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.
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Funding in U.S. Insular Areas Health Care Funding in U.S. Insular Areas
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Funding in U.S. Insular Areas Health Care Funding in U.S. Insular Areas
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Health Care Funding in U.S. Insular Areas Health Care Funding in U.S.
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Insular Areas Health Care Funding in U.S. Insular Areas Health Care
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Funding in U.S. Insular Areas Health Care Funding in U.S. Insular Areas
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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 [email protected]. 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 [email protected]

                                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. ***