Health Centers And Rural Clinics: State and Federal		 
Implementation Issues for Medicaid's New Payment System 	 
(17-JUN-05, GAO-05-452).					 
                                                                 
The Medicare, Medicaid, and SCHIP Benefits Improvement and	 
Protection Act of 2000 (BIPA) established a prospective payment  
system (PPS) for Medicaid payments to Federally Qualified Health 
Centers (FQHC) and Rural Health Clinics (RHC), giving providers a
financial incentive to operate efficiently. BIPA requires that	 
BIPA PPS rates be adjusted for inflation and changes in scope of 
services. States also may use an alternative methodology if it	 
pays no less than the BIPA PPS rate. In response to a BIPA	 
mandate, GAO reviewed states' implementation of the new payment  
requirements, the need to rebase or refine the BIPA PPS, and the 
Centers for Medicare & Medicaid Services' (CMS) oversight of	 
states' implementation. GAO surveyed the states about their	 
payment methodologies, did a targeted review in four states, and 
reviewed indexes used to reflect medical care inflation.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-452 					        
    ACCNO:   A26940						        
  TITLE:     Health Centers And Rural Clinics: State and Federal      
Implementation Issues for Medicaid's New Payment System 	 
     DATE:   06/17/2005 
  SUBJECT:   Administrative costs				 
	     Community health services				 
	     Cost analysis					 
	     Federal/state relations				 
	     Health care programs				 
	     Health care services				 
	     Medicaid						 
	     Payments						 
	     Health care costs					 
	     Health insurance cost control			 
	     State-administered programs			 
	     Prospective payments				 

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GAO-05-452

     

     * Results in Brief
     * Background
          * Characteristics of FQHCs and RHCs
          * Medicaid Reimbursement for FQHCs and RHCs
          * State Plan Approval Process
     * States' Implementation of BIPA PPS and Alternative Methodolo
          * BIPA PPS Implemented in Most States, but Issues Exist
               * Implementation of BIPA PPS for FQHCs
               * Implementation of BIPA PPS for RHCs
               * Issues with States' Implementation of BIPA PPS
          * Many States Implemented Alternative Payment Methodologies, b
               * Implementation of Alternative Methodologies for FQHCs
               * Implementation of Alternative Methodologies for RHCs
               * Issue with States' Implementation of Alternative Methodologi
     * Evidence to Date Is Insufficient about the Need to Rebase or
          * MEI May Not Be an Appropriate Index to Adjust BIPA PPS Rates
          * Lack of Cost-Reporting Requirement Hinders Ability to Determ
          * Analysis of Rates from Selected States Provided Inconclusive
     * CMS Guidance and Oversight Did Not Ensure Consistent State C
          * CMS Guidance Did Not Adequately Address Certain BIPA Require
          * CMS Oversight Has Been Limited
     * Conclusions
     * Matter for Congressional Consideration
     * Recommendations for Executive Action
     * Agency and State Comments and Our Evaluation
          * PPS Structure
          * BIPA PPS
          * Comparison of BIPA PPS with Selected Other PPSs
     * GAO Contact
     * Acknowledgments
          * Order by Mail or Phone

Report to Congressional Committees

United States Government Accountability Office

GAO

June 2005

HEALTH CENTERS AND RURAL CLINICS

State and Federal Implementation Issues for Medicaid's New Payment System

Medicaid Payment for FQHCs and RHCs Medicaid Payment for FQHCs and RHCs
Medicaid Payment for FQHCs and RHCs Medicaid Payment for FQHCs and RHCs
Medicaid Payment for FQHCs and RHCs Medicaid Payment for FQHCs and RHCs
Medicaid Payment for FQHCs and RHCs Medicaid Payment for FQHCs and RHCs
Medicaid Payment for FQHCs and RHCs Medicaid Payment for FQHCs and RHCs
Medicaid Payment for FQHCs and RHCs Medicaid Payment for FQHCs and RHCs
Medicaid Payment for FQHCs and RHCs Medicaid Payment for FQHCs and RHCs
Medicaid Payment for FQHCs and RHCs Medicaid Payment for FQHCs and RHCs
Medicaid Payment for FQHCs and RHCs Medicaid Payment for FQHCs and RHCs
Medicaid Payment for FQHCs and RHCs Medicaid Payment for FQHCs and RHCs
Medicaid Payment for FQHCs and RHCs Medicaid Payment for FQHCs and RHCs
Medicaid Payment for FQHCs and RHCs Medicaid Payment for FQHCs and RHCs
Medicaid Payment for FQHCs and RHCs Medicaid Payment for FQHCs and RHCs
Medicaid Payment for FQHCs and RHCs Medicaid Payment for FQHCs and RHCs
Medicaid Payment for FQHCs and RHCs Medicaid Payment for FQHCs and RHCs
Medicaid Payment for FQHCs and RHCs Medicaid Payment for FQHCs and RHCs
Medicaid Payment for FQHCs and RHCs Medicaid Payment for FQHCs and RHCs
Medicaid Payment for FQHCs and RHCs Medicaid Payment for FQHCs and RHCs
Medicaid Payment for FQHCs and RHCs Medicaid Payment for FQHCs and RHCs
Medicaid Payment for FQHCs and RHCs Medicaid Payment for FQHCs and RHCs
Medicaid Payment for FQHCs and RHCs Medicaid Payment for FQHCs and RHCs
Medicaid Payment for FQHCs and RHCs Medicaid Payment for FQHCs and RHCs
Medicaid Payment for FQHCs and RHCs Medicaid Payment for FQHCs and RHCs
Medicaid Payment for FQHCs and RHCs Medicaid Payment for FQHCs and RHCs
Medicaid Payment for FQHCs and RHCs Medicaid Payment for FQHCs and RHCs
Medicaid Payment for FQHCs and RHCs Medicaid Payment for FQHCs and RHCs
Medicaid Payment for FQHCs and RHCs Medicaid Payment for FQHCs and RHCs
Medicaid Payment for FQHCs and RHCs Medicaid Payment for FQHCs and RHCs
Medicaid Payment for FQHCs and RHCs Medicaid Payment for FQHCs and RHCs
Medicaid Payment for FQHCs and RHCs

GAO-05-452

Contents

Letter 1

Results in Brief 4
Background 6
States' Implementation of BIPA PPS and Alternative Methodologies Raises
Certain Issues 10
Evidence to Date Is Insufficient about the Need to Rebase or Refine the
BIPA PPS 29
CMS Guidance and Oversight Did Not Ensure Consistent State Compliance with
BIPA 36
Conclusions 40
Matter for Congressional Consideration 41
Recommendations for Executive Action 41
Agency and State Comments and Our Evaluation 42
Appendix I Methodology for Review of Selected States Using Cost-Based
Reimbursement 45
Appendix II Overview of Prospective Payment Systems 47
Appendix III Medicaid Payment Methodologies for FQHCs and RHCs, by State,
as of June 1, 2004 50
Appendix IV Comments from the Centers for Medicare & Medicaid Services 52
Appendix V GAO Contact and Staff Acknowledgments 56

Tables

Table 1: States' Use of the BIPA PPS to Make Payments to FQHCs, as of June
1, 2004 12
Table 2: Timetable for States' Application of the MEI Inflation Index to
FQHCs' BIPA PPS Rates 14
Table 3: States' Use of the BIPA PPS to Make Payments to RHCs, as of June
1, 2004 15
Table 4: Timetable for States' Application of the MEI Inflation Index to
RHCs' BIPA PPS Rates 17
Table 5: Alternative Payment Methodologies for FQHCs, as of June 1, 2004
19
Table 6: States That Used Limits in Determining Reasonable Costs for FQHCs
under Cost-Based Reimbursement Alternative Methodologies, by Type of
Limit, as of June 1, 2004 21
Table 7: Characteristics of Alternative PPSs for FQHCs, by State, as of
June 1, 2004 22
Table 8: Alternative Payment Methodologies for RHCs, as of June 1, 2004 24
Table 9: States That Used Limits in Determining Reasonable Costs for RHCs
under Cost-Based Reimbursement Alternative Methodologies, by Type of
Limit, as of June 1, 2004 25
Table 10: Characteristics of Alternative PPSs for RHCs, by State, as of
June 1, 2004 26
Table 11: Percentage Increase of the MEI Compared to Increases for Other
Indexes Commonly Used to Adjust for Medical Care Inflation (2001 to 2003)
31
Table 12: States' Cost Reporting Requirements for FQHCs and RHCs, as of
June 2004 33
Table 13: Comparison of Key Features of BIPA PPS to Selected Other PPSs 49

Figures

Figure 1: States' Implementation of the BIPA PPS for FQHCs, as of June 1,
2004 13
Figure 2: States' Implementation of the BIPA PPS for RHCs, as of June 1,
2004 16
Figure 3: Percentage Difference in Cost-Based and BIPA PPS Rates, by State
and Provider Type, 2001 through 2003 35
Figure 4: Timeline Showing CMS's Issuance of Guidance and Approval of
States' Plans to Implement BIPA's Medicaid Payment Provisions 37

Abbreviations

BIPA Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act
of 2000 CMS Centers for Medicare & Medicaid Services CPI Consumer Price
Index FQHC Federally Qualified Health Center HHS Department of Health and
Human Services HRSA Health Resources and Services Administration MEI
Medicare Economic Index PPI Producer Price Index PPS prospective payment
system RHC Rural Health Clinic SPA state plan amendment UDS Uniform Data
System

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United States Government Accountability Office

Washington, DC 20548

June 17, 2005

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

The Honorable Joe Barton Chairman The Honorable John D. Dingell Ranking
Minority Member Committee on Energy and Commerce House of Representatives

To increase the accessibility of primary and preventive health services
for low-income people living in medically underserved areas, Congress made
Federally Qualified Health Centers (FQHC) and Rural Health Clinics (RHC)
eligible for payments from Medicaid, a joint federal-state program that
finances health insurance for certain low-income adults and children.1
FQHCs are urban or rural centers that provide comprehensive
community-based primary care services to individuals regardless of their
ability to pay. In 2003, there were approximately 900 FQHCs. The nation's
approximately 3,600 RHCs provide similar primary care services in
underserved rural areas, but unlike FQHCs, RHCs are not required to
provide services to all individuals, such as those who are uninsured.2
Medicaid is a significant revenue source for FQHCs and RHCs; according to
the most recent data available, it accounted for about 35 percent of total
revenues for FQHCs and 24 percent for RHCs.3 In fiscal year 2003, Medicaid
payments to FQHCs and RHCs were almost $1.5 billion.

1The Rural Health Clinic Services Act of 1977, Pub. L. No. 95-210, S: 2,
91 Stat. 1485, 1488, authorized Medicaid payment for RHCs for covered
services; the Omnibus Budget Reconciliation Act of 1989, Pub. L. No.
101-239, S: 6404, 103 Stat. 2106, 2264, established FQHCs as a new
provider type and authorized Medicaid payment for covered services.

2The number of RHCs is as of August 2004.

Historically, federal law required state Medicaid programs to reimburse
FQHCs and RHCs on the basis of reasonable costs-that is, costs that are
not excessive for a type of service provided to Medicaid beneficiaries.
While this basis for reimbursement may have ensured that service providers
were paid for necessary costs, it was also regarded as potentially
inflationary because providers may have increased their payments by
raising their costs. The Medicare, Medicaid, and SCHIP Benefits
Improvement and Protection Act of 2000 (BIPA) changed Medicaid payment
requirements by establishing a new prospective payment system (PPS)
effective for services provided by FQHCs and RHCs on or after January 1,
2001.4 Unlike cost-based reimbursement, a PPS creates financial incentives
for providers to operate more efficiently. Providers that keep their costs
below their payment amount profit; conversely, providers lose money if
their service costs exceed the payment amount.

Although not typical of other PPSs, the BIPA PPS established a
provider-specific rate for the first year's payment rate (2001).
Specifically, states were to set the base rate at the average of each
FQHC's or RHC's fiscal year 1999 and fiscal year 2000 reasonable costs per
visit. In subsequent years, states were to use the Medicare Economic Index
(MEI) to increase payment rates annually for inflation and were to adjust
rates when necessary to reflect a change in scope of services. States may
use an alternative methodology to reimburse some or all of their FQHCs and
RHCs if they can demonstrate that the alternative payment methodology
would result in payments no lower than under the BIPA PPS payment rate and
if the FQHC or RHC agrees to its use.

3FQHC revenue data, which are as of 2003, are from the Uniform Data System
(UDS), a database of self-reported FQHC data maintained by the Health
Resources and Services Administration (HRSA). RHC data are from a 2000
National Rural Health Clinic Survey conducted by the Maine Rural Health
Research Center that was sent to a random sample of approximately one-half
of the nation's RHCs.

4Pub. L. No. 106-554, app. F, S: 702, 114 Stat. 2763A-463, 2763A-572. BIPA
amended Medicaid requirements to require states to reimburse FQHCs and
RHCs under the new PPS or an alternative methodology. (These requirements
were originally designated in BIPA as subsection (aa) of section 1902 of
the Social Security Act, but technical amendments to BIPA redesignated
them subsection (bb). Native American Breast and Cervical Cancer Treatment
Technical Amendment Act of 2001, Pub. L. No. 107-121, S: 2(b)(1), 115
Stat. 2384.) Throughout this report we refer to the PPS specifically set
out in section 702 of BIPA as the BIPA PPS.

BIPA required that we study the need for, and how to, rebase and refine
costs for making Medicaid payments to FQHCs and RHCs.5 We (1) reviewed
states' implementation of the Medicaid payment system under BIPA for FQHCs
and RHCs, (2) evaluated the need for rebasing or refining costs for making
payment under the BIPA PPS, and (3) reviewed the Centers for Medicare &
Medicaid Services' (CMS) oversight of states' Medicaid payment systems for
FQHCs and RHCs.

To examine these issues, we surveyed Medicaid officials in the 50 states
and the District of Columbia regarding their FQHC and RHC reimbursement
policies and practices as of June 1, 2004.6 States also submitted
documentation describing their methodologies, which we reviewed to
corroborate their survey responses. In addition to conducting the survey,
we reviewed the MEI, the index required by statute to annually adjust BIPA
PPS rates for inflation, as well as other indexes often used to reflect
changes in medical care inflation. To identify these other indexes, we
reviewed literature on medical care indexes and information from
organizations typically involved in developing and updating these indexes.
We also conducted a targeted review of FQHC and RHC payment rates in four
states-Iowa, Vermont, Virginia, and Wisconsin-that used cost-based
reimbursement as an alternative methodology. (See app. I for details about
the methodology of our targeted review.) We interviewed officials from CMS
and its regional offices; CMS is the agency within the Department of
Health and Human Services (HHS) that oversees states' Medicaid programs.
We also interviewed officials from HHS's Health Resources and Services
Administration (HRSA), which is responsible for reviewing FQHC grant
applications and disbursing federal public health grant funds to FQHCs. To
provide contextual information, we interviewed various stakeholders.
Specifically, we interviewed officials from the National Association of
Community Health Centers (an organization representing FQHCs), the
National Association of Rural Health Clinics, George Washington
University's Center for Health Services and Policy (an organization that
has conducted research on FQHCs), and a judgmentally selected sample of
eight FQHCs and eight RHCs. We performed our work from July 2004 through
May 2005 in accordance with generally accepted government auditing
standards.

5BIPA S: 702(d), 103 Stat. 2763A-574.

6Throughout this report, the term state refers to the 50 states and the
District of Columbia.

                                Results in Brief

Our analysis of states' implementation of Medicaid's new payment
system-the BIPA PPS and alternative methodologies-to pay FQHCs and RHCs
identified certain issues about the appropriateness of some states'
methodologies. Most states implemented the BIPA PPS and just under half of
states used an alternative methodology-generally cost-based reimbursement
or a PPS with features differing slightly from the BIPA PPS-to pay at
least a portion of their FQHCs or RHCs; and some states used more than one
methodology. States took an average of slightly more than a year to
implement their BIPA PPS, and a few states had not completed
implementation as of June 1, 2004. We noted three significant issues
regarding states' payment methodologies-two related to the BIPA PPS and
one related to alternative methodologies. First, some states' BIPA PPS
payment rates may be inappropriate because the states did not include all
Medicaid-covered FQHC and RHC services in determining the rates. Second,
over half of states using the BIPA PPS had not determined how they would
address the requirement to adjust their BIPA PPS rates for a change in
scope of services. Third, not all states with alternative methodologies
ensured that they resulted in payment at least equal to what FQHCs and
RHCs would have received under the BIPA PPS, as required by statute.

Evidence to date is insufficient to determine the need to rebase or refine
the BIPA PPS. Concerns exist about the appropriateness of the MEI, the
index required by statute to annually adjust BIPA PPS rates for inflation.
For example, the MEI was designed to measure the changing costs for the
average physician, which may be different from the costs of FQHCs and
RHCs. FQHCs often provide additional services, such as translation, and a
significant portion of RHC services may be provided by nonphysician
practitioners. Other indexes often used to reflect medical care inflation
have a similar shortcoming as they also do not reflect the services
typically provided by FQHCs and RHCs. Although the MEI may not be an
appropriate index, we determined that no inflation index is currently
available that reflects these services. Determining the need for rebasing
or refining is further complicated by the increasing lack of comprehensive
and current cost data because many states no longer require all FQHCs and
RHCs to submit cost reports. Our comparison of cost-based and BIPA PPS
rates from four states that used cost-based reimbursement as an
alternative payment methodology did not provide conclusive evidence on the
need to rebase or refine the BIPA PPS. Specifically, cost-based rates for
these states generally were higher than the BIPA PPS rates for most
providers, but it is unclear if this is because providers lacked the
incentive to deliver services efficiently or because they were operating
efficiently but their costs were higher than what the BIPA PPS would pay.

CMS guidance for and oversight of states' implementation of the new
BIPA-mandated payment requirements for FQHCs and RHCs were inadequate to
consistently ensure states' compliance with the law. Although CMS issued
guidance, it did not address how states were to implement some BIPA
requirements, such as how to adjust BIPA PPS rates to account for a
provider's change in scope of services and the relevance of this
requirement to states using alternative payment methodologies. Moreover,
CMS has conducted limited oversight of states' implementation of the new
payment system for FQHCs and RHCs. Instead, CMS has relied on states'
assurances that they were in compliance with BIPA and investigated payment
issues only in response to complaints, which CMS said were rare, or when
payment issues were raised during a CMS review conducted for other
purposes. As a result of its limited oversight, CMS was unaware of certain
compliance issues with states' payment methodologies for FQHCs and RHCs,
such as that some states' alternative methodologies did not comply with
BIPA's requirement that these methodologies result in payment no lower
than what FQHCs and RHCs would have received under the BIPA PPS.

This report includes a matter for congressional consideration and several
recommendations to the Administrator of CMS. We suggest that Congress
consider directing CMS to explore the development of a more appropriate
inflation index or develop a strategy to periodically assess the adequacy
of the MEI as an inflation index for adjusting BIPA PPS rates. We are
recommending that the Administrator of CMS also explore the development of
a more appropriate inflation index for the BIPA PPS, take various steps to
improve CMS guidance for states, and provide more consistent oversight of
states' payment methodologies for FQHCs and RHCs. In commenting on a draft
of this report, CMS said it would take certain actions related to its
oversight of states' payment methodologies for FQHCs and RHCs, but did not
agree that development of another inflation index or issuance of
additional guidance were necessary. We believe that the CMS response does
not adequately address the issues raised in this report, as its proposed
actions may not be sufficient to ensure states' compliance with BIPA. In
addition, we continue to believe that CMS should explore developing an
inflation index that more appropriately reflects the services provided by
FQHCs and RHCs. We therefore maintained this recommendation and also
elevated the issue to a matter for congressional consideration.

                                   Background

The FQHC and RHC programs were established to increase access to care for
individuals in medically underserved areas. Medicaid, which finances
health care for more than 50 million low-income Americans, is a
significant revenue source for FQHCs and RHCs, providing, on average,
one-quarter to over one-third of these providers' revenues.

Characteristics of FQHCs and RHCs

To be designated an FQHC, a facility generally must meet the requirements
of a grant recipient under section 330 of the Public Health Service Act;
be a public or private nonprofit entity that provides a statutorily
required set of primary care services to any individual, regardless of
ability to pay; and serve the medically underserved.7 In fiscal year 2002,
the President launched the Health Center Initiative with the goal of
adding 1,200 new or expanded health center sites and increasing the number
of patients served from about 10 million in fiscal year 2001 to 16 million
by 2006. In 2003, the approximately 900 FQHCs provided services to over 12
million people.8

FQHCs include community health centers, migrant health centers, public
housing and homeless programs, FQHC look-alikes, and certain facilities
operated by tribes or tribal organizations.9 A distinguishing feature of
FQHCs is that they provide enabling services such as outreach,
translation, and transportation, which help patients gain access to health
care. FQHCs vary considerably in their geographic location; their revenue
mix; and the size of the uninsured and Medicaid populations and degree of
managed care penetration in the surrounding area. For example, an FQHC may
be located in an urban area with a large uninsured or Medicaid population
and a high Medicaid managed care penetration, or in a rural area, where it
serves as the only source of primary care for several communities.

Unlike FQHCs, RHCs are not required to provide services to all
individuals, such as those who are uninsured, but they are required to
operate in rural areas that are designated as underserved.10 RHCs can
operate either independently or as part of a larger organization, such as
a hospital, skilled nursing facility, or home health agency. RHCs can be
specialty clinics, focusing their services on particular populations or
medical specialties such as pediatrics or obstetrics and gynecology. In
addition to being located in a rural, underserved area, to be certified by
CMS as an RHC, a provider must primarily offer outpatient primary medical
care, employ at least one nonphysician practitioner at least half the time
the clinic is open, and have a physician on-site at least once every 2
weeks.11 As of August 2004, approximately 3,600 RHCs operated in 44
states.12

742 U.S.C. S: 254b (2000). All section 330 health center grantees are
designated as FQHCs, making them certified Medicaid providers and
therefore eligible for Medicaid reimbursement.

8The data only include the federally funded FQHCs that report to the UDS
database.

9FQHC look-alikes are facilities that HRSA deems have met all of the
requirements to be a grant recipient under section 330 of the Public
Health Service Act but do not receive the federal grant.

In 2003, Medicaid reimbursement and HRSA grant funds were the two largest
single sources of revenue for FQHCs and accounted for 35 percent and 22
percent of these providers' total revenue, respectively. FQHCs also
received revenues from state, local, and private grants as well as other
insurance programs.13 In contrast, RHCs received a smaller proportion of
their total revenues from Medicaid (24 percent) but a higher proportion
from Medicare, commercial insurance, and directly from patients
(self-pay).14 Although Medicaid is a large revenue source for FQHCs and
RHCs, payments to these providers represent a very small percentage of
overall Medicaid expenditures. In fiscal year 2003, Medicaid payments to
FQHCs and RHCs totaled almost $1.5 billion combined, which accounted for
less than 1 percent of Medicaid expenditures for medical care.

10RHCs must be located in an area designated by HRSA as either a Health
Professional Shortage Area (an area that has a critical shortage of
physicians available to serve the people living there), a HRSA-designated
Medically Underserved Area (an area or population with a shortage of
health care services), or an area designated by the governor of the state
as a shortage area.

11Nonphysician practitioner refers to a nurse practitioner, physician
assistant, or certified nurse midwife.

12Connecticut, Delaware, the District of Columbia, Maryland,
Massachusetts, New Jersey, and Rhode Island reported that they have no
RHCs. We could not identify current or reliable data on the number of
people served by RHCs.

13State, local, and private grants accounted for approximately 13 percent
of FQHCs' total revenues in 2003. Other revenue sources included
commercial insurance (6 percent), payments directly from patients (6
percent), Medicare (5 percent), and other public insurance (3 percent).
The remaining 10 percent of revenue came from miscellaneous funding
sources, including other federal grants, revenue from indigent care
programs, and other revenue. These 2003 data are from the UDS database.

14RHCs received approximately 30 percent of their revenue from Medicare,
30 percent from commercial insurance, 15 percent directly from patients,
and the remaining from other miscellaneous sources. These data, the most
recent available, are from a 2000 National Rural Health Clinic Survey. The
survey, conducted by the Maine Rural Health Research Center, was sent to a
random sample of approximately one-half of the nation's RHCs.

Medicaid Reimbursement for FQHCs and RHCs

Prior to 2001, federal law required state Medicaid programs to pay FQHCs
and RHCs using a cost-based reimbursement methodology. To determine
cost-based payments, states required FQHCs and RHCs to submit cost
reports, which states reviewed to determine which reported costs were
allowable (related to providing services to Medicaid beneficiaries) and
reasonable (not excessive for the type of service). The Medicaid statute
directed states to follow the Medicare statute to reimburse FQHCs and
RHCs. This meant that states were to reimburse FQHCs and RHCs according to
CMS Medicare regulations, which provide guidance on the types of allowable
costs, such as compensation for physicians and other staff, supplies,
administrative overhead, and other items. The regulations allowed states
to establish their own definition of what constituted "reasonable costs,"
which could include a ceiling on costs per service, such as a medical
visit, or a limit on a type of cost, such as administrative costs.

In December 2000, BIPA established a PPS to pay for Medicaid-covered
services provided by FQHCs and RHCs. While BIPA did not specify when
states had to implement the PPS, the statute required that the BIPA PPS be
effective for services provided by FQHCs and RHCs on or after January 1,
2001. Unlike the prior cost-based reimbursement system, a PPS establishes
payment rates in advance of service delivery and creates incentives for
providers to operate more efficiently. Generally, the payment is not
contingent on an individual provider's actual cost of delivering care.
Providers that, on average, deliver care for less than the payment amount
can retain the portion of the payment amount exceeding their costs;
conversely, providers will lose money if their service costs are higher
than the payment. (See app. II for additional general information on PPSs,
including how the BIPA PPS compares with selected other PPSs.)

Under the PPS mandated by BIPA, the 2001 payment rate, called the base
rate, was effective for services provided beginning January 1, 2001. The
2001 payment rate was to be the average of each FQHC's and RHC's fiscal
year 1999 and fiscal year 2000 reasonable costs per visit, which states
were allowed to determine using their prior definitions of reasonable
costs. Beginning in fiscal year 2002, BIPA PPS payment rates were to be
adjusted annually for inflation by the MEI. In addition, BIPA required
that payments to FQHCs and RHCs be adjusted for increases or decreases in
the scope of services provided. States also were required to make
supplemental payments to FQHCs and RHCs that provide services to Medicaid
patients enrolled in a capitated managed care plan.15 BIPA allowed states
to use an alternative methodology to pay an FQHC or RHC as long as the
FQHC or RHC agreed to the alternative methodology and the methodology
resulted in payment to the FQHC or RHC of an amount that was no lower than
the amount otherwise required under the BIPA PPS.16

In June 2001, we reported that payments to FQHCs and RHCs under the new
BIPA PPS would likely be constrained.17 The report noted that because
states were allowed to continue to use their prior methods for determining
reasonable costs in establishing the 2001 base payment rate under the BIPA
PPS, the initial PPS rates for FQHCs and RHCs might be below their actual
costs. Additionally, the 2001 base PPS rate could be lower than what an
FQHC or RHC received in 2000 because the base rate was an average of
fiscal years' 1999 and 2000 costs. Furthermore, BIPA did not specify that
the initial 2001 payment rates be updated for inflation from 1999 through
2001. We also reported that the specific inflation index BIPA required
states to use, the MEI, increased at a lower rate than other measures of
inflation that some states had previously used to adjust FQHCs' payment
rates.

State Plan Approval Process

To comply with BIPA's January 1, 2001, effective date, states were
required to submit a state plan amendment (SPA) for the new FQHC and RHC
Medicaid payment requirements by the end of the first quarter of 2001
(March 31, 2001).18 To aid states in meeting this deadline, CMS provided
them with standard language that they could submit as a placeholder SPA
that would allow them to comply technically with the submission
deadline.19, 20 According to CMS, states could subsequently update their
SPAs with the specifics of their methodology before CMS review.

15Under a capitated managed care model, states contract with managed care
organizations and prospectively pay them a fixed monthly fee per patient
to provide or arrange for most health services. The managed care
organizations, in turn, pay providers either retrospectively for each
service delivered on a fee-for-service basis or through prospective
capitation payment arrangements. BIPA required states to compare the
aggregate managed care plans' payments to the amount that an FQHC or RHC
would have received under the BIPA PPS methodology. If the total managed
care payments were less, states were required to pay FQHCs and RHCs the
difference.

16States also may seek a waiver of the BIPA payment requirements. Under
section 1115 of the Social Security Act, the Secretary of Health and Human
Services has broad authority to approve demonstration projects that the
Secretary determines are likely to promote Medicaid objectives. 42 U.S.C.
S: 1315 (2000). The Secretary may waive certain provisions of the statute
if the Secretary finds it necessary for the performance of the
experimental, pilot, or demonstration projects. For this report, we refer
to demonstration projects approved under section 1115 as 1115 waiver
programs.

17See GAO, Heath Centers and Rural Clinics: Payments Likely to Be
Constrained Under Medicaid's New Sysem, GAO-01-577 (Washington, D.C.: June
19, 2001).

Once CMS receives a SPA, it has 90 days to approve it, disapprove it, or
request additional information from the state.21 Upon receipt of any
additional state information requested, CMS has an additional 90 days to
approve or disapprove the SPA.22 According to CMS, its regional offices
have primary responsibility for review and approval of SPAs but coordinate
with headquarters, which is responsible for making any final disapprovals.

States' Implementation of BIPA PPS and Alternative Methodologies Raises Certain
                                     Issues

Our analysis of states' implementation of the BIPA PPS and alternative
methodologies identified certain issues regarding the appropriateness of
some states' Medicaid payment systems for FQHCs and RHCs. Most states (39)
used the BIPA PPS and just under half of states (25) used the BIPA option
of an alternative methodology to pay at least a portion of their FQHCs,
RHCs, or both. (See app. III for the portion of FQHCs and RHCs, by state,
paid under each methodology.) States took an average of slightly more than
a year from the legislation's January 1, 2001, effective date to complete
implementation of their BIPA PPS, and a few states had not completed
implementation as of June 1, 2004. We found two significant issues with
states' implementation of the BIPA PPS. First, some states' BIPA PPS
payment rates may be inappropriate because the states did not include all
Medicaid-covered FQHC and RHC services in the rates. Second, as of June 1,
2004, over half of states using the BIPA PPS had not determined how they
would meet the requirement to adjust their BIPA PPS rates for a change in
scope of services. States implementing an alternative methodology
generally used either cost-based reimbursement or a PPS with features that
differed slightly from the BIPA PPS. We found one issue with states'
implementation of alternative payment methodologies. In establishing their
alternative payment methodologies, some states did not ensure that
payments to FQHCs and RHCs were at least equal to what the BIPA PPS would
pay, as required by law.

18SPAs may take effect no earlier than the first day of the quarter in
which an approvable plan is submitted to CMS. Thus, in order for a SPA to
be effective on January 1, 2001, it had to be submitted to the CMS
regional office by the end of the first quarter of 2001, which was March
31, 2001.

19At the time the standard language was provided to states, the agency was
known as the Health Care Financing Administration. On June 14, 2001, the
Secretary of Health and Human Services announced that the agency's name
would change to the Centers for Medicare & Medicaid Services. Throughout
this report, we refer to the agency as CMS.

20The standard language said that the state would comply with the BIPA
payment requirements by implementing the BIPA PPS, an alternative
methodology, or both.

2142 C.F.R. S: 430.16 (2004).

22If the state does not respond to CMS's request for information within 90
days, CMS disapproves the SPA.

BIPA PPS Implemented in Most States, but Issues Exist

The BIPA PPS was implemented in most states, but we noted issues with the
appropriateness of some states' methodologies. Thirty-nine states used the
BIPA PPS to pay at least a portion of their FQHCs, RHCs, or both-27 used
it for both FQHCs and RHCs, 6 used it for FQHCs only, and 6 for RHCs only.
While a few states had yet to completely implement their BIPA PPS as of
June 1, 2004, it took the remaining states an average of 15 to 16 months
to complete implementation of their methodologies. We found two issues
with some states' BIPA PPSs. Of the states using the BIPA PPS, more than a
third reported that they did not include all Medicaid-covered FQHC and RHC
services in their BIPA PPS payment rates and over half had either not
defined procedures for adjusting FQHCs' and RHCs' BIPA PPS rates for a
change in scope of services, an adjustment required by BIPA, or not
specified what would constitute such a change.

  Implementation of BIPA PPS for FQHCs

Thirty-three of 51 states reported using the BIPA PPS to pay some portion
of their FQHCs. The BIPA PPS was the only payment methodology used for
FQHCs in 27 of the states, while in the remaining 6 states only a portion
of FQHCs received Medicaid payments under the BIPA PPS (see table 1).23

23Since Minnesota intended for all FQHCs to be paid under the BIPA PPS, we
have included it in the 27 states that paid FQHCs only under the BIPA PPS.
The state, however, had not completed implementation of its BIPA PPS as of
June 1, 2004. As such, many FQHCs in Minnesota were being paid under an
interim payment method.

Table 1: States' Use of the BIPA PPS to Make Payments to FQHCs, as of June
1, 2004

                    Number of                                                 
Portion of FQHCs    states  States
All                     27  Alabama, Connecticut, Delaware, District of    
                               Columbia, Florida, Georgia, Hawaii, Idaho,     
                               Illinois, Indiana, Kentucky, Louisiana, Maine, 
                               Maryland, Minnesota,a Mississippi, Montana,    
                               Nevada, Ohio, Oklahoma, Oregon, Pennsylvania,  
                               Rhode Island, South Dakota, Tennessee,         
                               Washington, and Wyoming                        
Most (50% to             2  New York and North Dakota                      
<100%)                      
Some (>0% to             4  California, North Carolina, Utah, and          
<50%)                       Wisconsin                                      

Source: GAO analysis of state survey responses.

aAlthough the state intended to use the BIPA PPS to pay all FQHCs, it had
not fully implemented its methodology. As a result, many FQHCs were being
paid under an interim payment method.

Thirty-two states reported they had completed implementation of their BIPA
PPS for FQHCs as of June 1, 2004, while one had not fully implemented its
methodology. On average, it took states 15 months from BIPA's effective
date-January 1, 2001-to complete implementation of their BIPA PPS for
FQHCs. Implementation time periods ranged from 3 months to about 3 years
(see fig. 1). Although Minnesota intended to implement the BIPA PPS for
all of its FQHCs, as of June 1, 2004, the state had implemented this
methodology for only 30 percent of its FQHCs. Minnesota was paying the
remaining FQHCs an interim rate until the state determined these
providers' BIPA PPS rates.24 Regardless of the actual implementation date,
most states implementing a BIPA PPS (30 of 33 states) made the payment
rates retroactive to January 1, 2001.25 The three remaining states had an
alternative payment methodology initially but subsequently implemented the
BIPA PPS.26

24According to a state official, as of September 2004, Minnesota's
implementation of the BIPA PPS was delayed because the state had not
finished its review of FQHCs' 1999 and 2000 cost reports. Until the cost
reports were reviewed, the state was paying FQHCs interim rates, which
were based on FQHCs' preliminary 1999 and 2000 cost reports and inflated
annually by the MEI. Once the cost reports were reviewed and finalized,
the state planned to determine final BIPA PPS rates and settle the
differences between the final and interim rates.

25Although BIPA did not specify when states had to implement their
methodology, it required the methodology to be effective for services
provided on or after January 1, 2001. BIPA S: 702, 114 Stat. 2763A-573.

Figure 1: States' Implementation of the BIPA PPS for FQHCs, as of June 1,
2004

Note: Thirty-three states paid at least some FQHCs using the BIPA PPS, but
the figure does not include Minnesota, which had not completed
implementation of its BIPA PPS as of June 1, 2004.

Although BIPA specified how states were to determine the base payment rate
and which inflation index to use, states designed their systems
differently within these parameters. For example, BIPA specified that
beginning in fiscal year 2002, the BIPA PPS base rate was to be increased
annually for inflation using the MEI, but the law did not define which
12-month period constituted the 2002 fiscal year.27 States had the option
of using the federal, state, or FQHC fiscal year and varied as to the
month they first inflated the PPS rates. Most states first inflated their
FQHCs' base payment rates in either October 2001, which corresponds to the
federal and one state's fiscal year, or January 2002, the beginning of the
calendar year. A few states inflated FQHC payment rates earlier in 2001,
and one state-Louisiana-did not inflate rates until July 2002. (See table
2.) States also varied in the number of PPS rates they established for
each FQHC. Specifically, 10 states decided to establish more than one PPS
rate for each FQHC, depending on the type of service provided.28 For
example, FQHCs in Maryland had two rates-one for medical services and one
for dental services. In Ohio, FQHCs could have as many as nine PPS rates
depending on the specific services provided.29

26In Kentucky, the change to BIPA PPS rates was effective as of July 1,
2001, in Washington the change was effective as of January 1, 2002, and in
Indiana the change was effective as of July 1, 2002. All three states
reported that between January 1, 2001 (the effective date of the BIPA PPS
legislation), and the effective date of their BIPA PPS rates, they had
reimbursed or planned to reimburse the FQHCs the higher of their
reasonable costs or their BIPA PPS rate.

27Four states-Idaho, Indiana, Kentucky, and Minnesota-reported inflating
FQHCs' 1999 and 2000 costs prior to averaging them to determine the base
rates. According to CMS, inflating 1999 and 2000 costs prior to averaging
them was an acceptable approach to calculating the base rate under the
BIPA PPS.

Table 2: Timetable for States' Application of the MEI Inflation Index to
FQHCs' BIPA PPS Rates

Date MEI first Number of                                                   
applied           states  States
January 2001           3  North Carolina,a Oregon, and Utah                
July 2001              2  Delaware and Oklahoma                            
October 2001          13  Alabama, California, Connecticut, Florida,       
                             Georgia, Idaho, Maine, Nevada, New York, Ohio,   
                             Pennsylvania, Rhode Island, and Tennessee        
January 2002          14  District of Columbia, Hawaii, Illinois, Indiana, 
                             Kentucky, Maryland, Minnesota, Mississippi,      
                             Montana, North Dakota, South Dakota, Washington, 
                             Wisconsin, and Wyoming                           
July 2002              1  Louisiana                                        

Source: GAO analysis of state survey responses.

aJanuary 2001 was the first date that North Carolina may have applied the
MEI to any FQHC's BIPA PPS rate. However, the actual date that the MEI was
applied varied by FQHC because the state calculated BIPA PPS rates on the
basis of each FQHC's cost reporting year.

28The 10 states were Connecticut, Hawaii, Idaho, Illinois, Maryland,
Minnesota, Ohio, Pennsylvania, Tennessee, and Washington.

29The nine PPS rates in Ohio corresponded to the following services:
medical, dental, mental health, podiatry, vision, speech, transportation,
physical therapy, and chiropractic services.

  Implementation of BIPA PPS for RHCs

Of the 44 states with RHCs, 33 states reported using the BIPA PPS to pay
some portion of their RHCs. Twenty-five states paid all RHCs and 8 states
paid a portion of RHCs under the BIPA PPS.30 (See table 3.)

Table 3: States' Use of the BIPA PPS to Make Payments to RHCs, as of June
1, 2004

                   Number of                                                  
Portion of RHCs    states  States
All                    25  Alabama, Arkansas,a Florida, Hawaii, Idaho,     
                              Illinois, Indiana, Kentucky, Louisiana, Maine,  
                              Michigan, Minnesota,a Mississippi, Montana,     
                              Nevada, New York, Ohio, Oklahoma, Oregon,       
                              Pennsylvania, South Dakota, Tennessee, Utah,    
                              Washington, and Wyoming                         
Most (50% to            2  Georgia and North Dakota                        
<100%)                     
Some (>0% to            6  California, Iowa, Kansas,b North Carolina,      
<50%)                      Texas, and Virginia                             

Source: GAO analysis of state survey responses.

aAlthough the state intended to use the BIPA PPS to pay all RHCs, it had
not fully implemented its methodology. As a result, many RHCs were being
paid under an interim payment method.

bThis state had not fully implemented its BIPA PPS; thus, some RHCs were
being paid under an interim payment method. Other RHCs in this state opted
to be paid under an alternative methodology.

As of June 1, 2004, 30 of the 33 states using the BIPA PPS to pay some
portion of their RHCs had completed implementing their payment
methodologies, taking an average of 16 months. Implementation time periods
ranged from 4 months to over 3 years (see fig. 2). The remaining 3 states
were still in the process of implementing their BIPA PPS as of June 1,
2004: over 80 percent of Minnesota's RHCs, about 40 percent of Arkansas's
RHCs, and less than 10 percent of Kansas's RHCs did not have finalized
BIPA PPS rates. Regardless of when the methodologies were implemented, the
BIPA PPS rates were retroactive to January 1, 2001, in all states except
Washington, where the rates became effective 1 year later, and Kentucky,
where the rates became effective in July 2001.31

30Since Arkansas and Minnesota intended to pay all RHCs under the BIPA
PPS, they are included in the 25 states that pay RHCs only under the BIPA
PPS. Since these states had yet to complete implementation of their BIPA
PPS, as of June 1, 2004, they paid many RHCs under an interim payment
method. Kansas also had not completed implementation of its BIPA PPS, but
most of its RHCs opted to be paid under an alternative methodology. Thus,
only some RHCs in Kansas were to be paid under the BIPA PPS.

Figure 2: States' Implementation of the BIPA PPS for RHCs, as of June 1,
2004

Note: Thirty-three states paid at least some RHCs using the BIPA PPS, but
the figure does not include 3 states-Arkansas, Kansas, and Minnesota-which
had not completed implementation of their BIPA PPS as of June 1, 2004.

As with FQHCs, states varied in their design of certain features of their
BIPA PPS for RHCs. Specifically, because of differences in when fiscal
years began, states varied as to when they first inflated their BIPA PPS
base rates.32 Most states first inflated their RHCs' base payment rates in
either October 2001 or January 2002. A few states inflated RHC payment
rates earlier in 2001 and one state did not inflate rates until July 2002.
(See table 4.) In addition, four states paid RHCs with multiple BIPA PPS
payment rates that differed depending on the type of service provided.33
For example, Illinois RHCs received payment rates that differed depending
on whether a visit was for medical, dental, or behavioral health services.

31In 2001, Washington paid RHCs under an alternative payment
methodology-cost-based reimbursement-in which RHCs were paid 100 percent
of their reasonable costs. According to the state, this alternative
methodology paid at a rate greater than what the RHCs would have received
under the BIPA PPS and thus complied with BIPA requirements. In 2002, the
state switched to paying all RHCs under the BIPA PPS methodology.
Similarly, prior to the effective date of its BIPA PPS, Kentucky paid RHCs
the higher of their reasonable costs or their BIPA PPS rate.

32Five states-Arkansas, Idaho, Indiana, Kentucky, and Minnesota-reported
using an inflation index when calculating the base payment rate under
BIPA. These states inflated RHCs' 1999 and 2000 costs prior to averaging
them, which CMS has said is an acceptable approach to calculating the base
rate under the BIPA PPS.

Table 4: Timetable for States' Application of the MEI Inflation Index to
RHCs' BIPA PPS Rates

Date MEI first                                                             
applied        Number of states  States
January 2001                  3  North Carolina,a Oregon, and Utah         
July 2001                     2  Arkansas and Oklahoma                     
October 2001                 15  Alabama, California, Florida, Georgia,    
                                    Idaho, Kansas, Maine, Michigan, Nevada,   
                                    New York, Ohio, Pennsylvania, Tennessee,  
                                    Texas, and Virginia                       
January 2002                 12  Hawaii, Illinois, Indiana, Iowa,          
                                    Kentucky, Minnesota, Mississippi,         
                                    Montana, North Dakota, South Dakota,      
                                    Washington, and Wyoming                   
July 2002                     1  Louisiana                                 

Source: GAO analysis of state survey responses.

aJanuary 2001 was the first date that North Carolina may have applied the
MEI to any RHC's BIPA PPS rate. However, the actual date that the MEI was
applied varied by RHC because the state calculated BIPA PPS rates on the
basis of each RHC's cost reporting year.

  Issues with States' Implementation of BIPA PPS

We identified two issues with states' implementation of the BIPA PPS for
FQHCs and RHCs. First, BIPA PPS rates in more than one-third of states may
be inappropriate-these states reported that their rates did not include
all Medicaid-covered FQHC and RHC services. These states most commonly
excluded laboratory, radiology, and dental services. These exclusions are
inappropriate because, under BIPA and CMS guidance, the BIPA PPS must
include all Medicaid-covered services-specifically, outpatient services
provided in an FQHC or RHC and included in the state's plan. Prescription
drugs are the one service that states are allowed to exclude from the BIPA
PPS rate, according to CMS.34 Thus, all other Medicaid-covered outpatient
services provided by an FQHC or RHC must be paid for under the BIPA PPS.

33The four states were Illinois, Maine, Minnesota, and Tennessee.

Second, as of June 1, 2004, over 3 years after the passage of BIPA, over
half of states using the BIPA PPS had either not defined procedures for
adjusting payment rates for a change in scope of services or not specified
what would constitute such a change; states are required by BIPA to adjust
BIPA PPS rates for a change in scope of services. Specifically, according
to our survey results, 9 of the 39 states that pay FQHCs, RHCs, or both
using the BIPA PPS reported that they had not defined procedures for
adjusting payment rates for a change in scope of services. In addition,
according to our review of state documents, of the remaining 30 states
that reported defining adjustment procedures for a change in scope of
services, 12 did not specify what would constitute such a change.

Many States Implemented Alternative Payment Methodologies, but Not All Met BIPA
Requirements

Approximately half of the states chose the BIPA option to use an
alternative methodology to pay at least some FQHCs, RHCs, or both, but not
all states' methodologies met the BIPA requirements. Eighteen states used
an alternative methodology for both FQHCs and RHCs, 6 states used it for
FQHCs only, and 1 state used it for RHCs only. States with alternative
methodologies generally used either a cost-based reimbursement
methodology, similar to that used to pay FQHCs and RHCs prior to BIPA, or
implemented an alternative PPS methodology with features that differed
slightly from the BIPA PPS. Some states' alternative methodologies,
however, did not meet BIPA's requirement that alternative methodologies
result in payments no lower than what would have been received under the
BIPA PPS.

34BIPA authorized states to use an alternative methodology, but for those
FQHCs and RHCs being paid under the BIPA PPS, the state must use the BIPA
PPS methodology to pay for all Medicaid-covered services, except for
prescription drugs. Because of a special discount pricing program for
which many FQHCs are eligible, a CMS official said that states could pay
for prescription drugs under another method. The discount pricing program,
known as the 340B drug pricing program after the section of the Public
Health Service Act in which it is found, provides federal purchasers and
certain grantees of federal agencies access to prescription drugs at
reduced prices. 42 U.S.C. S: 256b (2000).

  Implementation of Alternative Methodologies for FQHCs

Twenty-four of 51 states opted to use one or more alternative payment
methodologies to pay at least some of their FQHCs. The type of alternative
methodology varied by state. Specifically, to pay at least a portion of
their FQHCs, 15 states used a cost-based reimbursement methodology, 8
states used an alternative PPS methodology, and 3 states used an
alternative methodology that was neither cost-based reimbursement nor a
PPS; 2 of these states used multiple methods.35 (See table 5.)

Table 5: Alternative Payment Methodologies for FQHCs, as of June 1, 2004

Alternative   Number of                                                    
methodology      states  States
Cost-based           15  Arkansas, California,a Colorado, Iowa, Kansas,b   
reimbursement            Missouri, Nebraska, New Hampshire, North          
                            Carolina, South Carolina, Utah, Vermont,          
                            Virginia, West Virginia, and Wisconsinc           
PPS                   8  Alaska, Arizona, California,a Michigan, New       
                            Jersey, New Mexico, North Dakota, and Texas       
Otherd                3  Massachusetts, New York, and Wisconsinc           

Source: GAO analysis of state survey responses.

aCalifornia had two alternative methodologies for paying FQHCs-cost-based
reimbursement (only for Los Angeles County FQHCs participating in the
county's 1115 waiver program) and an alternative PPS.

bState had not fully implemented this methodology.

cWisconsin had two alternative methodologies for paying FQHCs-cost-based
reimbursement and another methodology.

dOther methodologies were neither purely cost-based nor alternative PPSs.

Fifteen states used a cost-based reimbursement methodology for at least
some FQHCs. Under cost-based reimbursement, FQHCs were required to submit
cost reports, which the states reviewed to determine whether reported
costs were allowable and reasonable.36 States may set limits on the
reasonableness of costs, and 11 of the 15 states reported setting limits
for FQHCs.37 (Table 6 lists the states using limits, by type of limit.)
Some states used more than one limit, as follows:

35California and Wisconsin each used two alternative methodologies.
California paid a portion of FQHCs with cost-based reimbursement (Los
Angeles County only) and another portion under an alternative PPS.
Wisconsin paid a portion of FQHCs using cost-based reimbursement and
another portion with a flat rate set at the Medicare per visit limit.

36Four states-Arkansas, California, Nebraska, and New Hampshire-reported
relying on Medicare principles to determine allowable costs.

           o  Overall caps. Six states reported setting limits on how much
           they would reimburse for a patient's visit, with most basing their
           limit on that employed by Medicare.38 For example, three states
           set their limits at the Medicare upper payment limit, while two
           states set their limits at 125 percent and 133 percent,
           respectively, of the Medicare payment limit.
           o  Performance or productivity standards. Seven states limited
           reasonable costs by setting performance or productivity standards.
           These states stipulated the number of visits per year that a
           full-time-equivalent physician should provide; they used similar
           guidelines for other practitioners. Again, most of the states
           using performance or productivity standards relied on the
           guidelines specified by Medicare.39 
           o  Limits on administrative costs. Three states reported that they
           disallowed administrative costs exceeding 30 percent of total
           costs.

           Table 6: States That Used Limits in Determining Reasonable Costs
           for FQHCs under Cost-Based Reimbursement Alternative
           Methodologies, by Type of Limit, as of June 1, 2004

           Source: GAO analysis of state survey responses.

           aFour states-Arkansas, California, Nebraska, and Utah-did not
           report the use of any specific limits in determining reasonable
           costs.

           bColorado pays an FQHC the lower of the FQHC's current year of
           costs or a 3-year average of costs.

           Eight states had an approved alternative PPS for reimbursing at
           least a portion of their FQHCs. Generally, these alternative PPSs
           differed from the BIPA PPS in that they used a different base
           payment rate, a different inflation factor, or both. For example,
           California set its alternative PPS base rate at an FQHC's 2000
           reasonable costs, as opposed to an average of 1999 and 2000
           reasonable costs, which is stipulated under the BIPA PPS; Alaska
           used an inflation index developed by Data Resources Incorporated
           instead of the MEI to adjust rates. Arizona plans to rebase its
           alternative PPS every 3 years, calculating the base rate as the
           average of costs from the 2 previous years. Arizona also inflated
           rates using the physician services component of the Consumer Price
           Index (CPI). Table 7 provides the characteristics of the eight
           states' alternative PPS methodologies for FQHCs.

37Four states-Arkansas, California, Nebraska, and Utah-did not report the
use of any specific limits in determining reasonable costs.

38In 2004, the Medicare upper payment limit was $106.58 per visit for
urban FQHCs and $91.64 per visit for rural FQHCs.

39For example, Medicare guidelines specify that a full-time-equivalent
physician employed by the FQHC should provide at least 4,200 visits per
year.

                  Cap or upper       Performance or            Limit on       
Statea         payment limit  productivity standard   administrative costs 
Coloradob                               X             
Iowa                                    X             
Kansas               X                  X             
Missouri                                                       X           
New Hampshire        X                                
North Carolina       X                  X             
South Carolina                          X                      X           
Vermont              X                                
Virginia             X                  X             
West Virginia        X                  X             
Wisconsin                                                      X           
Total                6                  7                      3           

Table 7: Characteristics of Alternative PPSs for FQHCs, by State, as of
June 1, 2004

State        Base rate           Inflation factor         Other components 
Alaska       The inflated        Inflation index          Not applicable.  
                average of fiscal   developed by Data        
                years' 1999 and     Resources Incorporated.  
                2000 reasonable                              
                costs (inflated to                           
                fiscal year 2002).                           
Arizona      The average of the  Physician services       Rate is rebased  
                2 previous years'   component of the CPI.    every 3 years.   
                costs inflated to                            
                the current year.                            
California   Fiscal year 2000    MEI.                     Not applicable.  
                reasonable costs                             
                inflated to fiscal                           
                year 2001 by the                             
                MEI.                                         
Michigan     Fiscal years' 1999  If the base rate is less Not applicable.  
                and 2000 costs,     than the Medicaid limit, 
                converted to        then it is inflated by   
                calendar year, then the MEI; if the base     
                averaged and        rate is greater than the 
                inflated to the     Medicaid limit, then the 
                calendar year 2001  rate is inflated by the  
                midpoint by the MEI MEI plus a sliding scale 
                and compared to the percentage of the        
                state's Medicaid    difference between the   
                payment limit (the  limit and the FQHC's     
                Medicare per visit  calendar year 2001       
                payment limit plus  costs.                   
                $17.41). If costs                            
                are greater than                             
                the Medicaid                                 
                payment limit, then                          
                the base rate is                             
                the Medicaid                                 
                payment limit plus                           
                66.6 percent of                              
                costs above the                              
                Medicaid limit.                              
New Jersey   The greater of the  MEI.                     Not applicable.  
                fiscal year 1999 or                          
                2000 final settled                           
                costs based on the                           
                FQHC's Medicaid                              
                cost report.                                 
New Mexico   The average of      State chooses between    Not applicable.  
                fiscal years' 1999  the MEI or the CPI for   
                and 2000 reasonable urban consumers, but     
                costs.              adjustments can be no    
                                    less than that provided  
                                    by the MEI.              
North Dakota The lesser of the   State-determined, but    Not applicable.  
                fiscal year 2000    cannot exceed the MEI.   
                reasonable costs or                          
                the maximum                                  
                Medicare rate per                            
                visit for fiscal                             
                year 2000.                                   
Texas        The average of      MEI + 1.5 percent.       If an FQHC's     
                fiscal years' 1999                           costs increase   
                and 2000 reasonable                          more than the    
                costs.                                       inflation        
                                                             factor, then it  
                                                             can request an   
                                                             adjustment equal 
                                                             to 100 percent   
                                                             of costs if the  
                                                             FQHC can show    
                                                             that it is       
                                                             operating in an  
                                                             efficient manner 
                                                             or that the      
                                                             increase is due  
                                                             to a change in   
                                                             scope of         
                                                             services.        

Source: GAO analysis of state survey responses.

Note: For the purpose of comparison, the BIPA-specified PPS rate for each
FQHC would (1) use the average of fiscal years' 1999 and 2000 reasonable
costs per visit as the base rate, (2) use the MEI as the annual inflation
factor, and (3) be adjusted as necessary for a change in scope of
services.

Three states created alternative payment methodologies that were neither
purely cost-based nor an alternative PPS. Specifically, Massachusetts paid
most FQHCs the same rate, which was based on the 1998 costs from a sample
of FQHCs in the state.40 New York paid some FQHCs on the basis of
diagnosis,41 and Wisconsin paid two of its FQHCs a flat rate set at the
Medicare upper payment limit.

  Implementation of Alternative Methodologies for RHCs

Almost half of the states with RHCs (19 of 44 states) paid at least a
portion of their RHCs using an alternative methodology. Twelve states paid
at least a portion of their RHCs using a cost-based reimbursement
methodology, 6 states created an alternative PPS methodology, and 3 states
paid at least some RHCs by an alternative methodology that was neither
cost-based reimbursement nor a PPS. Two states-New Hampshire and
Wisconsin-used both cost-based reimbursement and another payment
methodology. (See table 8.)

40Massachusetts's FQHCs agreed to a class rate payment system whereby most
FQHCs received the same payment rates. The payment rates, which vary by
service, were based on an analysis of the 1998 cost reports submitted by
25 FQHCs, which represented approximately 75 percent of the FQHCs in the
state. After applying reasonableness tests, such as a limit on
administrative costs and productivity standards, the state determined a
unit cost for each of the 25 FQHCs sampled, which was inflated by a
state-specific inflation factor. The final payment rate was the average of
the rates for these 25 FQHCs. In July 2004, the payment rate was increased
13.7 percent to reflect a cumulative adjustment for inflation. The
remaining 3 FQHCs, all of which were hospital-affiliated, were paid using
an outpatient hospital payment methodology.

41New York's alternative methodology consists of 71 preset rates that
correspond to outpatient diagnostic categories. Five FQHCs in the state
selected this payment option.

Table 8: Alternative Payment Methodologies for RHCs, as of June 1, 2004

                           Number of                                          
Alternative methodology    states  States
Cost-based                     12  Georgia, Iowa, Kansas,a Missouri,       
reimbursement                      Nebraska, New Hampshire,b North         
                                      Carolina, South Carolina, Vermont,      
                                      Virginia, West Virginia, and Wisconsinc 
PPS                             6  Alaska, Arizona, California, New        
                                      Mexico, North Dakota, and Texas         
Otherd                          3  Colorado, New Hampshire,b and           
                                      Wisconsinc                              

Source: GAO analysis of state survey responses.

aThe state had not fully implemented this methodology.

bNew Hampshire had two alternative methodologies for paying
RHCs-cost-based reimbursement and another methodology.

cWisconsin had two alternative methodologies for paying RHCs-cost-based
reimbursement and another methodology.

dOther methodologies were neither purely cost-based nor alternative PPSs.

Twelve states used cost-based reimbursement to pay at least some RHCs and
most applied limits when determining reasonable costs (see table 9).

           o  Overall caps. Ten states reported applying limits on how much
           they would reimburse for a patient's visit. All 10 states set
           their limit at the Medicare upper payment limit for RHCs, which
           was $68.65 in 2004.42 
           o  Performance or productivity standards. Seven states limited
           reasonable costs by setting performance or productivity standards
           and all relied on the standards employed by Medicare.
           o  Limits on administrative costs. No state reported setting
           limits on administrative costs.

           Table 9: States That Used Limits in Determining Reasonable Costs
           for RHCs under Cost-Based Reimbursement Alternative Methodologies,
           by Type of Limit, as of June 1, 2004

           Source: GAO analysis of state survey responses.

           Note: No state reported applying limits on administrative costs.

           aNebraska did not report the use of any specific limits in
           determining reasonable costs.

           Six states had an approved alternative PPS for reimbursing at
           least a portion of their RHCs. One state used a base rate that was
           different from the BIPA PPS, two states either used or reserved
           the option to use an inflation index other than the MEI, and two
           states did both. For example, in Arizona, the state plans to
           rebase its alternative PPS every 3 years and inflate interim
           years' rates by a component of the CPI. The sixth state (Texas)
           used an alternative PPS that was virtually the same as the BIPA
           PPS except that RHCs did not have to return to the state any
           overpayments that might have occurred during the transition to the
           new payment system.43 See table 10 for details on the six states'
           alternative PPS for RHCs.

42In Medicare, RHCs based in hospitals with fewer than 50 beds are
eligible to receive an exception to the Medicare per visit payment limit.
State Medicaid programs often incorporate this exception into their
payment methodologies.

                    Cap or upper payment       Performance or productivity    
Statea                   limit                       standard              
Georgia                    X             
Iowa                                                     X                 
Kansas                     X                             X                 
Missouri                   X                             X                 
New Hampshire              X             
North Carolina             X                             X                 
South Carolina             X                             X                 
Vermont                    X             
Virginia                   X                             X                 
West Virginia              X                             X                 
Wisconsin                  X             
Total                     10                             7                 

Table 10: Characteristics of Alternative PPSs for RHCs, by State, as of
June 1, 2004

State        Base rate            Inflation factor        Other components 
Alaska       The inflated average Inflation index         Not applicable.  
                of fiscal years'     developed by Data       
                1999 and 2000        Resources Incorporated. 
                reasonable costs                             
                (inflated to fiscal                          
                year 2002).                                  
Arizona      The average of 2     Physician services      Rate is rebased  
                previous years'      component of the CPI.   every 3 years.   
                costs inflated to                            
                the current year.                            
California   Fiscal year 2000     MEI.                    Not applicable.  
                reasonable costs                             
                inflated to fiscal                           
                year 2001 by the                             
                MEI.                                         
New Mexico   The average of       State chooses between   Not applicable.  
                fiscal years' 1999   the MEI or the CPI for  
                and 2000 reasonable  urban consumers, but    
                costs.               adjustments can be no   
                                     less than that provided 
                                     by the MEI.             
North Dakota Provider-based RHCs: State-determined factor Not applicable.  
                100 percent of       not to exceed the MEI.  
                billed charges in                            
                fiscal year 2000.                            
                                                             
                Independent RHCs:                            
                fiscal year 2001                             
                Medicare upper                               
                payment limit.                               
Texas        The average of       MEI.                    RHCs did not     
                fiscal years' 1999                           have to pay back 
                and 2000 reasonable                          any overpayments 
                costs.                                       at settlement    
                                                             from old         
                                                             cost-based rate. 

Source: GAO analysis of state survey responses.

Note: For the purpose of comparison, the BIPA-specified PPS rate for each
RHC would (1) use the average of fiscal year's 1999 and 2000 reasonable
costs per visit as the base rate, (2) use the MEI as the annual inflation
factor, and (3) be adjusted as necessary for a change in scope of
services.

Three states reported that their alternative payment methodologies were
neither purely cost-based reimbursement nor an alternative PPS.
Specifically, most RHCs in Wisconsin were paid the Medicare upper payment
limit, and all RHCs in Colorado were paid the Medicare upper payment limit
or their Medicare rate if the upper payment limit did not apply.44 In New
Hampshire, hospital-based RHCs were paid approximately 92 percent of
allowable charges, which were determined on the basis of the RHCs'
Medicare cost reports.

43Between the time that the BIPA requirements were to be effective and the
time that Texas implemented its PPS, the state paid RHCs using an interim
payment methodology. When its alternative PPS was implemented, the state
conducted a reconciliation process to account for differences in the
reimbursement under the interim system and what RHCs would have received
under the BIPA PPS. While RHCs under the BIPA PPS had to reimburse the
state if the settlement process found that the interim payments exceeded
what would have been paid under the BIPA PPS, RHCs selecting the
alternative PPS did not have to return any overpayments to the state, if
they had occurred.

  Issue with States' Implementation of Alternative Methodologies

Not all states ensured that their alternative methodologies resulted in
payments that were at least equal to what FQHCs and RHCs would have
received under the BIPA PPS, as required by statute. Under BIPA, states
may use an alternative payment methodology only if the methodology results
in payment to an FQHC or RHC that is at least equal to what the FQHC or
RHC would have received under the BIPA PPS and if the FQHC or RHC agrees
to its use. Of the 25 states with alternative methodologies for either
FQHCs, RHCs, or both, 4 states (Missouri, New Hampshire, Vermont, and
Wisconsin) paid at least some providers less than what they would have
been paid under the BIPA PPS and it was unclear whether the alternative
payment methodologies in 2 states (Nebraska and North Carolina) resulted
in payments at least equal to what the FQHCs and RHCs would have received
under the BIPA PPS.45

Four states' alternative methodologies paid at least some FQHCs, RHCs, or
both less than what they would have received under the BIPA PPS, but the
states continued to pay the providers the lower rate under the alternative
methodology. Missouri determined whether its alternative methodology paid
at least as much as the BIPA PPS for only a portion of its FQHCs and RHCs
and did so only for the first year of the methodology.46 On the basis of
this assessment, Missouri found that over half of the FQHCs reviewed and
about 40 percent of the RHCs reviewed would fare better under the BIPA
PPS, yet the state continued to pay them under the alternative
methodology.47 In 2001, the FQHCs and RHCs that would have fared better
under the BIPA PPS would have received on average about $12 more and about
$25 more per visit, respectively. New Hampshire compared only the fiscal
year 2001 BIPA PPS rates for its FQHCs and RHCs with the cost-based rates;
although the state found that the BIPA PPS rates were higher for some
RHCs, a state official told us in October 2004 that the state had not
reimbursed these providers for the difference. Vermont only determined the
2001 BIPA PPS rates for its FQHCs and RHCs.48 On the basis of those rates,
we estimated the 2002 and 2003 BIPA PPS rates for Vermont's FQHCs and RHCs
and found that some RHCs would likely have fared better under the BIPA
PPS.49 However, the state reported that all FQHCs and RHCs were paid under
the alternative methodology. Wisconsin compared the fiscal year 2001,
2002, and 2003 BIPA PPS rates for its FQHCs and RHCs with the cost-based
rates used for those fiscal years and found that an RHC would have fared
better under the BIPA PPS each year, yet Wisconsin continued to pay that
RHC under the alternative methodology. Specifically, across the 3 years,
the BIPA PPS rate would have paid that RHC, on average, about $20 more per
visit compared with the state's alternative methodology. Since these
states did not routinely inform all FQHCs and RHCs of what their BIPA PPS
rates would have been, the FQHCs and RHCs may have been unaware that some
providers, including themselves, may have fared better under the BIPA PPS.

44The Medicare upper payment limit does not apply to RHCs based in
hospitals with fewer than 50 beds.

45The remaining 19 states reported they had determined that their
alternative methodologies resulted in payment rates at least equal to what
FQHCs and RHCs would have received under the BIPA PPS.

46Missouri made the determination for fewer than half of its FQHCs and
one-third of its RHCs, which represented those providers for which the
state had audited cost reports from fiscal year 1999 through 2001.

47The state contends that, in the aggregate, FQHCs and RHCs are better off
under the alternative methodology compared with the BIPA PPS. BIPA,
however, requires that each FQHC and each RHC receive payment at least
equal to that under the BIPA PPS.

For the remaining two states, it was unclear whether their alternative
payment methodologies complied with the requirement that alternative
methodologies must result in payments at least equal to what the FQHCs and
RHCs would have received under the BIPA PPS. Nebraska did not determine
whether its alternative methodology paid at least as much as the BIPA
PPS.50 North Carolina compared its payment rates under its alternative
methodology with preliminary BIPA PPS rates only for the base year (fiscal
year 2001) and not for any subsequent years. As of March 2005, the state
had not finalized all FQHCs' and RHCs' 2001 BIPA PPS rates, and it is
therefore unclear whether the state's alternative methodology resulted in
payment that was at least as much as the BIPA PPS would offer.51

48According to a state official, Vermont provided each FQHC and RHC with
its 2001 BIPA PPS rate. The state did not determine future years' BIPA PPS
rates but left this responsibility to the individual providers.

49We estimated the 2002 and 2003 BIPA PPS rates for Vermont's FQHCs and
RHCs by inflating the 2001 BIPA PPS rates for each FQHC and RHC by the
MEI, the annual inflation adjustment required by BIPA. On the basis of our
analysis of 2001, 2002, and 2003 cost-based and BIPA PPS rates, we
determined that some RHCs would have, on average, received about $3 more
per visit in certain years had they been paid under the BIPA PPS.

50According to a state official, Nebraska will compare the payment rates
under the alternative methodology to BIPA PPS rates. The official did not
indicate when such a comparison would be made.

Evidence to Date Is Insufficient about the Need to Rebase or Refine the BIPA PPS

Sufficient evidence is not available to determine whether there is a need
to rebase or refine the BIPA PPS. Concerns exist about the appropriateness
of the MEI, which was specified in the statute as the index used to
annually adjust BIPA PPS rates for inflation. For example, the MEI does
not reflect the costs of the services typically provided by FQHCs and
RHCs. Other indexes often used to reflect medical care inflation, however,
have a similar shortcoming. Although the MEI may not be an appropriate
index to adjust BIPA PPS rates, based on our research no inflation index
is currently available that reflects FQHC and RHC services. The ability to
determine the need for rebasing or refining is further complicated by an
increasing lack of comprehensive and current cost data because many states
no longer require all FQHCs and RHCs to submit Medicaid cost reports. Our
analysis of cost-based and BIPA PPS rates from selected states that used
cost-based reimbursement as an alternative payment methodology did not
provide conclusive evidence on the need to rebase or refine the BIPA PPS.

MEI May Not Be an Appropriate Index to Adjust BIPA PPS Rates for Inflation

Our prior work, discussions with stakeholders, and our analysis for this
report raised questions about the appropriateness of the MEI as the index
to annually adjust BIPA PPS rates for inflation. The MEI is designed to
estimate the increase in the total costs for the average physician to
operate a medical practice for the purpose of updating physician payment
rates under Medicare.52 As such, the MEI is intended to be an equitable
measure of cost changes associated with physician time and operating
expenses.

We reported in 2001 that the MEI increased at a lower rate than indexes
some states had used previously to adjust payment rates for FQHCs.53 Since
the MEI adjustment is the only automatic update of BIPA PPS rates,54 an
FQHC's or RHC's ability to manage under the BIPA PPS depends on its
initial payment rate as well as its ability to hold cost growth at or
below the MEI.

51According to a state official, North Carolina intends to compare the
payment rates under the alternative methodology to final BIPA PPS rates
once they are determined. If the state finds that the BIPA PPS would have
paid a higher rate, it plans to pay the FQHCs and RHCs the difference in
the rates.

52The MEI is calculated annually by CMS and is also used to annually
increase the Medicare upper payment limit for FQHCs and RHCs.

53Our prior report contained an analysis of the indexes used by four
states that previously set prospective rates for FQHCs using a prior
year's costs updated for inflation. The indexes used by each of these four
states grew faster than the MEI. See GAO-01-577 .

Some stakeholders we contacted expressed concern about the use of the MEI
to update BIPA PPS payments to FQHCs and RHCs. Officials from the National
Association of Community Health Centers told us that the MEI was not an
adequate measure of FQHCs' increasing costs. These officials pointed to
data from the Uniform Data System (UDS), a database of self-reported FQHC
data, which suggested that the MEI increased at a lower rate than FQHCs'
costs. Specifically, the data showed that FQHCs' total costs per patient
encounter increased approximately 5 to 6 percent annually between 2001 and
2003, while the MEI increased about 2 to 3 percent annually during the
same time period.55 This concern was echoed by officials we spoke with
from FQHCs and RHCs and by CMS officials from four regional offices. For
example, an official from a Florida FQHC reported that his center's costs
over the past 3 years had increased by 4.5 to 7 percent a year, while an
official from a Florida RHC reported cost increases of over 10 percent
annually. An important objective of a PPS, however, is to encourage
efficiency, so equivalent increases in a provider's payment adjustments
and its cost trends may not be desirable.

The MEI may not be an ideal index to adjust FQHCs' and RHCs' payment rates
for inflation, but other indexes often used to reflect medical care
inflation also have a similar shortcoming. As mentioned earlier, the MEI
was designed to measure the changing costs for the average physician.
However, FQHCs' and RHCs' costs may not be comparable to those of the
average physician. FQHCs provide additional services, including enabling
services (such as outreach and translation), and a significant portion of
RHC services may be provided by nonphysician practitioners. Like the MEI,
four other indexes commonly used to reflect changes in medical care
inflation do not reflect the services typically provided by FQHCs and
RHCs. The 2001 to 2003 cumulative increase for the MEI was greater than
the cumulative increases of the Producer Price Index (PPI) for Physician
Offices and the CPI for Urban Consumers for the same period, although
neither of the latter indexes reflect the same services provided by FQHCs
and RHCs.56 The cumulative increase for the MEI was less than the
cumulative increases for two other indexes-the PPI for General Medical and
Surgical Hospitals and the CPI for Medical Care-but the latter two indexes
included a set of hospital-related services that for the most part neither
FQHCs nor RHCs provided. (See table 11 for a comparison of these indexes.)

54BIPA also required that payments to FQHCs and RHCs be adjusted in the
event of a change in scope of services; however, these adjustments are not
automatic.

552002 and 2003 UDS data.

Table 11: Percentage Increase of the MEI Compared to Increases for Other
Indexes Commonly Used to Adjust for Medical Care Inflation (2001 to 2003)

                                             Percentage increase            
                                                  Cumulative         
Index                           2001 2002 2003   increase Average increase
PPI for Physician Offices            2.85 0.00       1.51    4.36   1.45 
CPI for Urban Consumers              2.85 1.58       2.28    6.71   2.24 
MEI                                  2.10 2.60       3.00    7.70   2.57 
PPI for General Medical and                                              
Surgical Hospitals                   3.01 3.65       5.79   12.45   4.15 
CPI for Medical Care                 4.60 4.69       4.03   13.32   4.44 

Source: GAO analysis of Bureau of Labor Statistics and CMS data.

On the basis of our review of literature on medical care indexes and
information from organizations typically involved in developing and
updating these indexes, we determined that no inflation index has been
developed specifically to reflect FQHC and RHC services. Other PPSs,
however, often incorporate an inflation index specifically designed to
reflect changes in the cost of services provided by or the price of
resources used by the providers paid under that PPS. For example, under
the Medicare home health PPS, the payment rate is inflated using a home
health market basket that measures the changes in the prices of goods and
services bought by home health agencies. CMS has similarly developed
update factors for Medicare payment rates for outpatient hospitals and
skilled nursing facilities (see app. II).

56Although it is used to reflect inflationary changes in medical care, the
CPI for Urban Consumers also includes many services unrelated to medical
care, such as food and housing.

Lack of Cost-Reporting Requirement Hinders Ability to Determine the Need to
Rebase or Refine the BIPA PPS

The lack of a Medicaid cost-reporting requirement for FQHCs and RHCs makes
it difficult to determine the need to rebase or refine the BIPA PPS. Under
BIPA, state Medicaid programs were no longer required to collect cost
reports from FQHCs and RHCs, which was how states had previously collected
cost data to help set Medicaid payment rates for these providers.57 The
decision to collect Medicaid cost data via cost reports or other methods
was therefore left to each individual state. In response to our survey,
many states reported they did not require cost reports from all FQHCs and
RHCs (see table 12). Twenty-one of 51 states (over 40 percent) reported
not requiring cost reports from all FQHCs. Specifically, 2 states reported
no longer requiring any cost reports and another 19 states reported
requiring cost reports from some FQHCs, generally only from new FQHCs or
those with a change in scope of services. Even fewer states reported
requiring cost reports from RHCs. Of the 44 states with RHCs, 22 (50
percent) reported not requiring cost reports from all RHCs-9 states did
not require any RHCs to submit cost reports and 13 states only required
cost reports from some. States that had implemented the BIPA PPS were
especially likely to not have cost-reporting requirements: 20 of the 33
states using the BIPA PPS for FQHCs (over 60 percent) reported not
requiring cost reports from all FQHCs and 19 of the 33 states using the
BIPA PPS for RHCs (approximately 58 percent) reported not requiring cost
reports from all RHCs. Without comprehensive and current cost data,
determining whether there is a need to rebase or refine the BIPA PPS is
difficult, if not impossible.

57Medicare requires FQHCs and RHCs to submit annual cost reports, but
Medicare does not cover the same set of services as Medicaid. Furthermore,
while some states obtain copies of the Medicare cost reports, others do
not.

Table 12: States' Cost Reporting Requirements for FQHCs and RHCs, as of
June 2004

                    Required to submit Number of   Number of states using the 
Type of provider cost reports          states                    BIPA PPSa 
FQHCs            All                       30                           13 
                    At least some, but        19                           18 
                    not all                      
                    None                       2                            2 
Total                                      51                           33 
RHCs             All                       22                           14 
                    At least some, but        13                           12 
                    not all                      
                    None                       9                            7 
Total                                     44b                           33 

Source: GAO analysis of state survey responses.

aThe 33 states that used the BIPA PPS were not the same for both FQHCs and
RHCs.

bAccording to states' survey responses, there are no RHCs in Connecticut,
Delaware, the District of Columbia, Maryland, Massachusetts, New Jersey,
and Rhode Island.

Analysis of Rates from Selected States Provided Inconclusive Evidence on the
Need to Rebase or Refine the BIPA PPS

Our comparison of cost-based and BIPA PPS rates for FQHCs and RHCs from
selected states provided inconclusive evidence concerning the need to
rebase or refine the BIPA PPS. From 2001 through 2003, most FQHCs' and
RHCs' cost-based rates exceeded their BIPA PPS rates in the four states we
reviewed-Iowa, Vermont, Virginia, and Wisconsin.58 Within these four
states, cost-based rates, on average, were greater than the BIPA PPS rates
for 41 of the 45 FQHCs and 128 of the 163 RHCs included in the analysis.
However, the extent of the difference between cost-based and PPS rates
varied considerably both within and among the states reviewed (see fig.
3). For example, among the 15 Wisconsin FQHCs we analyzed, cost-based
rates across the 3-year period ranged from approximately 30 percent less
than to approximately 70 percent more than BIPA PPS rates.59 For the 104
Iowa RHCs we analyzed, cost-based rates ranged from approximately 35
percent less than to approximately 82 percent more than BIPA PPS rates.60
Because the FQHCs and RHCs included in our analysis were paid cost-based
rates, they may have had less incentive to operate efficiently than if
they had been paid under the BIPA PPS.61 However, it is unclear whether
the difference between cost-based and PPS rates may be attributed to this
possible lack of incentive or if these providers were operating
efficiently but their costs remained higher than what the BIPA PPS would
pay. Given these unknowns and the variability in the extent of rate
differences, the fact that BIPA PPS rates were generally less than these
providers' cost-based rates is not compelling evidence that BIPA PPS rates
need to be rebased or refined at this time.

58We were unable to compare the rates in states that paid FQHCs and RHCs
only under the BIPA PPS because many of these states no longer required
cost reports and the states were no longer required to determine
cost-based rates.

59Over the same time period, the average difference between cost-based and
BIPA PPS rates for FQHCs in Wisconsin was about $20 per visit. Cost-based
rates per visit ranged from about $140 less than BIPA PPS rates to about
$166 greater than BIPA PPS rates.

60Over the same time period, cost-based rates for RHCs in Iowa were, on
average, $4 per visit more than BIPA PPS rates. Cost-based rates per visit
ranged from about $48 less than BIPA PPS rates to about $57 greater than
BIPA PPS rates.

61Cost-based payment methods have been criticized because increases in
costs result in increased payments, thus weakening providers' incentives
for efficiency. Under a PPS, cost increases would not necessarily result
in an increase in payment because payment is not contingent on an
individual provider's actual cost of delivering care. See, for example,
Medicare Payment Advisory Commission, Report to the Congress: Medicare
Payment Policy (Washington, D.C.: March 1999).

Figure 3: Percentage Difference in Cost-Based and BIPA PPS Rates, by State
and Provider Type, 2001 through 2003

aThe change in the organizational structure of one RHC in Wisconsin
resulted in a large difference between its cost-based and BIPA PPS rates,
which is reflected as the maximum percentage difference for RHCs in the
state.

CMS Guidance and Oversight Did Not Ensure Consistent State Compliance with BIPA

CMS guidance to states and regional offices and its oversight of states'
implementation of the new BIPA-mandated payment requirements for FQHCs and
RHCs did not ensure consistent state compliance with the law. CMS guidance
did not adequately address certain BIPA requirements and thus
uncertainties exist about whether and how some requirements for BIPA
compliance have been implemented, such as states' methodologies to adjust
BIPA PPS rates to account for any change in scope of services. Since CMS
initially approved states' plans to implement BIPA's Medicaid payment
provisions for FQHCs and RHCs, its oversight of states' implementation has
been limited. CMS has relied on states' assurances that they were in
compliance with BIPA and investigated payment issues only in response to
complaints, which CMS said were rare, or when concerns were identified
during a CMS review conducted for other purposes. As a result, CMS was
unaware of certain compliance issues, including that some states' BIPA PPS
rates and alternative methodologies were inconsistent with the law.

CMS Guidance Did Not Adequately Address Certain BIPA Requirements

CMS's guidance to its regional offices and the states did not adequately
address certain BIPA requirements and thus did not ensure that states had
enough information to develop payment systems that were consistent with
BIPA. CMS provided its regional offices and states with preliminary
information regarding the new payment requirements for FQHCs and RHCs
within the first 3 months following the enactment of BIPA; however, the
regional offices did not use all of this information consistently.62 (Fig.
4 provides the timeline of the issuance of CMS guidance.) On January 19,
2001, CMS issued a letter to state Medicaid directors summarizing BIPA's
new FQHC and RHC payment provisions, but the letter provided no
interpretation of the legislation or clarification as to how CMS expected
states to implement the new payment provisions. The letter also instructed
states to submit SPAs that conformed to the BIPA requirements before the
end of the first calendar quarter of 2001 (March 31, 2001). To assist
states in meeting this deadline, CMS provided regional offices with
standard BIPA-compliant SPA language on March 9, 2001. According to CMS,
prior to approving the SPAs, the regional offices were to work with each
state to ensure that the SPA reflected the specifics of the state's
payment methodology. While most of CMS's 10 regions followed this
protocol, 1 region approved the SPAs for its six states even though most
of these SPAs still contained only the standard language initially
provided by CMS. These SPAs indicated that states intended to conform to
BIPA, but most contained no details as to how each state planned to
implement the new payment system. Although these states reported to us in
response to our survey the details of how they were paying FQHCs and RHCs,
CMS did not require these states to update their SPAs. As a result, CMS
did not have an official record detailing how FQHCs and RHCs were paid in
most of the states in this region.

62As of March 2005, CMS had not issued regulations regarding states'
implementation of BIPA's new payment requirements for FQHCs and RHCs.

Figure 4: Timeline Showing CMS's Issuance of Guidance and Approval of
States' Plans to Implement BIPA's Medicaid Payment Provisions

aA state is included in the count if CMS approved the state plan amendment
for both FQHC and RHC payment by the date noted.

While CMS later provided the states and regional offices with more
detailed guidance, this guidance was issued after many states' SPAs were
submitted and approved. On April 13, 2001, 2 weeks after the deadline for
SPA submission, a CMS official provided regional office staff with
suggested SPA review guidelines by e-mail. By the time this guidance was
provided, all states had submitted their SPAs and CMS had approved 2
states' SPAs. The April 2001 guidance outlined key points that each SPA
was to include to ensure compliance with BIPA. For example, the guidance
recommended that each SPA explain the averaging methodology used to
determine the base PPS rate.63 Additional guidance from CMS was not issued
until 5 months later, by which time 57 percent of SPAs (SPAs for 29 of 51
states) had been approved. Specifically, on September 12, 2001, CMS sent a
Question and Answer document to regional office administrators, who were
instructed to provide the guidance to states. This document provided the
most comprehensive guidance to date and answers to commonly asked
questions about BIPA, including what services should be included in the
BIPA PPS rate, ongoing requirements for the collection and review of cost
reports, and the development of BIPA PPS rates for new centers and
clinics.

CMS guidance overall left some requirements for compliance with BIPA
unclear, particularly with regard to the adjustment of BIPA PPS rates due
to a change in scope of services. Although CMS has defined a change in
scope of services as one that affects the type, intensity, duration, and
amount of services, it has not clearly defined these elements or developed
further guidance regarding how change in scope of service adjustments
should be applied. As a result, at the time of our survey, over one-half
of the 39 states using the BIPA PPS had either not defined procedures for
adjusting FQHCs' and RHCs' BIPA PPS rates for a change in scope of
services or not specified what would constitute such a change. Among
states with defined procedures, definitions of what constituted a change
in scope of services varied considerably and several included factors that
are not directly related to the provision of services. For example,
documentation from 5 of these states specified relocation, remodeling, the
opening of a new site, or a combination of these as criteria to adjust the
BIPA PPS rate under this provision. However, CMS told us that factors such
as relocation do not constitute a change in scope of services unless there
is a corresponding change in the type, intensity, duration, or amount of
services. Furthermore, CMS has not offered guidance regarding the
requirement for states to adjust base BIPA PPS rates of FQHCs and RHCs
that are paid under an alternative payment methodology in the event of a
change in scope of services. If BIPA PPS rates are not appropriately
adjusted for a change in scope of services, states cannot accurately
compare payments under those rates to payments under an alternative
methodology to ensure payment that is at least equal to the payment under
the BIPA PPS, as BIPA required.

63The guidance also included recommendations that each SPA contain
language stating that the plan conforms to the provisions of BIPA, specify
when the MEI would be applied to update the PPS rates, describe the
methodology used to reimburse FQHCs and RHCs participating in Medicaid
managed care, and define the state's use of the term fiscal year.

CMS Oversight Has Been Limited

CMS oversight of states' Medicaid payment systems for FQHCs and RHCs has
been limited since the approval of the SPAs. CMS officials explained that
they have relied upon states' assurances that they are in compliance with
BIPA and have not asked states to provide supporting documentation to
verify their compliance with the new payment requirements. For example,
CMS has not required states using an alternative payment methodology to
provide evidence that payment was at least equal to what would have been
paid under the BIPA PPS. Additionally, CMS officials stated that they
would only initiate reviews of FQHC and RHC payment issues in response to
a complaint or if an issue was identified during a CMS review conducted
for other purposes. Regional office officials reported rarely receiving
complaints about Medicaid payments to FQHCs and RHCs. Furthermore, only
one regional office official told us that a CMS review identified issues
related to Medicaid payments for FQHCs and RHCs.64 CMS regional office
officials reported surveying state Medicaid offices during the summer of
2003 to determine the status of states' implementation of the new Medicaid
payment system. However, it is unclear how this information was used since
CMS regional office officials involved with the survey were, on several
occasions, unable to accurately identify the type of payment system-a
basic element required for oversight-used by states within their
jurisdiction.

As a result of this limited oversight, CMS was unaware of several
compliance issues we identified regarding payment to FQHCs and RHCs.
Specifically, CMS did not know that more than one-third of the 39 states
using the BIPA PPS may have incorrectly determined the base PPS rates by
inappropriately excluding certain Medicaid-covered services. While this
detail was not included in all SPAs, CMS approved at least two SPAs that
listed such exclusions. Additionally, a CMS official with responsibility
for overseeing Medicaid payments to FQHCs and RHCs acknowledged to us that
one state had not included the costs of all appropriate Medicaid services
in the calculation of the base rates, but was unaware of the other states
we identified that had similarly excluded certain services from their base
rate calculation. CMS was also unaware that 6 of the 25 states with
alternative methodologies were not routinely ensuring that they were
paying at least as much as what would have been paid under the BIPA PPS.
Furthermore, CMS did not know if states using an alternative payment
methodology were updating their BIPA PPS rates for a change in scope of
services, as required by law, before performing this comparison, but
believed that most were not.

64As part of a review of Washington's Medicaid managed care program,
Region 10 officials reviewed the state's methodology for making
supplemental payments to FQHCs and RHCs. According to a CMS regional
office official, the review found that the state may have inadequate
documentation to support the value of supplemental payments made to FQHCs
and RHCs and thus may be overpaying some facilities. As of February 2005,
CMS had not finalized its report on this review.

                                  Conclusions

BIPA changed the way that states pay FQHCs and RHCs for services provided
to Medicaid beneficiaries by establishing a PPS to pay these providers.
The BIPA PPS encouraged FQHCs and RHCs to operate more efficiently than
did the prior cost-based reimbursement system. Additionally, BIPA provided
states with the flexibility to implement an alternative payment
methodology, which many states opted to use, but it also established a
minimum level of payment for FQHCs and RHCs.

Although BIPA required states to use the MEI to annually adjust BIPA PPS
rates for inflation, the MEI may not be an appropriate index because it
was designed to estimate the increase in the total costs for the average
physician to operate a medical practice, not the increase in costs
associated with providing FQHC and RHC services. PPSs for other providers
often incorporate an inflation index specifically designed to reflect
changes in the cost of services delivered by those providers, but no such
inflation index has been developed to reflect the services typically
provided by FQHCs and RHCs.

CMS is responsible for overseeing states' Medicaid programs, including
states' implementation of the BIPA payment requirements, but its guidance
and oversight have not consistently ensured that states properly
implemented the new requirements. Specifically, CMS approved SPAs that did
not contain sufficient detail to convey basic information, such as whether
the state intended to implement the BIPA PPS or an alternative
methodology, which hindered CMS's ability to properly oversee states'
payment systems. In addition, CMS guidance did not address certain BIPA
requirements such as how rates were to be adjusted for a change in scope
of services. As a result, some states included factors in their
definitions of change in scope of services that are not directly related
to the provision of services, and other states did not specify what would
constitute such a change or did not define procedures for making the
adjustment. Furthermore, CMS's oversight has not ensured that states' BIPA
PPSs have included all Medicaid-covered services as required or ensured
that states' alternative payment methodologies met the legal requirement
that payments be at least as much as they would have been under the BIPA
PPS. Limited CMS oversight may be warranted given the relatively low share
of total Medicaid spending represented by FQHCs and RHCs and the agency's
many other competing priorities. However, CMS oversight must be sufficient
to ensure compliance with the law. Without such oversight, CMS is unable
to assure Congress that all FQHCs and RHCs are receiving the level of
payment to which they are entitled, which is especially important in the
absence of available evidence to determine whether there is a need to
rebase or refine the BIPA PPS for these providers.

                     Matter for Congressional Consideration

In our draft report, we recommended that the Administrator of CMS explore
the development of an inflation index that better captures the cost of
services provided by or price of resources used by FQHCs and RHCs and
propose to Congress, as appropriate, any needed revisions to the statute.
CMS responded that there is currently no evidence or data to reflect that
the need for a revised inflation factor is warranted at this time. Because
we continue to believe that CMS should explore developing an index that
more appropriately reflects the services provided by FQHCs and RHCs, we
maintained this recommendation to CMS and elevated the issue to a matter
for congressional consideration.

Congress may wish to consider directing CMS to explore the development of
an inflation index that better captures the cost of services provided by
or price of resources used by FQHCs and RHCs or develop a strategy to
periodically assess the adequacy of the MEI as an inflation index for
adjusting PPS rates for FQHCs and RHCs.

                      Recommendations for Executive Action

To provide for a more appropriate basis for adjusting BIPA PPS payment
rates for FQHCs and RHCs, we recommend that the Administrator of CMS
explore the development of an inflation index that better captures the
cost of services provided by or price of resources used by FQHCs and RHCs
and propose to Congress, as appropriate, any needed revisions to the
statute.

In addition, to better ensure consistent state compliance with the
BIPA-mandated Medicaid payment requirements for FQHCs and RHCs, we
recommend that the Administrator of CMS take the following four actions:

           o  Ensure that states' Medicaid plans provide sufficient
           information describing their methodologies for paying FQHCs and
           RHCs for Medicaid services, including, at a minimum, whether the
           state is using the BIPA PPS or an alternative methodology.
           o  Develop guidance for states describing what constitutes a
           change in scope of services provided by FQHCs and RHCs, including
           the definition of the specific elements that affect such a change.
           o  Ensure that states' FQHC and RHC BIPA PPS payment rates do not
           inappropriately exclude the costs of Medicaid-covered services.
           o  Ensure that states' alternative payment methodologies are
           paying FQHCs and RHCs at least as much as what would be paid under
           the BIPA PPS, including any needed adjustments due to a change in
           scope of services.

           We provided a draft of this report for comment to the Secretary of
           Health and Human Services and Medicaid directors in Iowa,
           Missouri, Nebraska, New Hampshire, North Carolina, Vermont,
           Virginia, and Wisconsin. We received written comments from CMS
           that represented the views of both CMS and HRSA. We also received
           technical comments from CMS and the states, which we incorporated
           as appropriate. CMS comments are included in appendix IV.

           CMS commented that it disagreed with the characterizations made in
           our report regarding the implementation of the BIPA legislation.
           CMS commented that it had little time to address implementation
           issues between the enactment of the BIPA legislation in December
           2000 and the January 1, 2001, effective date of BIPA's new
           Medicaid payment provisions. Our draft report acknowledged these
           dates, and we agree that there was limited time between the law's
           enactment and its effective date. However, our report addresses a
           broad range of BIPA implementation activities, including CMS
           oversight since BIPA was enacted in 2000. CMS noted, and the draft
           report acknowledged, that it issued guidance to the states in both
           January 2001 and September 2001. While CMS commented and our draft
           report noted that all SPAs have been approved, we disagree with
           the CMS assertion that all SPAs are BIPA-compliant. As we noted in
           the draft report, at least two states' approved SPAs documented
           that certain Medicaid-covered services would be excluded from the
           BIPA PPS rate, a practice that is not compliant with the law and
           related CMS guidance. Furthermore, although other states' SPAs may
           be BIPA-compliant, we found several compliance issues with states'
           payment methodologies for FQHCs and RHCs. For example, as noted in
           the draft report and acknowledged by CMS in its comments, some
           states did not include all Medicaid-covered services in their BIPA
           PPS rate. With regard to the requirement that alternative payment
           methodologies pay at least as much as the BIPA PPS, CMS commented
           that it had not received complaints from FQHCs and RHCs about the
           amount of payment received under an alternative methodology. We do
           not believe that the number of complaints should be the criteria
           to evaluate compliance with the statute. Regardless of whether
           providers in these states complained, CMS is responsible for
           ensuring that states are complying with BIPA requirements.

           On the basis of our recommendations that CMS better ensure
           consistent state compliance with the BIPA-mandated Medicaid
           payment requirements for FQHCs and RHCs, CMS said that it would
           take the following actions:

           o  request that SPAs clearly identify whether states intended to
           implement a BIPA PPS or an alternative methodology,
           o  contact states to ascertain which Medicaid services they are
           excluding from the BIPA PPS rate determination and assist each
           state in complying with BIPA requirements for determining the BIPA
           PPS rate or in establishing alternative payment methodologies, and
           o  remind states that BIPA requires that alternative payment
           methodologies pay at least as much as the BIPA PPS rate.

           Although these steps are important, they do not adequately ensure
           that states are complying with BIPA requirements. For example,
           while it is important to remind states that alternative payment
           methodologies must pay at least as much as the BIPA PPS, CMS needs
           to ensure that states' alternative methodologies actually pay as
           much as the BIPA PPS.

           In response to our recommendation that CMS explore the development
           of an inflation index that better captures the cost of services
           provided by or price of resources used by FQHCs and RHCs, CMS said
           that the MEI was selected because it is used by Medicare for these
           providers and that no evidence currently exists to reflect the
           need for a revised inflation factor. As we noted in the draft
           report, the MEI was designed to measure the changing costs for the
           average physician, which may not be comparable to cost changes
           experienced by FQHCs and RHCs. For example, FQHCs often provide
           additional services, such as translation. Because we continue to
           believe that CMS should explore developing an index that better
           captures the inflationary changes experienced by FQHCs and RHCs,
           we are also elevating this issue to a matter for congressional
           consideration.

           CMS also did not concur with our recommendation that it develop
           guidance for states describing what constitutes a change in scope
           of services provided by FQHCs and RHCs. In our draft report we
           acknowledged that, in its guidance, CMS defined a change in scope
           of services as "a change in type, intensity, duration and/or
           amount of services." The guidance also stated that "a change in
           the cost of a service is not considered in and of itself a change
           in the scope of services." However, as noted in our draft report,
           many states have yet to define procedures for changes in scope of
           services and those with defined procedures sometimes included
           factors, such as remodeling or relocation, that were not directly
           related to the provision of services. Therefore, we continue to
           believe that additional guidance, including the definition of the
           specific elements that affect a change in scope of services, is
           necessary.

           We are sending copies of this report to the Secretary of Health
           and Human Services, the Administrator of CMS, the Administrator of
           HRSA, and other interested parties. We will also make copies
           available to others on request. This report also will be available
           at no charge on GAO's Web site at http://www.gao.gov .

           Please call me on (202) 512-7118 or Debra Draper on (202) 512-5152
           if you have questions about this report. Major contributors to
           this report are listed in appendix V.

           Kathryn G. Allen Director, Health Care

           To determine the need for rebasing or refining costs for making
           payments under the Medicaid prospective payment system (PPS) for
           Federally Qualified Health Centers (FQHC) and Rural Health Clinics
           (RHC), we obtained detailed information from 5 of the 11 states
           that used cost-based reimbursement as their alternative payment
           methodology for both FQHCs and RHCs. We followed this approach
           since the Medicare, Medicaid, and SCHIP Benefits Improvement and
           Protection Act of 2000 (BIPA) required states using an alternative
           payment methodology to ensure that their methodology resulted in
           payment no lower than payment under the BIPA PPS. We therefore
           assumed that these states would have data available on their
           cost-based payment rates as well as comparative BIPA PPS rates.
           Having both rates for each FQHC and RHC in the selected states
           would enable us to assess the extent to which FQHCs' and RHCs'
           reasonable costs were covered under the PPS.1

           We selected states for the targeted review if, according to their
           responses to our survey, they met the following four criteria for
           both FQHCs and RHCs:

           o  implemented cost-based reimbursement as their alternative
           payment methodology,
           o  required FQHCs and RHCs to submit cost reports and the state
           audited them,
           o  had at least 1 year of audited cost reports following the
           implementation of their alternative payment methodologies, and
           o  determined what the FQHCs' and RHCs' payments would have been
           if the state had implemented the BIPA PPS.

           According to their survey responses, five states met all of these
           criteria-Iowa, Missouri, Vermont, Virginia, and Wisconsin.

           We requested that the five states provide us the 2001, 2002, and
           2003 cost-based and BIPA PPS payment rates for each of their FQHCs
           and RHCs.2 On the basis of their responses we excluded Missouri
           from further analysis. Missouri had determined the 2001 BIPA PPS
           rates for only a portion of FQHCs and RHCs in the state and had
           not determined the 2002 or 2003 BIPA PPS rates for any FQHCs or
           RHCs. Additionally, Missouri was unable to provide us with 2002
           and 2003 per visit cost-based rates. While we found that Vermont
           had not determined the 2002 and 2003 BIPA PPS rates for its FQHCs
           and RHCs, we were able to estimate those rates by inflating the
           2001 BIPA PPS rates for each FQHC and RHC by the Medicare Economic
           Index (MEI), the annual inflation adjustment required by BIPA.

           For our analysis, we included FQHCs and RHCs in the four states
           for which 3 full years of data were available-2001, 2002, and
           2003. While we generally relied on and did not independently
           verify the data provided to us by the states, we did review the
           data for reasonableness and to identify unusual patterns,
           including outliers. We identified some data that required
           follow-up with state Medicaid officials to obtain a better
           understanding of the reason for these patterns. As a result of
           these additional inquiries, one RHC was excluded from the
           analysis.

           We analyzed the data by state and type of provider (FQHC or RHC).
           We assessed (1) the percentage and dollar difference between the
           cost-based and BIPA PPS rates and (2) the number of providers
           whose cost-based rates exceeded their BIPA PPS rates. This
           analysis allowed us to compare reasonable costs with BIPA PPS
           rates in the selected states. The results of this analysis for the
           four states reviewed cannot be generalized to other states.

           Under prospective payment, a health care provider's payment is
           based on predetermined rates and is unaffected by the provider's
           actual costs or the amount of money charged for products or
           services. An important objective of a PPS is to create incentives
           for providers to operate more efficiently. This is done by making
           providers responsible for the difference between what they are
           paid and their actual costs. Therefore, providers whose costs
           exceed the predetermined payment rate will experience a loss and
           those whose costs are less than the payment rate will profit.

           In a PPS, the payment rate for a product or service may be
           determined by the following general formula:

           Payment rate = Inia base payment amoun x update factor x inpu-prce
           adjusment factor x reave value of the produc or servce x oher rate
           adjusment factors

           o  The initial base payment amount is usually a dollar amount for
           a specific year that reflects policymakers' decisions on the unit
           of payment for the unit of service (e.g., visit, episode of care,
           day) and the appropriate initial level of payment for the average
           unit.
           o  The update factor adjusts the initial base amount for inflation
           and other factors to set the base level of payment for the rate
           year.
           o  The input-price adjustment factor raises or lowers the base
           amount to reflect geographic price differences, such as
           differences in wages.
           o  The relative value adjusts the base amount to reflect the
           expected relative costliness of the particular product or service
           compared with that of the average unit of that product or service.
           o  One or more additional rate adjustment factors designed to
           reflect certain characteristics of the provider, the service, or
           the specific patient may be applied to the payment rate. For
           example, the payment rate may be adjusted on the basis of
           patients' severity of illness or condition treated by a provider,
           referred to as case-mix. Additionally, some systems include an
           adjustment to mitigate the financial risk of providers who incur
           unusually large costs. This adjustment may be in the form of an
           outlier payment in which additional payments are made to the
           provider for cases that exceed a specified threshold.

           BIPA established a new PPS to reimburse FQHCs and RHCs for
           services provided to Medicaid beneficiaries on or after January 1,
           2001.1 Under the new PPS, the base payment amount-the payment for
           2001-was set at each FQHC's or RHC's average cost per visit for
           fiscal years 1999 and 2000. Future years' payment rates were to be
           adjusted annually for inflation by the MEI and, when necessary, to
           reflect a change in scope of services. Therefore:

           Payment rate = Inia base payment amoun x update factor x other rae
           adjusment factor

           While it contains some of the features common in other PPSs, the
           BIPA PPS differs in other respects. For example, the initial base
           payment rate under the BIPA PPS is determined for each provider
           individually, and not for a group of providers as is the case for
           most other PPSs we reviewed. The BIPA PPS base rate is the average
           of each individual FQHC's or RHC's reasonable cost per visit in
           1999 and 2000.2 Additionally, the BIPA PPS does not include an
           input-price adjustment factor or a calculation of the relative
           value of the product. Table 13 compares the key features of the
           BIPA PPS to selected other PPSs, specifically those used by states
           to make Medicaid payments to nursing homes and those used in
           Medicare to pay for home health, hospital outpatient, and skilled
           nursing home services.3

                  Agency and State Comments and Our Evaluation

Appendix I: Methodology for Review of Selected States Using Cost-Based
Reimbursement Appendix I: Methodology for Review of Selected States Using
Cost-Based Reimbursement

1Providers paid under a cost-based reimbursement methodology may not have
the same financial incentives to operate as efficiently as those providers
paid under a PPS. As a result, our analysis may overestimate what the
difference in providers' reasonable costs and BIPA PPS rates would be if
the providers had been paid under the BIPA PPS. However, because many
states that pay providers under the BIPA PPS no longer required cost
reports and because states' definition of reasonable costs varied, we were
unable to compare the BIPA PPS rates to the reasonable costs of FQHCs and
RHCs in these states.

2Wisconsin also provided the payment rates for RHCs paid under another
alternative payment methodology; however, our analysis only included the
RHCs paid under cost-based reimbursement.

Ap Payment Appendix II: Overview of Prospective Payment Systems

PPS Structure

BIPA PPS

Comparison of BIPA PPS with Selected Other PPSs

1Prior to the passage of BIPA, federal law required state Medicaid
programs to pay FQHCs and RHCs on a cost-related basis. Such cost-based
payment methods can be resource-intensive because they require the
submission of cost reports and annual reconciliation, can result in
unpredictable payments and spending for providers and payers, and can
weaken providers' incentives for efficiency.

2Each state defines which of its FQHCs' and RHCs' reported costs are
reasonable.

3Medicare is the federal program that helps pay for health care services
for approximately 40 million elderly and disabled individuals.

Table 13: Comparison of Key Features of BIPA PPS to Selected Other PPSs

                                                                               Other rate 
             Initial base                                                      adjustment 
            payment amount                       Input-price                    factors   
                                                 adjustment            Change                    
                                                   factor             in scope                   
           Provider Individual            Update (geographic Relative    of     Outlier          
PPS         group    provider    Case-mix factor adjustment)  value   services  paymenta  Otherb 
Medicaid                          X                  Xc                                           X      
FQHC and                                                                                                 
RHC (BIPA                                                                                                
PPS)                                                                                                     
Medicaid                          X                  Xe         X                           X             X
nursing                                                                                                  
homed                                                                                                    
Medicare          X                                  Xf         X        X                  X         X   X
home                                                                                                     
health                                                                                                   
Medicare          X                                  Xg         X        X                            X   X
outpatient                                                                                               
hospital                                                                                                 
Medicare          X                                  Xh         X        X                  X            
skilled                                                                                                  
nursing                                                                                                  
facility                                                                                                 

Source: GAO summary of information from BIPA, previous GAO work, CMS, and
the Medicare Payment Advisory Commission.

aAn outlier payment is an adjustment that mitigates the financial risk to
providers by allowing additional payments for high-cost services or
beneficiaries.

bExamples of other rate adjustment factors include adjustments for the
costs of new technology and for beneficiaries who experience a significant
change in their condition.

cUnder the BIPA PPS, states are to update payment rates annually using the
MEI, which measures the change in cost of providing physician services.

dThe features noted reflect those commonly found in states' Medicaid
nursing home payment methodologies based on our analysis of 19 states,
although the specific features varied by state. See GAO, Medicaid Nursing
Home Payments: States' Payment Rates Largely Unaffected by Recent Fiscal
Pressure, GAO-04-143 (Washington, D.C.: Oct. 17, 2003).

eWhile the specific update factor used varied among the 19 states analyzed
in GAO-04-143 , the two most commonly used factors were the Consumer Price
Index and the skilled nursing facility market basket index developed by
CMS.

fUnder the Medicare home health PPS, CMS updates the payment rate annually
by the projected change in the home health market basket, which measures
changes in the prices of goods and services bought by home health
agencies.

gUnder the Medicare outpatient hospital PPS, CMS updates the payment rate
annually by the hospital market basket index, unless Congress stipulates
otherwise.

hUnder the Medicare skilled nursing facility PPS, CMS updates the payment
rate annually using a skilled nursing facility market basket index, which
measures the national average price level for the goods and services
purchased by these providers.

ApMeas o Appendix III: Medicaid Payment Methodologies for FQHCs and RHCs,
by State, as of June 1, 2004

aAt the time of our survey, the state had not completed implementation of
its BIPA PPS or alternative methodology. As such, at least some FQHCs or
RHCs were being paid an interim payment rate.

bState does not have any RHCs.

cKentucky has the authority to use a payment methodology other than the
BIPA PPS for paying FQHCs and RHCs in the counties operating under the
state's 1115 waiver managed care program.

dUnder Utah's 1115 waiver, the state has the authority to use a payment
methodology other than the BIPA PPS for paying FQHCs for beneficiaries
enrolled in the state's Primary Care Network program. According to state
officials, FQHCs are reimbursed on a fee-for-service basis for any
services provided to beneficiaries in this 1115 waiver program.

Appendix IV: Comments from the Centers for Medicare & Medicaid Services
Appendix IV: Comments from the Centers for Medicare & Medicaid Services

Ap Appendix V: GAO Contact and Staff Acknowledgments

                                  GAO Contact

Debra Draper (202) 512-5152

                                Acknowledgments

Major contributors included Michelle Rosenberg, Patricia Roy, Janice
Raynor, Elizabeth T. Morrison, and Daniel Ries.

(290375)

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Highlights of GAO-05-452 , a report to congressional committees

June 2005

HEALTH CENTERS AND RURAL CLINICS

State and Federal Implementation Issues for Medicaid's New Payment System

The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act
of 2000 (BIPA) established a prospective payment system (PPS) for Medicaid
payments to Federally Qualified Health Centers (FQHC) and Rural Health
Clinics (RHC), giving providers a financial incentive to operate
efficiently. BIPA requires that BIPA PPS rates be adjusted for inflation
and changes in scope of services. States also may use an alternative
methodology if it pays no less than the BIPA PPS rate. In response to a
BIPA mandate, GAO reviewed states' implementation of the new payment
requirements, the need to rebase or refine the BIPA PPS, and the Centers
for Medicare & Medicaid Services' (CMS) oversight of states'
implementation. GAO surveyed the states about their payment methodologies,
did a targeted review in four states, and reviewed indexes used to reflect
medical care inflation.

What GAO Recommends

GAO recommends that CMS explore the development of a more appropriate
inflation index for the BIPA PPS and improve its guidance for states and
its oversight of states' payment methodologies. CMS said it will take
steps related to its oversight but disagreed on the need to issue
additional guidance. CMS also disagreed on the need to develop an
inflation index; GAO maintained the recommendation and also elevated the
issue to a matter for congressional consideration.

GAO's review of states' implementation of Medicaid's new payment
system-the BIPA PPS and alternative methodologies-for FQHCs and RHCs
identified certain issues regarding the appropriateness of some states'
methodologies. Most states used the BIPA PPS and about half of states used
an alternative methodology-generally cost-based reimbursement or a PPS
with features slightly different from those required for the BIPA PPS-to
pay at least some of their FQHCs, RHCs, or both. States took an average of
slightly more than a year from the legislation's January 1, 2001,
effective date to implement their BIPA PPS, and a few states had not
completed implementation as of June 1, 2004. GAO identified three
significant issues with states' new Medicaid payment systems. First, some
states' BIPA PPS payment rates may be inappropriate because they did not
include all Medicaid-covered FQHC and RHC services in the rates as
required by law. Second, as of June 1, 2004, over half the states using
the BIPA PPS had not determined how they would make the required
adjustment to BIPA PPS rates for a change in scope of services. Third,
some states did not ensure that their alternative methodologies resulted
in payments no lower than what the FQHCs and RHCs would have received
under the BIPA PPS.

Evidence to date is insufficient to determine the need to rebase or refine
the BIPA PPS. Concerns exist that the statutorily specified annual
inflation index used to adjust the BIPA PPS is inappropriate because it
not only increases more slowly than do many FQHCs' and RHCs' costs but
also does not reflect the services these providers deliver. Other indexes
GAO reviewed had a similar shortcoming. GAO's analysis determined that no
inflation index has been developed that reflects the services typically
provided by FQHCs and RHCs. Because many states no longer require FQHCs
and RHCs to submit cost reports, comprehensive and current Medicaid cost
data are no longer available to help inform an evaluation of the need to
rebase or refine the BIPA PPS. Although GAO's comparison of cost-based and
BIPA PPS rates from four states showed that cost-based rates generally
exceeded BIPA PPS rates, not all factors contributing to the higher rates
are known. Differences between cost-based and BIPA PPS rates varied widely
within and among the states reviewed, which also limited the ability to
draw conclusions about the need to rebase or refine rates.

CMS guidance and oversight regarding the new BIPA payment requirements
were inadequate to ensure consistent state compliance with the law. CMS
guidance did not fully address certain requirements, and as states
developed their new payment systems, they lacked important information
clarifying the new requirements. As a result, uncertainties exist
regarding how states were to implement some BIPA requirements, such as how
to adjust BIPA PPS rates to account for a change in scope of services. CMS
has conducted limited oversight of states' implementation and therefore
was unaware of compliance issues with some states' payment systems.
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