Medicaid: States' Efforts to Maximize Federal Reimbursements	 
Highlight Need for Improved Federal Oversight (28-JUN-05,	 
GAO-05-836T).							 
                                                                 
Medicaid--the federal-state health care financing program	 
covering almost 54 million low-income people at a cost of $276	 
billion in fiscal year 2003--is by its size and structure at	 
significant risk of waste and exploitation. Because of challenges
inherent in overseeing the program, which is administered	 
federally by the Centers for Medicare & Medicaid Services (CMS), 
GAO added Medicaid to its list of high-risk federal programs in  
2003. Over the years, states have found various ways to maximize 
federal Medicaid reimbursements, sometimes using consultants paid
a contingency fee to help them do so. From earlier work and a	 
report issued today (GAO-05-748), GAO's testimony addresses (1)  
how some states have inappropriately increased federal		 
reimbursements; (2) some ways states have increased federal	 
reimbursements for school-based Medicaid services and		 
administrative costs; and (3) how states are using		 
contingency-fee consultants to maximize federal Medicaid	 
reimbursements and how CMS is overseeing states' efforts.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-836T					        
    ACCNO:   A28220						        
  TITLE:     Medicaid: States' Efforts to Maximize Federal	      
Reimbursements Highlight Need for Improved Federal Oversight	 
     DATE:   06/28/2005 
  SUBJECT:   Administrative costs				 
	     Consultants					 
	     Expense claims					 
	     Federal/state relations				 
	     Health care programs				 
	     Medicaid						 
	     Program abuses					 
	     Program management 				 
	     Risk management					 
	     State-administered programs			 
	     Financial management				 
	     Reimbursements from government			 

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GAO-05-836T

     

     * Background
     * States Have Used Intergovernmental Transfers to Facilitate F
     * Questionable Methods Have Boosted Federal Reimbursements for
     * States' Use of Contingency-Fee Consultants to Maximize Feder
          * Some Contingency-Fee Projects in Georgia and Massachusetts R
               * Targeted Case Management
               * Rehabilitation Services
          * Two Factors Increase Risk of Problematic Claims
          * Problems Illustrate Need to Improve the Financial Management
     * Conclusions
     * Contact and Acknowledgments
          * Order by Mail or Phone

Testimony

Before the Committee on Finance, U.S. Senate

United States Government Accountability Office

GAO

For Release on Delivery Expected at 10:00 a.m. EDT

Tuesday, June 28, 2005

MEDICAID

States' Efforts to Maximize Federal Reimbursements Highlight Need for
Improved Federal Oversight

Statement of Kathryn G. Allen

Director, Health Care

GAO-05-836T

Mr. Chairman and Members of the Committee:

I am pleased to be here today as you explore issues relating to states'
efforts to maximize federal Medicaid reimbursements and how they can
affect the Medicaid program. Medicaid-the federal-state program financing
health care for certain low-income children, families, and individuals who
are aged or disabled-covered nearly 54 million people at an estimated
total cost of $276 billion in federal fiscal year 2003. Medicaid is the
third-largest mandatory spending program in the federal budget and one of
the largest components of state budgets, second only to education. The
program fulfills a crucial national role by providing health coverage for
a variety of vulnerable populations. Congress has structured Medicaid as a
shared financial responsibility of the federal government and the states,
with the federal share of each state's Medicaid payments determined by a
formula specified by law.1 The Centers for Medicare & Medicaid Services
(CMS), within the Department of Health and Human Services (HHS), is the
federal agency responsible for the program, and the states design and
administer their programs with considerable discretion and flexibility
within broad federal guidelines. We have previously reported that the
challenges inherent in overseeing a program of Medicaid's size, growth,
and diversity put the program at high risk for waste, abuse, and
exploitation. In 2003, we added Medicaid to our list of high-risk federal
programs.2

States can design and administer their Medicaid programs in a manner that
helps them ensure that they receive the maximum allowable federal share of
expenditures they incur for covered services provided to eligible
beneficiaries under a CMS-approved state Medicaid plan, as long as they do
so within the framework of federal law, regulation, and CMS policy. To
that end, states can employ consultants to assist them in performing a
number of valid Medicaid-related functions that may help them to identify
and implement ways to obtain additional federal funds or that may help
save money for both the federal government and states. Consultants, for
example, can help identify claims that are inappropriately paid or that
are subject to recovery from other payers.3 States may choose to pay
consultants on a contingency-fee basis (that is, a percent of the
additional federal reimbursements they generate for the state) to develop
various types of reimbursement-maximizing projects.4 In the current
environment of steadily rising Medicaid costs straining federal and state
budgets, states' use of contingency-fee consultants to maximize federal
reimbursement can be problematic if controls are inadequate to ensure that
additional federal reimbursements are allowable Medicaid expenditures. We
have earlier reported on (1) certain types of financing schemes that
involved some states making illusory payments to government-owned or
government-operated entities such as nursing homes or hospitals, often
through a mechanism known as intergovernmental transfers (IGTs),5 to
obtain increased federal reimbursements and (2) concerns with practices
used by states and school districts to boost federal payments for
school-based services.6 As part of our body of work on Medicaid financing
issues, today we are releasing a report, undertaken at the Chairman's
request, that addresses states' use of contingency-fee consultants to
maximize federal Medicaid reimbursements.7

1By a formula established in law, the federal government matches from 50
to 83 percent of each state's reported Medicaid expenditures for medical
assistance. States with lower per capita incomes receive higher federal
matching rates. The federal government also matches states' costs for
administering the Medicaid program, generally at 50 percent.

2GAO, Major Management Challenges and Program Risks, Department of Health
and Human Services, GAO-03-101 (Washington, D.C.: January 2003).

For today's hearing, you asked us to address issues we have identified in
our past and current work concerning some reimbursement-maximizing
strategies used by some states and CMS's oversight of them. In my
testimony, I will describe: (1) how, over the years, some states have
inappropriately increased federal reimbursements, sometimes using IGTs,
through varied state financing schemes; (2) how states have used
questionable methods to increase federal reimbursements for school-based
Medicaid services and administrative costs and the status of CMS's actions
to improve oversight in this area; and (3) how states are using
contingency-fee consultants to maximize federal Medicaid reimbursements
and how CMS oversees states' reimbursement-maximizing strategies. My
testimony is based on several previous reports and testimonies, including
the report we are issuing today, assessing states' Medicaid financing
methods and federal oversight of them. The work that produced these
reports and testimonies was conducted from June 1993 through June 2005 in
accordance with generally accepted government auditing standards.

3Consultants can provide a wide range of services to states for their
Medicaid programs. States that lack sufficient in-house resources can turn
to consultants to add staff or needed expertise. Contingency-fee
consultants are particularly attractive to budget-constrained states
because the states do not need to pay them up front. Consultants can help
states by performing services such as identifying new methods or projects
to maximize federal Medicaid reimbursements, training state and local
staff in procedures for documenting and submitting claims, and preparing
state claims for federal Medicaid reimbursement.

4Contingency fees generally cannot be claimed for federal Medicaid
reimbursement, unless a contingency-fee contract (1) results in
cost-avoidance savings or recoveries in which the federal government would
share, (2) is competitively procured, and (3) the savings upon which the
contingency-fee payment is based are adequately defined and the payments
documented to CMS's satisfaction.

5Intergovernmental transfers are a tool that state and local governments
use to carry out their shared governmental functions, such as collecting
and redistributing revenues to provide essential government services.

6See related GAO products at the end of this statement.

7GAO, Medicaid Financing: States' Use of Contingency-Fee Consultants to
MaximzeFederal Rembursements Highlghts Need for Improved Federa Oversight,
GAO-05-748 (Washington, D.C.: June 28, 2005).

In summary, for many years we have reported on the varied financing
schemes and questionable methods that states have used to increase the
federal reimbursements they receive for operating their state Medicaid
programs. In our view, these methods can undermine the Medicaid
federal-state partnership and threaten the fiscal integrity of the
program. We previously reported that:

           o  Some states have used IGTs to make large supplemental payments
           to government-owned or government-operated providers, which have
           greatly exceeded the established Medicaid payment rates. Such
           supplemental payments create the illusion of valid expenditures
           for services delivered to Medicaid beneficiaries and allow states
           to obtain the federal reimbursement, only to have the local
           government providers, under agreements with the states, transfer
           the excessive federal and state payments back to the state. As a
           result, some states are able to shift a portion of their share of
           program expenditures to the federal government, essentially
           increasing the federal matching rate beyond that established under
           federal law.

           o  Some states and school districts have used questionable methods
           to increase federal Medicaid reimbursement for Medicaid health
           services and administrative costs, that is, methods that lacked
           sufficient controls to ensure that the claims were legitimate.
           Medicaid funding is available for certain health services provided
           by local school districts, such as diagnostic screening and
           physical therapy for eligible children, including those with
           disabilities. Medicaid reimbursement is also available for the
           administrative costs of providing school-based Medicaid services.
           We found funding arrangements in some states among schools,
           states, and private consulting firms that resulted in schools'
           receiving a small portion of the Medicaid reimbursements, while
           some states retained up to 85 percent of Medicaid reimbursements
           for school-based health services or administrative claims.
           Moreover, some school districts paid contingency fees to the
           private consultants who assisted them in preparing and submitting
           Medicaid claims, further reducing the net amount the schools
           received.

           As we are reporting today, a growing number of states are using
           consultants on a contingency-fee basis to maximize federal
           Medicaid reimbursements. As of 2004, 34 states-up from 10 states
           in 2002-used contingency-fee consultants for this purpose. We
           identified some claims from contingency-fee projects that appear
           to be inconsistent with current CMS policy and some that were
           inconsistent with federal law; we also found claims that
           undermined the fiscal integrity of the Medicaid program. In
           Georgia and Massachusetts, where we focused our review of specific
           projects, selected projects that involved the assistance of
           contingency-fee consultants generated a significant amount of
           additional federal reimbursements for the states: from fiscal year
           2000 through 2004, an estimated $1.5 billion for Georgia and
           nearly $570 million for Massachusetts. For those additional
           reimbursements, Georgia paid its consultant about $82 million in
           contingency fees, and Massachusetts paid its consultants about $11
           million in contingency fees. Just to be clear: any state's use of
           consultants-including contingency-fee consultants-or any
           associated growth in federal reimbursements, is not problematic,
           in and of itself. However, we identified concerns in each of the
           five categories of claims where we reviewed the states'
           contingency-fee projects: supplemental payment arrangements,
           school-based services, targeted case management, rehabilitation
           services, and administrative costs, in either Georgia,
           Massachusetts, or both states. We found that problematic projects
           often tended to be in areas of Medicaid claims where federal
           requirements were inconsistently applied, evolving, or not
           specific. The lack of clear CMS guidance has allowed states to
           develop new financing arrangements, or to continue existing ones,
           that take advantage of ambiguity and result in considerable
           additional costs to the federal government.

           We believe that the continuing problems we have reported in
           several high-risk categories of Medicaid claims illustrate not
           only the need to improve oversight of claims stemming from
           contingency-fee projects, but also the urgent need for CMS to
           address certain issues in its overall financial management and
           oversight of Medicaid. In our report issued today, we are
           reiterating certain recommendations we have previously made to
           Congress and to the Administrator of CMS that remain open, as well
           as new ones to the Administrator to improve the financial
           management and oversight, and fiscal integrity, of the Medicaid
           program.

           In commenting on a draft of the report issued today, CMS stated
           that it has already substantially met our recommendations. While
           acknowledging that improper Medicaid payments had unquestionably
           occurred, the agency provided detailed information to support why
           it believes that it (1) was already aware of the concerns
           identified in projects we examined and (2) has taken sufficient
           action to address these concerns and our related GAO
           recommendations. In our view, however, CMS has not sufficiently
           identified or addressed the concerns that we identified, and we
           believe CMS needs to do more to identify problematic claims
           resulting from contingency-fee projects sooner, before large
           reimbursements have been made to states. We continue to believe
           that CMS needs to do more to clarify, communicate, and
           consistently apply its policies concerning certain high-risk areas
           of the Medicaid program.

           Title XIX of the Social Security Act8 authorizes federal funding
           to states for Medicaid, which finances health care for certain
           low-income children, families, and individuals who are aged or
           disabled. Although states have considerable flexibility in
           designing and operating their Medicaid programs, they must comply
           with federal requirements specified in Medicaid statute and
           regulation. For example, states must provide methods to ensure
           that payments for services are consistent with economy,
           efficiency, and quality of care.9 Medicaid is an entitlement
           program: states are generally obligated to pay for covered
           services provided to eligible individuals, and the federal
           government is obligated to pay its share of a state's expenditures
           under a CMS-approved state Medicaid plan.

           Our prior and current work addresses five categories of Medicaid
           claims where we are aware that states have
           reimbursement-maximizing strategies. Our current work in
           particular concentrated on these five categories because-on the
           basis of factors such as nationwide growth in dollars claimed, the
           results of our past reviews, and work by HHS's Office of Inspector
           General (OIG) to assess the appropriateness of claims in these
           categories-we judged them to be of particularly high risk. Over
           the past few years, states' claims in some of these categories
           have grown significantly in dollar amounts. The five categories of
           claims we examined, and recent trends in claimed expenditures, are
           described in table 1.

                                   Background

842 U.S.C. S:S: 1396, et seq. (2000).

942 U.S.C. S: 1396a(a)(30) (2000).

Table 1: Five Categories of Medicaid Claims Reviewed by GAO Where States
Are Maximizing Federal Medicaid Reimbursements and Trends in Reported
Expenditures

Source: GAO.

aFor example, the Medicare, Medicaid, and SCHIP Benefits Improvement and
Protection Act of 2000 directed CMS to issue a final regulation to limit
states' ability to claim excessive federal reimbursements through UPL
supplemental payments.

bCMS recently reiterated this policy in a 2004 Administrator's decision
that denied approval of a state plan amendment requested by Maryland to
provide TCM services to children in the state's foster care program. See
CMS, Disapproval of Maryland State Plan Amendment No. 02-05, Docket No.
2003-02 (Aug. 27, 2004). The Administrator's decision was based in part on
a statement in the legislative history accompanying the legislation
authorizing coverage for TCM services that payment for TCM services must
not duplicate payments to public agencies or private entities under other
program authorities. See H.R. Rep. No. 99-453, at 546 (1985). We did not
evaluate the legal basis for CMS's policy as part of this review.

cUnlike CMS's direct review and approval role for states' Medicaid plan
amendments, CMS has an advisory review role for the plans that state
Medicaid agencies prepare for allocating their administrative overhead
costs; at the national level, HHS's Division of Cost Allocation instead
takes the lead in reviewing these cost allocation plans. The division
generally distributes copies of cost allocation plan sections to affected
federal agencies, including CMS, for comment.

dThese figures include costs associated with school-based administration.

  States Have Used Intergovernmental Transfers to Facilitate Financing Schemes
         That Inappropriately Increase Federal Medicaid Reimbursements

For many years, states have used varied financing schemes, sometimes
involving IGTs, to inappropriately increase federal Medicaid
reimbursements. Some states, for example, have made large Medicaid
payments to certain providers, such as nursing homes operated by local
governments, which have greatly exceeded the established Medicaid payment
rate. These transactions create the illusion of valid expenditures for
services delivered by local-government providers to Medicaid-eligible
individuals and enable states to claim large federal reimbursements. In
reality, the spending is often only temporary because states require the
local governments to return all or most of the money to the states through
IGTs. Once states receive the returned funds, they can use them to
supplant the states' own share of future Medicaid spending or even for
non-Medicaid purposes.

As various schemes involving IGTs have come to light, Congress and CMS
have taken actions to curtail them, but as one approach has been
restricted, others have often emerged. Table 2 describes some of the
states' financing schemes over the years and how Congress and CMS have
responded to them.

Table 2: Medicaid Financing Schemes Used to Inappropriately Generate
Federal Reimbursements and Federal Actions to Address Them

Source: GAO, Medicaid: Intergovernmental Transfers Have Facilitated State
Financing Schemes, GAO-04-574T (Washington, D.C.: Mar. 18, 2004). Before
June 2001, CMS was known as the Health Care Financing Administration
(HCFA).

A leading variant of these illusory financing arrangements today involves
states' taking advantage of Medicaid's upper payment limit (UPL)
provisions. Although states are allowed, under law and CMS policy, to
claim federal reimbursements for supplemental payments they make to
providers up to the UPL ceilings, we have reported earlier that payments
in excess of the provider's costs that are not retained by the provider as
reimbursement for services actually provided are inconsistent with
Medicaid's federal-state partnership and fiscal integrity.10 For example,
we have reported that by paying nursing homes and hospitals owned by local
governments much more than the established Medicaid payment rate and
requiring the providers to return, through IGTs, the excess state and
federal payments to the state, states obtain excessive federal Medicaid
reimbursements while their own state expenditures remain unchanged or even
decrease.11 Such round-trip payment arrangements can be accomplished via
electronic wire transfer in less than an hour. States have then used the
returned funds to pay their own share of future Medicaid spending or to
fund non-Medicaid programs.

Problems with excessive supplemental payment arrangements remain, despite
congressional and CMS action to curtail financing schemes. For example, in
our current review of states' use of contingency-fee consultants, we found
an example in Georgia that illustrates how current law and policy continue
to allow states to generate excessive federal reimbursements beyond
established Medicaid provider payments for covered services. Georgia and
its consultant developed five UPL arrangements using IGTs-one each for
local-government-operated inpatient hospitals, outpatient hospitals,
nursing homes and for state-owned hospitals and nursing homes. Over the
3-year period of state fiscal years 2001 through 2003, the state made
supplemental payments totaling $2.0 billion to nursing homes and hospitals
operated by local governments (see fig. 1). A sizable share of the $2.0
billion payments was illusory, however. In reality, the nursing homes and
hospitals netted only $357 million because they had initially transferred
$1.7 billion to the state Medicaid agency, through IGTs, under an
agreement with that agency. The state combined this $1.7 billion with $1.2
billion in federal funds, which represented the estimated federal share of
its supplemental payments to local-government facilities of $2.0 billion.
The state thus had a funding pool of $2.9 billion at its disposal. From
this pool, the state made the $2.0 billion in supplemental payments to
local-government providers and retained $844 million to offset its other
Medicaid expenditures.

10See, for example, GAO-04-574T and Medicaid: Improved Federal Oversght of
State Financng Schemes Is Needed, GAO-04-228 (Washington, D.C.: Feb. 13,
2004).

11In another approach, some states require a few counties to initiate the
transaction by taking out bank loans for the total amount the states
determined they can pay under the UPL. The counties wire the funds to the
states, which then send most or all of the funds back to the counties as
Medicaid payments. The counties use these "Medicaid payments" to repay the
bank loans. Meanwhile, the states claim federal matching funds on the
total amount.

Figure 1: Georgia's UPL Arrangement with Local-Government Health Care
Providers, State Fiscal Years 2001-2003

Note: Totals may not add up because of rounding. See GAO-05-748 .

In our view, the inappropriate use of IGTs in schemes such as UPL
financing arrangements violates the fiscal integrity of Medicaid's
federal-state partnership in at least three ways.

           o  The schemes effectively increase the federal matching rate
           established under federal law by increasing federal expenditures
           while state contributions remain unchanged or even decrease. We
           previously estimated that one state effectively increased the
           federal share of its total Medicaid expenditures from 59 percent
           to 68 percent in state fiscal year 2001, by obtaining excessive
           federal funds and using these as the state's share of other
           Medicaid expenditures.12

           o  There is no assurance that these increased federal
           reimbursements are used for Medicaid services, since states use
           funds returned to them via these schemes at their own discretion.
           In examining how six states with large schemes used the federal
           funds they generated, we previously found that one state used the
           funds to help finance its education programs, and others deposited
           the funds into state general funds or other special state accounts
           that could be used for non-Medicaid purposes or to supplant the
           states' share of other Medicaid expenditures.13

           o  The schemes enable states to pay a few public providers amounts
           that well exceed the costs of services provided, which is
           inconsistent with the statutory requirement that states provide
           for methods that ensure that Medicaid payments are consistent with
           economy and efficiency. We previously reported that, in one state,
           the state's proposed scheme increased the daily federal payment
           per Medicaid resident from $53 to $670 in six
           local-government-operated nursing homes.14

           Another category of claims where states have used questionable
           practices to maximize federal reimbursements is services provided
           to children in schools and associated administrative costs.
           Medicaid is authorized to cover services to, for example,
           Medicaid-eligible children with disabilities who may need
           diagnostic, preventive, and rehabilitative services; speech,
           physical and occupational therapies; and transportation. School
           districts may also receive Medicaid reimbursement for the
           administrative costs of providing school-based Medicaid services.
           Our work in this area has addressed claims for Medicaid
           school-based health services and administration. In 1999, we found
           a need for federal oversight of growing Medicaid reimbursements to
           states for Medicaid school-based administrative services,
           including outreach activities to enroll children in Medicaid.15 In
           April 2000, we reported that Medicaid expenditures for
           school-based health services totaled about $1.6 billion for
           services provided by schools in 45 states and the District of
           Columbia, while Medicaid administrative expenditures were about
           $712 million for costs billed by schools in 17 states.16 We found
           that some of the methods used by school districts and states to
           claim reimbursement for school-based health services did not
           ensure that the services paid for were provided: some claims, for
           example, were made solely on the basis of at least one day's
           attendance in school, rather than on documentation of any actual
           service delivery. Methods used by school districts to claim
           Medicaid reimbursement failed in some cases to take into account
           variations in service needs among children.

           With regard to Medicaid school-based administrative costs, we
           found that some methods used by school districts and states did
           not ensure that administrative activities were properly identified
           and reimbursed. Poor controls resulted in improper payments in at
           least two states, and there were indications that improprieties
           could have been occurring in several other states. We further
           found that, in some states, funding arrangements among schools,
           states, and private consulting firms created adverse incentives
           for program oversight and caused schools to receive a small
           portion-as little as $7.50 for every $100 in Medicaid claims-of
           Medicaid reimbursement for school-based administrative and service
           claims. We reported that 18 states retained a total of $324
           million, or 34 percent, of federal funds intended to reimburse
           schools for their Medicaid administrative and service claims; for
           7 of the states, this amounted to 50 to 85 percent of federal
           Medicaid reimbursement for school-based health services claims. In
           addition, contingency fees, which some school districts paid to
           private consultants for their assistance in preparing and
           submitting Medicaid claims, ranged from 3 to 25 percent of the
           federal reimbursement, further reducing the net amount that
           schools received.

           In response to recommendations we made to the Administrator of
           CMS, CMS has clarified guidance for states on submitting claims
           for school-based administrative activities.17 Subsequent to our
           work, HHS OIG conducted reviews of school-based claims in 18
           states from November 2001 through June 2005, several of which have
           identified issues with the appropriateness of claims related to
           consultants' projects.18

           In our own most recent work, we determined that Georgia was
           retaining a share of the additional federal reimbursements gained
           from its claims for Medicaid school-based services. Georgia's
           contingency-fee consultant assisted the state with its Medicaid
           claims for school-based services in a project that generated about
           $54 million in federal Medicaid reimbursements over the 3 years
           the consultant was paid and that, on the basis of state data, we
           estimate continues to generate about $25 million annually.19 As
           before, we found that the school districts were not receiving all
           of the federal Medicaid reimbursements that were generated on
           their behalf. According to a state official and documents provided
           by the state, the state retained $3.9 million, or 16 percent, of
           federal reimbursements that were claimed on behalf of the school
           districts for state fiscal year 2003, most of which was used to
           pay its contingency-fee consultant and about $1 million of which
           was used to cover the salaries and administrative costs of the
           five state employees who administered school-based claims in
           Georgia.20

           A growing number of states are using consultants on a
           contingency-fee basis to maximize federal Medicaid reimbursements.
           CMS reported that, according to a survey it conducted in 2004, 34
           states had used consultants on a contingency-fee basis for this
           purpose, an increase from 10 states reported to have such
           arrangements in 2002. In the 2 states where we examined selected
           projects that involved the assistance of contingency-fee
           consultants, Georgia and Massachusetts, we found that the projects
           generated a significant amount of additional federal
           reimbursements for the states: from fiscal year 2000 through 2004,
           an estimated $1.5 billion in Georgia and nearly $570 million in
           Massachusetts. For those additional reimbursements, Georgia paid
           its consultant about $82 million in contingency fees, and
           Massachusetts paid its consultants about $11 million in
           contingency fees. We identified claims from contingency-fee
           consultant projects that appear to be inconsistent with current
           CMS policy and claims that are inconsistent with federal law; we
           also identified claims from projects that undermine Medicaid's
           fiscal integrity. Such projects and resulting problematic claims
           arose in each of the five categories of claims that we reviewed in
           Georgia, Massachusetts, or for some categories, both states. We
           observed two factors common to many projects that we believe
           increase their risk. First, many projects were in categories of
           Medicaid claims where federal requirements for the services have
           been inconsistently applied, are evolving, or were not specific.
           Second, many projects involved states' shifting costs to the
           federal government through Medicaid reimbursements to other state
           or local-government entities.

           For the five categories of claims we reviewed where states
           frequently used contingency-fee consultants to maximize their
           federal Medicaid reimbursements, we identified problematic claims
           in each category in either Georgia or Massachusetts or in both
           states. These projects resulted in claims that appear to be
           inconsistent with current CMS policy and that, for one project,
           were inconsistent with federal law. We also identified claims that
           were inconsistent with the fiscal integrity of the Medicaid
           program. I have already discussed our current findings regarding
           Georgia's use of IGTs in UPL supplemental payment arrangements and
           its project to increase claims for school-based Medicaid services
           and administrative costs. We also reviewed Georgia's and
           Massachusetts's use of contingency-fee consultants to increase
           federal reimbursements for targeted case management services,
           rehabilitation services for mental or physical disabilities, and
           states' claims for administering their Medicaid programs. In these
           two states, our findings were most significant in the areas of
           targeted case management and rehabilitation services.

           Georgia and Massachusetts-with the help of their contingency-fee
           consultants-developed approaches to maximize federal Medicaid
           reimbursements by claiming costs for targeted case management
           (TCM) services under state plan amendments that CMS had approved
           prior to 2002. Georgia's consultant assisted the state in
           increasing federal Medicaid reimbursement for TCM services
           provided by two state agencies: the Department of Juvenile Justice
           and the Division of Family and Children's Services.21 In
           Massachusetts, contingency-fee consultants helped the state
           increase federal reimbursement for TCM services provided by three
           state agencies: the Departments of Social Services, Youth
           Services, and Mental Health. These case management services in
           Georgia and Massachusetts appear integral to the states' own
           programs; the states' laws, regulations, or policies called for
           case management services in these programs, and the case
           management services were provided to all Medicaid- and
           non-Medicaid-eligible children served by the programs.22 More
           recently, CMS has denied coverage for comparable services by other
           states because CMS determined that the services are an integral
           component of the state programs providing the services. For
           example, in fiscal year 2002, CMS denied a state plan amendment
           proposal to cover TCM services in Illinois and in fiscal year 2004
           it found TCM claims in Texas unallowable, in part because the TCM
           services claimed for reimbursement were considered integral to
           other state programs. As in Georgia and Massachusetts, the TCM
           services in Illinois were for children served by the state's
           juvenile justice system. In Texas, such children were served by
           the state's child welfare and foster care system.

           In fiscal year 2003, we estimate that Georgia received $17 million
           in federal reimbursements for claims for TCM services provided by
           its two state agencies, of which about $12 million was for
           services that appear to be integral to non-Medicaid programs. In
           fiscal year 2004, Massachusetts received an estimated $68 million
           in federal reimbursements for services that appear to be integral
           to non-Medicaid programs in the three state agencies whose TCM
           projects were developed by consultants.23 CMS officials agreed
           with our assessment that the claims for TCM services in these two
           states were problematic.

           Our review of projects involving rehabilitation services found
           concerns with methods and claims in Georgia. Georgia's consultant
           helped the state increase federal Medicaid reimbursements for
           rehabilitation services provided through two state agencies by $58
           million during state fiscal years 2001 through 2003. The
           consultant suggested that state agencies-which pay private
           facilities under a per diem rate for providing room and board,
           rehabilitation counseling and therapy, educational, and other
           services to children in state custody-base their claims for
           Medicaid reimbursement on the private facilities' estimated costs,
           instead of on what the state agencies actually paid those
           facilities. The state agencies increased their claims for Medicaid
           reimbursement without increasing their payments to the facilities.
           In some cases, the state agencies' Medicaid claims for
           rehabilitation services alone exceeded the amount paid by the
           agencies for all the services the facilities provided to children.
           Specifically, for 82 of the residential facilities (about 43
           percent), the amount the state Medicaid agency reimbursed the two
           agencies in state fiscal year 2004 exceeded the total amount these
           agencies actually paid the residential facilities for all
           services, not just rehabilitation services. One facility, for
           example, was paid by the Division of Family and Children's
           Services $37 per day per eligible child for all services covered
           by the per diem payment, but the state agency billed the Medicaid
           program $62 per day for rehabilitation services alone. CMS
           officials agreed with our conclusion that claims from this
           contingency-fee project were not in accord with the statutory
           requirement that payments be efficient and economical.

           During our work we observed two factors that appear to increase
           the risk of problematic claims. One factor involved federal
           requirements that were inconsistently applied, evolving, or not
           specific; the second involved states' claiming Medicaid
           reimbursement for services provided by other state or
           local-government agencies. Despite CMS's long-standing concern
           about state financing arrangements for both TCM and supplemental
           payments, for example, the agency has not issued adequate guidance
           to clarify expenditures allowable for federal reimbursement.
           Federal TCM and supplemental payment policy for allowable claims
           in these categories has evolved over time, and the criteria that
           CMS applies to determine whether claims are allowable have been
           communicated to states primarily through state-specific state plan
           amendment reviews or claims disallowances, rather than through
           formal guidance or regulation.

           o  Inconsistently applied policy for allowable TCM services. In
           2002, CMS began to deny proposed state plan amendments that sought
           approval for Medicaid coverage of TCM services that were the
           responsibility of other state agencies. CMS had determined that
           such arrangements were not eligible for federal Medicaid
           reimbursement for several reasons: (1) the services were typically
           integral to existing state programs, (2) the services were
           provided to beneficiaries at no charge, and (3) beneficiaries'
           choice of providers was improperly limited.24 However, CMS
           approved Georgia's and Massachusetts's state plan amendments for
           TCM services before 2002. Although CMS has been applying these
           criteria to deny new TCM arrangements-for example, in Maryland,
           Illinois, and Texas-it has not yet sought to address similar,
           previously approved TCM arrangements that are inconsistent with
           these criteria. CMS regional officials told us they could not
           reconsider the TCM claims from two agencies in Georgia and four in
           Massachusetts because they were waiting for new guidance that the
           agency was preparing.25 CMS has been working on new TCM guidance
           for more than 2 years, according to agency officials. As of May
           2005, however, this guidance had not been issued. CMS's fiscal
           year 2006 budget submission identifies savings that could be
           achieved by clarifying allowable TCM services, but CMS had not
           published a specific proposal at the time we completed our work.26

           o  Evolving policy for allowable supplemental payment
           arrangements. For several years, we and others have reported on
           state financing schemes that allow states to inappropriately
           generate federal Medicaid reimbursement without the state's paying
           its full share. Although Congress and CMS have taken steps to curb
           these abuses, states can still develop arrangements enabling them
           to make illusory payments to gain federal reimbursements for their
           own purposes. Recognizing that states can unduly gain from
           supplemental payment arrangements, such as UPL payment
           arrangements that use IGTs, since fiscal year 2003 CMS has worked
           with individual states to address such arrangements. At the same
           time, the agency has not issued guidance stating its policy on
           acceptable approaches for UPL payment arrangements, specifically
           the use of IGTs and the relationship to state share of spending.
           CMS's budget for fiscal year 2006 proposes to achieve federal
           Medicaid savings by curbing financing arrangements that have been
           used by a number of states to inappropriately obtain federal
           reimbursements. The specific proposal, however, had not been
           published at the time we completed our review.27

           o  Unspecified policy on allowable Medicaid rehabilitation
           payments to other state agencies. CMS has not issued policy
           guidance that addresses situations where Medicaid payments are
           made by a state's Medicaid agency to other state agencies for
           rehabilitation services. CMS financial management officials told
           us that states' claims for rehabilitation services posed an
           increasing concern, in part because officials believed that states
           were inappropriately filing claims for services that were the
           responsibility of other state programs. CMS does not specify
           whether claims for the cost of rehabilitation services that are
           the responsibility of non-Medicaid state agencies are allowable.
           CMS's fiscal year 2006 budget submission identifies savings that
           could be achieved by clarifying appropriate methods for claiming
           rehabilitation services. CMS had not published a specific proposal
           at the time we completed our review.28

           The second factor we observed that increased the financial risk to
           the federal government of reimbursement-maximizing projects was
           that the projects shifted state costs to the federal government by
           claiming Medicaid reimbursement for services provided by other
           non-Medicaid state or local government agencies. Medicaid
           reimbursement to government agencies serving Medicaid
           beneficiaries is allowable in cases where the claims apply to
           covered services and the amounts paid are consistent with economy
           and efficiency. However, the projects and associated claims we
           reviewed showed that reimbursement-maximizing projects often
           involved services and circumstances that Medicaid should not pay
           for-such as illusory payments to government providers.

           As we describe in the report issued today, the problems we
           identified with states' Medicaid claims stemming from
           contingency-fee projects illustrate the urgent need to address
           certain issues in CMS's overall financial management of the
           Medicaid program. These issues, however, are not limited to
           situations that involve contingency-fee consultants. We have
           identified problems with claims in states other than Georgia and
           Massachusetts that have undertaken reimbursement-maximizing
           activities, without employing consultants, in categories of
           long-standing concern, such as supplemental payment arrangements.
           CMS relies on its standard financial management controls to
           identify any unallowable Medicaid claims that states may submit,
           including those that might be associated with
           reimbursement-maximizing contingency-fee projects. However, CMS
           lacks clear, consistent policies to guide the states' and its own
           financial oversight activities. Furthermore, in our previous work
           on CMS's financial management, we found that the agency did not
           have a strategy for focusing its resources most effectively on
           areas of high risk.29 In our current work, we found that CMS has
           known for some time that two high-risk categories we
           identified-claims generated from consultants paid on a
           contingency-fee basis to maximize reimbursements and claims
           generated from arrangements where state Medicaid programs are
           paying other state agencies or government providers-were
           problematic. For example, CMS had listed these two categories on a
           financial tracking sheet of high-risk areas as of 2000.30 At an
           October 2003 congressional hearing, the CMS Administrator
           expressed concern that the Medicaid program was understaffed and
           that consultants in the states were "way ahead of" CMS in helping
           states take advantage of the Medicaid system.31

           CMS has undertaken important steps to improve its financial
           management of the Medicaid program. A major component of the
           agency's initiative is hiring, training, and deploying
           approximately 100 new financial analysts, mainly to regional
           offices. These analysts are responsible for identifying state
           sources of Medicaid funding and contributing to the review of
           state budget estimates and expenditure reports. Expectations for
           CMS's new Division of Reimbursement and State Financing and for
           the 100 new financial analysts are high and their responsibilities
           broad. It is too soon, however, to assess their accomplishments.

           For more than a decade, we and others have reported on the methods
           states have used to inappropriately maximize federal Medicaid
           reimbursement and have made recommendations to end financing
           schemes. CMS has taken important steps in recent years to improve
           its financial management. Yet more can be done.

           Many of the problematic methods we examined involved categories of
           claims where CMS policy has been inconsistently applied, evolving,
           or unspecified. They have also involved increasing payments to
           units of state and local government-which states have long used to
           maximize federal Medicaid funding, in part because IGTs can help
           facilitate illusory payments-suggesting that greater CMS attention
           is needed to payments among levels of government, regardless of
           whether consultants are involved. We believe that it is important
           to act promptly to curb opportunistic financing schemes before
           they become a staple of state financing and further erode the
           integrity of the federal-state Medicaid partnership. Addressing
           recommendations that remain open from our prior work on state
           financing schemes and on CMS's financial management could help
           resolve some of these issues. In addition, in the report being
           issued today, we are making new recommendations to the
           Administrator of CMS to improve the agency's oversight of states'
           use of contingency-fee consultants and to strengthen certain of
           the agency's overall financial management procedures. These
           recommendations address developing guidance to clarify CMS policy
           on TCM, supplemental payment arrangements, rehabilitation
           services, and Medicaid administrative costs; ensuring that such
           guidance is applied consistently among states; and collecting and
           scrutinizing information from states about payments made to units
           of state and local governments.

           Understandably, states that have relied on certain practices to
           increase federal funds as a staple for the state share of Medicaid
           spending are concerned about the potential loss of these funds.
           The continuing challenge remains to find the proper balance
           between states' flexibility to administer their Medicaid programs
           and the shared federal-state fiduciary responsibility to manage
           program finances efficiently and economically in a way that
           ensures the fiscal integrity of the program. States should not be
           held solely responsible for developing arrangements that
           inappropriately maximize federal reimbursements where policies
           have not been clear or clearly communicated or where CMS has known
           of risks for some time and has not acted to mitigate them. Without
           clear and consistent communication of policies regarding allowable
           claims in high-risk areas, such as those for TCM and UPL where
           billions of dollars are claimed each year, CMS is at risk of
           treating states inconsistently and of placing undue burdens on
           states to understand federal policy and comply with it.

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

           For future contacts regarding this testimony, please call Kathryn
           G. Allen at (202) 512-7118. Katherine Iritani, Ellen M. Smith,
           Helen Desaulniers, and Kevin Milne also made key contributions to
           this testimony.

           Medicaid Fnancing: Sates' Use of Coningency-Fee Consultants to
           Maximize Federal Rembursements Highlighs Need for Improved Federal
           Oversight. GAO-05-748 . Washington, D.C.: June 28, 2005.

           High-Rsk Seres: An Updae. GAO-05-207 . Washington, D.C.: January
           2005.

           Medicaid Program Integrity: Sate and Federal Eorts to Prevent
           andDetect Improper Payments. GAO-04-707 . Washington, D.C.: July
           16, 2004.

           Medicaid: ntergovernmena Transers Have Factated State Fnancing
           Schemes. GAO-04-574T . Washington, D.C.: March 18, 2004.

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

           Medicaid Fnancial Management: Beter Oversght of State Claims for
           Federal Rembursement Needed. GAO-02-300 . Washington, D.C.:
           February 28, 2002.

           Medicaid: HCFA Reversed Is Posion and Approved Addional Stae
           Financing Schemes. GAO-02-147 . Washington, D.C.: October 30,
           2001.

           Medicaid: Sae Financng Schemes Agan Drive Up Federal Payments.
           GAO/T-HEHS-00-193 . Washington, D.C.: September 6, 2000.

           Medicaid n Schools: mproper Paymens Demand mprovements in HCFA
           Oversight. GAO/ HEHS/OSI-00-69 . Washington, D.C.: April 5, 2000.

           Medicaid n Schools: Poor Oversght and Improper Payments
           CompromsePotenta Benet. GAO/T-HEHS/OSI-00-87 . Washington, D.C.:
           April 5, 2000.

           Medicaid: Quesionable Practices Boost Federal Payments for
           School-Based Services. GAO/T-HEHS-99-148 . Washington D.C.: June
           17, 1999.

           Medicaid: Saes Use usory Approaches to Shif Program Costs
           toFederal Government. GAO/HEHS-94-133. Washington, D.C.: August 1,
           1994.

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12 GAO-04-228 .

Questionable Methods Have Boosted Federal Reimbursements for School-Based Claims

13 GAO-04-228 .

14GAO, Medicaid: HCFA Reversed Its Position and Approved Additional State
Financing Schemes, GAO-02-147 (Washington, D.C.: Oct. 30, 2001).

15GAO, Medicaid: Questionable Practices Boost Federal Payments for
School-Based Services, GAO/T-HEHS-99-148 (Washington, D.C.: June 17,
1999).

16GAO, Medicaid in Schools Improper Payments Demand Improvements in HCFA
Oversght, GAO/HEHS/OSI-00-69 (Washington, D.C.: Apr. 5, 2000). States were
asked to provide school-based claims data for the most recent fiscal year
for which they were available, which for approximately half the states was
state fiscal year 1999. Most of the remaining states provided data for
state fiscal year 1998, federal fiscal year 1998, or calendar year 1998;
three states provided data for periods before July 1997.

17CMS, Medicaid School-Based Admnistrative Clamng Guide (May 2003).

18See, for example, HHS OIG, Medicaid Payments for School-Based Healh
Servces-Massachusetts Divison of Medcal Asssance, A-01-02-00009
(Washington, D.C.: July 14, 2003); and HHS OIG, Medicad SchoolBased Health
Services Adminisratve Coss-Massachusetts, A-01-02-00016 (Washington, D.C.:
Sept. 15, 2004). See GAO-05-748 , app. II, for other HHS OIG reports on
school-based services and administration.

19We did not assess whether the school-based health services that the
state claimed were allowable.

20 GAO-05-748 .

 States' Use of Contingency-Fee Consultants to Maximize Federal Reimbursements
                 Highlights Need for Improved Federal Oversight

Some Contingency-Fee Projects in Georgia and Massachusetts Resulted in
Problematic Federal Reimbursements

  Targeted Case Management

21The consultant assisted Georgia by streamlining the billing process,
drafting state plan amendment proposals, and increasing the number of
Medicaid beneficiaries for whom these two non-Medicaid state agencies
billed case management services, thus reducing costs to the state for
operating these agencies.

22For example, all children served by Georgia's and Massachusetts's child
welfare agencies receive a broad range of services to promote their
welfare and protect them from abuse and neglect. To fulfill this
responsibility, state employees provide case management services, refer
the children to others for services, and monitor their well-being and
progress.

  Rehabilitation Services

Two Factors Increase Risk of Problematic Claims

23In examining CMS expenditure reports, we found that both Georgia and
Massachusetts had categorized non-TCM services, such as rehabilitation
services, as TCM. We obtained estimates from the states of the amount the
states had claimed for TCM services.

24CMS most recently explained its policy and rationale in a September 2004
Administrator's decision denying a proposed state plan amendment from
Maryland to cover TCM services. This decision articulated the criteria
that CMS has applied to deny state TCM plan amendments.

25A CMS official stated that the agency's most recent guidance on TCM,
issued in January 2001, contained problems and errors that caused
confusion regarding appropriate TCM claims when non-Medicaid state
agencies were involved.

26The CMS Administrator's performance budget for fiscal year 2006 proposes
to clarify allowable TCM services and align federal reimbursement for TCM
services with an administrative matching rate of 50 percent. CMS estimates
5-year budget savings from reducing the reimbursement for TCM to the
administrative matching rate of $1 billion.

27The budget proposes to build on CMS's efforts to curb questionable
financing practices by (1) recovering federal funds claimed for covered
services but retained by the state and (2) capping payments to government
providers at no more than the cost of furnishing services to Medicaid
beneficiaries. CMS estimated 5-year budget savings of $5.9 billion from
this proposal. CMS's proposal is consistent with a recommendation that we
first made to Congress in 1994 to consider legislation to prohibit
Medicaid payments to government providers that exceed the providers'
actual costs. See GAO, Medicaid: Staes Use Illusory Approaches to Shift
Program Coss to Federal Government, GAO/HEHS-94-133 (Washington, D.C.:
Aug. 1, 1994).

Problems Illustrate Need to Improve the Financial Management of Medicaid

28The CMS Administrator's budget for fiscal year 2006 expresses CMS's
concern that states have attempted to shift costs associated with other
social service programs to Medicaid. The budget proposes to clarify
allowable services that could be claimed as rehabilitation. For its
proposal to clarify allowable TCM and rehabilitation services that could
be claimed, CMS estimates 5-year budget savings of $2 billion. See Centers
for Medicare & Medicaid Services' performance budget proposal for fiscal
year 2006.

29See, for example, GAO, Medicad Financal Management Better Oversight of
State Caimsfor Federal Reimbursement Needed, GAO-02-300 (Washington, D.C.:
Feb. 28, 2002). This February 2002 report found that CMS's systems for
financial oversight of state Medicaid programs were limited. We
recommended a range of approaches to strengthen internal controls and
target limited resources, including that CMS revise its existing
risk-assessment efforts to more effectively and efficiently target
oversight resources to areas most vulnerable to improper payments. An
ongoing GAO review is assessing CMS's progress in implementing related
recommendations. Also, in a report on state financing schemes (see
GAO-04-228 ), we recommended that CMS improve oversight of state UPL
projects, including issuing guidance to states setting forth acceptable
methods to calculate UPLs. These recommendations remain open.

30In 2001, CMS asked each regional office to complete a risk assessment to
identify the extent to which states in each region have attributes
warranting closer CMS financial oversight and scrutiny. The identified
risk factors that regional staff were asked to assess included: areas
where federal policy was unclear, states' use of a contingency-fee
consultant to maximize reimbursements, and payments to public providers in
which state Medicaid agencies may lack an incentive to monitor and control
expenditures. Regional officials were to base their assessment of these
and other risk factors on their working knowledge of each state.

31Thomas Scully, Administrator, Centers for Medicare & Medicaid Services,
responding to questions at a hearing, Challenges Facing the Medicaid
Program in the 21st CenturyHearng before the Subcommittee on Healh, House
Commee on Energy and Commerce, 108th Cong., 1st Sess., October 8, 2003.

                                  Conclusions

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Highlights of GAO-05-836T , a testimony before the Committee on Finance,
U.S. Senate

June 28, 2005

MEDICAID

States' Efforts to Maximize Federal Reimbursements Highlight Need for
Improved Federal Oversight

Medicaid-the federal-state health care financing program covering almost
54 million low-income people at a cost of $276 billion in fiscal year
2003-is by its size and structure at significant risk of waste and
exploitation. Because of challenges inherent in overseeing the program,
which is administered federally by the Centers for Medicare & Medicaid
Services (CMS), GAO added Medicaid to its list of high-risk federal
programs in 2003. Over the years, states have found various ways to
maximize federal Medicaid reimbursements, sometimes using consultants paid
a contingency fee to help them do so.

From earlier work and a report issued today (GAO-05-748), GAO's testimony
addresses (1) how some states have inappropriately increased federal
reimbursements; (2) some ways states have increased federal reimbursements
for school-based Medicaid services and administrative costs; and (3) how
states are using contingency-fee consultants to maximize federal Medicaid
reimbursements and how CMS is overseeing states' efforts.

What GAO Recommends

GAO recommends that CMS improve oversight of contingency-fee projects and
states' reimbursement-maximizing methods. Although CMS believes its recent
initiatives substantially respond to the recommendations, GAO maintains
that additional actions are needed.

For many years, GAO has reported on varied financing schemes and
questionable methods used by states to increase the federal reimbursements
they receive for operating their state Medicaid programs. These schemes
and methods can undermine Medicaid's federal-state partnership and
threaten its fiscal integrity. For example:

           o  Some states make large supplemental payments to
           government-owned or government-operated entities for delivery of
           Medicaid services while requiring these entities to return the
           payments to the state. This process creates the illusion of valid
           expenditures in order to obtain federal reimbursement, effectively
           shifting a portion of the state's share of program expenditures to
           the federal government and increasing the federal share beyond
           that established by formula under law.
           o  Medicaid funding is available for local school districts for
           certain health services for eligible children and for
           administrative costs. To claim increased federal Medicaid
           reimbursement, however, some states and school districts have used
           methods lacking sufficient controls to ensure that claims were
           legitimate. GAO also found funding arrangements among schools,
           states, and private consulting firms where some states retained up
           to 85 percent of reimbursements for administrative costs. In some
           cases, school districts paid contingency fees to consultants.

A growing number of states are using consultants on a contingency-fee
basis to maximize federal Medicaid reimbursements. As of 2004, 34
states-up from 10 states in 2002-used contingency-fee consultants for this
purpose. GAO identified claims in each of five categories of claims (see
table) from contingency-fee projects that appeared to be inconsistent with
current CMS policy, inconsistent with federal law, or that undermined the
fiscal integrity of the Medicaid program. Problematic projects often were
in categories where federal requirements were inconsistently applied,
evolving, or not specific. CMS has taken steps to improve its fiscal
management of Medicaid, but a lack of oversight and clear guidance from
CMS has allowed states to develop new financing methods or continue
existing ones that take advantage of ambiguity and generate considerable
additional federal costs.

Five Categories of Medicaid Claims Reviewed by GAO

Source: GAO based on CMS information.
*** End of document. ***