to cap Medicaid payments to government providers

21GAO-02-147.

22GAO-04-228.

23U.S. General Accounting Office, Medicaid: States Use Illusory Approaches
to Shift Program Costs to Federal Government, GAO/HEHS-94-133 (Washington
D.C.: Aug. 1, 1994).

Conclusions

(such as public hospitals or county-owned nursing homes) to the actual
cost of providing services to Medicaid beneficiaries.24

The term "IGTs" has come to be closely associated-if not synonymous- with
the abusive financing schemes undertaken by some states in connection with
illusory payments for Medicaid services to claim excessive federal
matching funds. IGTs are a legitimate state budget tool and not
problematic in themselves. But when they are used to carry out
questionable financial transactions that inappropriately shift state
Medicaid costs to the federal government, they become problematic.

We believe the problem goes beyond IGTs. An observation we made in our
first report on this issue in 1994 is as valid today as it was then: in
our view, the Medicaid program should not allow states to benefit from
arrangements where federal funds purported to benefit providers are given
to providers with one hand, only to be taken back with the other.25 State
financing schemes, variants of which have been applied for a decade or
longer, circumvent the federal and state funding balance set under law.
They have also resulted in the diversion of federal funds intended to pay
for covered services for Medicaid-eligible individuals to whatever purpose
a state chooses.

Although Congress and CMS have often acted to address Medicaid financing
schemes once they become apparent, new variations continue to emerge.
Experience shows that some states are likely to continue looking for
creative means to supplant state financing, making a compelling case for
the Congress and CMS to sustain vigilance over federal Medicaid payments.
Understandably, states that have relied on federal funding as a staple for
their own share of Medicaid spending are feeling the budgetary pressure
from the actual or potential loss of these funds. The continuing challenge
remains to find the proper balance between states' flexibility to
administer their Medicaid programs and the shared federal-state fiduciary
responsibility to manage program finances efficiently and economically in
a way that ensures the program's fiscal integrity.

24U.S. Department of Health and Human Services, Budget in Brief FY 2005
(Washington, D.C.: Mar. 1, 2004), http://www.hhs.gov/budget/docbudget.htm
(downloaded Mar. 15, 2004).

25GAO/HEHS-94-133.

Mr. Chairman, this concludes my prepared statement. I will be happy to
answer any questions that you or Members of the Subcommittee may have.

Contact and For future contacts regarding this testimony, please call
Kathryn G. Allen at (202) 512-7118. Katherine Iritani, Tim Bushfield,
Ellen W. Chu, HelenAcknowledgments Desaulniers, Behn Miller Kelly, and
Terry Saiki also made key contributions to this testimony.

Related GAO Products

Medicaid: Improved Federal Oversight of State Financing Schemes Is Needed.
GAO-04-228. Washington, D.C.: February 13, 2004.

Major Management Challenges and Program Risks: Department of Health and
Human Services. GAO-03-101. Washington, D.C.: January 2003.

Medicaid: HCFA Reversed Its Position and Approved Additional State
Financing Schemes. GAO-02-147. Washington, D.C.: October 30, 2001.

Medicaid: State Financing Schemes Again Drive Up Federal Payments.
GAO/T-HEHS-00-193. Washington, D.C.: September 6, 2000.

State Medicaid Financing Practices. GAO/HEHS-96-76R. Washington, D.C.:
January 23, 1996.

Michigan Financing Arrangements. GAO/HEHS-95-146R. Washington, D.C.: May
5, 1995.

Medicaid: States Use Illusory Approaches to Shift Program Costs to Federal
Government. GAO/HEHS-94-133. Washington, D.C.: August 1, 1994.

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