    U.S. Insular Areas: Multiple Factors Affect Federal Health Care
    Funding (14-OCT-05, GAO-06-75).

    Five insular areas of the United States--American Samoa, the
    Commonwealth of the Northern Mariana Islands (CNMI), Guam, Puerto
    Rico, and the U.S. Virgin Islands--benefit from federal health
    care financing and grant programs that help fund health care
    services to their over 4 million residents. However, notable
    differences exist in how the programs are funded or operate in
    the insular areas, such as statutory limits on federal Medicaid
    funding to the insular areas that do not apply in the states. To
    help understand these differences, GAO was asked to identify (1)
    the key sources of federal health care funding in the insular
    areas, (2) differences between insular areas and the states in
    the methods used to allocate these funds, and (3) differences in
    spending levels per individual between insular areas and the
    states. In commenting on a draft of this report, American Samoa,
    CNMI, and Puerto Rico suggested the need for additional
    information on certain issues, such as implications of statutory
    limits on federal Medicaid spending and a more comprehensive
    analysis of local circumstances that affect the availability and
    costs of health care services.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-06-75
        ACCNO:   A39517
      TITLE:     U.S. Insular Areas: Multiple Factors Affect Federal
    Health Care Funding
         DATE:   10/14/2005
      SUBJECT:   Comparative analysis
    	     Federal aid programs
    	     Federal grants
    	     Health care costs
    	     Health care programs
    	     Health care services
    	     Medicaid
    	     Medicare
    	     Territories and possessions
    	     Access to health care
    	     American Samoa
    	     Guam
    	     Northern Mariana Islands
    	     Puerto Rico
    	     State Children's Health Insurance
    	     Program

    	     Virgin Islands

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    GAO-06-75

         *
              * Results in Brief
              * Background
         * Relationship to United States
         * Characteristics of the Insular Areas
         * Federal Health Care Financing and Grant Programs
              * Multiple Federal Agencies Fund Health Care Services in Insul
         * Medicare Represents the Majority of Federal Health Care Spen
         * Health Care Grants Represent Smaller Share of Federal Fundin
              * Notable Differences Exist in Methods Used to Allocate Federa
         * Medicare Funds Are Allocated Differently for Parts A and D
         * Medicaid and SCHIP Federal Funding to the Insular Areas Is L
         * Certain HHS Grants Are Allocated Differently
              * Multiple Factors Explain Differences in Individual Spending
         * Lower Medicare Spending Per Beneficiary Explained by Payment
         * Medicaid and SCHIP Individual Spending Levels in Insular Are
         * HHS Per Capita Grant Spending Is Higher in Insular Areas
              * Agency Comments and Our Evaluation
         * Appendix I: Scope and Methodology
              * Medicare
              * Medicaid
              * SCHIP
              * HHS grants
              * Department of the Interior Grants
         * Data Reliability
         * Appendix II: Changes in Insular Area Health Care Funding Pro
         * Appendix III: Characteristics of Insular Areas' Medicaid Pro
         * Appendix IV: Comments from the Department of the Interior
         * Appendix V: Comments from American Samoa
         * Appendix VI: Comments from the Commonwealth of the Northern
         * Appendix VII: Comments from the Commonwealth of Puerto Rico
         * Appendix VIII: GAO Contact and Staff Acknowledgments
              * GAO Contact
              * Acknowledgments
         * Order by Mail or Phone

    Report to Congressional Requesters

    United States Government Accountability Office

    GAO

    October 2005

    U.S. INSULAR AREAS

    Multiple Factors Affect Federal Health Care Funding

    Health Care Funding in U.S. Insular Areas Health Care Funding in U.S.
    Insular Areas Health Care Funding in U.S. Insular Areas Health Care
    Funding in U.S. Insular Areas Health Care Funding in U.S. Insular Areas
    Health Care Funding in U.S. Insular Areas Health Care Funding in U.S.
    Insular Areas Health Care Funding in U.S. Insular Areas Health Care
    Funding in U.S. Insular Areas Health Care Funding in U.S. Insular Areas
    Health Care Funding in U.S. Insular Areas Health Care Funding in U.S.
    Insular Areas Health Care Funding in U.S. Insular Areas Health Care
    Funding in U.S. Insular Areas Health Care Funding in U.S. Insular Areas
    Health Care Funding in U.S. Insular Areas Health Care Funding in U.S.
    Insular Areas Health Care Funding in U.S. Insular Areas Health Care
    Funding in U.S. Insular Areas Health Care Funding in U.S. Insular Areas
    Health Care Funding in U.S. Insular Areas Health Care Funding in U.S.
    Insular Areas Health Care Funding in U.S. Insular Areas Health Care
    Funding in U.S. Insular Areas Health Care Funding in U.S. Insular Areas
    Health Care Funding in U.S. Insular Areas Health Care Funding in U.S.
    Insular Areas Health Care Funding in U.S. Insular Areas Health Care
    Funding in U.S. Insular Areas Health Care Funding in U.S. Insular Areas
    Health Care Funding in U.S. Insular Areas Health Care Funding in U.S.
    Insular Areas Health Care Funding in U.S. Insular Areas Health Care
    Funding in U.S. Insular Areas Health Care Funding in U.S. Insular Areas
    Health Care Funding in U.S. Insular Areas Health Care Funding in U.S.
    Insular Areas Health Care Funding in U.S. Insular Areas Health Care
    Funding in U.S. Insular Areas Health Care Funding in U.S. Insular Areas
    Health Care Funding in U.S. Insular Areas Health Care Funding in U.S.
    Insular Areas Health Care Funding in U.S. Insular Areas Health Care
    Funding in U.S. Insular Areas Health Care Funding in U.S. Insular Areas
    Health Care Funding in U.S. Insular Areas Health Care Funding in U.S.
    Insular Areas Health Care Funding in U.S. Insular Areas Health Care
    Funding in U.S. Insular Areas Health Care Funding in U.S. Insular Areas
    Health Care Funding in U.S. Insular Areas Health Care Funding in U.S.
    Insular Areas Health Care Funding in U.S. Insular Areas Health Care
    Funding in U.S. Insular Areas Health Care Funding in U.S. Insular Areas
    Health Care Funding in U.S. Insular Areas Health Care Funding in U.S.
    Insular Areas Health Care Funding in U.S. Insular Areas Health Care
    Funding in U.S. Insular Areas Health Care Funding in U.S. Insular Areas
    Health Care Funding in U.S. Insular Areas Health Care Funding in U.S.
    Insular Areas Health Care Funding in U.S. Insular Areas Health Care
    Funding in U.S. Insular Areas Health Care Funding in U.S. Insular Areas
    Health Care Funding in U.S. Insular Areas Health Care Funding in U.S.
    Insular Areas Health Care Funding in U.S. Insular Areas

    GAO-06-75

    Contents

    Letter 1

    Results in Brief 2
    Background 4
    Multiple Federal Agencies Fund Health Care Services in Insular Areas 12
    Notable Differences Exist in Methods Used to Allocate Federal Health Care
    Funds in the Insular Areas Compared to the States 17
    Multiple Factors Explain Differences in Individual Spending Levels in
    Insular Areas Compared to the States 23
    Agency Comments and Our Evaluation 37
    Appendix I Scope and Methodology 41
    Appendix II Changes in Insular Area Health Care Funding Proportions over
    Time 45
    Appendix III Characteristics of Insular Areas' Medicaid Programs 52
    Appendix IV Comments from the Department of the Interior 54
    Appendix V Comments from American Samoa 55
    Appendix VI Comments from the Commonwealth of the Northern Mariana Islands
    57
    Appendix VII Comments from the Commonwealth of Puerto Rico 60
    Appendix VIII GAO Contact and Staff Acknowledgments 64

    Tables

    Table 1: Medicare-Certified Healthcare Providers and Hospital Beds in
    Insular Areas and States, January 2005 9
    Table 2: Formula Components for CDC's Public Health Preparedness and
    Response for Bioterrorism Grant 22
    Table 3: Mandatory Medicaid Services Covered by Insular Areas and States,
    Fiscal Year 2005 33
    Table 4: Federal Health Care Spending for Five Insular Areas, Fiscal Years
    1999 through 2003 46
    Table 5: Federal Health Care Spending for American Samoa, Fiscal Years
    1999 through 2003 47
    Table 6: Federal Health Care Spending for CNMI, Fiscal Years 1999 through
    2003 48
    Table 7: Federal Health Care Spending for Guam, Fiscal Years 1999 through
    2003 49
    Table 8: Federal Health Care Spending for Puerto Rico, Fiscal Years 1999
    through 2003 50
    Table 9: Federal Health Care Spending for the Virgin Islands, Fiscal Years
    1999 through 2003 51
    Table 10: Comparison of Federal Medicaid Categorical and Income
    Eligibility Standards to Insular Area Standards, Fiscal Year 2004 52
    Table 11: Summary of Certain Optional Medicaid Services Covered by Insular
    Areas and States, Fiscal Year 2005 53

    Figures

    Figure 1: Insular Areas and United States Demographics and Health
    Indicators 7
    Figure 2: Key Federal Health Care Funding Sources for Five Insular Areas,
    Fiscal Year 2003 13
    Figure 3: Key Federal Health Care Funding Sources by Insular Area, Fiscal
    Year 2003 15
    Figure 4: Medicare Spending Per Beneficiary in Five Insular Areas Compared
    to the States, Fiscal Year 2003 24
    Figure 5: Number of Medicare Part B Major Medical Procedures Per 1,000
    Beneficiaries in Selected States and Insular Areas, Calendar Year 2003 27
    Figure 6: Federal Medicaid Per Capita Funding in Selected States and
    Insular Areas, Fiscal Year 2003 30
    Figure 7: Per Capita Funding to Insular Areas and Selected States for
    CDC's Bioterrorism Grant, Fiscal Year 2003 36
    Figure 8: Ratio of Federal Funding Sources for Five Insular Areas, Fiscal
    Years 1999 through 2003 46
    Figure 9: Ratio of Federal Health Care Funding Sources for American Samoa,
    Fiscal Years 1999 through 2003 47
    Figure 10: Ratio of Federal Health Care Funding Sources for CNMI, Fiscal
    Years 1999 through 2003 48
    Figure 11: Ratio of Federal Health Care Funding Sources for Guam, Fiscal
    Years 1999 through 2003 49
    Figure 12: Ratio of Federal Health Care Funding Sources for Puerto Rico,
    Fiscal Years 1999 through 2003 50
    Figure 13: Ratio of Federal Health Care Funding Sources for the Virgin
    Islands, Fiscal Years 1999 through 2003 51

    Abbreviations

    AS American Samoa CDC Centers for Disease Control and Prevention CMS
    Centers for Medicare & Medicaid Services CNMI Commonwealth of the Northern
    Mariana Islands DOI Department of the Interior DSH disproportionate share
    hospital EPSDT Early and Periodic Screening, Diagnostic, and Treatment
    ESRD end stage renal disease FMAP federal medical assistance percentage
    FPL federal poverty level FQHC federally qualified health center GU Guam
    HHS Department of Health and Human Services HIV human immunodeficiency
    virus HIPAA Health Insurance Portability and Accountability Act of 1996
    HPSA health professional shortage area HRSA Health Resources and Services
    Administration MMA Medicare Prescription Drug, Improvement, and
    Modernization Act of 2003 MUA medically underserved areas NF nursing
    facility NIH National Institutes of Health OIA Office of Insular Affairs
    PPS prospective payment system PR Puerto Rico PSA physician scarcity areas
    RHC rural health clinic SAMHSA Substance Abuse and Mental Health Services
    Administration SCHIP State Children's Health Insurance Program SSI
    Supplemental Security Income TAGGS Tracking Accountability in Government
    Grants System TEFRA Tax Equity and Fiscal Responsibility Act of 1982 VI
    Virgin Islands

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    United States Government Accountability Office

    Washington, DC 20548

    October 14, 2005

    Congressional Requesters

    The five largest insular areas of the United States-American Samoa, the
    Commonwealth of the Northern Mariana Islands (CNMI), Guam, Puerto Rico,
    and the U.S. Virgin Islands-and their more than 4 million residents have a
    unique relationship with the federal government.1 With the exception of
    American Samoa, those born in the insular areas are U.S. citizens;
    however, insular area residents are not afforded all of the rights of
    citizens residing in the 50 states.2, 3 Although numerous federal health
    care financing and social programs-including Medicare, the federal health
    care program for the elderly and disabled, and Medicaid, the joint
    federal-state program that finances health care for certain low-income
    individuals-have been extended to insular area residents to varying
    degrees, notable differences exist in how these programs are funded or
    operate in the insular areas compared to the states. For example, the
    insular areas are subject to statutory limits on federal Medicaid funding
    that do not apply to the states. To help understand these differences, you
    asked us to identify (1) the key sources of federal health care funding in
    the insular areas, (2) the extent to which the methods used to allocate
    these sources of health funds differ from the methods used in the states,
    and (3) how spending levels per individual from these key sources differ
    between insular areas and the states.

    To identify key sources of health care funding to the insular areas, we
    reviewed the Census Bureau's Consolidated Federal Funds Report and
    interviewed officials at the Departments of Health and Human Services
    (HHS) and the Interior (DOI) as well as officials from each of the five
    insular areas. For the key sources identified, we obtained comprehensive
    health expenditure data for federal fiscal years 1999 through 2003 from
    the respective agencies. To assess the reliability of HHS and DOI data, we
    discussed data quality control procedures and reviewed relevant
    documentation with officials. We determined the data were sufficiently
    reliable for the purposes of this report.

    1These five insular areas are the subject of this report. Nine smaller
    insular areas of the United States, which are not included in the scope of
    this report, are Navassa Island in the Caribbean Sea, and Baker Island,
    Howland Island, Kingman Reef, Jarvis Island, Johnston Atoll, Midway Atoll,
    Palmyra Atoll, and Wake Island in the Pacific Ocean.

    2Throughout this report, the term states refers to the 50 states and the
    District of Columbia.

    3Those born in American Samoa are considered to be American nationals of
    the United States. An American national is either a citizen or someone who
    "owes permanent allegiance to the United States." 8 U.S.C. S: 1101(a)(21),
    (22) (2000). While American nationals are not entitled to all the benefits
    for which only citizens qualify, they are not aliens and therefore cannot
    be expelled or deported.

    To determine the extent to which methods used to allocate funds to the
    insular areas differ from those used in the states, we reviewed federal
    laws and guidance on this funding and interviewed agency and insular area
    officials. To determine the extent to which spending levels per individual
    from these key sources differ between insular areas and the states, we
    examined trends in program expenditures between states and insular areas.
    To assess the reliability of the program expenditure data, we reviewed
    relevant documentation, interviewed agency officials about the data, and
    conducted electronic data testing. We determined that the program
    expenditure data were sufficiently reliable for the purposes of this
    report. We conducted our work from October 2004 through September 2005 in
    accordance with generally accepted government auditing standards. (For
    additional information on our methodology, see app. I.)

                                    Results in Brief

    Multiple federal programs, such as federal health care financing programs
    and various HHS and DOI grant programs, fund health care services in the
    insular areas. In fiscal year 2003, funding from these sources to the five
    insular areas totaled $2.2 billion. Medicare was the single largest source
    of health care funding, representing over three-quarters of total funding.
    When funding from the other federal health care financing
    programs-Medicaid and the State Children's Health Insurance Program
    (SCHIP)-is added to the Medicare total, the federal health care financing
    programs represented nearly 9 of every 10 federal dollars spent in the
    five insular areas. However, because Puerto Rico represents over 90
    percent of the total insular area population, the aggregate spending
    numbers mask the often significant variation that exists in the sources of
    funding among the insular areas. Specifically, while the proportion of
    federal spending by source in Puerto Rico largely mirrored the aggregate
    numbers, health care grant funding represented a much larger proportion of
    health care funding in the other four insular areas, largely due to their
    comparatively smaller Medicare populations. For example, grant funding
    represented about 56 percent of total funding in American Samoa in fiscal
    year 2003 but only 11 percent of total funding in Puerto Rico. In
    addition, the extent to which the insular areas relied on grant funding
    often fluctuated significantly from year to year. For example, from fiscal
    years 1999 through 2001, DOI funding to CNMI grew from 2 to 26 percent of
    total health care funding and fell back to 2 percent in 2003.

    Notable differences exist in methods used to allocate federal health care
    funds in the insular areas compared to the states, and these differences
    are often statutory in nature. For example, while most hospitals in the
    states and Puerto Rico are paid under Medicare's inpatient prospective
    payment system (PPS),4 hospitals in the other insular areas are not
    included in the PPS statutory provision and are instead paid based on
    their costs. Similarly, under the new Medicare prescription drug benefit,
    to be implemented in January 2006, certain low-income beneficiaries in the
    insular areas will not receive direct subsidies to help pay for their
    premiums, deductibles, and copayments that are available to certain
    beneficiaries in the states. Instead, CMS will provide each insular area
    with an allotment, which they will then use to administer the program to
    low-income beneficiaries based on a locally developed plan. In addition,
    federal funding for the Medicaid and SCHIP programs in the insular areas
    is subject to statutory limits that do not apply to states. For example,
    the statutory formula used to calculate the federal share of a state's
    Medicaid expenditures, which results in a higher federal share of Medicaid
    expenditures in poorer states, does not apply to the insular areas. In
    contrast, the federal contribution to the insular areas is set by statute
    at the minimum rate available to states, although nearly all of the
    insular areas have a lower median household income than the poorest state.
    In addition, unlike the states, where there are no caps on the federal
    share of Medicaid funding as long as the state contributes its share of
    program expenditures, federal Medicaid funding in the insular areas is
    subject to an annual statutory cap. Although similar methods are used to
    allocate some HHS grants to states and insular areas, other grants use
    separate rules to determine funding amounts in the insular areas.

    Multiple factors, including differences in funding allocation methods,
    compliance with program requirements, and beneficiaries' use of program
    services, all contribute to differences in program spending per individual
    in insular areas compared to the states. For example, Medicare spending
    per beneficiary in the insular areas is less than half the amount it is in
    the states, due in part to differences in methods used to pay for certain
    services and beneficiaries' utilization of services. In addition, the
    statutory limits on federal Medicaid funding in the insular
    areas-particularly the minimum federal matching contribution and funding
    cap-contribute to federal Medicaid spending per capita levels in the
    insular areas that are significantly lower than in the states. However,
    insular areas are not required to meet all Medicaid eligibility
    requirements, and in light of limits on federal funding, CMS does not hold
    these areas accountable for covering all Medicaid benefit requirements,
    which may help explain lower per capita spending. For example, none of the
    insular areas provides full coverage for nursing facility services, which
    represented nearly one-third of Medicaid expenditures in the states in
    fiscal year 2003. In contrast, HHS grant funding per capita is higher in
    the insular areas than in the states due in part to allocation formulas
    that result in higher payments to them as well as to states with smaller
    populations.

    4Since 1984, Medicare payments to most hospitals have been based on PPS
    instead of on their allowable incurred costs, which was the previous
    practice. Under PPS, each hospital receives a standard rate for each
    discharge related to a specific diagnosis, which is adjusted based on
    local costs and the delivery setting.

    We received written comments on a draft of this report from DOI, American
    Samoa, CNMI, and Puerto Rico, and technical comments from HHS and Puerto
    Rico. DOI acknowledged that improving health care in the insular areas is
    a priority for both the agency and the insular areas and commented that
    the report identifies areas of disparity that may be reviewed for
    improvement. The three insular areas expressed concern that the report did
    not sufficiently address certain issues, such as implications of statutory
    limits on federal Medicaid spending and a more comprehensive analysis of
    local circumstances that affect the availability and costs of health care
    services. Where appropriate, we revised the report to include information
    about local circumstances that may affect the provision or cost of health
    care services. However, a more comprehensive analysis of insular areas'
    local contribution to total health care funding or their health care
    infrastructures was beyond the scope of this report.

                                       Background

    Five insular areas-American Samoa, Guam, CNMI in the Pacific Ocean, and
    the Commonwealth of Puerto Rico and the Virgin Islands in the Caribbean
    Sea-represent the largest insular areas of the United States. More than 4
    million U.S. citizens and nationals live in these insular areas under the
    sovereignty of the United States. These areas vary in terms of how they
    came under the sovereignty of the United States and also in terms of their
    demographics, such as median age and education levels. However, all of
    these insular areas participate in three major federal health care
    financing programs-Medicare, Medicaid, and SCHIP-and are eligible for a
    variety of federal health grant programs.

    Relationship to United States

    These five areas have come under the sovereignty of the United States in
    various ways. Puerto Rico and Guam were ceded to the United States by
    treaty at the end of the Spanish-American War in 1898, and the Virgin
    Islands were purchased from Denmark in 1917. Following the renunciation by
    Great Britain and Germany of their claims to what is now American Samoa
    and the cession of these islands by the Samoan chiefs to the United
    States, the Congress ratified the instruments ceding the islands to the
    United States in 1929. The United States was responsible for administering
    the Northern Mariana Islands after World War II under a United Nations
    trusteeship agreement. In 1976, a covenant between the United States and
    the Northern Marianas established the islands as a commonwealth under the
    sovereignty of the United States.

    Each of these areas has its own government and maintains a unique
    diplomatic relationship with the United States. General federal
    administrative responsibility for all insular areas but Puerto Rico is
    vested in the Department of the Interior. All departments, agencies, and
    officials of the executive branch treat Puerto Rico administratively "as
    if it were a state;" any matters concerning the fundamentals of the
    U.S.-Puerto Rican relationship are referred to the Office of the
    President.5

    People born in Puerto Rico, Guam, CNMI, or the Virgin Islands are American
    citizens; those born in American Samoa are American nationals. The
    residents of all five of these larger insular areas enjoy many of the
    rights enjoyed by U.S. citizens in the 50 states.6 But some rights that,
    under the Constitution, are reserved for citizens residing in the states,
    have not been extended to residents of the insular areas. For example,
    residents of the insular areas cannot vote in national elections, nor do
    they have voting representation in the final approval of legislation by
    the full Congress.

    5Memorandum of the President, Nov. 30, 1992, 57 Fed. Reg. 57,093 (1992).
    For a more thorough discussion of the applicability of the provisions of
    the Constitution to the five insular areas, see GAO, U.S. Insular Areas:
    Application of the U.S. Constitution, GAO/OGC-98-5 (Washington, D.C.: Nov.
    7, 1997).

    6The Territorial Clause of the Constitution authorizes the Congress to
    "make all needful Rules and Regulations respecting the Territory or other
    Property" of the United States. U.S. Const. art. IV, S: 3, cl. 2. Relying
    on the Territorial Clause, the Congress has enacted legislation making
    some provisions of the Constitution explicitly applicable in the insular
    areas. In addition to this congressional action, courts from time to time
    have ruled on the application of constitutional provisions to one or more
    of the insular areas.

    Characteristics of the Insular Areas

    The insular areas-particularly those in the Pacific-are geographically
    isolated from the United States. For example, Hawaii, which is the closest
    state to the Pacific insular areas, lies 3,300 to 3,700 miles away, or up
    to 13 hours by air.7 In addition, when compared to the U.S. states and
    each other, the insular areas have unique demographic characteristics. For
    example, with the exception of Puerto Rico, the populations in the insular
    areas are small relative to the states, and with the exception of Guam,
    they are significantly poorer. For example, four of the insular areas have
    median incomes that range from about $14,000 to about $25,000,
    considerably lower than the two poorest states, Mississippi and West
    Virginia.8 In addition, the populations in the Pacific island
    areas-American Samoa, CNMI, and Guam-are younger than those of the states
    and Puerto Rico and the Virgin Islands. For example, nearly half of the
    population of American Samoa is under the age of 19 compared to about 27
    percent in the United States. Similarly, while over 12 percent of the U.S.
    population is over 65, this age cohort represents only 1.5 to 5.3 percent
    of the population in the three Pacific insular areas. In terms of
    available health indicators, the differences are not as clear. While the
    insular areas have a higher mortality rate than the U.S. for certain
    diseases, such as diabetes, their mortality rates for cancer are lower.
    (See fig. 1.)

    7By comparison, the nearest state to Hawaii is California at 2,400 miles
    away. The distance from Anchorage, Alaska, to Seattle, Washington, is
    approximately 1,400 miles. Puerto Rico and the Virgin Islands are located
    in the Caribbean and are both about 1,000 miles from Florida.

    8The 1999 median household income for Mississippi and West Virginia was
    $31,330 and $29,696 respectively.

    Figure 1: Insular Areas and United States Demographics and Health
    Indicators

    *CDC determined that the data did not meet reliability standards because
    less than 20 cases were reported.

    Some insular areas do not have certain types of health care providers, and
    even when providers operate in these areas, their numbers per capita are
    lower, on average, than in the states. For example, most of the insular
    areas do not have Medicare-certified outpatient rehabilitation facilities,
    community mental health centers, or ambulatory surgical centers. In
    addition, none of the Pacific insular areas has a Medicare-certified,
    free-standing skilled nursing facility or a Medicare-certified hospice
    facility.9 Provider shortages in insular areas are often particularly
    acute for certain specialists.10 For example, although Guam has a cardiac
    catheterization lab, it is not used because there is no cardiac surgeon.
    Also, although its rate of diabetes death is high, American Samoa has no
    resident nephrologists. Instead, the nephrologist that serves the area is
    based at St. Francis Medical Center in Hawaii. When providers are present,
    the average number per capita is usually lower than in the states,
    although the differences between the states and Puerto Rico are less
    pronounced than the differences among the states and the other four
    insular areas. For example, the insular areas have significantly fewer
    skilled nursing facilities than do the states. One notable exception is
    that there are more end-stage renal facilities per capita in American
    Samoa, Guam, and the Virgin Islands when compared to the states, perhaps
    due to a higher prevalence of diabetes in these areas. (See table 1.)

    9Federally Qualified Health Centers (FQHC) are entities that receive
    federal grants as community health centers under section 330 of the Public
    Health Service Act and typically provide a variety of services, including
    physicians' services and services provided by physician assistants and
    nurse practitioners. (Codified at 42 U.S.C. S: 254b (2000)).

    10To varying degrees, each of the insular areas qualifies for one or more
    federal designations that are used to indicate areas with a shortage of
    providers-Health Professional Shortage Areas (HPSA), physician scarcity
    areas (PSA), and Medically Underserved Areas (MUA)-which may help them
    qualify for certain grants or for increased Medicare payments. A HPSA is
    computed based on factors including primary care physician ratio, poverty
    rates, and infant mortality rate, and is used as a qualifying criterion
    for certain federal grants and a 10 percent increase in payment rates for
    Medicare providers. A PSA is computed based on the ratio of primary care
    physicians to Medicare beneficiaries and is used to qualify Medicare
    providers for a 5 percent increase in payments. Providers in areas that
    are designated as both HPSA and PSA qualify for both payment increases. A
    MUA is computed based on factors including the ratio of primary care
    providers to the population, the percentage of the population over 65, and
    the poverty level, and is used as a qualifying criterion for certain
    federal grants.

    Table 1: Medicare-Certified Healthcare Providers and Hospital Beds in
    Insular Areas and States, January 2005

                                                       Average (four other
    Providers (per 100,000)             Puerto Rico      insular areas) States
    Ambulatory surgical center                  0.6                 0.3    1.5
    Comprehensive outpatient                   0.03                   0    0.2
    rehabilitation facility
    Community mental health center              0.2                   0    0.2
    End stage renal disease facility            1.0                 2.1    1.6
    Federally qualified health center           0.2                 0.8    1.0
    Home health agency                          1.2                 1.3    2.7
    Hospice                                     0.9                 0.3    0.9
    Skilled nursing facility                    0.2                 0.5    5.3
    Hospital beds                               321                 265    416

    Source: GAO analysis of Centers for Medicare & Medicaid Services (CMS)
    data.

    Note: Because Puerto Rico's population represents over 90 percent of the
    total population of the insular areas, we separately analyzed provider
    data from Puerto Rico and the other four insular areas to ensure that the
    higher prevalence of providers in Puerto Rico did not mask the more
    pronounced shortages of certain providers in the other insular areas.
    Provider figures for Guam, Puerto Rico, and the United States include some
    Department of Veterans Affairs and Department of Defense facilities.

    Federal Health Care Financing and Grant Programs

    Each insular area participates in three major federal health care
    financing programs-Medicare, Medicaid, and SCHIP. In addition, each area
    receives health-related grant funds from a variety of HHS agencies and
    four of the five areas receive health-related grant funds from DOI.

    Medicare covers a variety of health care services and items for more than
    41 million beneficiaries-individuals who are 65 or older, have end-stage
    renal disease (ESRD), or are disabled-including about 600,000 in the
    insular areas. Medicare includes separate components or "parts" that cover
    different types of services. Individuals who are eligible for Medicare
    automatically receive Hospital Insurance, known as Part A, which helps pay
    for inpatient hospital care, skilled nursing facility services following a
    hospital stay, certain home health services, and hospice care.
    Beneficiaries pay no premiums for Part A but are liable for required
    deductibles, coinsurance, and copayments. Medicare Part A is funded
    through the Medicare trust fund, which is financed by state and insular
    area employer and employee contributions. Medicare Part B Supplemental
    Medical Insurance helps pay for physician, outpatient hospital care,
    laboratory, and other services. Beneficiaries who opt for Part B coverage
    must pay a premium-about $78 per month in 2005-and are responsible for
    deductibles, coinsurance, and copayments.11

    Medicare's new prescription drug program, Part D, was authorized in
    December 2003, and the interim phase of the program began in June 2004.
    Under the interim phase, all beneficiaries in the states and the insular
    areas who choose to enroll pay a fee to receive a discount drug card, with
    an expected discount of 10 to 15 percent on covered drugs.12 In addition,
    certain low-income beneficiaries in the states are also entitled to
    assistance to subsidize drug costs in 2004 and 2005, and the amount of
    assistance available to each individual is generally $600 per year. Under
    the permanent program, to be implemented in January 2006, beneficiaries in
    the states and the insular areas can choose to enroll in an optional
    prescription drug coverage program subject to an estimated average monthly
    premium of about $32. Like the interim program, certain low-income
    participants in the states will also receive subsidies to lower their
    monthly premiums, deductibles, and copayments. To help offset the costs of
    providing coverage to individuals eligible for both Medicare and Medicaid,
    states must pay the federal government an amount that is roughly equal to
    the amount they would have paid to provide outpatient prescription drug
    coverage to elderly and disabled individuals previously eligible for
    prescription drug benefits under their Medicaid programs. Part D is
    otherwise financed through beneficiary premiums and general revenues.

    Medicaid operates as a joint federal-state program to finance health care
    coverage for certain categories of low-income individuals, including
    children, pregnant women, and individuals who are elderly or disabled.
    Although state and insular area participation in Medicaid is voluntary,
    all states and insular areas currently participate in the program. To
    obtain federal matching funds, states and insular areas generally must
    comply with certain minimum federal requirements related to services and
    eligibility, including income and resource requirements. Within these
    broad federal guidelines and under federally approved plans, states and
    insular areas have great discretion in setting eligibility standards and
    provider payment rates; determining the amount, scope, and duration of
    covered benefits; and developing their own administrative structures. For
    example, while federal law requires Medicaid programs to offer coverage to
    children age 5 and under if their family incomes are at or below 133
    percent of the federal poverty level and to children ages 6 to 18 if their
    family incomes are at or below the federal poverty level, a state may
    decide to increase the thresholds in order to offer coverage to more
    people. As a result, Medicaid essentially operates as 56 separate
    programs: 1 in each of the 50 states, the District of Columbia, and each
    of the 5 largest insular areas. The federal share of states' Medicaid
    programs, the Federal Medical Assistance Percentage (FMAP), is determined
    based on state per capita income in relation to the national per capita
    income, with poorer states receiving higher federal matching rates than
    wealthier states. In 2005, the FMAP ranged from 50 percent in wealthier
    states, such as New York and Connecticut, to about 77 percent in
    Mississippi.

    11Traditionally, Medicare has paid for covered services on a
    fee-for-service basis. Medicare Advantage, known as Part C, encompasses
    private managed care plans that provide Medicare-covered benefits to
    enrollees. Beneficiaries who opt for Medicare Advantage plans must pay the
    Part B premium.

    12This fee is waived for certain low-income beneficiaries in the states.
    For more details on the savings provided by the discount drug card, see
    GAO, Prescription Drug Discount Cards: Savings Depend on Pharmacy and Type
    of Card Used, GAO-03-912 (Washington, D.C.: Sept. 3, 2003).

    In 1997, the Congress enacted SCHIP to provide health care coverage to
    uninsured, low-income children living in families whose incomes exceed the
    eligibility limits for Medicaid.13 States and insular areas have three
    options in designing SCHIP: expand their Medicaid programs, develop
    separate child health programs that function independently of the Medicaid
    programs, or do a combination of both. States that implement SCHIP by
    expanding Medicaid must use their Medicaid enrollment and benefit
    structure. Although SCHIP is generally targeted to families with incomes
    at or below 200 percent of the federal poverty level, each state or
    insular area may set its own income eligibility limits within certain
    guidelines. The FMAP for SCHIP ranges from 65 percent for the wealthiest
    states to about 84 percent for the poorest states.

    Various HHS agencies also distribute health care grants to the insular
    areas. These grant funds-awarded by agencies such as the Centers for
    Disease Control and Prevention (CDC), the Health Resources and Services
    Administration (HRSA), and the Substance Abuse and Mental Health Services
    Administration (SAMHSA)-may be used to support health care services and
    outreach programs and are generally awarded to public health agencies.
    Similarly, DOI's Office of Insular Affairs (DOI-OIA) funds health
    infrastructure and provides technical assistance to all insular areas but
    Puerto Rico. DOI also provides the Pacific insular areas with funds to
    offset the cost of providing services to residents of the freely
    associated states.14

    13The Balanced Budget Act of 1997 established SCHIP as Title XXI of the
    Social Security Act. Pub. L. No. 105-33, S: 4901, 111 Stat. 251, 552-574.
    SCHIP is set out at 42 U.S.C. S: 1397aa et seq. (2000).

          Multiple Federal Agencies Fund Health Care Services in Insular Areas

    Each of the five insular areas receives funding for health care services
    from multiple federal sources. Federal health care financing
    programs-Medicare, Medicaid, and SCHIP-comprised 88 percent of aggregate
    federal health care funding in the insular areas in fiscal year 2003, with
    Medicare representing the single largest funding source (76 percent). The
    areas also received a significant amount of health care grant funding from
    certain HHS agencies and DOI. However, significant variation exists among
    the insular areas in terms of the distribution of funds by source, largely
    due to the number of Medicare beneficiaries residing in each area. For
    example, the Pacific insular areas have relatively young populations, and
    therefore receive less Medicare funding compared to other sources. From
    fiscal years 1999 through 2003, total federal health care funding in the
    insular areas increased by 37 percent, although funding increases varied
    considerably among the insular areas.

    Medicare Represents the Majority of Federal Health Care Spending in Insular
    Areas

    Federal health care financing programs-primarily Medicare-comprised the
    vast majority of the $2.2 billion in total federal health care spending in
    the five insular areas in fiscal year 2003.15 Medicare funds alone, which
    are generally paid directly to health care providers for services to
    beneficiaries rather than directly to the insular area government,
    represented 76 percent-about $1.68 billion-of the aggregate funding to the
    insular areas. (See fig. 2.) The Medicaid program represented 10 percent
    of the total funding in the insular areas, about $226 million, and funding
    for the SCHIP program totaled about $33 million, 2 percent of total health
    care funding in these areas. Unlike Medicare, Medicaid and SCHIP funds are
    provided directly to the insular area governments.

    14Through agreements with the U.S. government, residents of the freely
    associated states-the Federated States of Micronesia, the Republic of the
    Marshall Islands, and the Republic of Palau-may enter the United States to
    live and work without limitations on their length of stay. Visitors from
    these areas are eligible for public services, such as health care and
    education.

    15The estimate for total federal health spending in the insular areas is
    limited to spending from key sources, as identified in appendix II.

    Figure 2: Key Federal Health Care Funding Sources for Five Insular Areas,
    Fiscal Year 2003

    In addition to the federal health care financing programs, three HHS
    agencies-CDC, HRSA, and SAMHSA-provided health-related grants to public
    and private entities in the insular areas. These grants represented
    approximately 11 percent, more than $250 million, of total federal health
    care funding in the insular areas.16 In 2003, these agencies awarded
    grants from 87 different programs to the insular areas, with individual
    awards ranging from over $9,000 to nearly $39 million. The funds may be
    used to support health care services and outreach programs. For example,
    HRSA provided grant funding to the insular areas for programs related to
    health care resources and services, including community health centers,
    human immunodeficiency virus (HIV) care and treatment, maternal and child
    health care, and bioterrorism preparedness.

    16Other HHS agencies, such as the Agency for Healthcare Research and
    Quality (AHRQ), CMS, and the National Institutes of Health (NIH), also
    awarded grants to the insular areas during this time. However, we did not
    include grants from these agencies for a number of reasons. For example,
    grants from AHRQ and NIH were targeted exclusively to research. Grants
    from CMS, apart from Medicaid and SCHIP funding, represented less than 1
    percent of HHS grant funding to the insular areas from fiscal years 1999
    through 2003.

    DOI also provided a number of health-related grants to the four insular
    areas that were eligible for these funds.17 In fiscal year 2003, DOI
    grants to the insular areas totaled about $13.6 million, 1 percent of
    federal health care funding in the insular areas. The grants had multiple
    purposes, including offsetting the costs of providing care to individuals
    from the freely associated states and supporting health-care-related
    activities, such as facility construction and information technology.

    From 1999 through 2003, total federal health care funding in the insular
    areas increased 37 percent-from over $1.6 billion to over $2.2 billion.
    During this time, funding from all sources but SCHIP increased. For
    example, total Medicare funding increased by 41 percent, Medicaid by 21
    percent, HHS grants by 73 percent, and DOI by 11 percent. Although funds
    from HHS had the largest percentage increase over this time, the biggest
    increase in dollars was seen in Medicare, with an increase of over $485
    million.

    Health Care Grants Represent Smaller Share of Federal Funding in Puerto Rico
    Compared to Other Insular Areas

    Since Puerto Rico represents about 91 percent of total insular area
    population, the aggregate spending numbers obscure the often significant
    variation that exists in the sources of funding among the insular areas.
    For example, similar to aggregate numbers, Medicare spending represented
    78 percent of spending in Puerto Rico in fiscal year 2003, whereas the
    Medicare share in the other areas was smaller, ranging from 29 percent in
    American Samoa to 63 percent in the Virgin Islands. (See fig. 3.) This
    variation is influenced by differences in the share of Medicare
    beneficiaries residing in each area relative to its overall population.
    For example, Medicare as a share of total spending was largest in both
    Puerto Rico and the Virgin Islands, whose populations of individuals 65 or
    older are comparatively larger than that of the Pacific insular areas and
    are more closely aligned with the U.S. average. Differences in the other
    federal health financing programs also varied, but to a lesser extent,
    with Medicaid and SCHIP funding combined representing between 12 and 21
    percent of health care funding in each of the areas.

    17DOI does not have jurisdiction over Puerto Rico; therefore, the island
    is not eligible for DOI grants.

    Figure 3: Key Federal Health Care Funding Sources by Insular Area, Fiscal
    Year 2003

    Note: Figures may not total to 100 percent due to rounding.

    In terms of health care grants from both HHS and DOI, significant
    variation existed in the share of health care funding they represented
    among the insular areas. For example, in fiscal year 2003, these grants
    represented 11 percent of total health care funding in Puerto Rico;
    however, they represented 25 to 56 percent of total funding in the other
    insular areas. Variation among the insular areas in terms of DOI health
    grants as a share of total federal funding was more pronounced than that
    of HHS grants during this time. While HHS grants represented roughly the
    same share of total health care funding in each insular area except Puerto
    Rico, DOI grants represented 2 percent of total health care funding in
    CNMI, 7 percent in Guam, and 37 percent in American Samoa. The Virgin
    Islands, although eligible for these funds, received none in fiscal year
    2003.

    The availability of grant funds, and therefore the share they represented
    of health care funding, has fluctuated considerably in recent years. For
    example, DOI grants to CNMI, which represented 2 percent of total health
    care funds in 1999, increased to 26 percent of total funding in 2001 and
    fell back to 2 percent in 2003.18 Similarly, HHS grants to the Virgin
    Islands represented 13 percent of total federal health funding in 1999,
    but grew to nearly one-third of total spending in 2002. (See app. II for a
    detailed description of trends in federal funding sources over time for
    each insular area.) Such year-to-year variability can make it difficult to
    establish long-range budgets and to develop, manage, and staff programs
    funded by grant awards. In addition, according to insular area officials,
    capturing and retaining HHS grant funds can be labor intensive. For
    example, for most of the grants we reviewed, agencies require insular
    areas and states to complete comprehensive applications with detailed
    budgets and program plans. Agencies may also require periodic data
    reporting or local cost sharing.

    When considered individually, each of the five insular areas experienced
    an overall increase in total federal health care funding from 1999 through
    2003. Increases, however, varied considerably among the areas, ranging
    from 36 percent in Puerto Rico to 81 percent in CNMI.19 The variation was
    largely due to differences in the annual increases specific to Medicare
    and HHS grant awards. For example, Medicare funding increased in all
    areas, but most dramatically in CNMI, largely due to changes in the way
    its hospital reported costs to CMS. Similarly, total HHS grant funding
    increased in each area, although increases were more pronounced in certain
    areas, such as American Samoa and Guam, due in part to the introduction of
    new grants related to bioterrorism.

    18DOI grants are generally large awards of short duration-1 to 5 years-and
    targeted to address specific needs, thus creating significant year-to-year
    fluctuation. For example, the large increase in CNMI in 2001 was due to an
    influx of funding earmarked for specific construction projects.

    19By comparison, federal health care funding in the states increased by
    39.5 percent from fiscal years 1999 through 2003.

    Notable Differences Exist in Methods Used to Allocate Federal Health Care Funds
                      in the Insular Areas Compared to the States

    The methods used to allocate federal health care funds in the insular
    areas differ, in some cases, from those used in the states. Although
    Medicare payment policy does not differ for certain providers, such as
    physicians, notable differences exist in the policies used to pay
    hospitals and for the new Part D prescription drug benefit. Similarly,
    differences exist in how the Medicaid and SCHIP programs are funded in the
    insular areas. Unlike in the states, the federal share of Medicaid and
    SCHIP expenditures in the insular areas-the FMAP-is limited by statute,
    and federal Medicaid funding is capped. In addition, allocation methods
    used for certain HHS grants establish separate rules for the insular
    areas.

    Medicare Funds Are Allocated Differently for Parts A and D

    The Medicare program operates similarly in the insular areas and the
    states in terms of eligibility for the program and beneficiaries'
    entitlement to benefits. For example, like their counterparts in the
    states, insular area residents who are eligible for Medicare are
    automatically enrolled in Part A and do not pay premiums for this
    coverage. Likewise, the policies used to determine payment for physicians
    under Part B are essentially the same. However, significant differences
    exist between the insular areas and the states regarding the methods used
    to determine payments to hospitals and the funding of the Medicare Part D
    benefit.

    Unlike the states and Puerto Rico, where hospitals are paid under
    Medicare's PPS, hospitals in the other insular areas are paid based on
    their costs.20 There are differences in the cost-based payment methods
    used in these areas. The hospitals in Guam and the Virgin Islands are paid
    using the methodology established under the Tax Equity and Fiscal
    Responsibility Act of 1982 (TEFRA) for classes of hospitals not included
    in the PPS. Payments to these hospitals are the lesser of their average
    cost per discharge or a specific target amount.21 Hospitals in American
    Samoa and CNMI are also paid based on their costs; however, they are not
    subject to target amounts or a national cap.22 We did not evaluate how
    payments under these cost-based methods compare to PPS payments to
    hospitals in the states.

    20When Medicare's inpatient PPS was implemented in 1984, it did not
    include hospitals in the insular areas. Hospitals in Puerto Rico lobbied
    to be included in the PPS and were transitioned into the system in 1987.

    21TEFRA established this payment methodology for classes of hospitals not
    included in PPS. The target amount is the PPS-exempt provider's
    Medicare-allowable costs per patient stay in a designated base year,
    inflated to the current year by an annual update factor. Pub. L. No.
    97-248, S: 101(a)(1), 96 Stat. 324, 331-333.

    Although hospitals in Puerto Rico are paid under the PPS system, the
    formula that CMS uses to reimburse hospitals in Puerto Rico is distinct
    from that used for hospitals in the states. Each of the Puerto Rico PPS
    payment rates is a "blended rate," which is comprised of 75 percent of a
    national rate used for hospitals in the states and 25 percent of a local
    rate, which is lower than the national rate. The rates are further
    adjusted for each hospital using national and local cost factors. These
    adjustments account for the lower costs of providing hospital services in
    Puerto Rico compared to the states and for differing costs among hospitals
    within Puerto Rico.

    Differences also exist between the insular areas and the states regarding
    the methods used to fund Medicare's new Part D prescription drug benefit
    for low-income beneficiaries. For example, during the interim phase of the
    Part D program, certain low-income beneficiaries in the states who
    participate in the program are entitled to assistance to subsidize drug
    costs in 2004 and 2005, and the amount of assistance available to each
    individual is generally $600 per year. In contrast, low-income Medicare
    beneficiaries in the insular areas do not receive this direct subsidy.
    Instead, CMS provided each insular area with an allotment, which the
    insular areas typically used to subsidize prescription drug coverage to
    certain low-income Medicare beneficiaries.23 Similarly, although the
    permanent Part D program, scheduled to begin in January 2006, allows for
    identical coverage for most beneficiaries in the insular areas and states,
    however, low-income beneficiaries in the insular areas will not receive
    direct benefits to help subsidize their premiums, deductibles, and
    copayments available to Medicare and Medicaid dual eligible beneficiaries
    in the states. Instead, CMS will again provide each of the insular areas
    an allotment, which they will use to administer the program to low-income
    beneficiaries based on a locally-developed plan. The extent to which the
    benefits in the insular areas will mirror the federal program is not clear
    as none of the insular areas has finalized its plan for the administration
    of this program.

    22Hospitals in American Samoa and CNMI are not subject to the TEFRA
    payment methodology because they do not have the capacity to complete the
    full cost report required by this methodology.

    23The Medicare Prescription Drug, Improvement, and Modernization Act of
    2003 (MMA) provided the insular areas with $35 million, which was to be
    allocated among them based on their Medicare enrollment as of July 1,
    2003, to assist Part D eligible individuals (as outlined in 1935(e)) with
    the purchase of prescription drugs. Pub. L. No. 108-173, S:101, 117 Stat.
    2066, 2146 (amending 42 U.S.C. S: 1395w-141(j)). CMS provides these funds
    to the insular areas in the form of an enhanced allotment to their
    Medicaid program funds.

    Medicaid and SCHIP Federal Funding to the Insular Areas Is Limited by Statute

    Like the states, each of the insular areas receives federal funding from
    the Medicaid and SCHIP programs. However, how federal funds for these
    programs are allocated to the insular areas differs, often significantly,
    from the states, and these differences are statutory in nature. For
    example, recognizing that states vary in their capacity to pay for
    Medicaid expenses, the statutory formula used to calculate the federal
    share of each state's expenditures-the FMAP-is based on a state's per
    capita income in relation to the national average per capita income. The
    FMAP ranges from 50 to no more than 83 percent of Medicaid expenditures,
    with poorer states receiving a higher federal matching rate than wealthier
    states.24 In contrast, the FMAP for the insular areas does not recognize
    their capacity to pay for Medicaid expenses; instead, the FMAP is set at
    the lowest rate-50 percent-although all of the insular areas, except Guam,
    had a lower median household income than the poorest U.S. state.

    In addition, federal Medicaid funding in states is not limited, provided
    the states contribute their share of program expenditures for services
    provided. In contrast, federal Medicaid funding in each insular area is
    subject to a statutory cap, which is increased annually by the percentage
    increase in the medical care component of the Consumer Price Index for all
    urban consumers, which averaged about 4 percent per year from 1999 through
    2003.25 All five of the insular areas typically exhaust the Medicaid cap
    prior to the end of the fiscal year, and once the cap is exhausted, the
    insular areas assume the full costs of Medicaid.26 Due to insufficient
    local funds, once the Medicaid cap is met, some insular areas may suspend
    services or cease payments to providers until the next fiscal year.27

    24Alaska and the District of Columbia have matching percentages that are
    higher than what would be calculated under the FMAP formula. Alaska's
    higher matching rate, which is about 58 percent, was authorized by the
    Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of
    2000. Pub. L. No. 106-554, App. F, S: 706, 114 Stat. 2763, 2763A-577. The
    District of Columbia's higher matching rate, which is currently 70
    percent, was authorized by the Balanced Budget Act of 1997. Pub. L. No.
    105-33, S: 4725 and tit. XI, 111 Stat. 251, 518 and 712.

    2542 U.S.C. S: 1308(a), (f) (2000). As a result, payments in insular areas
    increased about 21 percent during fiscal years 1999 through 2003, while
    the increase in the states, bound only by state contributions to the
    Medicaid program, was about 49 percent.

    Federal statute and the Medicaid cap also affect the ability of insular
    areas to access certain sources of Medicaid funding. For example, insular
    areas are not included in the federal legislation that established the
    Medicaid disproportionate share hospital (DSH) program, which provides
    supplementary payments to hospitals that serve a large number of Medicaid
    and low-income uninsured patients.28 DSH is a key source of Medicaid
    funding for "safety net" hospitals in the states and totaled about 5
    percent of all federal Medicaid funding to the states in fiscal year 2003.
    In addition, although states and the insular areas are eligible for other
    sources of Medicaid federal matching funds, CMS officials said the federal
    cap prevents the insular areas from accessing these funds. For example,
    none of the insular areas accessed available funding for the development
    of immunization registries or for the update of data systems to comply
    with provisions of the Health Insurance Portability and Accountability Act
    of 1996 (HIPAA) because funds spent on these programs would count against
    the cap and thereby divert funds from the direct provision of care. For
    this same reason, none of the insular areas participates in the optional
    Breast and Cervical Cancer Prevention and Treatment program, which allows
    for expanded eligibility and an enhanced Medicaid match rate for treatment
    provided to women diagnosed with these cancers. All 50 states and the
    District of Columbia have opted to cover women under this program.

    Whereas fundamental differences exist between insular areas and the states
    in terms of the allocation of federal Medicaid funds, the differences that
    exist in the funding of their SCHIP programs are less pronounced. For
    example, unlike Medicaid, where federal funding to the states is
    open-ended, annual SCHIP allotments to both the states and the insular
    areas are set in statute and function like a cap. The statute specified a
    total annual allotment for the states and insular areas for fiscal years
    1998 through 2007, with the insular areas receiving 0.25 percent of the
    annual nationwide SCHIP allotment, which is divided among them based on
    statutorily set proportions.29 The remainder of the allotment is allocated
    to states based on the population of low-income uninsured children. The
    Congress awarded additional funds to insular areas for fiscal years 1999
    through 2007 which, when combined with the original allotment, increased
    their portion of total SCHIP funding.30

    26For example, a CNMI official told us that a single patient requiring
    expensive off-island care, such as a baby with congenital heart disease or
    a child with leukemia, can consume a large portion of the available
    federal Medicaid contribution.

    27For example, CMS officials told us that each year, the Virgin Islands
    Medicaid program becomes further in arrears with providers and must use
    current cap allotments to cover past due payments to providers.

    28See 42 U. S. C. S: 1396r-4 (2000). Similarly, the Social Security Act
    provides for a shorter extension of transitional medical assistance
    eligibility for Medicaid beneficiaries who lose eligibility due to
    increased resources or hours of work in the insular areas, as opposed to
    the states. In these circumstances, beneficiaries in the insular areas are
    provided up to a 4 month extension of eligibility (42 U.S.C. S:
    1396a(e)(1)(A)) while beneficiaries in the states are provided up to a 12
    month extension of eligibility (42 U.S.C. S: 1396r-6(a), (b)).

    Although SCHIP funding is limited for both states and insular areas, the
    FMAP for SCHIP, similar to Medicaid, does not consider the capacity of
    insular areas to pay for services. The statute provides for an "enhanced"
    FMAP, which is equal to each state and insular area's Medicaid matching
    rate plus 30 percent of the difference between the Medicaid match and 100
    percent, not to exceed a federal share of 85 percent. Thus, like states
    that receive the minimum 50 percent Medicaid match, the insular areas
    receive the minimum 65 percent match available under SCHIP.

    Certain HHS Grants Are Allocated Differently

    Each HHS grant has a distinct funding allocation method, and although
    certain grants use identical allocation methods for the states and the
    insular areas, others treat some or all of the insular areas differently.
    For example, the method used to calculate HRSA's Consolidated Health
    Center grants, which are competitive awards made to individual qualifying
    health centers based upon proposed budgets and their capacity to compete
    for funds, is the same in the states as in the insular areas. In contrast,
    different allocation rates are used to determine funding levels for some
    insular areas under HRSA's Ryan White Title II HIV Care Formula grants to
    States and CDC's Public Health Preparedness and Response for Bioterrorism
    grant. The allocation formulas for these grants have two components-a base
    component, which is a set dollar amount, and a variable component, which
    is based on population or other factors. For example, funding levels for
    the Ryan White Title II grant are based largely on the prevalence of AIDS
    in individual states as well as in Puerto Rico and the Virgin Islands. In
    contrast, funding of this grant for the Pacific insular areas does not
    consider the prevalence of AIDS; instead, these insular areas receive a
    lower, standard base rate.31 Similarly, when compared to the states, the
    base and variable components for the CDC's Public Health Preparedness and
    Response to Bioterrorism grant is smaller for each of the insular areas
    except Puerto Rico. (See table 2.)

    29The disbursement proportions for the SCHIP allotment for insular areas
    are as follows: Puerto Rico-91.6 percent; Guam-3.5 percent; the Virgin
    Islands-2.6 percent; American Samoa-1.2 percent; and CNMI-1.1 percent.

    30As a result, the insular areas received about 1 percent of the total
    SCHIP allotment. The Congress did not provide similar, supplemental SCHIP
    funds to states. In addition, for fiscal years 1998 through 2002, all the
    insular areas also received redistribution funds, which are available
    SCHIP funds not expended by states within the prior 3-year period. Insular
    areas are eligible for 1.05 percent of the total redistribution funds,
    which are allocated among them according to the percentages of the initial
    allotment. The amount of SCHIP funds available for redistribution has
    declined over time. For example, while these funds increased the insular
    areas' share of the total SCHIP allotment by 0.7 percent in 1999, they
    added only about 0.2 percent of the total SCHIP allotment in 2002.

    Table 2: Formula Components for CDC's Public Health Preparedness and
    Response for Bioterrorism Grant

                                                               Variable component
    Grant program and recipients           Base component (dollars per person)
    Public Health Preparedness and
    Response for Bioterrorism
    All states and Puerto Rico             $3.915 million                $2.03
    Washington, D.C.                           10 million                 2.03
    Chicago, Los Angeles County, and New
    York City                                   5 million                 2.03
    American Samoa, CNMI, Guam, the Virgin
    Islands, and the freely associated
    states                                        391,500                 0.79

    Source: CDC.

    CDC's Immunization and Vaccines for Children grant provides another
    example of where the method used to allocate funds differs in the insular
    areas compared to the states. In this case, grant amounts to the states
    are based on certain rules that consider characteristics of the population
    as well as funding history. In contrast, these rules are not used to
    determine the grant amounts for insular areas. Instead, the award amounts
    to insular areas are determined at the discretion of the agency's project
    officer.32

    31The Pacific Insular areas receive a base amount of $50,000 while Puerto
    Rico and the Virgin Islands are treated like states in the determination
    of grant funding. States with more than 90 living AIDS cases receive a
    base amount of $500,000; those with 90 or fewer AIDS cases receive a base
    rate of $200,000.

     Multiple Factors Explain Differences in Individual Spending Levels in Insular
                              Areas Compared to the States

    Although most of the key sources of health care funding available in the
    insular areas are also available in the states, individual spending levels
    are often lower in the insular areas. For example, Medicare spending per
    beneficiary is significantly lower in the insular areas, due in part to
    differences in methods used to pay for certain services and in
    beneficiaries' utilization of services. In addition, statutory limits on
    Medicaid funding in the insular areas contribute to lower per capita
    spending. In light of these statutory limits, CMS does not hold insular
    areas accountable for providing all the mandatory Medicaid services,
    including nursing home care, which makes up nearly a third of Medicaid
    expenditures in the states. In contrast, HHS grant funding per capita is
    higher in the insular areas than in the states, due, in part, to
    allocation formulas that result in higher payments to them as well as to
    states with smaller populations.

    Lower Medicare Spending Per Beneficiary Explained by Payment Policy Differences
    and Lower Utilization

    As in the insular areas, Medicare comprised the majority-over 60
    percent-of federal health care funding in the states in fiscal year 2003
    and, with limited exceptions, the program operates largely the same in the
    insular areas as in the states. However, Medicare spending per beneficiary
    in the insular areas in fiscal year 2003 was less than half of Medicare
    spending in the states-about $2,800 on average in the insular areas
    compared to $6,800 in the states.33 (See fig. 4.)

    32HHS officials stated that the Vaccines for Children grant is allocated
    differently to the insular areas because their public health
    infrastructures are so much different than the states. Therefore, the
    agency tailors funding to these areas to ensure that the program fulfills
    its statutory requirement of providing vaccines to eligible children.

    33A small portion of the gap is attributable to cost of living differences
    in the insular areas compared to the states. However, even when adjusting
    Medicare payment rates to account for differences in the cost of providing
    health care in different locations, the gap in per beneficiary spending in
    the states versus the insular areas remained significant.

    Figure 4: Medicare Spending Per Beneficiary in Five Insular Areas Compared
    to the States, Fiscal Year 2003

    Differences in payment policy help explain some of the disparity in
    Medicare per beneficiary spending in the insular areas compared to the
    states. For example, the PPS methodology used to determine payments to
    hospitals in Puerto Rico, which includes a lower local component,
    contributes to lower payments. Similarly, the method used to determine
    supplemental PPS payments for Medicare's DSH program results in lower
    payments to hospitals in Puerto Rico compared to the states.34 To qualify
    for Medicare DSH payments, at least 15 percent of a hospital's patient
    days must be attributable to certain patients receiving either
    Supplemental Security Income (SSI) or Medicaid benefits (which combined
    serve as a measure of the number of low-income patients treated by any
    single hospital). Further, the actual DSH payment is based on the number
    of patient days attributable to these low-income patients. Because
    residents of Puerto Rico are statutorily ineligible for SSI payments
    regardless of whether or not they meet the income thresholds required for
    SSI eligibility, only SSI patients visiting from the states are included
    in the counts for DSH. We were informed that, as a result, it is more
    difficult for hospitals in Puerto Rico to meet the 15 percent threshold,
    and those hospitals meeting the threshold receive limited DSH payments
    because the low-income counts do not include some poor patients.

    34The Medicare DSH program provides supplementary payments to hospitals
    that serve a large number of low-income and uninsured patients. DSH
    payments are only available to hospitals that are paid based on the PPS;
    therefore, hospitals in the other insular areas are not eligible for these
    payments.

    Whether cost-based methods used to pay hospitals in the other insular
    areas similarly contribute to lower per beneficiary payments relative to
    the states is less clear. However, some of the variation in spending per
    beneficiary among the insular areas is likely due to the fact that
    statutory limits on Medicare payments apply to hospitals in some, but not
    all, insular areas. For example, hospital payments in CNMI are based on
    what the hospital claims as its actual costs. These costs are not limited,
    are not audited, and have increased dramatically in recent years. In
    contrast, under TEFRA, payments to hospitals in the Virgin Islands are
    limited, and according to officials with the Medicare fiscal intermediary
    serving the Virgin Islands, these payments may not be covering costs.35
    The different methods used to pay these hospitals likely explain, in part,
    why Medicare payments per beneficiary in CNMI are significantly higher
    than in the Virgin Islands.

    Another factor that helps explain lower Medicare per beneficiary spending
    in the insular areas is the extent to which Medicare beneficiaries in the
    insular areas use certain covered services. For example, an analysis of
    Medicare utilization rates for major medical procedures36 shows that, on
    average, beneficiaries in the insular areas received far fewer of these
    services than beneficiaries in the states-rates in the insular areas
    ranged from 144 to 203 per thousand beneficiaries compared to 297 per
    thousand in the states. Rates were similarly low in Hawaii (172 per
    thousand), but not in other remote or poor states studied. (See fig. 5).

    35Under TEFRA, the payments to hospitals in the Virgin Islands are the
    Medicare-allowable costs per patient stay in a designated base year,
    inflated to the current year by an annual update factor. A fiscal
    intermediary is a private company that has a contract with the Medicare
    program to pay Part A and some Part B bills. Cooperativa de Seguros de
    Vida de Puerto Rico, the fiscal intermediary serving the Virgin Islands,
    believes that the base-year cost estimates for facilities in the Virgin
    Islands may be understated, leading to costs that exceed Medicare
    payments.

    36For this analysis, major medical procedures are services classified as
    such by the Berenson-Eggers Type of Service codes, which were developed by
    CMS primarily for analyzing growth in Medicare expenditures for services,
    including major cardiovascular procedures such as angioplasty, pacemaker
    insertion, and bypass surgery.

    Figure 5: Number of Medicare Part B Major Medical Procedures Per 1,000
    Beneficiaries in Selected States and Insular Areas, Calendar Year 2003

    Notes: Utilization rates in CNMI may be understated due to hospital
    billing practices. According to CNMI officials, physicians in CNMI do not
    separately bill Medicare for services they provide in the hospital.
    Instead, the hospital captures these costs in its hospital cost report.

    States included in the analysis were selected based on their geographic
    remoteness or their lower income levels relative to the U.S. average.

    Several factors likely contribute to lower Medicare utilization, and
    therefore per beneficiary spending, in the insular areas. For example,
    limited access to certain specialty services, a lack of Medicare-certified
    physicians, and local cultural differences may contribute to lower
    Medicare utilization rates. A CMS official serving the Pacific insular
    areas reported that certain specialty services, such as chemotherapy, are
    not available in these areas, and it is often too expensive for
    beneficiaries to travel to receive such services off island. Lower
    utilization rates of physician services in American Samoa could also be
    attributable, in part, to a lack of Medicare-certified providers.
    According to a CMS official, many medical professionals in American Samoa
    who provide services to residents are not certified to receive payments
    under Medicare.37 Cultural differences may also contribute to lower
    utilization of Medicare services in the insular areas. For example, a CMS
    official said that some American Samoans are less likely to seek care in
    Medicare-certified facilities. Similarly, reliance on nursing facilities
    may be less prevalent in certain insular areas, as families assume primary
    care responsibility for individuals who might commonly receive care in
    these facilities in the states.

    Another factor contributing to lower per beneficiary spending is that the
    percentage of Medicare beneficiaries enrolled in Part B is significantly
    lower in most of the insular areas than in the states. On average, in 2003
    about 77 percent of Medicare beneficiaries in the insular areas opted for
    Part B, compared to 95 percent in the states.38 Insular area officials
    provided a number of reasons to explain the enrollment differences. For
    example, Medicare beneficiaries in the states and all insular areas but
    Puerto Rico are automatically enrolled in Part B, typically around their
    65th birthday.39 However, some insular area officials told us that their
    residents opt out of Part B coverage because they cannot afford its
    monthly premium, which was about $78 in 2005.40, 41 Also, beneficiaries in
    Puerto Rico must go to a local Social Security office to enroll in Part
    B,42 and according to CMS officials, this policy leads to lower
    enrollment. Similarly, American Samoa officials said that some of their
    Medicare beneficiaries may lack the incentive to purchase Part B coverage
    as they have access to free health coverage through the local hospital.43

    37Medicare does not pay for services provided by noncertified providers
    and such services would not be captured in the Medicare data we analyzed.

    38The percentage of Medicare beneficiaries enrolled in Part B in July 2003
    ranged from 68 to 79 percent in all insular areas but the Virgin Islands,
    where enrollment was 91 percent.

    39Approximately 3 months prior to their 65th birthdays, eligible
    individuals receive Part A enrollment information and an enrollment card
    for Part B. To opt out of Part B coverage, individuals must return the
    Part B card to the CMS contractor handling claims for services in their
    area.

    Medicaid and SCHIP Individual Spending Levels in Insular Areas are Lower;
    Minimum Program Requirements Are Not Strictly Enforced

    Federal Medicaid spending per capita was also lower in the insular areas
    compared to the states. In fiscal year 2003, federal Medicaid per capita
    spending in the states averaged $565 compared to between $33 and $65 for
    the insular areas. Poorer states with higher federal matching rates
    received as much as $813 in federal Medicaid per capita spending-more than
    12 times the amount received by any insular area.44 (See fig. 6.)

    40Individuals who do not enroll in Part B when they are first eligible may
    sign up for coverage during specified open enrollment periods. However, in
    most cases, the Part B premium increases 10 percent for each 12-month
    period that an individual could have had Part B but did not select it.

    41State Medicaid agencies provide cost-sharing assistance to certain
    low-income Medicare beneficiaries. However, because of the statutory cap
    on federal Medicaid funding, most of the insular areas do not participate
    in these assistance programs, although some insular areas pay for the Part
    B premiums for select Medicare beneficiaries.

    42The 1972 amendments to the Social Security Act, which created automatic
    enrollment procedures for Part B, specifically exempted residents of
    Puerto Rico. 42 U.S.C. S: 1395p(f),(g).

    43Local law requires American Samoa to provide health care free of cost to
    all residents, which is funded by both federal and local sources.
    According to an American Samoa official, this law precludes the government
    owned and operated hospital from charging patients adequate physician fees
    and also deters the development of private health care services as private
    facilities can not compete with the subsidized care provided by the
    government.

    44Even when adjusting for differences in costs of living, the gap in per
    capita spending remains. Using Medicare geographic indices to account for
    differences in the cost of providing health care in different locations,
    per capita spending in the states was eight times that in the insular
    areas.

    Figure 6: Federal Medicaid Per Capita Funding in Selected States and
    Insular Areas, Fiscal Year 2003

    Note: States included in the analysis were selected based on their
    geographic remoteness or their lower income levels relative to the U.S.
    average.

    The statutory limits on federal Medicaid funding in the insular
    areas-particularly the minimum federal matching contribution and payment
    cap-clearly contribute to lower federal per capita spending. However,
    insular areas are not required to meet all Medicaid eligibility
    requirements, and in light of the statutory limits on federal funding, CMS
    does not hold these areas accountable for covering all Medicaid benefit
    requirements.45 For example, Puerto Rico and the Virgin Islands have
    implemented eligibility criteria that are more restrictive than the
    federal standards, which have resulted in lower Medicaid enrollment than
    would otherwise be the case.46 In contrast, American Samoa, whose median
    household income is less than half that of the United States, neither uses
    specific categories to determine eligibility nor links eligibility to
    income levels that reflect local conditions. Instead, it considers every
    resident with an income at or below the federal poverty level-the majority
    of the population-as eligible for Medicaid. The different eligibility
    determination methods affect Medicaid enrollment in each insular area.
    While nationwide about 14 percent of the population is enrolled in
    Medicaid, Medicaid enrollment in the insular areas ranges from 12 percent
    in CNMI to 65 percent in American Samoa. (See app. III for a summary of
    the characteristics of insular areas' Medicaid programs.)

    Another notable difference between states and the insular areas is the
    range of services covered by their respective Medicaid programs, and
    disparities in federal per capita spending should be considered in the
    context of these differences. For example, once states choose to
    participate in Medicaid, they are required to cover certain mandatory
    services, such as inpatient and outpatient hospital care; physician
    services; nursing facility care; and early and periodic screening,
    diagnostic, and treatment (EPSDT) services for children. With limited
    exceptions, all of the states cover each of the mandatory services.47 In
    contrast, none of the insular areas cover all mandatory services. For
    example, none of the insular areas provides full coverage for nursing
    facility services, which represented 32 percent of Medicaid expenditures
    in the states in fiscal year 2003.48 CMS is aware that the insular areas
    do not provide all mandatory Medicaid services. However, according to a
    CMS official, the agency does not have any guidance as to how it should
    ensure compliance with the federal Medicaid standards regarding mandatory
    services, especially in light of limits on federal funding in the insular
    areas. Over time, CMS has allowed the insular areas to determine which
    Medicaid services they provide to maximize their use of federal health
    care funds.49 (See table 3.)

    45Section 1902(j) of the Social Security Act allows the Secretary of HHS
    to waive or modify Medicaid requirements with respect to American Samoa
    and CNMI, except for the Medicaid cap, the statutorily set FMAP, and
    payment for Medicaid services described in section 1905(a), which includes
    all of Medicaid's mandatory services.

    46Puerto Rico and the Virgin Islands determine Medicaid eligibility based
    on locally established poverty levels, which, at less than the federal
    poverty level, are more restrictive in terms of enrollment. According to
    officials in these areas, restricting eligibility allows them to target
    Medicaid services to fewer, albeit needier, individuals.

    47Rural health clinics (RHC) are clinics located in areas designated by
    the Bureau of Census as rural and by the Secretary of HHS as medically
    underserved or having an insufficient number of physicians. In order to be
    certified as a RHC, requirements under 42 C.F.R. S: 491et seq. must be
    met. As of June 2004, Connecticut, Delaware, D.C., Maryland,
    Massachusetts, New Jersey, and Rhode Island did not have RHCs that met
    these criteria. See GAO, Health Centers and Rural Clinics: State and
    Federal Implementation Issues for Medicaid's New Payment System,
    GAO-05-452 (Washington, D.C.: June 17, 2005).

    48According to an American Samoa official, no free-standing nursing
    facilities exist in American Samoa because its only major hospital, which
    is government owned and operated, provides long-term care as part of its
    inpatient services. The availability of these services within the hospital
    has deterred private interests from developing nursing facilities because
    they can not compete with government-provided care.

    49Officials from Puerto Rico pointed out that although CMS has not
    enforced the provision of mandatory Medicaid services, other federal
    entities, including the U.S. Department of Justice and HRSA, have
    successfully taken or encouraged enforcement actions against Puerto Rico
    regarding certain Medicaid-eligible expenses.

    Table 3: Mandatory Medicaid Services Covered by Insular Areas and States,
    Fiscal Year 2005

                                                                        Number of
    Service                                     AS  CNMI GU  PR  VIa    states
    Inpatient hospital services                 0M   0M  0M  0M  0M         51
    Outpatient hospital services                0M   0M  0M  0M  0M         51
    Physician's services                        0M   0M  0M  0M  0M         51
    Laboratory and x-ray services               0M   0M  0M  0M  0Mb        51
    Early and periodic screening, diagnostic,   0M   0M  0M  0M  0M         51
    and treatment (EPSDT) services for
    individuals under 21
    Family planning services and supplies       0M   0M  0M  0M  0M         51
    Transportation services                     0M   0M  0m  0Lc 0Ld        51
    Certified nurse practitioner services       0M  0me  0M  0m  0Lf       50g
    Home health services                        0Lh  0M  0m  0m  0M         51
    Federally-qualified health center (FQHC)    0m   0m  0m  0M  0M         51
    services
    Nursing facility (NF) services for          0m  0me  0Li 0m  0Lj        51
    individuals 21 or over
    Nurse midwife services                      0M  0me  0m  0m  0m        50k
    Rural health clinic (RHC) services          0m   0m  0m  0m  0m        48l

    Sources: Insular area officials and The Kaiser Commission.

    Key: 0M = service covered; 0L = service covered with limitations; 0m =
    service not covered

    Notes: Number of states includes Washington, D.C.

    The Kaiser Commission on Medicaid and the Uninsured. Medicaid Benefits:
    Online Database (The Henry J. Kaiser Family Foundation).
    http://www.kff.org/medicaid/benefits/index.jsp (downloaded Aug. 22, 2005).

    aAll services in the Virgin Islands must be provided in health department
    facilities (including FQHCs and referral facilities located off-island)
    that are pre-approved by the Medicaid program.

    bLaboratory and x-ray services require prior approval.

    cAmbulance services are covered when appropriate. Off-island
    transportation is not covered.

    dNo transportation services are covered on-island; transportation
    off-island must be pre-approved.

    eService not provided because of a lack of qualified local providers.
    However, these services are covered off-island when the patient is
    referred off-island to receive them.

    fCertified nurse practitioner services are not covered as a separate
    entity, but are covered if they are provided in a Medicaid-certified
    facility or program.

    gCalifornia does not cover nurse practitioner services.

    hLong-term or transitional care provided on a case-by-case basis in
    hospital wards.

    iNursing facility care is available to Medicaid enrollees in a
    non-Medicaid certified facility. This coverage is a supplement to the
    Medicaid program and is paid for by Guam's Medically Indigent Program.

    jThe Virgin Islands has one nursing facility with 80 beds, 20 of which are
    Medicaid certified. No other nursing facility services are available.

    kIllinois does not cover nurse midwife services.

    lConnecticut, D.C., and New Jersey do not cover rural health clinic
    services.

    Mandatory services may not be provided in an insular area because
    qualified providers or facilities do not exist.50 For example, none of the
    Pacific insular areas have a Medicaid-certified, free-standing skilled
    nursing facility. In other cases, insular areas may not cover certain
    services although qualified providers are available. For example,
    Medicaid-qualified providers are available in Puerto Rico for nursing
    facility, home health, nurse midwife, and certified nurse practitioner
    services; however, because of the limitations of the Medicaid cap, the
    Medicaid program does not include them in its benefit package, according
    to a Puerto Rico Medicaid official. Similarly, an official associated with
    the Virgin Islands' Medicaid program said that although qualified
    providers are available, nurse midwife and nurse practitioner services are
    not covered due to their costs. However, the Medicaid programs of some
    insular areas incur additional costs that states may not. For example,
    several insular areas pay the costs associated with transporting enrollees
    off-island to receive services not available locally. The costs associated
    with transportation are typically high, particularly for the Pacific
    insular areas, and count against the Medicaid cap.51 In addition, each
    insular area has chosen to add benefits, such as coverage for outpatient
    prescription drugs, which are optional under the statute. (See app. III
    for a summary of these optional benefits.)52

    Federal SCHIP individual spending levels were also lower in the insular
    areas compared to the states. In fiscal year 2003, federal SCHIP spending
    per child under age 19 averaged $24 in the insular areas (ranging from $14
    in American Samoa to about $25 in Puerto Rico) compared to an average of
    $41 in the states. When compared to the states, the insular areas are
    poorer and have a higher proportion of children under 19 years of age.
    Therefore, the statutory SCHIP allotment, which distributes funds to the
    insular areas based on their proportion of total insular population versus
    number of uninsured children, contributes to this disparity. However, as
    is the case with the Medicaid program, the operation of the SCHIP program
    in most of the insular areas is fundamentally different than the states.
    For example, while nearly 6 million children were served through SCHIP
    state programs in fiscal year 2003,53 most of the insular areas do not
    have a unique SCHIP program that extends health insurance coverage to
    additional children. Instead, the insular areas primarily use SCHIP funds
    to continue to pay for services provided to children enrolled in the
    Medicaid program once the Medicaid cap is met. One exception is Puerto
    Rico, which uses SCHIP funding to extend Medicaid coverage to children
    with family incomes between 100 and 200 percent of its local poverty
    level.54

    50According to a CNMI official, the federal cap on Medicaid funding has
    contributed to its difficulties in recruiting and retaining qualified
    physicians and other health care providers.

    51For purposes of this report, we consider transportation to be a
    mandatory Medicaid service. Although coverage for transportation is not
    explicitly required under the federal Medicaid statute, several
    regulations indicate that states must provide transportation services as
    part of their Medicaid programs. 42 C.F.R. S: 431.53 requires state
    Medicaid programs to ensure necessary transportation for beneficiaries to
    and from providers. 42 C.F.R. S: 440.170 (a) defines transportation to
    include expenses for transportation and other related travel expenses
    determined to be necessary by the agency to secure treatment for a
    beneficiary. 42 C.F.R. S: 441.62 requires the EPSDT program to offer
    assistance with transportation to program beneficiaries.

    52Although state Medicaid programs must generally allow recipients freedom
    of choice among health care providers participating in Medicaid, the
    insular areas are exempt from this requirement.

    HHS Per Capita Grant Spending Is Higher in Insular Areas

    In fiscal year 2003, total HHS per capita spending on health-related
    grants from three agencies-CDC, HRSA, and SAMHSA-was higher in the insular
    areas compared to the states. On average, these three agencies awarded
    about $60 per capita in the insular areas compared to about $48 per capita
    in the states. Differences in per capita spending are due in part to the
    methods used to allocate grant funds. For example, the base rate formula
    used to calculate the CDC bioterrorism grant results in higher payments to
    all insular areas except Puerto Rico and to states with smaller
    populations. In the four smaller insular areas, awards per capita for this
    grant range from $5.20 in Guam to $11.37 in American Samoa, and in states
    with small populations, such as Alaska and Wyoming, awards were $10.62 and
    $12.06 respectively compared to $3.61 in the states on average. (See fig
    7.)

    53An SCHIP Medicaid expansion must use Medicaid's enrollment structures,
    benefit packages, and provider networks, whereas SCHIP programs separate
    from Medicaid have greater flexibility in design and may introduce limited
    cost sharing or offer different benefit packages.

    54When SCHIP funding first became available, Guam used some of these funds
    to pay for services provided to a group of children who previously
    received services through Guam's Medically Indigent Program. Remaining
    SCHIP funds are used to pay for services provided to children enrolled in
    Medicaid once the cap has been met.

    Figure 7: Per Capita Funding to Insular Areas and Selected States for
    CDC's Bioterrorism Grant, Fiscal Year 2003

                           Agency Comments and Our Evaluation

    We provided a draft of this report for comment to HHS, DOI, and key health
    officials in each of the five insular areas. We received written comments
    from DOI, American Samoa, CNMI, and Puerto Rico, which are included in
    appendixes IV, V, VI and VII, respectively. Although HHS provided no
    general comments, it did provide technical comments, as did Puerto Rico,
    which we incorporated as appropriate.

    DOI noted that improving health care in the insular areas is a priority
    for both the agency and the insular areas and commented that the report
    will help identify areas of disparity which may be reviewed for
    improvement. The insular areas expressed concern that the report did not
    sufficiently address certain issues, such as implications of statutory
    limits on federal Medicaid spending and a more comprehensive analysis of
    local circumstances that affect the availability and costs of health care
    services. The insular areas also provided a number of specific comments
    and suggestions.

    Specifically, CNMI and Puerto Rico commented that the statutory limits on
    federal Medicaid spending-the Medicaid cap and minimum FMAP-result in
    insufficient federal Medicaid payments to the insular areas and explain
    the significant differences in federal Medicaid payments between them and
    the states. For example, CNMI noted that one patient with an expensive
    medical condition, such as a baby with congenital heart disease or a child
    with leukemia, can consume a large portion of the available federal
    Medicaid contribution in a given year. CNMI also commented that the
    federal funding limits prevent its Medicaid program from providing all
    Medicaid mandatory services and suggested that the report implied that
    this was a "satisfactory state of affairs" because the federal government
    does not penalize insular areas for not providing these services. We did
    not intend to imply that this is a satisfactory condition; rather, our
    purpose was to describe mandatory Medicaid services that are not provided
    by insular areas and to explain that, in light of the limits on federal
    funding, CMS does not hold these areas accountable for providing these
    services. We revised the report to clarify this point.

    The three insular areas commented that the report did not adequately
    explore other implications of the statutory federal funding limits,
    including the impact on the local contribution to total health care costs
    and the local health care infrastructure. For example, Puerto Rico
    commented that as a result of the limits on federal Medicaid payments, it
    and other insular areas shoulder a larger share of financial
    responsibility for the Medicaid program than the states, and that the
    federal contribution to the program is far less than the minimum FMAP
    suggests. Similarly, CNMI commented that the report failed to discuss the
    effect of limited federal funding on health outcomes, physician
    recruitment and retention, and other necessary government services.
    American Samoa commented that the report minimized or omitted local
    circumstances that affect the costs of health care services and are major
    factors in the analysis of federal funding. For example, a local statute
    requires the American Samoan government to provide medical services to
    qualified citizens at no cost, and its only hospital, which the government
    owns and operates, is the sole provider of primary, secondary, and
    tertiary care. In combination, these factors have deterred the development
    of privately-owned health care facilities and providers, which can not
    compete with government-level charges, and this has limited the
    availability of services. Where appropriate, we revised the report to
    include information about these local circumstances and their effect on
    American Samoa's ability to provide health care services. A more
    comprehensive analysis of insular areas' local contribution to total
    health care funding or their health care infrastructures, however, was
    beyond the scope of this report.

    The insular areas also provided a number of specific comments or
    suggestions. For example, CNMI commented that the report implied that the
    availability of certain grant funds, including those provided to offset
    the cost of providing services to residents of the freely associated
    states, ameliorated the adverse effects of disparities in federal funding
    for the Medicare and Medicaid programs and added that grant funds are not
    enough to replace inadequate Medicaid funding. It was not our intent to
    imply that these grants are a substitute for other sources of federal
    health care funding. Rather, the report identifies major sources of
    federal health care funding in insular areas, of which grants are a
    significant portion. Puerto Rico also suggested that the report include a
    more thorough and substantive review of several issues it considers to be
    programmatic barriers to a balanced partnership between insular areas and
    the federal government, including the Medicaid cap, SCHIP allotment
    methods, and the level of the Medicare Part D low-income subsidy for
    insular areas. Such an analysis was beyond the scope of this report.

    Finally, CNMI commented the report should include recommendations to
    address what it characterizes as "the outright discrimination in federal
    health care funding" for the insular areas and suggested that specific
    recommendations could include eliminating the Medicaid cap, calculating
    the FMAP based on actual poverty rates, and providing additional Medicare
    Part D pharmacy benefits. We acknowledge CNMI's views on the adequacy of
    current levels of federal health care funding. However, we did not include
    recommendations in this report because it is the Congress's prerogative to
    set the overall design of the Medicaid program. Puerto Rico commented that
    this report describes many of the challenges and the imbalance affecting
    the federal and insular area health care partnership, such as the Medicaid
    cap, and provides the foundation for the Congress to address these issues.

    As arranged with your offices, unless you publicly announce the contents
    of this report earlier, we plan no further distribution of it until 30
    days after its issuance date. At that time, we will send copies of this
    report to the Secretary of Health and Human Services, the Secretary of the
    Interior, and insular area governments. In addition, the report is
    available at no charge on GAO Web site at http://www.gao.gov .

    If you or your staff have any questions about this report, please contact
    me at (202) 512-7118 or allenk@gao.gov. Contact points for our Offices of
    Congressional Relations and Public Affairs may be found on the last page
    of this report. GAO staff who made major contributions to this report are
    listed in appendix VIII.

    Kathryn G. Allen Director, Health Care

    List of Requesters

    The Honorable Dan Burton Chairman Subcommittee on the Western Hemisphere
    Committee on International Relations House of Representatives

    The Honorable Neil Abercrombie The Honorable Madeleine Z. Bordallo The
    Honorable Ed Case The Honorable Donna Christensen The Honorable Eni F.H.
    Faleomavaega The Honorable Raul Grijalva The Honorable Michael M. Honda
    The Honorable Robert Menendez House of Representatives

    Appendix I: Scope and Methodology Appendix I: Scope and Methodology

    To compare characteristics of the five largest insular areas-American
    Samoa, the Commonwealth of the Northern Mariana Islands (CNMI), Guam,
    Puerto Rico, and the Virgin Islands-we used demographic data from the
    Census Bureau and disease mortality data from the Centers for Disease
    Control and Prevention (CDC). Except for Puerto Rico, interim and
    supplemental censuses to the decennial census are not performed for the
    insular areas. Therefore, 2000 census data for all insular areas and
    states were used for consistency. Reliable data for the incidence of
    disease are not collected for all insular areas. CDC's 2002 natality and
    mortality report provided health indicator data except where the number of
    cases was too few to provide reliable estimates.

    To identify key federal sources of health care funding to the insular
    areas we reviewed the Census Bureau's Consolidated Federal Funds Report
    and conducted interviews with representatives from insular areas, six
    agencies of the Department of Health and Human Services (HHS),1 the
    Department of the Interior's Office of Insular Affairs (DOI-OIA), and the
    White House Office of Intergovernmental Affairs. We defined health care
    funding as federal funds provided to support directly delivered health
    care, health data collection, disease prevention, and other health-related
    activities. On the basis of the discussions, we focused our work on the
    following key sources of funding: Medicare, Medicaid, and SCHIP, in
    addition to grants from three HHS agencies-CDC, the Health Resources and
    Services Administration (HRSA), and the Substance Abuse and Mental Health
    Services Administration (SAMHSA)-and DOI.2

    We collected federal health expenditure data for the states and the
    insular areas. We selected five states for comparison to insular
    areas-Alaska, Hawaii, Mississippi, West Virginia, and Wyoming. States were
    selected on the basis of one or more criteria: geographic remoteness, low
    Medicare spending, and high federal Medicaid matching rate.

    1These agencies were the Agency for Healthcare Research and Quality, CDC,
    the Centers for Medicare & Medicaid Services (CMS), Health Resources and
    Services Administration (HRSA), National Institutes of Health, and the
    Substance Abuse and Mental Health Services Administration (SAMHSA).

    2Grants to the insular areas from other HHS agencies, such as the Agency
    for Healthcare Research and Quality (AHRQ) and the National Institutes of
    Health (NIH), were excluded from our analyses because they were targeted
    exclusively to research. Grants from CMS, apart from Medicaid and SCHIP
    funding, were also excluded as they represented less than 1 percent of HHS
    grant funding to the insular areas from fiscal years 1999 through 2003.

    We analyzed data provided by each agency and by the insular areas to
    identify the composition of federal health care funding to insular areas
    and growth in the awards from fiscal year 1999 through 2003. We compared
    insular area data with funding to the states as a whole, and to select
    individual states. We also analyzed expenditures per capita or by
    beneficiaries of respective programs, where available and consistent.3

      Medicare

    To calculate Medicare expenditures for beneficiaries residing in the
    insular areas, we used Medicare's 1999-2003 claims data.4 We supplemented
    the results with figures for inpatient and Part C expenditures calculated
    by the Centers for Medicare & Medicaid Services (CMS).5 Expenditures for
    the U.S. for fiscal year 2003 were obtained from CMS.6 Beneficiary figures
    for the insular areas and the U.S. were calculated using CMS's Denominator
    File, which contains enrollment data for Medicare beneficiaries.7 We used
    the Denominator File and CMS's National Claims History File for Physician
    and Supplier Claims Data to calculate Medicare Part B utilization by
    beneficiaries in the insular areas and select states.8

      Medicaid

    We obtained insular area and state Medicaid expenditure data from CMS.9
    Medicaid enrollee figures were obtained directly from CMS and the insular
    areas, but were not consistently available from all insular areas in all
    years.

      SCHIP

    SCHIP funding, including the initial allotments, supplementary
    allocations, and redistribution funds for the insular areas and states for
    fiscal years 1999 through 2003 were obtained from the Federal Register.10
    SCHIP enrollee figures were not consistently available for insular areas.

    3Any per capita analysis is based on population from the 2000 Census.

    4Expenditure data for the insular areas was computed using the Standard
    Analytic Files for institutional claims and the National Claims History
    File for Physician and Supplier Claims Data, extracted January 2005.
    Beneficiary computations used the CMS Denominator File, extracted May
    2005.

    5We received Part C expenditures for the insular areas from CMS for
    January 2005 and inpatient expenditures for the insular areas as of June
    2005.

    6National Health Expenditure data was calculated for the fiscal year and
    based on the 2005 Trustees' Report.

    7Beneficiary computations used the CMS Denominator file, extracted May
    2005.

    8Extracted January 2005.

    9State-reported Medicaid Form 64 data, available on the CMS Web site, were
    used for state expenditures.

      HHS grants

    We obtained data from HHS's Tracking Accountability in Government Grants
    System for fiscal years 1999 through 2003.11 For the grants provided by
    three HHS agencies, we evaluated the annual total and per capita award to
    each insular area, as well as nationally and for the selected states.

    We totaled the award amounts for each grant in fiscal years 2002, 2003,
    and 2004 and identified eight individual grants whose 3-year aggregate
    comprised at least 5 percent of all HHS grant funding to any insular area
    and were awarded to at least three areas. We obtained the select grant
    award amounts from the agencies and computed the per capita award amounts
    for each of the insular areas, nationally, and for the selected states.12

    For the select HHS grants, we obtained information about the application
    processes, allocation methods, and administrative requirements for insular
    areas and the states from the agencies. To identify differences in funding
    allocation methods, we reviewed relevant federal laws, regulations, and
    guidance. We augmented that work with interviews of officials at funding
    agencies to identify variations between programs for states and insular
    areas.

      Department of the Interior Grants

    DOI-OIA provided us with the funding totals for health-related grants
    provided to insular areas. Grants included funds earmarked for health care
    infrastructure, technical assistance, and to offset the cost of providing
    services to residents of the freely associated states.

    Data Reliability

    For the key sources identified, we obtained comprehensive health
    expenditure data for federal fiscal years 1999 through 2003 from the
    respective agencies. To assess the reliability of the program expenditure
    data, we reviewed relevant documentation, interviewed knowledgeable agency
    officials about the data, and conducted electronic data testing. To assess
    the reliability of HHS and DOI-OIA data, we talked with officials about
    data quality control procedures and reviewed relevant documentation. We
    determined the data were sufficiently reliable for the purposes of this
    report.

    10Insular area data came from Federal Register announcements of insular
    area SCHIP allocations and redistribution amounts.

    11Data for the insular areas received December 2004, data for the states
    received January 2005.

    12Any per capita analysis is based on population from the 2000 Census.

    We conducted our work from October 2004 through September 2005 in
    accordance with generally accepted government auditing standards.

    Appendix II: Changes in Insular Area Health Care Funding Proportions over
    Time Appendix II: Changes in Insular Area Health Care Funding Proportions
    over Time

    When considered in the aggregate, health care funding in the five largest
    insular areas varied little in terms of the proportion of funding
    attributable to various sources for fiscal years 1999 through 2003. For
    each of the years, Medicare represented about three-quarters of total
    funding, followed by Medicaid and HHS grants, which each represented about
    one-tenth of the total. Funding from SCHIP and DOI grants together
    represented 5 percent or less of total funding. However, Puerto Rico's
    comparatively large population masks much of the variation in funding
    sources that exists in the other insular areas. These areas, particularly
    those in the Pacific, are considerably more reliant upon grant funding,
    which can fluctuate from year to year. (See fig. 8 through 13 and tables 4
    through 9.)1

    1Fiscal year 2003 does not include SCHIP redistribution funds, which are
    available SCHIP funds not expended by states within the prior 3-year
    period.

    Figure 8: Ratio of Federal Funding Sources for Five Insular Areas, Fiscal
    Years 1999 through 2003

    Table 4: Federal Health Care Spending for Five Insular Areas, Fiscal Years
    1999 through 2003

                       1999           2000           2001           2002           2003
    Medicare $1,192,327,998 $1,266,268,455 $1,399,127,443 $1,548,352,782 $1,677,804,491
    Medicaid    187,080,000    193,630,000    201,160,000    210,430,000    226,181,000
    SCHIP        72,283,085     68,055,124     63,252,222     39,822,486     33,075,000
    HHS         144,420,702    166,695,857    189,640,591    257,142,673    250,283,171
    grants
    DOI          12,230,000     13,584,790     17,002,352     12,085,000     13,565,894
    grants
    Total    $1,608,341,785 $1,708,234,226 $1,870,182,608 $2,067,832,941 $2,200,909,556

    Source: GAO analysis of funding data from Medicare, Medicaid, SCHIP,
    grants from three HHS agencies, and DOI.

    Figure 9: Ratio of Federal Health Care Funding Sources for American Samoa,
    Fiscal Years 1999 through 2003

    Note: Figures may not total to 100 percent due to rounding.

    Table 5: Federal Health Care Spending for American Samoa, Fiscal Years
    1999 through 2003

                         1999        2000        2001        2002        2003
    Medicare    $4,629,925  $4,827,064  $5,602,888  $7,382,854  $7,666,176
    Medicaid     3,090,000   3,200,000   3,320,000   3,470,000   3,727,000
    SCHIP          867,397     816,661     759,027     477,870     396,900
    HHS grants   1,299,877   2,178,295   2,677,466   5,554,821   5,123,934
    DOI grants   9,657,000   9,389,790   9,565,502   9,392,000   9,891,947
    Total      $19,544,199 $20,411,810 $21,924,883 $26,277,545 $26,805,957

    Source: GAO analysis of funding data from Medicare, Medicaid, SCHIP,
    grants from three HHS agencies, and DOI.

    Figure 10: Ratio of Federal Health Care Funding Sources for CNMI, Fiscal
    Years 1999 through 2003

    Note: Figures may not total to 100 percent due to rounding.

    Table 6: Federal Health Care Spending for CNMI, Fiscal Years 1999 through
    2003

                        1999       2000        2001        2002        2003
    Medicare   $3,109,803 $4,947,156  $7,498,466  $7,050,130  $6,586,360
    Medicaid    1,860,000  1,930,000   2,010,000   2,100,000   2,255,000
    SCHIP         795,113    748,606     695,775     438,047     363,825
    HHS grants  1,102,221  1,090,134   1,385,892   1,489,705   3,305,777
    DOI grants    153,000     10,000   4,152,100           -     230,000
    Total      $7,020,137 $8,725,896 $15,742,233 $11,077,882 $12,740,962

    Source: GAO analysis of funding data from Medicare, Medicaid, SCHIP,
    grants from three HHS agencies, and DOI.

    Figure 11: Ratio of Federal Health Care Funding Sources for Guam, Fiscal
    Years 1999 through 2003

    Note: Figures may not total to 100 percent due to rounding.

    Table 7: Federal Health Care Spending for Guam, Fiscal Years 1999 through
    2003

                         1999        2000        2001        2002        2003
    Medicare   $15,265,639 $16,994,396 $18,636,429 $22,728,513 $26,832,745
    Medicaid     5,230,000   5,410,000   5,620,000   5,880,000   6,321,000
    SCHIP        2,529,909   2,381,930   2,213,827   1,393,787   1,157,625
    HHS grants   2,859,071   5,795,473   7,020,535   9,108,189  10,495,714
    DOI grants   2,420,000   4,185,000   2,855,000   2,633,000   3,443,947
    Total      $28,304,619 $34,766,799 $36,345,791 $41,743,489 $48,251,031

    Source: GAO analysis of funding data from Medicare, Medicaid, SCHIP,
    grants from three HHS agencies, and DOI.

    Figure 12: Ratio of Federal Health Care Funding Sources for Puerto Rico,
    Fiscal Years 1999 through 2003

    Note: Figures may not total to 100 percent due to rounding.

    Table 8: Federal Health Care Spending for Puerto Rico, Fiscal Years 1999
    through 2003

                       1999           2000           2001           2002           2003
    Medicare $1,141,552,210 $1,209,959,203 $1,337,114,946 $1,476,738,502 $1,599,351,575
    Medicaid    171,500,000    177,500,000    184,400,000    192,900,000    207,341,000
    SCHIP        66,211,306     62,338,494     57,939,035     36,477,397     30,296,700
    HHS         133,820,563    149,657,652    168,783,855    221,260,544    216,598,403
    grants
    DOI                   -              -              -              -              -
    grants
    Total    $1,513,084,079 $1,599,455,349 $1,748,237,836 $1,921,376,443 $2,053,587,678

    Source: GAO analysis of funding data from Medicare, Medicaid, SCHIP,
    grants from three HHS agencies, and DOI.

    Figure 13: Ratio of Federal Health Care Funding Sources for the Virgin
    Islands, Fiscal Years 1999 through 2003

    Note: Figures may not total to 100 percent due to rounding.

    Table 9: Federal Health Care Spending for the Virgin Islands, Fiscal Years
    1999 through 2003

                         1999        2000        2001        2002        2003
    Medicare   $27,770,421 $29,540,636 $30,274,714 $34,452,783 $37,367,635
    Medicaid     5,400,000   5,590,000   5,810,000   6,080,000   6,537,000
    SCHIP        1,879,360   1,769,433   1,644,558   1,035,385     859,950
    HHS grants   5,338,970   7,974,303   9,772,843  19,729,414  14,759,343
    DOI grants           -           -     429,750      60,000           -
    Total      $40,388,751 $44,874,372 $47,931,865 $61,357,582 $59,523,928

    Source: GAO analysis of funding data from Medicare, Medicaid, SCHIP,
    grants from three HHS agencies, and DOI.

    Appendix III: Characteristics of Insular Areas' Medicaid Programs Appendix
    III: Characteristics of Insular Areas' Medicaid Programs

    To obtain Medicaid federal matching funds, state and insular area programs
    are to meet broad criteria related to eligibility, including categorical,
    income, and resource requirements. However, the insular areas vary in the
    extent to which their eligibility standards comply with the federal
    standards. For example, Guam, Puerto Rico, and the Virgin Islands use the
    same broad federal categories established in statute; however, the levels
    two of these areas use to determine income eligibility are based on
    locally established poverty levels rather than the federal poverty level
    (FPL). Table 10 compares the federal categorical and income eligibility
    standards to those in the insular areas.

    Table 10: Comparison of Federal Medicaid Categorical and Income
    Eligibility Standards to Insular Area Standards, Fiscal Year 2004

                                                                        Number of
                                                                        enrollees
    Federal                                                     (percentage of
    eligibility                       Income level in relation           total
    standards      Categories         to FPL                       population)
    States         Five federal       Varies by category,         41.9 million
                      categoriesa        ranges between 100% to             (14%)
                                         185% of FPL for low
                                         income children to 133%
                                         to 185% of FPL for
                                         pregnant women
    American Samoa No specific        At or below FPL             37,504 (65%)
                      categories
    CNMI           Individuals whose  The federal benefit rate     9,758 (12%)
                      total income does  is $10,152 per year for
                      not exceed 150% of an individual and
                      the SSI federal    allowable resource limit
                      benefit amount and of $2,000 per year for an
                      allowable resource individual
                      limit
    Guam           Five federal       Below FPL                   25,529 (15%)
                      categoriesa
    Puerto Rico    Five federal       At or below local poverty  938,266 (24%)
                      categoriesa        level, which was $4,800
                                         per year for an
                                         individual
    Virgin Islands Five federal       At or below local poverty   16,125 (15%)
                      categoriesa        level, which was about
                                         $5,500 per year for an
                                         individual

    Source: GAO analysis of data from CMS, Kaiser Family Health Foundation,
    and insular area officials.

    Note: In 2004, 100 percent of FPL for an individual was $9,310 per year,
    133 percent of the FPL was $12,382 per year, and 185 percent of the FPL
    was $17,224 per year.

    aThe five federal categories are children, pregnant women, adults in
    families with children, elderly, and individuals with disabilities.

    In addition to eligibility requirements, Medicaid mandates coverage for
    certain services. However, as shown in table 3, none of the insular areas
    provides coverage for all the mandatory services. Nonetheless, each
    insular area, like the states, has chosen to add optional benefits under
    the statute, with most providing coverage for outpatient prescription
    drugs, clinic services, dental and eye care, and physical therapy. (See
    table 11.)

    Table 11: Summary of Certain Optional Medicaid Services Covered by Insular
    Areas and States, Fiscal Year 2005

    Service                                 AS CNMI GU PR VI  Number of states
    Outpatient prescription drugs           0M 0Ma  0M 0M 0Mb               51
    Dental services                         0M 0Lc  0M 0M 0M                45
    Clinic services                         0m  0M  0M 0M 0M                47
    Prosthetic devices, eyeglasses          0M 0Md  0M 0m 0Le        48 and 41
    Physical therapy and related services   0M  0M  0m 0M 0m                34
    Inpatient psychiatric hospital services 0M  0m  0m 0m 0m                48
    for individuals under age 21
    Personal care services                  0m  0M  0m 0m 0m                31
    Diagnostic, screening, preventive, and  0m  0m  0m 0M 0m                35
    rehabilitative services
    Intermediate care facility for          0m  0m  0m 0m 0m                51
    individuals with mental retardation
    (ICF/MR) services
    Targeted case management services (home 0m  0m  0m 0m 0m                50
    and community health)
    Hospice care                            0m  0m  0m 0m 0m                48
    Inpatient hospital and nursing facility 0m  0m  0m 0m 0m                44
    services for individuals 65 or over in
    an institution for mental diseases
    (IMD)
    Private duty nursing services           0m  0m  0m 0m 0m                23

    Sources: Insular area officials and The Kaiser Commission.

    Key: 0M = service covered; 0L = service covered with limitations; 0m =
    service not covered

    Notes: Number of states includes Washington, D.C.

    The Kaiser Commission on Medicaid and the Uninsured. Medicaid Benefits:
    Online Database (The Henry J. Kaiser Family Foundation).
    http://www.kff.org/medicaid/benefits/index.jsp (downloaded Aug. 22, 2005).

    aDrug coverage is limited to a 30-day supply unless a larger quantity is
    required for off-island travel. Any quantity larger than the 30-day supply
    must be pre-approved.

    bPrior approval required for prescriptions that cost more than $200.

    cMost dental services are covered, including fillings and extractions, and
    dentures are covered subject to prior approval. Orthodontics, prosthetics,
    and root canals are specifically not covered, and oral surgery is limited
    to emergencies.

    dPrior authorization is required for prosthetic devices and eyeglasses.

    eEye clinic care provided to children only.

    Appendix IV: Comments from the Department of the Interi Appendix IV:
    Comments from the Department of the Interior

    Now GAO-06-75.

    Appendix V: Comments from American Samoa Appendix V: Comments from
    American Samoa

    Appendix VI: Comments from the Commonwealth of the Northern Mariana
    Islands Appendix VI: Comments from the Commonwealth of the Northern
    Mariana Islands

    Now GAO-06-75.

    Appendix VII: Comments from the Commonwealth of Puerto Rico Appendix VII:
    Comments from the Commonwealth of Puerto Rico

    Now GAO-06-75.

    AAc Appendix VIII: GAO Contact and Staff Acknowledgments

                                      GAO Contact

    Kathryn G. Allen (202) 512-7118 or allenk@gao.gov

                                    Acknowledgments

    In addition to the contact named above, Susan T. Anthony, Assistant
    Director, Gerardine Brennan, Richard Lipinski, Michaela M. Monaghan, Mary
    Reich, and Margaret J. Weber made key contributions to this report.

    (290428)

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    Highlights of GAO-06-75 , a report to congressional requesters

    October 2005

    U.S. INSULAR AREAS

    Multiple Factors Affect Federal Health Care Funding

    Five insular areas of the United States-American Samoa, the Commonwealth
    of the Northern Mariana Islands (CNMI), Guam, Puerto Rico, and the U.S.
    Virgin Islands-benefit from federal health care financing and grant
    programs that help fund health care services to their over 4 million
    residents. However, notable differences exist in how the programs are
    funded or operate in the insular areas, such as statutory limits on
    federal Medicaid funding to the insular areas that do not apply in the
    states. To help understand these differences, GAO was asked to identify
    (1) the key sources of federal health care funding in the insular areas,

    (2) differences between insular areas and the states in the methods used
    to allocate these funds, and (3) differences in spending levels per
    individual between insular areas and the states.

    In commenting on a draft of this report, American Samoa, CNMI, and Puerto
    Rico suggested the need for additional information on certain issues, such
    as implications of statutory limits on federal Medicaid spending and a
    more comprehensive analysis of local circumstances that affect the
    availability and costs of health care services.

    Multiple federal programs fund health care services in the insular areas.
    Federal health care financing programs-Medicare, Medicaid, and the State
    Children's Health Insurance Program (SCHIP)-represented nearly

    90 percent of the $2.2 billion in health care funding to these areas in
    fiscal year 2003, with Medicare alone representing over three-quarters of
    total funding. The Departments of Health and Human Services (HHS) and the
    Interior (DOI) also provide grants to the insular areas. Significant
    variation exists among the insular areas in terms of the distribution of
    funds by these sources, largely due to the number of Medicare
    beneficiaries in each area.

    Key Federal Health Care Funding Sources to Five Insular Areas, by
    Percentage, Fiscal Year 2003

    The methods used to allocate these federal funds to insular areas often
    differ from methods used in the states. For example, Medicare pays
    hospitals in most insular areas based on their costs rather than the
    prospective payment system used for most hospitals in the states.
    Similarly, federal funding for Medicaid and SCHIP is subject to statutory
    limits that do not apply to states, including minimum federal
    contributions and a cap on federal Medicaid payments. In addition, certain
    HHS grants use different rules to determine insular areas' funding.

    Differences in allocation methods as well as other factors contribute to
    lower spending levels per individual in the insular areas compared to the
    states. For example, Medicare spending per beneficiary in the insular
    areas was less than half the amount it was in the states, due in part to
    differences in payment policies and to beneficiaries' lower utilization of
    services. In addition, the statutory limits on federal Medicaid funding in
    these areas contributed to lower federal Medicaid per capita payments in
    the five insular areas compared to the national average. However, in light
    of limits on federal funding, the insular areas are not held accountable
    for covering all Medicaid benefit requirements, such as nursing facility
    services that represent nearly one-third of Medicaid expenditures in the
    states. Insular areas benefit from certain HHS grant allocation formulas
    that result in higherper capita payments to them than the states, on
    average.
    *** End of document. ***